MONARCH BANCORP, SB-2, 1995-05-12

MONARCH BANCORP
SB-2, 1995-05-12
STATE COMMERCIAL BANKS

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<PAGE>

As filed with the Securities and Exchange Commission on May 12, 1995
Registration No.
---------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________________

MONARCH BANCORP
(Name of small business issuer in its charter)

California 6090 95-3863296
(State or other jurisdiction (Primary Standard (IRS Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)

30000 Town Center Drive
Laguna Niguel, California 92677
(714) 495-3300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
____________________________

E. Lynn Caswell
Chairman of the Board of Directors
and Chief Executive Officer

Monarch Bancorp
30000 Town Center Drive
Laguna Niguel, California 92677
(714) 495-3300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
____________________________

Copy to:

Loren P. Hansen, Esquire
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, California 92660
____________________________

Approximate date of commencement of proposed sale to public:
As soon as practicable after the Registration Statement becomes effective
____________________________

If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box [X].

____________________________

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE (1) PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par
value.................. 3,177,296 (2) $1.35 $4,289,349.60 $1,479.08
- ---------------------------------------------------------------------------------------------------------
<FN>
- --------------------
(1) Estimated solely for the purpose of calculation the registration fee in
accordance with Rule 457 under the Securities Act of 1933.

(2) Includes shares which may be purchased upon the exercise of Subscription
Rights, and shares which may be issued pursuant to the Standby Purchase
Agreements.

</TABLE>

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registration
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.

<PAGE>
MONARCH BANCORP
CROSS-REFERENCE SHEET

ITEM REGISTRATION STATEMENT
NO. ITEM AND HEADING CAPTION IN PROSPECTUS
- ---- ------------------------------------ ------------------------------------
1. Front of the Registration
Statement and Outside Front
Cover Page of Prospectus.......... Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus

2. Inside Front and Outside Back
Cover Pages of Prospectus.......... Inside Front and Outside Back Cover
Pages of Prospectus; Available
Information

3. Summary Information and Risk
Factors............................ Prospectus Summary; The Company;
Risk Factors

4. Use of Proceeds..................... Prospectus Summary; Use of Proceeds;
Capitalization

5. Determination of Offering Price..... The Offering; Determination of
Offering Price

6. Dilution............................ Risk Factors; The Offering; Dilution

7. Selling Security Holders............ *

8. Plan of Distribution................ Outside Front Cover Page of
Prospectus; Prospectus Summary; The
Offering

9. Legal Proceedings................... Business

10. Directors, Executive Officers,
Promotors and Control
Persons............................ Management

11. Security Ownership of Certain
Beneficial Owners and
Management......................... Management

12. Description of Securities to be
Registered......................... Prospectus Summary; The Offering;
Management; Description of Capital
Stock; Dividends

13. Interests of Named Experts and
Counsel............................ Legal Matters

<PAGE>

ITEM REGISTRATION STATEMENT
NO. ITEM AND HEADING CAPTION IN PROSPECTUS
- ---- ------------------------------------ ------------------------------------

14. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................... Indemnification and Limitation of
Liability

15. Organization Within Last Five
Years.............................. *

16. Description of Business............. Available Information; Documents
Incorporated by Reference;
Prospectus Summary; Risk Factors;
the Company; Capitalization;
Market for Common Stock;
Dividends; Capitalization;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Consolidated
Financial Statements

17. Management's Discussion and
Analysis or Plan of Operation........ Management's Discussion and
Analysis of Financial Condition
and Results of Operation

18. Description of Property............... Prospectus Summary; The Company;
Business

19. Certain Relationships and Related
Transactions......................... Management

20. Market for Common Equity and Related
Stockholder Matters................. Risk Factors; Prospectus Summary;
Market for Common Stock;
Dividends; Capitalization

21. Executive Compensation................ Management

22. Financial Statements.................. Financial Statements

23. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure................. *

- ---------------------------
* Item not applicable.

<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
a solicitation of any offer to buy nor shall there be any sale of those
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
<PAGE>

SUBJECT TO COMPLETION, DATED ________, 1995

PROSPECTUS

UP TO 3,177,296 SHARES

MONARCH BANCORP

COMMON STOCK

Monarch Bancorp (the "Company") is offering (the "Offering") up to
3,177,296 shares of its common stock, no par value (the "Common Stock"), in
a Rights Offering and a Public Offering. Holders of record as of the close
of business on March 30, 1995 (the "Record Date") have a nontransferable
right (the "Right") to subscribe for and purchase up to 3,177,296 shares of
Common Stock for a cash price of $1.35 per share (the "Subscription Price").
Holders of Rights ("Rights Holders") will be able to exercise their rights
until 5:00 p.m., California time, on ____________, 1995, unless extended by
the Company (the "Rights Offering Expiration Date"). The Public Offering
in its entirety will expire at 5:00 p.m. California time on ____________,
1995, unless extended by the Company ("Public Offering Expiration Date").

(COVER PAGE CONTINUED ON NEXT PAGE)

____________________________

THE PURCHASE OF COMMON STOCK IN THE OFFERING INVOLVES CERTAIN RISKS. POTENTIAL
PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER THE HEADING
"RISK FACTORS."

THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SUBSCRIPTION PRICE UNDERWRITING AND OTHER FEES PROCEEDS TO THE
AND EXPENSES(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $1.35 $.094(3) $1.26
Total Maximum(2) $4,289,350 $300,000 $3,989,350
- -------------------------------------------------------------------------------------------------

<FN>
- --------------------
(1) The per share amount constitutes the amount payable to the Financial
Advisors in their capacity as such, which equals 5% of the gross
proceeds received from the Offering. The total amounts include amounts
payable to the Financial Advisors in such capacity. The Company has
agreed to indemnify the Financial Advisors against certain liabilities
under the Securities Act of 1933. See ""The Offering.''

(2) Includes expenses of the Offering payable by the Company estimated to be
$85,000, including registration fees, legal and accounting fees,
printing and other miscellaneous fees.

(3) Estimated based upon the maximum offering assuming all shares are sold,
but before deducting expenses of the Offering payable by the Company.

</TABLE>

The date of this Prospectus is _______, 1995

<PAGE>

The Company has granted to each shareholder the Right to
subscribe for and purchase, at the Subscription Price, up to four (4) shares
of Common Stock for each share of Common Stock held of record as of the
Record Date. The Rights are not transferable. Once a Rights Holder has
exercised the subscription rights, such exercise may not be revoked. The
Rights are not evidenced by certificates. Following conclusion of the Rights
Offering portion of the Offering, all of the Company's shareholders,
including shareholders that have subscribed in the Private Placement Offering
completed March 31, 1995, and the general public, will be permitted to
subscribe for any remaining unsubscribed shares of Common Stock in the Public
Offering portion of the Offering, subject to the right of the Company, in its
sole discretion, to accept or reject any subscription for Shares in the
Public Offering, either in whole or in part. (See "The Offering.") The
Company presently intends, but shall not be required to, accept subscriptions
(in addition to Rights subscriptions) from shareholders as of the Record Date
up to amounts that would maintain the ownership percentage of such
shareholders at the Record Date.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
Commission's Regional Offices located on the 15th Floor, 7 World Trade
Center, New York, New York 10048 and Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material may also be obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.

The Company has filed with the Commission a Registration Statement on
Form SB-2 (the "Registration Statement") pursuant to the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules relating
thereto as permitted by the rules and regulations of the Commission. For
further information pertaining to the Company and the securities offered
hereby, reference is made to the Registration Statement and the exhibits
thereto. Items of information omitted from this Prospectus, but contained in
the Registration Statement, may be obtained at prescribed rates or inspected
without charge at the Commission, Washington, D.C. Any statements contained
herein concerning the provisions of any document are not necessarily
complete, and, in each instance, reference is made to the copy of such
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission. Each such statement is qualified in its entirety by
such reference.

The Company will provide stockholders with annual reports of the Company
containing audited financial statements.

-2-

<PAGE>

PROSPECTUS SUMMARY

THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO,
AND SHOULD BE READ IN CONJUNCTION WITH, THE DETAILED INFORMATION AND
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO SET FORTH ELSEWHERE IN
THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN.

THE COMPANY AND THE BANK

Monarch Bancorp (the "Company") is a Laguna Niguel, California based
bank holding company organized in 1984 and conducting operations through its
sole subsidiary, Monarch Bank (the "Bank"), a California state-chartered
bank. The Company has operated as a one-bank holding company, registered
under the Bank Holding Company Act of 1956 since 1984. The Bank commenced
operations in 1980 and currently operates through its head office in Laguna
Niguel, California. The only material activity of the Company is the
operation of the Bank. As of March 31, 1995, the Company had consolidated
total assets, total deposits and shareholders' equity of approximately $63
million, $56 million and $6.8 million, respectively. The Bank is insured
under the Federal Deposit Insurance Act, but it is not a member of the
Federal Reserve System.

BUSINESS. The Bank's primary market area is South Orange County,
California. The principal business of the Bank is to accept time and demand
deposits, and to make commercial loans, consumer loans, real estate loans and
other investments. The Bank's loans are primarily short-term and/or
adjustable rate. (See "Business.") The Bank's Strategic Plan since 1987 has
emphasized serving the banking needs of individuals, professionals, and small
to medium-sized businesses in Laguna Niguel, California and the surrounding
communities. The Bank has carved a local niche by being active in civic and
community activities and providing a high degree of individualized personal
service. The Bank was the first in the local area to be open for Saturday
business and maintains operating hours from 7:00 a.m. to 7:00 p.m. in an
effort to serve its largely "commuter" customer base as well as its small
business customers. In addition, it has a chartered courier branch which
operates throughout mid- and southern-Orange County, serving professionals
and small businesses, which has greatly expanded its service area without the
need for additional physical facilities. Since 1987, the Bank's major
lending emphasis has been directed at short term owner-occupied luxury home
construction projects, commercial lending to professionals and individuals,
with the objective of building a balanced community loan and investment
portfolio mix. The Bank relies on a foundation of locally generated deposits
and has a low cost of funds due to a high percentage of low cost and
noninterest bearing deposits. The Bank also originates SBA loans, has a
mortgage referral program and its own credit card program. Due to
consolidations, mergers, and the small number of independent banks
headquartered in South Orange County, the Bank believes that, given
appropriate capital resources (a portion of which are intended to be raised
in this Offering), it may be well positioned to prudently expand and build a
larger, regional independent financial institution in the affluent South
Orange County market. (See "Business.")

FINANCIAL CONDITION AND OPERATIONS. Although the Company experienced
growth in both assets and net earnings from 1988 to 1992, weaknesses in the
Southern California economy, particularly with regard to price and demand for
real estate, led to substantial losses in 1993 and 1994, as well as increases
in nonperforming assets. These losses temporarily decreased the capital
resources of the Bank well below regulatory requirements, although the Bank
met all regulatory capital requirements at March 31, 1995. See "RISK FACTORS
- - Financial Condition and Operations; Loss in 1993 and 1994" and the
financial information included herein.

-3-

<PAGE>

ADMINISTRATIVE ACTIONS

As a result of the losses incurred in 1993 and 1994, as well as certain
of the factors that contributed thereto, both the FDIC and the California
Superintendent of Banks issued orders to the Bank requiring it to take
corrective actions and increase its capital ratios. See "RISK FACTORS -
Existing and Potential Enforcement Actions."

USE OF PROCEEDS

The net proceeds of the Offering are estimated to be $3,989,350 if the
maximum 3,177,296 shares of Common Stock are purchased. It is anticipated
that net proceeds from the sale of the shares of Common Stock offered hereby
will be used for general corporate purposes and to allow for the prudent
expansion of the organization through continued growth in its present
facility, and particularly to expand into other communities in Southern
California by the acquisition of other financial institutions or acquisition
or establishment of branches of such institutions subject to regulatory
approvals and satisfaction of the terms of the Orders. Although the Company
has had preliminary discussions with a number of financial institutions
regarding possible acquisitions, and the Company is having ongoing
discussions with Rancho Santa Fe National Bank, no agreements or
understandings have been reached at this time. See "Use of Proceeds" and
"Business."

RISK FACTORS

A PURCHASE OF THE COMPANY'S SECURITIES INVOLVES CERTAIN RISKS.
POTENTIAL PURCHASERS OF RIGHTS OR COMMON STOCK SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS" WHICH FOLLOWS THIS
SUMMARY.

THE OFFERING

Securities Offered . . . . . . . The Company offers hereby a maximum aggregate of
3,177,296 shares of Common Stock. With the
completion of the Private Placement Offering, an
additional 4,547,111 shares of Common Stock were
issued on March 31, 1995, increasing the outstanding
shares of Common Stock of the Company up to
5,341,434 shares, and no shares of Preferred Stock are
outstanding. Upon completion of this Offering, it is
anticipated that up to an additional 3,177,296 shares
of Common Stock will

</TABLE>

-4-

<PAGE>

<TABLE>
<S> <C>
be issued and that up to 8,518,730 shares of the
Company's Common Stock will be issued and outstanding.

The Offerings . . . . . . . . . The Company is offering the shares of Common Stock
in a Rights and Public Offering (the "Offerings").

The Rights Offering. . . . . . . Each record holder of Common Stock at the close of
business on the Record Date ("Record Date Holder")
has been granted one nontransferable subscription
right ("Right") to subscribe to purchase four (4) shares
of Common Stock for each share of Common Stock
held of record on the Record Date. Payments received
for the shares which are not available for purchase will
be returned without interest. The Rights are not
transferable.

Subscription Price . . . . . . . $1.35 per share, payable in cash.

Record Date. . . . . . . . . . . March 30, 1995.

Rights Offering Expiration Date. 5:00 p.m., California Time, ____________ 1995.

Public Offering Expiration Date. 5:00 p.m., California Time, ___________, 1995, or
such later time to which the Offering may have been
extended in the discretion of the Company.

Procedure for Exercising Rights. The Rights may be exercised by properly completing
the subscription order form and forwarding it, with
payment of the Subscription Price for each underlying
share subscribed for pursuant thereto, to Monarch
Bank, the wholly-owned subsidiary of the Company,
as escrow agent, which must receive such subscription
order form and payment at or prior to the Rights
Offering Expiration Date. If subscription order forms
and payments are sent by mail, Rights Holders are
urged to use registered mail, properly insured, with
return receipt requested. See "The Rights Offering -
Exercise of Rights."

ONCE AN INVESTOR HAS SUBSCRIBED, SUCH
SUBSCRIPTION MAY NOT BE REVOKED.

</TABLE>

-5-

<PAGE>
<TABLE>
<S> <C>
Issuance of Common Stock . . . . Certificates representing shares of Common Stock
purchased will be delivered as soon as practical after
the subscriptions have been accepted by the Company.

Public Offering. . . . . . . . . The Company anticipates that upon completion of the
Rights Offering, any remaining unsubscribed shares
will be offered to the general public in a Public
Offering. The Company presently intends, but shall
not be required to, accept subscriptions (in addition to
Rights subscriptions) from shareholders as of the
Record Date up to amounts that would maintain the
ownership percentage of such shareholders at the
Record Date to the extent feasible. See "The
Offering."

Dilution . . . . . . . . . . . . Issuance of Common Stock in the Offering could
result in a reduction in the proportionate ownership
interest in the Company. Issuance of Common Stock
at the Subscription Price, net of anticipated expenses,
is expected to result in an immediate dilution in book
value per share to investors in this Offering of
approximately $0.09 as of March 31, 1995. See
"Dilution."

Market for Common Stock. . . . . The Company's Common Stock is currently thinly
traded on the over-the-counter market. The Company
intends in the near future to apply to list its Common
Stock on the NASDAQ - Small Cap market. No
assurance can be given that such application will be
accepted. Since January 1, 1995, the Company had
three transactions totaling 26,691 shares of Common
Stock at prices of $1.50 to $.80 per share. Shares of
Common Stock issued in the Private Placement
Offering are subject to the transferability restrictions
contained in Regulation D, and such shares may not be
sold, hypothecated, pledged or otherwise transferred
except pursuant to an effective registration statement
or an exemption from registration. The Company has
agreed to register such shares by March 31, 1996. See
"Market for Common Stock."

No Board or Financial
Advisor Recommendation. . . . . An investment in shares of Common Stock must be
made pursuant to each investor's evaluation of its, his
or her best interests. Neither the Company's

</TABLE>

-6-

<PAGE>

<TABLE>
<S> <C>
Board of Directors nor the Financial Advisors make any
recommendation to prospective investors regarding
whether they should exercise Rights or purchase
shares. See "The Offering."

</TABLE>

-7-

<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA

AS OF OR FOR THE QUARTER ENDED MARCH 31,
---------------------------------------------
1995 1994
---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Net interest income ....................... $ 712 $ 659
Provision for loan losses ................. -- --
Other income .............................. 356 167
Other operating expense ................... 893 782
Earnings (loss) before income taxes ....... 175 44
Net earnings (loss) ....................... 182 44
PER SHARE DATA (4)
Net earnings (loss) ....................... 0.03 0.06
Book value ................................ 1.26 3.60
BALANCE SHEET DATA:
Loans (5).................................. 30,413 34,498
Assets .................................... 63,531 67,777
Deposits .................................. 55,978 64,919
Allowance for Loan Losses ................. 980 471
Shareholders' equity ...................... 6,768 2,858
ASSET QUALITY:
Nonperforming loans (6).................... 941 1,749
Other real estate owned ("OREO") (7)....... 617 810
Total nonperforming loans and OREO ........ 1,558 2,559
Loans with modified terms ................. -- --
ASSET QUALITY RATIOS:
Net charge-offs to average loans .......... 0.51% 1.73%
Nonperforming loans and OREO to total period-end
loans and OREO ........................... 5.02% 7.25%
Allowance for loan losses to period-end
loans .................................... 3.22% 1.37%
Allowance for loan losses to period-end
nonperforming loans and OREO ............. 62.90% 18.41%
SELECTED PERFORMANCE RATIOS:
Return on average assets .................. 0.32% 0.07%
Return on average shareholders' equity .... 15.65% 1.39%
Average shareholders' equity to average
assets ................................... 2.04% 4.80%
CAPITAL RATIOS:
Tier 1 risk-based ......................... 22.28% 8.49%
Total risk-based .......................... 23.53% 9.38%
Leverage .................................. 10.90% 4.65%

<FN>
- ----------
(4) All per share numbers are based on the number of shares outstanding at
period end, and have been retroactively adjusted for the one-for-five
reverse stock split effective December 14, 1993. Calculations are based
on number of common and common equivalent shares outstanding of 794,324
in 1994 and 5,341,434 in 1995. Results for the first quarter of 1994 were
not representative of results for the full year, and results for the first
quarter of 1995 may not be representative of the results that will be
achieved for the full year.

(5) Excludes deferred loan fees, unearned interest income on lease financing,
and allowances for loan losses.

(6) Includes nonaccrual loans and loans past due 90 days or more but still
accruing interest.

(7) Includes other real estate acquired by the Company through legal
foreclosure or dead-in-lieu of foreclosure.
</TABLE>

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<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>

AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1993
---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Net interest income ....................... $ 2,835 $ 3,103
Provision for loan losses ................. 995 1,280
Other income .............................. 649 960
Other operating expense ................... 4,338 4,123
Earnings (loss) before income taxes ....... (1,848) (1,340)
Net earnings (loss) ....................... (1,850) (1,341)
PER SHARE DATA (8)
Net earnings (loss) ....................... (2.33) (1.71)
Book value ................................ 0.88 3.68
BALANCE SHEET DATA:
Loans (9).................................. 31,040 35,369
Assets .................................... 59,974 67,119
Deposits .................................. 58,643 63,715
Allowance for Loan Losses ................. 1,137 1,055
Shareholders' equity ...................... 702 2,923
ASSET QUALITY:
Nonperforming loans (10)................... 793 2,925
Other real estate owned ("OREO") (11)...... 617 1,293
Total nonperforming loans and OREO ........ 1,410 4,218
Loans with modified terms ................. -- --
ASSET QUALITY RATIOS:
Net charge-offs to average loans .......... 2.82% 1.96%
Nonperforming loans and OREO to total period-end
loans and OREO ........................... 4.45% 11.89%
Allowance for loan losses to period-end
loans .................................... 3.66% 3.09%
Allowance for loan losses to period-end
nonperforming loans and OREO ............. 80.64% 25.01%
SELECTED PERFORMANCE RATIOS:
Return on average assets .................. (2.92)% (1.96)%
Return on average shareholders' equity .... (74.51)% (33.20)%
Average shareholders' equity to average
assets ................................... 3.92% 5.90%
CAPITAL RATIOS:
Tier 1 risk-based ......................... 3.58% 7.55%
Total risk-based .......................... 3.79% 8.81%
Leverage .................................. 1.75% 4.36%

<FN>
- ----------
(8) All per share numbers are based on the number of shares outstanding at
period end, and have been retroactively adjusted for the one-for-five
reverse stock split effective December 14, 1993. Calculations are based
on Weighted Average number of common and common equivalent shares
outstanding of 794,324 in 1994 and 785,986 in 1993.

(9) Excludes deferred loan fees, unearned interest income on lease financing,
and allowance for loan losses.

(10) Includes nonaccrual loans and loans past due 90 days or more but still
accruing interest.

(11) Includes other real estate acquired by the Company through legal
foreclosure or deed-in-lieu of foreclosure.
</TABLE>

-9-

<PAGE>

RISK FACTORS

In determining whether or not to purchase the shares of Common Stock,
offered hereby, prospective investors should carefully consider the following
factors in addition to the other information set forth herein.

FINANCIAL CONDITION AND OPERATIONS; LOSS IN 1993 AND 1994

The Company experienced significant economic, financial and operational
related difficulties in recent years. As a result of the local area
recession and the down turn in the Southern California real estate market,
the Company reported a net loss of approximately $1,341,000 for the year
ended December 31, 1993 and approximately $1,850,000 for the year ended
December 31, 1994, although the Company reported net earnings of $182,000
during the three months ended March 31, 1995.

Weaknesses in the Southern California economy, including a deterioration
in the real estate market, led to rising levels of nonperforming assets
(defined as loans on nonaccrual and loans past due 90 days or more still
accruing interest) in 1993. Nonperforming assets grew from approximately
$869,000, or 1.27% of total assets, at December 31, 1992, to approximately
$2.9 million, or 4.36% of total assets, at December 31, 1993, before
declining to approximately $793,000, or 1.32% of total assets at December 31,
1994. Nonperforming assets increased slightly to $941,000 or 1.49% of total
assets as of March 31, 1995. The impact of the recession on the
collectibility of loans, and the value of underlying (or foreclosed)
collateral resulted in high provisions for loan losses and contributed to the
reduction in earnings in 1992, approximately $1,341,000 in net losses in
1993, and approximately $1,850,000 in net losses in 1994. The net losses in
1993 and 1994 included approximately $1,280,000 in 1993, and approximately
$995,000 in 1994, provided for loan loss losses. Included within such net
losses is a charged-off loan in the amount of $375,000, with respect to which
the Company filed a claim under its Bankers Blanket Bond in 1994, settling
with the bond carrier in the amount of $191,000 less expenses of $19,100 in
the first quarter of 1995.

The Company's net loss for 1993 and 1994 also reflected a reduction in
net interest income that was largely attributable to a decline in interest
earning assets and the yields thereon, as well as the loss of income on
non-accrual loans and other non-performing assets.

The ability of the Company to reverse the trend of its net losses is
largely dependent on the quality and level of its earnings and nonperforming
assets, the interest rate environment and the adequacy of its allowance for
loan losses. While the Company has taken significant measures to protect and
enhance its future assets, the real estate market in Southern California and
the overall economy in the area is likely to continue to have a significant
effect on the quality and level of the Company's assets. See "Risk Factors --
on Real Estate Loans" and Risk Factors -- Asset Quality; Impact of
Recessionary Environment in the Company's Market Area."

At December 31, 1994, the Company's allowance for loan losses was
approximately $1,137,000, which represented approximately 3.70% of net loans
and approximately 80.6% of nonperforming loans and OREO. At March 31, 1995,
the Company's allowance for loan losses was approximately $980,000, which
represented approximately 3.8% of net loans and 62.9% of nonperforming loans
and OREO. Although management utilizes its best judgment in providing for
possible loan losses and establishing the allowance for loan losses, the
allowance is an estimate which is inherently uncertain,

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whose predictive value depends on the outcome of future events. Although
certain data indicates that the Company's asset quality problems may have
lessened, including a recent independent loan audit by the Company's outside
loan auditor, there can be no assurance that these trends will continue or
that further deterioration will not occur. Management of both the Company
and the Bank remains committed to devoting substantial time and resources to
the identification, collection and workout of nonperforming assets. The real
estate markets and the overall economy in the Company's primary market area,
however, will be significant determinants of the quality of the Company's
assets in future periods and, thus its financial condition and operations.
No assurance can be given that substantial additional provisions to the
allowance for loan losses or reductions in the carrying value of OREO will
not be required in the future as a result of the possible further
deterioration of the real estate market and the economic conditions in the
Company's primary market area. The impact thereof, and possible future
increases in nonperforming assets could adversely affect the Company's
results of operations and, if sufficiently adverse, lead to further
regulatory enforcement actions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."

EXISTING AND POTENTIAL ENFORCEMENT ACTIONS

The Bank's performance and credit problems from 1992 through 1994 raised
concerns for the FDIC and the Superintendent.

MEMORANDUM OF UNDERSTANDING. As a result of the deficiencies noted
above, on September 22, 1993, the Bank entered into a Memorandum of
Understanding (the "MOU") with both the FDIC and the Superintendent. The MOU
required the Bank to take certain corrective actions, including reductions of
problem assets, correction of deficiencies in credit administration and the
calculation of loan loss reserves, and increases in capital to at least 7% by
March 22, 1994.

SECTION 8(b) ORDER. Following the conclusion of examinations in
1994 by the FDIC and the Superintendent, the Bank stipulated to the issuance
of an Order (the "8(b) Order") by the FDIC and an order (the "1913 Order") by
the Superintendent, without admitting or denying the related charges. The
Orders require the Bank to perform several actions within fixed time limits.
The Orders include requirements with respect to management, Board of Director
participation, the elimination of assets classified loss and the reduction of
substandard assets, restrictions on extensions of credit to classified
borrowers, maintenance of an adequate allowance for loan loss, revised
policies and procedures, a written plan and comprehensive budget, correction
of certain violations of law, and file accurate reports of condition,
refraining from cash dividends without the prior consent of the regulatory
agencies, and the filing of written progress reports. The Orders also
required the Bank to have Tier 1 capital in an amount as to equal or exceed
7% of the Bank's total assets by April 30, 1995, and maintain such ratio
thereafter. (See "Risk Factors".)

SECTION 38 NOTICE. As a result of its 1994 examination, the FDIC
notified the Bank that it fell within the undercapitalized capital category
under Section 38 of the FDI Act. As a result of such notification, the Bank
filed a capital plan with the FDIC, and the Company executed a guarantee of
the capital plan. However, by February 28, 1995, the Bank achieved compliance
with Section 38 as the Bank's leverage capital ratio exceeded 4% (it was
approximately 7.85% at March 31, 1995, following completion of the Private
Placement Offering).

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<PAGE>

The Bank has taken several actions to comply with the Orders, including
the Private Placement Offering and this Offering, and management believes
(but cannot assure that the respective regulator would agree) that the Bank
is in substantial compliance with provisions of the Orders. However, if the
FDIC or the Superintendent determines that the Bank is not in substantial
compliance with the Orders, or that its condition has significantly
deteriorated, the Bank could be subject to additional enforcement actions
that would impair the value of an investment in the Company. Enforcement
actions may include the imposition of civil money penalties, limitations on
business activities that can be conducted and, under extreme circumstances,
the imposition of a conservator or receiver, the termination of insurance of
deposits. In addition, the Superintendent, may under certain circumstances
such as insolvency of the institution or its failure or refusal to comply
with the provisions of any agreement lawfully made by the Superintendent,
take control of the Bank and cause its liquidation or merger or a transfer of
its assets and liabilities to another institution.

CONCERNS RELATING TO REAL ESTATE LOANS

At December 31, 1994 and March 31, 1995, approximately 83% and 82%,
respectively, of the Company's loans were secured by real estate, either as a
principal source of repayment, or as an additional source of repayment on
loans for non-real estate related purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The value of the
Company's real estate collateral has been, and could in the future continue
to be, adversely affected by the economic recession and possible further
deterioration of the real estate market in Southern California.

The Company's primary lending focus has historically been real estate
mortgage lending, construction lending and commercial lending. At December
31, 1994 and March 31, 1995, real estate mortgage, construction and
commercial loans comprised approximately 39%, 13%, and 39%; and 37%, 16% and
28%, respectively, of total loans in the Company's portfolio. In light of
the ongoing economic recession in Southern California and the impact it has
had and may have on possible further deterioration of the Southern California
real estate market, this real estate dependence increases the risk of loss in
both the Company's loan portfolio and its holdings of OREO.

ASSET QUALITY; IMPACT OF RECESSIONARY ENVIRONMENT IN THE COMPANY'S MARKET AREA

The Company concentrates on marketing to, and servicing the needs of,
small and medium sized businesses and high net worth individuals in South
Orange County, California. The economy in general and the real estate market
in particular in this market area have suffered from the effects of the
current recession that has negatively impacted the ability of certain
borrowers of the Company to perform under the original terms of their
obligations to the Company and eroded the value of the Company's real estate
collateral. In addition, the bankruptcy of the County of Orange, where the
Company, the Bank and most its customers are located, in late 1994, may also
adversely impact the Company through indirect impact on the level of economic
activity, or local taxation levels. To date, the Company has not experienced
any material adverse impact that it can relate to such bankruptcy.

As of December 31, 1994 and March 31, 1995, the Company had
nonperforming assets and OREO of approximately $1,410,000 and $1,588,000,
respectively. Nonperforming assets were comprised of approximately $431,000
and $454,000 in nonaccrual loans, approximately $362,000 and $487,000 in
loans past due for 90 days or more but still accruing interest and
approximately $617,000

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<PAGE>

and $617,000, respectively, in OREO at such dates, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."

A continuation or worsening of current economic conditions is likely to
have an adverse effect on the Company's business, including the level of
nonperforming assets, the cash flow of borrowers and their ability to repay
outstanding loans, the value of the Company's real estate collateral and OREO
and the demand for new loan originations. Although the Company has taken
actions to reduce its dependence on real estate, a further decline of
economic conditions that would have an adverse impact on the Company remains
possible, while the Company still faces substantial competition in its market
area.

INTEREST RATE RISK

The Company's net interest income, which is the difference between
interest income received on its interest-earning assets, including loans and
investment securities, and the interest expense incurred in connection with
its interest-bearing liabilities, including deposits, can be significantly
affected by changes in market interest rates. The timing within which the
Company's assets and liabilities reprice is not perfectly matched.
Accordingly, the yield on interest earning assets may at times decline faster
than, or not increase as quickly as, the cost of the Company's funds. A
rising interest rate environment may result in decreased origination of some
types of loans (particularly fixed rate loans), while declining rate
environments may lead to increases in demand for adjustable rate loans, as
well as increased principal repayments and refinancing of higher yielding
loans in the Company's portfolio.

RISK OF FAILURE TO MEET CAPITAL REQUIREMENTS

The Company and the Bank are required to maintain certain minimum
capital requirements that are applicable to all bank holding companies and
banks. See "Business." The Bank is also subject to Orders that required the
Bank to increase its Tier 1 capital to 7% of its total assets by April 30,
1995 and to thereafter maintain such ratio during the life of the Orders. As
a result of the completion of the first phase of the Private Placement
Offering, based on preliminary unaudited figures as of March 31, 1995, the
Bank's leverage capital ratio increased to approximately 7.85%, which was
approximately $539,000 above the 7% level required under the Orders, and the
Bank believes it is in compliance with capital requirements under the Orders.
See "Capitalization." However, no assurance can be given that future
results after the Closing Date will not cause the Bank to once again fall
below the capital requirements established by the Orders or other regulatory
requirements. Thus, the Company may be required to raise additional capital
in the future through the sale of additional securities. Any such sale of
additional securities could involve dilution of the equity ownership of the
shareholders of the Company, including purchasers of Common Stock in
conjunction with this Offering. Furthermore, in the event that the Company
or the Bank fail to satisfy any of the terms of the Orders, they could be
subject to enforcement actions by the Federal Reserve Bank, the FDIC and/or
the Superintendent, including various mandatory and discretionary sanctions
and restrictions provided for in the prompt corrective action provision of
the FDIC Improvement Act. See "Risk Factors -- Existing and Potential
Enforcement Action."

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<PAGE>

RESTRICTIONS ON PAYMENT OR RECEIPT OF DIVIDENDS

The Company has never paid a cash dividend on the Common Stock.
Management currently intends to retain all future earnings, if any, to
increase the capital of the Company in order to affect planned expansion and
increases in the assets of the Bank. There are various restrictions on the
Company's ability to pay a cash dividend, including a resolution of the
Bank's Board of Directors that prohibits the Company from paying any cash
dividend without prior notification to the Federal Reserve Bank.
Furthermore, the ability of the Company to pay a cash dividend depends
largely on the Bank's ability to pay a cash dividend to the Company.
Pursuant to the Orders, the Bank is prohibited from paying any cash dividend
without the prior approval of the FDIC. There are also statutory and other
regulatory restrictions on the Bank's ability to pay cash dividends to the
Company. See "Dividends."

POSSIBLE FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY

Acquisitions of Common Stock by persons who are not currently holders of
the Common Stock, or by current holders whose acquisition would increase or
maintain their equity ownership in the Company above 5%, could result in a
current or future "ownership change" within the meaning of Section 382 of the
Code, thereby imposing an annual limitation significantly reducing the
Company's ability to utilize certain potential tax benefits to reduce taxable
income. Due to the "ownership change" in connection with the completion of
the first phase of the Private Placement Offering, the Company will most
probably lose its right to utilize all or a significant portion of certain
potential tax benefits, including net operating loss carryforwards of
approximately $2.7 million, investment tax carryforwards of approximately
$330,000, and certain unrealized built-in losses as defined in Section
382(h)(3) of the Code (tax losses inherent in the Company's tax assets on the
date of the ownership change).

TRADING MARKET FOR THE COMPANY'S COMMON STOCK

Prior to this Offering, the Company's Common Stock has traded only over
the counter through two brokers in San Diego and Orange County on a sporadic
basis. The Company intends to assist market makers in qualifying the Common
Stock for quotation on the National Association of Securities Dealers, Inc.
If certain listing qualifications are satisfied as a result of this Offering,
the Company may seek to have the Common Stock quoted on the NASDAQ Small-Cap
automated quotation system. There is no assurance that an active trading
market for the Company's Common Stock will develop or be sustained after this
Offering or that the Company's Common Stock will be traded on a recognized
exchange or in any other organized market. See "Market for Common Stock" and
"Determination of Offering Price."

DILUTION

Record Date Holders who do not exercise their Rights in full may suffer
a dilution in their voting rights and their proportional interest in any
future net earnings of the Company. Purchasers in this Offering will suffer
an immediate dilution in book value per share of approximately $0.09
following completion of this Offering, assuming sale of all shares offered
hereby. See "Dilution" and "Capitalization."

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<PAGE>

REGULATORY CHANGE

The financial institutions industry is subject to significant
regulation, which has materially affected the business of the Company and
other financial institutions in the past and is likely to do so in the
future. Regulations now affecting the Company may be changed at any time, and
the interpretation of these regulations by examining authorities of the
Company is also subject to change. For a description of certain of the
significant changes which have been enacted, and proposals which have been
made recently, see "Business". There can be no assurance that these or any
future changes in the laws or regulations or in their interpretation will not
adversely affect the business of the Company.

COMPETITION

The Company faces substantial competition for deposits and loans
throughout its market area. Competition for deposits comes primarily from
other commercial banks, savings institutions, credit unions, thrift and
loans, money market and mutual funds and other investment alternatives.
Competition for loans comes from other commercial banks, saving institutions,
mortgage banking firms, credit unions, thrift and loans and other financial
intermediaries. The Company faces competition for deposits and loans
throughout its market area not only from local institutions but also from
out-of-state financial intermediaries which have opened loan production
offices or which solicit deposits in its market area. Many of the financial
intermediaries operating in the Company's market areas offer certain
services, such as trust, investment and international banking services, which
the Company does not offer directly. Additionally, banks with larger
capitalization and financial intermediaries not subject to bank regulatory
restrictions have larger lending limits and are thereby able to serve the
credit needs of larger customers.

THE OFFERING

GENERAL

The Company hereby offers, both to shareholders of the Company and to
the public, up to a maximum of 3,177,296 shares of Common Stock, no par value
per share, with no minimum.

RIGHTS OFFERING

RIGHTS. Shareholders and non shareholders alike may subscribe for any
number of shares of Common Stock being offered hereby. However, until
__________, 1995, shareholders of record ("Record Date Holders") of Common
Stock of the Company as of the close of business on March 30, 1995 (the
"Record Date") will have a right to subscribe for all or any portion of four
(4) shares for each share of Common Stock held. Shareholders that invested
in the Private Placement Offering on March 31, 1995 are not Record Date
Holders. The Company presently intends, but shall not be required to, accept
subscriptions (in addition to Rights subscriptions) from shareholders as of
the Record Date up to amounts that would maintain the ownership percentage of
such shareholders at the Record Date, to the extent feasible.

The Company has issued Rights to each shareholder on the Record Date at
no charge to the shareholder. The Company is not legally obligated to
provide its shareholders with preemptive rights

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<PAGE>

of any sort. The Company is issuing the Rights in order to enable its
shareholders to participate in the Offering if they wish.

If the Company determines, following the Rights Offering Expiration
Date, that the issuance of underlying shares (other than pursuant to the
exercise of Rights) will have an adverse effect upon the Company's ability to
utilize certain tax benefits, then the Company will have the right, but not
the obligation, to reduce the number of underlying shares so issuable.

PUBLIC OFFERING. Common Stock not subscribed for in the Rights Offering
will be offered to shareholders who subscribed in the Private Placement
Offering and the general public in the Public Offering. See "The Offering -
Public Offering." The Rights Offering and the Public Offering are sometimes
collectively referred to herein as the "Offerings."

SUBSCRIPTION PRICE. The Subscription Price is $1.35 per share
subscribed for pursuant to the exercise of Rights or in the Public Offering,
payable in cash.

EXPIRATION DATES. The Rights Offering is expected to expire at 5:00
p.m., local time on _________, 1995 (the "Rights Offering Expiration Date"),
and the Public Offering is expected to expire in its entirety at 5:00 p.m.,
local time, on ________, 1995 (the "Public Offering Expiration Date"). The
Public Offering is subject to extension for up to two 45-day periods or
earlier termination by the Company.

In compliance with the federal securities laws, any material change to
the terms of the Offering would require an affirmative resolicitation of
offerees hereunder before subscriptions are accepted. The Company will make
reasonable efforts to comply with the securities laws of all states in the
United States in which shareholders entitled to subscribe for the Common
Stock pursuant to the Rights Offering reside. However, no shareholder will
receive any subscription rights if he resides in a foreign country or he
resides in a state of the United States with respect to which any or all of
the following apply: (i) a small number of shareholders reside in such
state; (ii) the granting of subscription rights or the offer or sale of
shares of Common Stock to such shareholders would require the Company or its
employees to register, under the securities laws of such state, as a broker,
dealer, salesman or agent or to register or otherwise qualify its securities
for sale in such state; and (iii) such registration or qualification would be
impracticable for reasons of costs or otherwise. To the extent shares are
not sold under such circumstances, such shares will become available for
offer and sale in the Public Offering. No payments will be made in lieu of
the granting of subscription rights to any such person.

In the event Subscriptions for the Rights Offering (i) are not received
by the Rights Offering Expiration Date, (ii) are defectively filled out or
executed, or (iii) are not accompanied by the full payment required for the
shares subscribed for, the subscription rights for the shareholders for whom
such rights have been granted will lapse as though such persons failed to
return the completed Subscription forms within the time period specified.

THE BOARD OF DIRECTORS, MANAGEMENT OF THE COMPANY AND THE FINANCIAL
ADVISORS MAKE NO RECOMMENDATION TO SHAREHOLDERS REGARDING WHETHER THEY SHOULD
EXERCISE THEIR SUBSCRIPTION RIGHTS.

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<PAGE>

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

CONSEQUENCES TO STOCKHOLDERS -- The following is a summary of certain
federal income tax consequences applicable to stockholders upon the issuance
of the Rights and to Right holders upon the exercise or lapse of such Rights.
This summary is qualified in its entirety by reference to, and is based
upon, laws, regulations, rulings and decisions in effect on the date of this
Prospectus and as those laws, regulations, rulings and decisions were
interpreted on such date. This summary does not discuss all aspects of
federal income taxation that may be relevant to a particular investor or to
certain types of investors subject to special treatment under the federal
income tax laws (for example banks, dealers in securities, life insurance
companies, tax exempt organizations, and foreign taxpayers), or any aspect of
state, local or foreign tax laws. Shareholders receiving Rights should
consult their own tax advisors to determine the proper tax treatment of their
interests in the Rights and the underlying shares of Common Stock.

For federal income tax purposes, receipt by stockholders of the Company
as of March 30, 1995 ("Record Date Holders") of the Rights should be treated
as a nontaxable distribution with respect to the Common Stock. A Record Date
Holder will have a zero basis in the Rights, unless (i) the Record Date
Holder exercises such Rights, and (ii) the Record Date Holder elects under
Section 307 of the Internal Revenue Code of 1986, as amended (the "Code"), to
allocate a portion of his basis in his existing Common Stock to the Rights
(based on their relative fair market value of the Common Stock at that time).
The IRS could argue that the Rights have a fair market value equal to or
exceeding 15% of the fair market value of the Common Stock. In such a
situation, and to the extent that the IRS asserts that the Rights represent a
distribution of the Company's earnings and profits, the Record Date Holders'
receipt of the Rights could result in either taxable dividend treatment, or
an allocation of basis as described above.

The foregoing summary of certain federal income tax consequences
constitutes the opinion of the Company's counsel, Knecht & Hansen. Such
opinion is limited to the federal income tax consequences applicable to
stockholders upon the issuance of the Rights and to Rights Holders upon the
exercise or lapse of such Rights.

THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY. BECAUSE
OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, RECORD DATE HOLDERS ARE ADVISED
TO CONSULT THEIR TAX ADVISOR WITH RESPECT TO THESE AND OTHER FEDERAL, STATE
AND LOCAL TAX CONSEQUENCES OF THE DISTRIBUTION AND EXERCISE OF RIGHTS.

CONSEQUENCES TO THE COMPANY -- In general, no gain or loss will be
recognized to the Company on the distribution to its Record Date Holders of
the Rights. However, under Section 382 of the Code, as a result of the
completion of the first phase of the Private Placement Offering, if there is
a change of ownership of more than 50% in value of the Common Stock of the
Company, then the Company will be restricted in its ability to deduct any
previously incurred net operating loss carryovers or built-in losses, or
utilize investment tax carryovers, under Section 382 of the Code.

Furthermore, if the IRS were to argue that the Rights have a fair market
value of more than zero, the Company could suffer adverse tax consequences.
To the extent that the Rights were viewed as a distribution of earnings, and
to the extent that the amount distributed to Record Date Holders

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<PAGE>

exceeds the Company's current and accumulated earnings and profits (the
Company does not have accumulated earnings and profits), the Company would be
required to include in its taxable income approximately one and one-half
times the amount of such excess (assuming a 34% corporate income tax rate).
If the Rights have a value of less than 15% of the fair market value of the
Common Stock at the time of distribution, the distribution of such Rights
should not be viewed as a distribution of earnings.

REGULATORY LIMITATION

The Company will not be required to issue shares of Common Stock in the
Offering to anyone who in the Company's sole judgment and discretion, is
required to obtain prior clearance, approval or nondisapproval from any state
or federal bank regulatory authority to own or control such shares unless,
prior to the Public Offering Expiration Date, satisfactory evidence of such
clearance, approval or nondisapproval has been provided to the Company.

The Federal Change in Bank Control Act of 1978 prohibits a person, or
group of persons "acting in concert," from acquiring "control" of a bank
holding company unless the Federal Reserve Board has been given 60 days'
prior written notice of such proposed acquisition and within that time period
the Federal Reserve Board has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days the period during which
such a disapproval may be issued. An acquisition may be made prior to the
expiration of the disapproval period if the Federal Reserve Board issues
written notice of its intent not to disapprove the action. Under a
rebuttable presumption established by the Federal Reserve Board, the
acquisition of more than 10% of a class of voting stock of a bank holding
company with a class of securities registered under Section 12 of the
Exchange Act (such as the Common Stock) would, under the circumstances set
forth in the presumption, constitute the acquisition of control.

In addition, any "company" would be required to obtain the approval of
the Federal Reserve Board under the Bank Holding Company Act of 1956, as
amended ("BHC Act") before acquiring 25% (5% in the case of an acquiror that
is, or is deemed to be, a bank holding company) or more of the outstanding
Common Stock of, or such lesser number of shares as constitute control over,
the Company.

PUBLIC OFFERING

Shares not subscribed for in the Rights Offering may be purchased by
shareholders that purchased in the Private Placement Offering and by the
public.

PLAN OF DISTRIBUTION

The Offering is not underwritten.

The Company engaged the Financial Advisors to render such services as
the Company requests including (i) reviewing the financial condition and
prospects of the Company and advising the Board of Directors regarding the
Private Placement Offering and the Rights Offering; (ii) assisting the
Company in structuring of the financial aspects of the Private Placement
Offering and the Rights Offering; (iii) assisting the Company in the
preparation of the Private Placement memorandum describing the Company; (iv)
identifying potential investors; and (v) assisting the investors to evaluate

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<PAGE>

the need for, and to make any necessary applications or notices to regulatory
agencies. The Financial Advisors shall not effect the sale of securities to
any investors, and any offers or sales to investors shall be made by the
Company or a properly licensed broker-dealer.

The Financial Advisors will receive a fee equal to five percent (5%) of
the gross proceeds of the Offering and a payment of their expenses. The
Company is also responsible for all NASD and Blue Sky legal expenses and
filing fees. The Company shall also provide to the Financial Advisors an
option which will entitle the Financial Advisors to purchase shares equal to
5% of the number of shares issued and outstanding following completion of
this Offering at a price of 120% of the offering price. The option will
expire ten years after issuance and will be exercisable after the first year.
Pursuant to the agreement between the Company and the Financial Advisors,
the Company has agreed to hold the Financial Advisors harmless against all
losses, claims, damages, liabilities and expenses which may be asserted
against Spectrum, including liabilities under the Securities Act of 1933, in
connection with the offer and sale of the shares of Common Stock.

The Company understands that its directors and officers, upon and after
the effective date of the Offering, may contact such potential investor,
indicating that the Company's Registration Statement and Offering have been
declared effective, and that the Prospectus and any supplemental materials
approved for use by the Commission would be sent to such potential investor.
Such directors or officers should inform the potential investor that the
Offering has nothing to do with the potential investor's business activities
with the Bank. Such director and/or officer may follow up such initial
contact by telephone or in person once the potential investor has received
the offering materials.

Except for some directors, management does not expect that all directors
and officers will participate in this Offering, and management expects that
upon conclusion of this Offering that the ownership of current directors will
be diluted.

The Company has no devices in place to prevent a change of control,
except requirements of the Change of Bank Control Act. See "The Offering -
Regulatory Limitation."

ESCROW ACCOUNT

Monarch Bank ("Escrow Agent"), the wholly-owned subsidiary of the
Company, will act as the escrow agent to accept stock orders in the Rights
Offering and the Public Offering. All funds will be held by the Escrow Agent
until such funds are distributed to the Company at the Closing or refunded to
subscribers. Once all conditions precedent to the consummation of one or
more of the Closings have been satisfied or duly waived, the Escrow Agent
will release the funds held in the escrow to the Company. All communications
to the Escrow Agent should be addressed as follows:

Monarch Bank
30000 Town Center Drive
Laguna Niguel, California 92677
Attn: William C. Demmin
Senior Vice President

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METHOD OF SUBSCRIBING FOR SHARES

Shares may be ordered in the Offerings by properly completing, signing
and delivering the appropriate Subscription Form accompanying this Prospectus
(I.E., a Subscription Form for the Rights Offering or the Public Offering).
Payment may be made by personal check, cashier's check or certified check or
money order. Checks should be made payable to the order of "Monarch Bank -
Escrow Agent." Completed Subscription Forms and full payments for shares
subscribed for in the Rights Offering must be received before 5:00 p.m.,
local time, on the Rights Offering Expiration Date and in the Public Offering
on or before 5:00 p.m., local time, on the Public Offering Expiration Date at
the Escrow Agent, unless extended. ALL SUBSCRIPTIONS ARE IRREVOCABLE.

The method of delivery of a Subscription Form to the Escrow Agent is at
the risk of the person submitting the order. The Company suggests that an
overnight carrier be used to ensure timely delivery. If delivery is made by
regular mail service, the use of registered or certified mail, return receipt
requested, properly insured, is recommended. COMPLETED SUBSCRIPTION FORMS
AND PAYMENTS SHOULD BE MAILED OR DELIVERED TO MONARCH BANK.

THE CLOSINGS

The Company intends to conduct one or more closings in connection with
the Offering. On the Rights Offering Expiration Date, the Company will
conduct an initial closing upon which shares of Common Stock will be issued
to subscribers whose subscriptions have been accepted, the Bank as escrow
agent will release the funds representing the orders of such subscribers, and
the Company will continue the Offering until completion or termination.

DELIVERY OF STOCK CERTIFICATES; REFUNDS

Certificates representing shares of Common Stock subscribed for and
issued, together with any refund, with interest, of the Offering Price for
shares of Common Stock subscribed in the Offering and not issued, will be
mailed as soon as practicable upon the completion or termination of both the
Rights Offering and Offering. Certificates for shares of Common Stock issued
pursuant to the exercise of Rights will be registered in the name of the
shareholder exercising such rights.

AMENDMENT AND WAIVER; TERMINATION

The Company reserves the right to extend the Offering Expiration Date
for up to two periods of an additional 45 days each and to amend the terms
and conditions of the Offering. The amended terms and conditions, if any,
may be more or less favorable to the shareholders of record as of the Record
Date. The Company will not, however, amend the terms of the Offerings to
change the Offering Price, and any material change to the terms of the
Offerings would require an affirmative solicitation by the Company. All
questions as to the validity, form, eligibility (including time of receipt
and record ownership) and acceptance of any stock orders shall be determined
by the Board of Directors of the Company, in its sole discretion, and its
determination shall be final and binding. The Company reserves the right to
reject any stock order if such order is not in accordance with the terms of
the Offering or not in proper form or if the acceptance thereof or the
issuance of Units pursuant thereto could be deemed unlawful. The Company
also reserves the right to waive any deficiency or irregularity with respect
to the Subscription Form.

-20-

<PAGE>

The Company reserves the right, in its sole discretion, at any time
prior to delivery of the shares of Common Stock offered hereby, to terminate
the Rights Offering and the Offering by making a public announcement thereof.
In such event, all funds would be promptly refunded without interest.

ADDITIONAL INFORMATION

Any questions or requests for assistance concerning the method of
subscribing for shares of Common Stock in the Rights Offering or Public
Offering or for additional copies of the Prospectus or Subscription Order
Forms should be directed to E. Lynn Caswell, President and Chief Executive
Officer, William C. Demmin, Senior Vice President, or Carole Z. Bowman,
Senior Vice President, telephone (714) 495-3300.

USE OF PROCEEDS

The net proceeds of the Offering will be used for general corporate
banking purposes and to allow for the prudent expansion of the organization
through continued growth in its present facility, and to expand into other
communities in Southern California, possibly through the acquisition of other
financial institutions or acquisition or establishment of branches of such
institutions, subject to regulatory approvals and satisfaction of the terms
of the Orders. Upon completion of the Private Placement Offering to
accredited investors pursuant to SEC Regulation D on March 31, 1995, the
Company issued an additional 4,547,111 new shares of Common Stock, $3,550,000
was contributed to the Bank to increase the Company's investment in the Bank,
$53,500 was used to retire Company debt, and approximately $2,065,000 was
retained by the Company. The Company believes that it has complied with the
capital requirements of the Orders. In addition, the Company may raise up to
an additional $3,989,350 pursuant to this Offering. It is anticipated that
the Company will retain the funds raised upon the completion of this Offering
for general corporate purposes, future investment or acquisition, or to
enhance the Bank's capital in the future. Although the Company has had
preliminary discussions regarding possible acquisitions with a number of
financial institutions, and the Company is having ongoing discussions with
Rancho Santa Fe National Bank, no agreements or understandings have been
reached at this time.

Although the Bank currently exceeds all capital requirements applicable
to its business, no assurance can be given that the results of operations in
the future will not make the capital raised hereby insufficient to maintain
the 7% minimum required by the Orders.

The net proceeds of the Offering initially will be invested in deposits,
debt securities, equity of the Bank, or other liquid investments pending
their allocation to longer term assets.

-21-

<PAGE>

PRO FORMA CAPITAL AMOUNTS AND CAPITAL RATIOS

The following tables illustrate the capitalization amounts and ratios of
the Company and the Bank as of March 31, 1995 and the pro forma effect of the
Offering on such ratios, assuming all shares of Common Stock offered hereby
are sold, and estimated costs of $300,000 are incurred.

RISK BASED CAPITAL RATIOS

At March 31, 1995
The Company The Bank
----------- --------
(Dollars in Thousands)

Amount Ratio Amount Ratio
------ ----- ------ -----

Tier 1 Capital $6,768 21.91% $4,996 16.09%
Tier 1 Capital-Minimum Required 1,236 4.00% 1,242 4.00%

Excess 5,532 3,754

Tier 1 Capital - Pro Forma(12) 10,757 30.84% 4,996 16.09%

Excess 9,522 3,754

Total Capital 7,156 23.17% 5,384 17.34%
Total Capital - Minimum Required 2,471 8.00% 2,484 8.00%

Excess 4,685 2,900

Total Capital - Pro Forma 11,145 31.95% 5,384 17.34%

Excess 8,674 2,900

Risk Weighted Assets (Actual) 30,889 31,052

Risk Weighted Assets (Pro Forma) 34,878 31,052

- ----------------

(12) Net proceeds of approximately $3.99 million would be realized by the
Company after deduction of estimated costs of issuance of approximately
$300,000, and the Company would retain all net proceeds.

-22-

<PAGE>

LEVERAGE CAPITAL RATIOS

At March 31, 1995
The Company The Bank
----------- --------
(Dollars in Thousands)

Amount Ratio Amount Ratio
------ ----- ------ -----

Tier 1 Capital to total Average $6,768 10.66% $4,996 7.85%
(Assets)

Tier 1 Capital to total Average
Assets - Minimum Required 3,175 5.00%(2) 4,457 7.00%(3)

Excess (Deficiency) 3,593 539

Tier 1 Capital to total Average
Assets Pro Forma(1) 10,757 15.94%

Excess 7,582

Average Assets for the Period
(Actual) 63,508 63,671

Pro Forma Assets 67,497

DILUTION

At March 31, 1995, the book value of the Company's Common Stock(4) was
$6,768,000 or $1.26 per share. Without taking into account any changes in
book value after March 31, 1995, other than to give effect to the completion
of this Offering of 3,177,296 shares of Common Stock, the pro forma book
value of the Company would be $10,757,350 or $1.26 per share of Common Stock.
This would represent a DE MINIMUS decrease in pro forma book value of $0.004
to existing shareholders, and an immediate decrease in book value of $0.09 to
investors in the shares of Common Stock.

- ---------------

(2) Under the Federal Reserve Board's leverage capital adequacy
guidelines, all bank holding companies must maintain a leverage capital
ratio of at least 3%. However, institutions which are not among the most
highly rated by the federal regulators must maintain a ratio 100-to-200
basis points above the 3% minimum. The federal Reserve Board has not
informed the Company of the amount by which its leverage capital ratio
must exceed the 3% minimum, but the Company is currently in excess of
the 5% ratio.

(3) Provides for minimum Tier 1 risk-based capital ratio and minimum total
risk-based capital ratio for bank holding companies and banks
established by Federal Reserve Board regulation, except that the 7%
leverage ratio is the minimum requirement contained in the Orders. See
"Management's Discussion and Analysis of Financial condition and Results
of Operations" and "Business."

(4) Net Book value represents the Company's total assets less total
liabilities.

-23-

<PAGE>

The following table illustrates the pro forma in net book value to
purchasers of shares as of March 31, 1995 assuming the sale of the maximum
level of 3,177,296 shares of Common Stock of the Company and completion of
the Private Placement Offering.

<TABLE>

<S> <C>
Net book value per share before the Offering . . . . . . . . . . . $1.267
Decrease attributable to subscriptions by Purchasers . . . . . . . $0.004
Pro forma net book value per share after Offering . . . . . . . . $1.263
Decrease per share to Purchasers . . . . . . . . . . . . . . . . . $0.09

</TABLE>

DETERMINATION OF OFFERING PRICE

Prior to this Offering, there has been only a limited trading market in the
Company's Common Stock. See "Market for Common Stock." No assurance can be
given that a more active market for the Company's Common Stock will exist as
a result of the Offering. The price at which the shares of Common Stock are
offered and sold in this Offering was independently established by the Board
of Directors, who received assistance in setting such price from the
Financial Advisors. The Board of Directors also took into consideration
several factors, including the book value of the Company's Common Stock, the
Company's and the Bank's results of operations, analysis of the historical
growth and growth potential of the Company and the Company's market area, and
assessment of the Company's and the Bank's management and financial
condition. Neither the Company's Board of Directors or its Financial
Advisors make any recommendation to prospective investors regarding whether
they should exercise Rights or purchase shares. (See "Offering".)

MARKET FOR COMMON STOCK

The Company is aware of two securities dealers who have handled
transactions in its Common Stock: Spelman & Company, San Diego, California,
and Crowell, Weedon & Company, Laguna Hills, California (the "Securities
Dealers"). The Company effected a One-For-Five Reverse Stock Split on
December 14, 1993, and the prices per share listed below have been
retroactively adjusted for the Reverse Stock Split. The Company effected the
Reverse Stock Split for several reasons, including the resulting increase in
book value per share to qualify for listing on NASDAQ, and the Company
intends to seek such listing on NASDAQ following the close of the Offering.
The Company's Common Stock currently is traded over-the-counter, is not
listed on any exchange, and is not quoted by NASDAQ. No assurance can be
given that the Company's application for such listing on NASDAQ will be
approved, nor that an active public trading market for the Common Stock will
develop subsequent to the Offering. The number of record holders of the
Company's Common Stock as of March 31, 1995 was approximately 724.

The following table summarizes those trades of Company Common Stock of
which management is aware, setting forth the high and low sales prices for
each quarterly period since December 31, 1992, retroactively adjusted for the
One-For-Five Reverse Stock Split that was effected on December 14, 1993. The
table does not represent all trades that have occurred, of which the Company
is not aware.

-24-

<PAGE>

<TABLE>
<CAPTION>
Approximate Sales Prices
Quarter Ended ------------------------
(last trading day) High(5) Low(1)
------------------ ------- ------
<S> <C> <C>
December 31, 1992 5.00 3.25
March 31, 1993 5.00 4.50
June 30, 1993 4.75 4.25
September 30, 1993 4.25 3.75
December 31, 1993 4.25 3.75
March 31, 1994 3.75 2.50
June 30, 1994 None None
September 30, 1994 2.44 1.90
December 31, 1995 0.80 0.80
March 31, 1995 1.50 0.80

</TABLE>

The information in the above table may not be indicative of
the current value of Common Stock of the Company, and the table is not a
representation as to the future value of the Common Stock of the Company.
Since March 31, 1995, there have not been any significant trades of the
Company's Common Stock. Trades totaling 26,691 shares of the Company's
Common Stock occurred during the first quarter at $1.50 to $.80 per share.

DIVIDENDS

Holders of Company Common Stock are entitled to receive dividends
declared by the Company's Board of Directors out of funds legally available
therefor under the laws of the State of California. Under California law,
the Company would be prohibited from paying dividends unless: (1) its
retained earnings immediately prior to the dividend payment equals or exceeds
the amount of the dividend; or (2) immediately after giving effect to the
dividend (i) the sum of the Company's assets would be at least equal to 125%
of its liabilities and (ii) the current assets of the Company would be at
least equal to its current liabilities, or, if the average of its earnings
before taxes on income and before interest expense for the two preceding
fiscal years was less than the average of its interest expense for the two
preceding fiscal years, at least 125% of its current liabilities.

The Bank may declare cash dividends to its parent out of funds legally
available therefor. Under California law, funds available for cash dividend
payments by a bank are restricted to the lesser of: (1) retained earnings
(undivided profits), or (ii) the Bank's net income for its last three fiscal
years (less any distributions to shareholders made during such period). Cash
dividends may also be paid out of net income for a bank's past preceding
fiscal year upon the prior approval of the Superintendent, without regard to
retained earnings or net income for its past three fiscal years. If the
Superintendent finds that the stockholders' equity of a bank is not adequate
or that the payment of a dividend would be unsafe or unsound for a bank, the
Superintendent may order a bank not to pay any dividend to a bank's
shareholders.

- ----------------

(5) High and low prices have been retroactively adjusted to account for the
One-For-Five Reverse Stock Split effective December 14, 1993.

-25-

<PAGE>

The Company has never paid a cash dividend on the Common Stock.
Management currently intends to retain all earnings, if any, to increase the
capital of the Company to affect planned expansion activities and to pay
dividends only when it is prudent to do so and the Company's performance
justifies such action. There are various limitations on the Company's
ability to pay a cash dividend. As part of Board of Director resolutions,
the Company may not pay a cash dividend without providing prior notice to the
Federal Reserve Bank. See "Business." Furthermore, the ability of the
Company to pay a dividend depends largely upon the Bank's ability to pay a
cash dividend to the Company. Pursuant to its Orders with the FDIC and the
Superintendent, the Bank is prohibited from paying any cash dividends without
the prior consent of the FDIC. Although the Board of Directors believes this
limitation would be eliminated when and if the Orders are satisfied and
removed by the FDIC and the Superintendent. no assurance can be given that
any dividends will be declared by the Company or the Bank in the foreseeable
future.

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company as of March 31, 1995, adjusted to give pro forma effect to completion
of the Offering as of March 31, 1995, and assumes that (i) 3,177,296 shares
are sold in this Offering, and (ii) the Company will have net proceeds of
approximately $3.99 million, after deducting estimated expenses of $300,000.
The financial information included in this section and throughout this
Prospectus should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes appearing elsewhere herein. The table is
provided for the purpose of illustration only and does not limit the right of
the Company to sell any number of shares of Common Stock in the Offering up
to the maximum number of shares of Common Stock offered. See "Use of
Proceeds" for Pro Forma Capital Ratios.

-26-

<PAGE>

<TABLE>
<CAPTION>
Assuming Sale of
3,177,296 Shares of
Outstanding Common Stock to
(Actual) complete this Offering(6)
----------- -------------------------
<S> <C> <C>

Shareholders' Equity
Preferred Stock, no par value,
5,000,000 shares authorized,
no shares outstanding N/A N/A

Common Stock, no par value,
25,000,000 shares authorized,
5,341,435 shares outstanding
before completion of this
Offering $13,036,000 $17,025,350

Accumulated Deficit (5,955,000) (5,955,000)

Unrealized appreciation on
certain investment securities (150,000) (150,000)

Deferred charge related to
KSOP (163,000) (163,000)

TOTAL SHAREHOLDERS' EQUITY $ 6,768,000 $10,757,350

<FN>
- ------------------

(6) Does not reflect shares that may be issued pursuant to the granting
and exercise of employee stock options or the exercise of options
anticipated to be issued to the Financial Advisors.

</TABLE>

-27-

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The $1,850,000 loss as of December 31, 1994 embodied three significant
issues: (i) a decrease of approximately $5.1 million in average assets and
more specifically a shift in earning assets from generally higher yielding
loans to generally lower yielding investments; (ii) a continuation of the
recession related credit problems as troubled borrowers from 1993 could no
longer meet their loan commitments in 1994 as measured in a $995,000
provision for loan loss expense; and (iii) a $360,000 write-off of expenses
for a 1994 unsuccessful public offering.

REDUCTIONS IN ASSETS

The Bank's average assets decreased in 1994 by approximately $5.1
million, and average earning assets decreased by approximately $5.6 million
for five reasons: (1) the recession; (2) low loan demand; (3) Management's
willingness to allow a reduction in total deposits which could not be
profitably used in the normal lending program or short-term investments; (4)
Management's acknowledgment of the need to manage regulatory capital ratios
during a period of reduced shareholders' equity; and (5) an increase in the
average level for OREO.

The 1994 economic conditions were previously discussed in Item 1, and
most current information suggests the local economy is finally starting to
recover from a major recession.

Average net loans decreased by approximately $8.4 million in 1994 during
a period when interest rates for both loans and deposits were increasing.
The Bank's primary focus in 1994 was working with existing borrowers who were
attempting to survive the recession while screening all new credit requests
under the highest underwriting standards. Excess funds not used for
lending were moved to other investments, with the Bank electing to maintain a
very high level of cash liquidity rather than reach for higher yielding,
longer-term investment alternatives. The decrease in total interest income
of approximately $409,000 is primarily attributed to the decrease in loan
volume since loan rates increased for most of the year. Interest rates on
all earning assets progressively increased in 1994 as the Federal Reserve
systematically increased interest rates; however, the most measurable
increases were during the latter part of the year. While interest rates were
increasing on earning assets and on deposits, the increase for deposits was
much less as the Bank consistently priced its deposit products nearer the
lower end of the deposit rate ranges for other local financial institutions.

INVESTMENT ACTIVITY

The Bank had a full year's experience with FASB 115 which requires the
investment portfolio to be segmented into three possible categories:
available for sale (AFS), held to maturity (HTM), and trading. The Bank does
not have a trading portfolio and had no sales of securities from either its
AFS or HTM portfolios in 1994, and the Bank does not, as a rule, expect to
sell securities from the AFS portfolio except under unforeseen circumstances
to meet specific funding or liquidity needs. Decisions on the portfolio
allocation between AFS and HTM are made based on the expectation that
variable rate securities (AFS portfolio) would allow for some automatic
adjustment to market values over a reasonably short period (one to two years
in most rate change cycles) while the shorter-term, fixed-rate investments
(HTM's) would not be required to book accounting cost adjustments during
swings in investment prices.

-28-

<PAGE>

While FASB 115 requires the AFS portfolio to be adjusted to market value
directly through the equity account, banking regulators, as a group, have
excluded this equity accounting adjustment from capital ratio calculations
because of the short-term volatility of the adjustments that may or may not
represent a real change in equity capital.

The Bank's investment portfolio, including information through the end
of March, 1995, displays the following volatility in considering the Bank's
investment portfolio:

<TABLE>
<CAPTION>
MAR 1995 DEC 1994 DEC 1993
-------- -------- --------
<S> <C> <C> <C>
HTM
Cost basis 4,590 4,405 3,285
Market value 4,465 4,170 3,274
------ ------ ------
Appreciation/(depreciation) (125) (235) (11)
AFS
Cost basis 11,910 12,137 14,861
Market value 11,760 11,780 14,914
------ ------ ------
Appreciation/(depreciation) (150) (357) 53

</TABLE>

The Bank, as part of its investment portfolio, holds derivative
securities. These securities include three Collateralized Mortgage
Obligations (CMOs) which total approximately $2,487,000 at current market
value with a weighted average rate of 6.82% and a weighted average life of
3.44 years. All three CMO's are periodically tested using the FFIEC High
Risk Security Test, and each of the securities has passed the tests that are
used by bank regulators to assess relative CMO investment risks. The Bank
also holds a $2.5 million SLMA Multi Step-up security that will reprice to
increasingly higher levels each March unless called during the next four
years. The Bank's Investment Committee makes every effort to keep informed
about both the perceived and real risks of derivative securities, and has set
general limits on the types of derivatives the Bank can purchase at the most
basic levels which include step-up notes and CMO's.

The Bank has not been involved in any off balance sheet hedging type
activities.

CREDIT RISK AND LOAN ISSUES

NET CHARGE OFFS: The following table illustrates the net results of
loan charge offs and recoveries in 1994, 1993 and 1992 (dollars in
thousands):

1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Real estate 756 52 90
Construction 0 75 70
Commercial 134 594 32
Installment 24 78 15
--- --- ---
912 799 207

</TABLE>

The trend for net charge offs in 1994, 1993 and 1992 is a direct
reflection of the impact of the recession. Net charge offs on a historic
basis on a larger loan portfolio base in 1991 and 1990 were $27,000 and
$31,000, respectively.

-29-

<PAGE>

Of the $992,000 in total loan losses in 1994, three borrowers
accounted for $717,000 or 72% of the total. Two large real estate loans were
acquired through foreclosure in 1994 and because of the distressed market for
million dollar homes, these loans were written down through the Reserve at
the time of foreclosure by $542,000. One of the properties subsequently sold
at the booked price, and the other is still owned by the Bank at a book
value of approximately $617,000. The Bank is actively attempting to sell
this property, and the current appraised value -- less estimated selling
costs -- continues to support this value; however, there are a limited number
of buyers for properties in this area, and the sales market is slow. Both of
these real estate loans were defaulted upon because of marital problems even
though the borrowers appeared to have adequate cash flows to meet their
payments. The third large borrower was a $175,000 loan that was charged off
when the borrower was forced to close one of his two business locations.
There were also 14 additional charge offs with a mean average of $20,000 and
a high of $77,000 and a low of $640.

A review of past due and nonaccrual loans as of December 31, 1994 and
1993 shows:

<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C> <C> <C>
# $'000 # $ '000
Past due 60 - 89 days 2 3 4 106
Past due 90 + and accruing 3 362 3 505
Non-accruing 6 431 4 2,420
-- ---- -- ------
11 796 11 3,031
</TABLE>

As of April, 1994, the three loans Past due 90 + and still accruing
included (i) two loans that are secured by real estate (supported by current
appraisals or market reviews), and (ii) one loan that has paid off. The
nonaccrual loans include (i) two loans that are secured by real estate with
reasonable equity based on current appraisals; (ii) one loan that was
restored to an accrual status in February 1995 because of improved financial
performance and 11 consecutive months of current monthly payments; and (iii)
a final loan that is secured by real estate that is currently being
refinanced by another financial institution.

Other than loans classified for regulatory purposes as loss, doubtful,
substandard or special mention by the Bank or by regulators during periodic
examinations, the Bank is not aware of trends or uncertainties that would
materially impact the loan portfolio. The Bank has included consideration of
possible unknown credit problems form the recession in its analysis of
problem loans and reserves.

The Bank holds one OREO property which was written down by $300,000 when
it was acquired in 1994, and by an additional $200,000 as of December 31,
1994. The property's book value of $617,000 is supported by a current
appraisal, and the property is being actively marketed. This property is
located in an area of the state where real estate sales are still very slow.
The original cost of this home was approximately $2.3 million. The Bank
completed the sale of other OREO properties in 1994 with little or no net
gain or loss. The Bank estimates the monthly carrying cost of the remaining
OREO at approximately $5,000 per month.

PUBLIC OFFERING EXPENSES

The public offering which required a write off for direct and indirect
expenses of approximately $360,000 was previously discussed in Item 1.

-30-

<PAGE>

LIQUIDITY AND INTEREST RATE RISK

During 1994, the Bank consistently maintained very high cash liquidity
(Cash, Investments (both HTM and AFS at cost), and Federal Funds Sold divided
by Total Deposits) of approximately 40% or greater. Conversely, the Bank's
loan-to-deposit ratio for most of 1994 was in the range of 55% to 60%. The
high liquidity was a product of low demand for loans and very high
underwriting standards during the latter part of a major recession.

The following table breaks down rate sensitivity for earning assets
(RSA) and rate sensitive liabilities (RSL) based on the earliest possible
repricing dates for variable rate instruments, or for fixed rate assets and
liabilities, on scheduled maturities. The table includes experience-based
prepayment assumptions for mortgage loans. The table uses data from FDIC
Call Reports and is similar to the reporting assumptions required during bank
examinations. (Dollars in thousands):

1 2-90 91-365 1-5 5+
Day Days Days Years Years Total
------ ----- ------ ------ ----- ------
CD's at other banks 0 0 788 601 0 1,389
Investments
Fixed rate 0 0 0 1,753 0 1,753
Floating 5,191 4,492 2.087 2,664 0 14,434
Loans
Fixed 0 432 1,993 6,650 671 9,746
Floating 13,016 704 6,339 805 0 20,864
Nonaccrual 0 0 431 0 0 431
Federal Funds Sold 5,891 0 0 0 0 5,891
------ ----- ------ ------ ----- ------
Total RSA 24,098 5,628 11,638 12,473 671 54,508

Savings 0 3,742 2,494 0 0 6,236

MMDA 11,436 0 0 0 0 11,436
Now Accounts 13,351 0 0 0 0 13,351
CD's over $100,000 0 1,650 601 0 0 2,251
Other CD's 0 2,755 1,607 230 0 4,592
------ ----- ------ ------ ----- ------
Total RSL 24,787 8,147 4,702 230 0 37,866
------ ----- ------ ------ ----- ------
Net RSA-RSL (689) (2,519) 6,936 12,243 671 16,642
Cumulative RSA-RSL (3,208) 3,728 15,971 16,642

As a rule, the Bank works to keep the cumulative difference between
RSA and RSL as balanced as possible over a one year cycle. In 1994 and 1993
deposit interest rates were low and many deposits shifted balances into
shorter term instruments and out of certificates of deposits (CD). This
tended to reduce total CD deposits as a normal balancing factor for deposit
maturities and to increase the shortest end of rate sensitive liabilities.
The Bank, and most banks as a group, are currently faced with a need to
progressively increase deposit rates which were held low in 1994 because of
the lack of competition for deposits at a time when banks were still
operating with low or lower than normal loan demand. This need and pricing
pattern appears to be changing, and the Bank and the banking industry expects
to see cost of funds increase at a much faster pace in 1995 than in 1994.

-31-

<PAGE>

Bank regulators are reviewing proposed standards for measuring interest rate
risk, and new standards and reporting requirements are expected to be
introduced in 1995.

CASH FLOW -- PARENT COMPANY ONLY

The Company as of December 31, 1994 had $53,500 in notes that mature
in August 1995. These notes were repaid on March 31, 1995 from part of the
funds received from the private placement. During 1994, all corporate
expenses were held to minimum levels, and cash balances currently available
are adequate to meet cash flow needs for the coming year. Following the
completion of the private placement, the Company as of March 31, 1995, has
over $2 million in available cash to support current operations, as
additional capital to support the Bank, or for other possible investments.

As a result of the capital increase for the Bank, the Bank's Tier 1
capital ratio, as of March 31, 1995 was 7.85%. The increase in the Bank's
capital meets or exceeds the Bank's regulatory commitments to the FDIC and
Superintendent to increase the Bank's ratio for Tier 1 capital to total
assets to equal or exceed 7.0% by April 30, 1995.

RECESSION / INFLATION

Based on local newspaper reports, the recent recession was the most
severe experienced in Orange County as measured by decreases in employment
and a significant decline in real estate values. Nearly every area of the
local economy had declines, and virtually all community banks experienced
significant loan losses and declines in the relative size of their loan
portfolios as a direct result of the recession.

The recovery appears to have started in California, but Orange County
continues to lag behind the rest of the country. More recently, this has
been compounded by the bankruptcy filing by Orange County. Through March
1995, the market for home sales was down for the first three months of 1995
both because of higher interest rates and concerns about the County, and
local businesses pondering the uncertainty caused by higher interest rates
and lack of a published workout plan by the County. One local economic
research organization has published data that suggests that on a technical
basis the local economic recovery began sooner than previously suggested and
is currently stronger than expected. Several economists feel that the
bankruptcy will cause short-term uncertainty but that the local economy is
moving faster into the recovery than expected, and this will be more evident
once the County's workout plan is completed. One key feature of the plan is
a proposed tax increase of one-half percent that is expected to be presented
for vote in June or July. However, no assurances can be given regarding the
possible recovery in the local economy.

OPERATIONS RESULTS

INTEREST INCOME decreased by approximately $409,000 or 9% for the
year 1994 versus 1993. The decrease was caused by a decline in loan totals
as lending activity continued to decrease in 1994 under recessionary
pressure. The decrease would have been even greater given the drop in loan
volume had interest rates for earning assets not been increasing.

INTEREST EXPENSE declined by approximately $143,000 or 11% in 1994
versus the prior year as overall interest rates on deposits marginally
decreased for the year while total deposits were dropping.

-32-

<PAGE>

Low deposit rates also compelled many depositors in 1993 and the start of 1994
to move away from certificates of deposit into interest bearing transactional
accounts or even simple non-interest bearing demand deposits. This trend
started to reverse itself later in 1994 and continues in the first months of
1995 as the cost of funds was progressively increasing at the end of the year.

NON-INTEREST INCOME decreased for the comparative years by
approximately $264,000 or 28%. The primary reason for this decrease was the
termination of the sale leaseback on assets which had provided approximately
$13,000 per month in income as the gain on sale was amortized to income.
This lease terminated in September 1993 and represents approximately $111,000
of the decrease. Rental income decreased by approximately $48,000 or 40%
with the renegotiation at a reduced rate on a subleased facility. The Bank
also recorded a gain on sale of securities in 1993 but wrote down one
security in 1994 by $47,000.

The Bank generates a significant amount of income, $230,000 and
$278,000 for the years 1994 and 1993, respectively, from Overdraft
Charges for service charges ($15 per check) relating to checks drawn against
insufficient funds (NSF). This
charge is generally made whether the check is paid or not paid. The Bank
very carefully controls and monitors overdraft or potential overdraft
activity, and actual daily overdrafts average less than $25,000. The Bank
has very little charge off activity from overdrafts -- the average is less
than $500 per year for each of the past five years. The Bank is one of the
few financial institutions that continues to make daily telephone calls to
depositors on the "pending" overdraft report and checks are only paid for
established, well-known depositors or for depositors who make a confirmed
deposit the same day to cover their NSF checks. Based on discussions with
other local community banks, this level of NSF income is consistent with our
market place. The Bank's knowledge of its customers and tight controls over
the review and approval process for overdraft or NSF activity reduce any
potential credit exposure.

OPERATING EXPENSES increased by approximately $215,000 or 5.2% for the
year 1994 versus 1993. This increase includes specific nonrecurring items for
1994 including: (i) approximately $366,000 in expenses that were written off
following the termination of the public stock offering in 1994 when the
Company failed to raise the minimum required in the offering; and (ii) a
$200,000 direct write down on December 31, 1994 on the book value of the
Bank's remaining OREO. The OREO adjustment was made to reflect the current
estimated market value of the property in a slow real estate market.

Without these two large expenses, Operating Expenses decreased by
$351,000 which reflects numerous areas where expense controls were effective
in reducing costs. Specific material reductions include salary and benefits
which decreased by $51,000, and Office and Occupancy expenses which decreased
by $496,000 or 28% inclusive of the relative expense reductions following the
end of the sale leaseback of Bank assets in September 1993 and other strict
expense controls in all areas of the Bank.

INTERNAL CONTROLS

In addition to the annual audit done by the Company's independent
auditors and periodic examinations by bank regulators, the Audit Committee of
the Bank maintains an engagement with R. Maslac & Associates for periodic
loan, administrative, operational, and data processing audits of internal
controls. These internal control audits are performed on a periodic basis
during the year.

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Expenses for outside credit and internal control reviews were approximately
$26,000 in 1994, $25,000 in 1993. The Board's committees, and when needed
the full Board, review all reports from these outside reviews.

FORWARD LOOKING

The March 31, 1995 first closing of the private placement allowed the
Company to increase the Bank's capital by $3.6 million and meet the Bank's
April 30, 1995 commitments under the Bank's regulatory orders to increase
capital. The private placement process also included a detailed due
diligence review of the Bank's loan portfolio, accounting, and operations.
The due diligence process and the 1994 annual audit were used by the Company
to carefully examine the Bank's assets and operations, and included
recommendations for some write offs to reflect actual or probable losses to
Bank assets from the economic problems that have beset the area -- including
the recession and more recently from the bankruptcy of Orange County.
While the Bank and Company have no assurance that there are no additional
surprise losses, it appears that the Bank is now positioned to operate with
sustainable profitability for the foreseeable future. The current largest
challenges for the Bank are to rebuild loan activity with good credit quality
and to progressively increase the level of total assets and total deposits.

The Company retained just over $2 million in cash from the private
placement, and has projected an additional $1.6 million to $2.5 million from
a final closing of the private placement and from a shareholders' rights
offering for the shareholders prior to the private placement. The
completion of the private placement is dependent on the Federal Reserve and
State Banking Department approval after their review of change of control
applications that were filed for two individuals. These two individuals will
each hold approximately 13% of the Company's common stock if and when the
private placement is completed (this will decrease depending on the amount
raised from the rights offering).

The private placement has increased the number of shareholders by
approximately 26 with the largest single shareholder projected to hold
approximately 13% of the stock.

The stated goal of the Company is to continue to operate the Bank as a
community bank with a local Board of Directors. The Company also has
adequate cash to assist the Bank to expand or to expand the Company's
activities into areas that are approved for bank holding companies to
operate. The Company has no immediate or specific plans for expansion,
although it is investigating opportunities to expand.

The Bank has developed and the Board of Directors has
approved separate management
action plans to address each of the issues detailed in the regulatory Orders
it signed with the FDIC and Superintendent. The plans are divided into three
major sections -- capital, credit administration, and other items. With the
March 31, 1995 completion of the first closing for the private placement, the
Bank has achieved and exceeded the capital ratios required by April 30, 1995,
and the Bank expects to continue to operate with a leverage ratio of not less
than 7.0% during the life of the Orders. Once the Orders have been removed,
the Bank expects to operate at or above the "well capitalized" level (as
periodically defined by bank regulations). As of March 31, 1995, the Bank
meets and exceeds the numerical regulatory definitions for a "well
capitalized" bank. The Bank's capital restoration plan and budget were
submitted to the FDIC and Superintendent and were approved in January, 1995.

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As of March 31, 1995, to the best of management's knowledge, the Bank
has met each of the action date requirements defined in the Orders relating
to credit administration including reduction of classified assets to defined
levels. Actions relating to: credit administration include revisions to the
Loan Policy; maintenance of an adequate loan loss reserve; and other actions
to strengthen credit administration have also been taken.

Action has also been taken for each of the other items in the Orders,
and the Bank feels that it is in compliance with all of the required actions
that were to be completed by March 31, 1995. It has also instituted action
to comply with the few remaining actions that are tied to dates later in 1995.

As of March 31, 1995, the Bank settled a claim filed in 1994 under its
Bankers Blanket Bond for approximately $171,000 net of expenses.

BUSINESS

GENERAL

The Company was organized and incorporated under the laws of the State
of California on May 20, 1983 at the direction of the Board of Directors of
Monarch Bank (the "Bank") and for the purpose of becoming a bank holding
company by acquiring all of the outstanding capital stock of the Bank. The
reorganization of the Bank and the Company was effected on June 18, 1984.
The Company's principal business is to serve as a holding company for its
banking subsidiary and other possible banking or banking-related subsidiaries
which the Company or the Bank may form or acquire. Since inception, the
Company has not been active except through its subsidiaries. The Company has
no salaried employees, and shares both executive management and its Board of
Directors with its banking subsidiary, the Bank.

MONARCH BANK

The Bank was incorporated under the laws of the State of California on
October 3, 1979 and was licensed by the California Superintendent of Banks
(the "Superintendent") and commenced operations as a California
state-chartered bank on April 21, 1980. The Bank is an insured bank under
the Federal Deposit Insurance Act up to the applicable limits thereof, but
like many state-chartered banks of its size in California, it is not a member
of the Federal Reserve System. The Bank is subject to regulation,
supervision, and regular examination by the Superintendent and the FDIC, and
is subject to applicable provisions of the Federal Reserve Act and
regulations issued pursuant thereto. The regulations of these various
agencies govern most aspects of the Bank's business, including required
reserves on deposits, investments, loans, certain of their check clearing
activities, issuance of securities, payment of dividends, opening of
branches, and numerous other areas. As a consequence of the extensive
regulation of commercial banking activities in the United States, the Bank's
business is particularly susceptible to changes in California and the Federal
legislation and regulations which may have the effect of increasing the cost
of doing business, limiting permissible activities, or increasing competition.

The Bank conducts a general banking business including the acceptance of
checking and savings deposits and the making of commercial, real estate,
installment and other term loans. The Bank is located at 30000 Town Center
Drive, Laguna Niguel, California. The Bank issues Master Card

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credit cards through a correspondent bank. The Bank is a merchant depository
for cardholder drafts under Visa and Master Card credit cards and, similar to
other state-chartered banks of its size, can provide investment and
international banking services through its major correspondent banks. The
Bank is not a member of the Federal Reserve System.

The Bank's primary market area is South Orange County, California. The
principal business of the Bank is to accept time and demand deposits, and to
make commercial loans, consumer loans, real estate loans, and other
investments. The Bank offers a broad range of banking products and services,
including many types of business and personal savings and checking accounts
and other consumer banking services. The Bank originates several types of
loans, including secured and unsecured commercial and consumer loans,
commercial and residential real estate mortgage loans, and commercial and
residential construction loans. The Bank's loans are primarily short-term
and/or adjustable rate. Special services or requests beyond the limits of
the Bank are arranged through correspondent banks. The Bank currently offers
access to ATM networks, and investment or international services through
other major banks.

Since 1987, the Bank's Strategic Plan has emphasized serving the banking
needs of individuals, professionals, and small to medium-sized businesses in
Laguna Niguel, California and the contiguous communities which adjoin it.
The Bank has carved a local niche by being active in civic and community
activities and providing a high degree of individualized personal service.
The Bank was the first in the local area to be open for Saturday business and
maintains operating hours from 7:00 a.m. to 7:00 p.m. in an effort to serve
its largely commuter customer base as well as its mall business customers.
In addition, it has a chartered courier branch which operates throughout
mid- and southern-Orange County, serving professionals and small businesses,
which has greatly expanded its service area without the need for additional
physical facilities. Under present management since 1987, the Bank's major
lending emphasis has been directed at short term owner-occupied luxury home
construction projects, commercial lending to professionals and individuals,
with the objective of building a balanced community loan and investment
portfolio mix (although real estate loans, and other loans secured by real
estate, have dominated the portfolio in the past). The Bank relies on a
foundation of locally generated deposits and Management believes it has a
relatively low cost of funds due to a high percentage of low cost and
noninterest bearing deposits. The Bank also originates SBA loans, has a
mortgage referral program and operates its own credit card program on a small
scale. Due to consolidations, mergers, and a reduced number of independent
banks headquartered in South Orange County, the Bank believes that, when it
has sufficient capital resources, it will be well positioned to prudently
expand and seek to build a larger, regional independent financial institution
in the affluent South Orange County market.

Since its inception, it has been the Bank's policy to develop
specialized markets which management believes have the potential for
generating high return on assets. In selecting divisions to penetrate these
markets, the Bank has given preference to those markets which it believed to
be able to obtain independent sources of funding, such as the packaging and
selling of loans or the sale of loan participations.

In January 1990, the Bank received a license from the State of
California to sell disability and life insurance. Recent changes in federal
legislation limit state chartered bank activities in selling insurance
without a special waiver from the FDIC. The Bank has no plans to request
such a waiver or to engage in direct sales of insurance that would be
otherwise authorized under the state license. The

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Bank received approval in 1991 from the State Banking Department to engage in
certain equity ownership in real estate projects. The FDIC on December 9,
1992 approved rules that restrict this kind of real estate investment by
state banks. The Bank has not made, and under the new rules, does not
currently anticipate making any direct equity investments in real estate
projects.

In 1992 the Bank entered into the SBA lending market on a limited basis.
Outside sources are used to assist in the documentation, and loans are
generally expected to be held in the Bank's portfolio rather than sold. SBA
loans will help meet the business loan needs of the community as well as
offer an additional source of diversification for the loan portfolio.

The Bank provides item processing services to another local bank under a
three-year contract that was signed in 1992; however, this contract matured
in March 1995 and has not been renewed. Planned staff reductions and other
direct reductions in expenses are expected to approximately offset this loss
in revenue. A "new" service was introduced in 1993 to allow the Bank to
process electronic fund transfers for certain of its customers. This
represents a new technical service for many of the Bank's customers and a new
source of fee income for the Bank. The Bank has limited this service to
existing customers as an additional component of relationship banking.

As part of its package of products, the Bank introduced its own Monarch
Bank Credit Card (Visa) in 1993. The Bank's intent was to use this card to
complement its relationship banking concept; the Bank does not intend to mass
market the card and has established high credit qualifications for the card.
As of December 31, 1994, the Bank had approximately $100,000 in outstanding
balances from credit card activity.

As part of its efforts to achieve long term stable profitability and
respond to a changing economic environment in Southern California and South
Orange County, the Company and the Bank have augmented its traditional focus
by broadening the credit and customer services provided to individuals,
professionals and small and medium size businesses. The Company and the Bank
believe that additional capital will permit an acceleration of this effort,
leading to greater diversification of both the Bank's loan portfolio and
deposit base and new sources of fee income. Areas of current and intended
future diversification include expanded days and hours of operation,
mortgage, brokerage, annuity and mutual funds products, as well as the
acquisition of other financial institutions or branches of other financial
institutions, in cities and areas adjoining its Laguna Niguel headquarters.

The Company believes (but cannot assure) that the franchise value of the
Bank, in part due to the shrinking number of independent banks in South
Orange County, can be greatly enhanced by expansion into the affluent markets
of Laguna Beach, Laguna Hills, Leisure World (the largest retirement
community in the United States), Lake Forest, Mission Viejo, Dana Point, San
Juan Capistrano and San Clemente. These communities are among communities
with the highest per capital incomes in California, most of which do not
presently have a locally headquartered independent community bank. Very few
bank charters are presently being granted, and the capitalization
requirements for such charters are substantially higher than in the past;
therefore, it is management's belief that a well run community bank which
concentrates its expansion in such an affluent coastal area of Southern
California can, over a five to ten year period, substantially improve its
franchise value, as well as its assets size and income levels. See "Risk
Factors" and "Use of Proceeds". However, no assurances can be given that the
Company will experience an improvement in its franchise value or achieve any
of the goals referred to herein.

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<PAGE>

It is the Company's belief that substantial opportunity exists within
the Bank's South Orange County market area to prudently expand the operations
of the Bank into the remainder of that metropolitan area. Banks in San
Clemente, Laguna Beach and Lake Forest have been acquired by other larger
financial institutions, leaving a void, the Company believes, in contiguous
communities with populations of 25,000 to 75,000, which have no locally
headquartered community bank. In addition, the severe problems associated
with the savings and loan industry and the problems being experienced by
other independent banks within Orange County, with operations in South Orange
County, have resulted in a number of branch facilities being made available
for sale. The Company also believes that one or more small institutions may
be available at attractive prices and that branches of other financial
institutions may be available at substantially below their investment cost.
Although the Company has had preliminary discussions with a number of
financial institutions regarding possible acquisitions, and the Company is
having ongoing discussions with Rancho Santa Fe National Bank, no agreements
or understandings have been reached at this time. The Company has been
contacted by other financial institutions with regard to their interest in
selling various branches of their companies. Except as otherwise stated, no
negotiations are ongoing with respect to such transactions, and the Company
cannot predict whether assets or banks can definitely be acquired on terms
acceptable to the Company. Acquisitions of this nature can take from 60 to
90 days or longer for the approval and purchase of assets and branches, and 6
to 12 months or longer for the negotiation, approval and purchase of an
entire financial institution. While the Bank is under no restrictions
relative to acquisitions with regard to the Orders, regulatory approval can
be expected to be difficult to obtain during the life of the Orders. No
assurance can be given that the Company can successfully negotiate the
acquisition of other institutions or branches at prices that would be
acceptable to it, or that any such acquisition would receive the requisite
regulatory and shareholder (if applicable) approvals.

MONARCH BANCORP

Upon the reorganization of the Bank as a wholly-owned subsidiary, the
Company became a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "Act"), and is subject to the
supervision and regulation of the Board of Governors of the Federal Reserve
System (the "Board"). The Company functions primarily as the sole
stockholder of the Bank and its nonbank subsidiary, and the Company
establishes general policies and activities of the operating subsidiaries.

The capital stock of the Company is subject to the registration
requirements of the Securities Act of 1933. The common stock of the Bank is
exempt from such requirements. The Company is also subject to the periodic
reporting requirements of the Securities Exchange Act of 1934, which include,
but are not limited to, the filing of annual, quarterly and other reports
with the Securities and Exchange Commission.

The Company, as a bank holding company, is subject to regulation under
the Bank Holding Company Act of 1956, as amended, and is registered with and
subject to the supervision of the Federal Reserve Board. The Company is
required to obtain the prior approval of the Federal Reserve Board before it
may acquire all or substantially all of the assets of any bank, or ownership
or control of voting shares of any bank if, after giving effect to such
acquisition, the Company would own or control, directly or indirectly more
than 5% of such bank. The Bank Holding Company Act prohibits the Company
from acquiring any voting shares of, interest in, or all or substantially all
of the assets of a

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<PAGE>

bank located outside the State of California unless the laws of such state
specifically authorize such acquisition.

Under the Bank Holding Company Act, the Company may not engage in any
business other than managing or controlling banks or furnishing services to
its subsidiaries, except that it may engage controlling banks as to be a
proper incident thereto. The Company is also prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any company unless the company is engaged in
such activities. The Federal Reserve Board's approval must be obtained
before the shares of any such company can be acquired and, in certain cases,
before any approved company can open new offices. In making such
determinations the Federal Reserve Board considers whether the performance of
such activities by a bank holding company would offer advantages to the
public, such as greater convenience, increased competition, or gains in
efficiency, which outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices. Further, the Federal Reserve Board
is empowered to differentiate between activities commenced de novo and
activities commenced by acquisition, in whole or in part, of a going concern.

Although the fullest scope of permitted activities is uncertain and
cannot be predicted, the major non-banking activities that have been
permitted to bank holding companies with certain limitations are: making,
acquiring or servicing loans that would be made by a mortgage, finance,
credit card or factoring company; operating an industrial loan company;
leasing real and personal property; acting as an insurance agent, broker, or
principal with respect to insurance that is directly related to the extension
of credit by the bank holding company or any of its subsidiaries and limited
to repayment of the credit in the event of death, disability or involuntary
unemployment; issuing and selling money orders, savings bonds and travelers
checks; performing certain trust company services; performing appraisals of
real estate and personal property; providing investment and financial advice;
providing data processing services; providing courier services; providing
management consulting advice to nonaffiliated depository institutions;
arranging commercial real estate equity financing; providing certain
securities brokerage services; underwriting and dealing in government
obligations and money market instruments; providing foreign exchange advisory
and transactional services; acting as a futures commission merchant;
providing investment advice on financial futures and options on futures;
providing consumer financial counseling; providing tax planning and
preparation services; providing check guaranty services; engaging in
collection agency activities; and operating a credit bureau.

The Company's primary sources of income are the receipt of dividends and
management fees from its subsidiaries, and interest income on its
investments. The Bank's ability to make such payments to the Company is
subject to certain statutory and regulatory restrictions.

The Company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease
of property or furnishing of services. For example, with certain exceptions
the Bank may not condition an extension of credit on a customer's obtaining
other services provided by it, the Company or any other subsidiary or on a
promise by the customer not to obtain other services from a competitor.

As a bank holding company, the Company is required to file reports with
the Federal Reserve Board and to provide such additional information as the
Federal Reserve Board may require. The

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Federal Reserve Board also has the authority to examine the Company and each
of its subsidiaries with the cost thereof to be borne by the Company.

In addition, banking subsidiaries of bank holding companies are subject
to certain restrictions imposed by federal law in dealings with their holding
companies and other affiliates. Subject to certain exceptions set forth in
the Federal Reserve Act, a bank can loan or extend credit to an affiliate,
purchase or invest in the securities of an affiliate, purchase assets from an
affiliate, accept securities of an affiliate as collateral security for a
loan or extension of credit to any person or company or issue a guarantee,
acceptance or letter of credit on behalf of an affiliate only if the
aggregate amount of the above transactions of the Bank and its subsidiaries
does not exceed 10% of the Bank's capital stock and surplus on a per
affiliate basis or 20% of the Bank's capital stock and surplus on an
aggregate affiliate basis. Such transaction must be on terms and conditions
that are consistent with safe and sound banking practices. A bank and its
subsidiaries generally may not purchase a low-quality asset, as that term is
defined in the Federal Reserve Act, from an affiliate. Such restrictions
also prevent a holding company and its other affiliates from borrowing from a
banking subsidiary of the holding company unless the loans are secured by
collateral.

The BHC Act also prohibits a bank holding company or any of its
subsidiaries from acquiring voting shares or substantially all the assets of
any bank located in a state other than the state in which the operations of
the bank holding company's banking subsidiaries are principally conducted
unless such acquisition is expressly authorized by statutes of the state in
which the bank to be acquired is located. Legislation recently adopted in
California permits out-of-state bank holding companies to acquire California
banks on a regional basis as of July 1, 1987, and on a nationwide reciprocal
basis as of January 1, 1991. See "Effect of Governmental Policies and Recent
Legislation" later in this section regarding the Interstate Banking Act
signed into law on September 29, 1994.

The BHC Act and regulations of the Federal Reserve Board also impose
certain constraints on the redemption or purchase by a bank holding company
of its own shares of stock.

The Federal Reserve Board has cease and desist powers to cover parent
bank holding companies and nonbanking subsidiaries where action of a parent
bank holding company or its non-financial institutions represent an unsafe or
unsound practice or violation of law. The Federal Reserve Board has the
authority to regulate debt obligations (other than commercial paper) issued
by bank holding companies by imposing interest ceilings and reserve
requirements on such debt obligations.

EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION

Banking is a business that depends on rate differentials. In general,
the difference between the interest rate paid by the Bank on its deposits and
its other borrowings and the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank's portfolio
comprise the major portion of the Bank's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Bank.
Accordingly the earnings and growth of the Bank are subject to the influence
of local, domestic and foreign economic conditions, including recession,
unemployment and inflation.

The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national

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monetary policies (with objectives such as curbing inflation and combating
recession) by its open-market operations in United States Government
securities, by adjusting the required level of reserves for financial
intermediaries subject to its reserve requirements and by varying the
discount rates applicable to borrowings by depository institutions. The
actions of the Federal Reserve Board in these areas influence the growth of
bank loans, investments and deposits and also affect interest rates charged
on loans and paid on deposits. The nature and impact of any future changes
in monetary policies cannot be predicted.

From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial intermediaries are frequently made in Congress, in the
California legislature and before various bank regulatory and other
professional agencies. The likelihood of any major changes and the impact
such changes might have on the Bank are impossible to predict. Certain of
the potentially significant changes which have been enacted and proposals
which have been made recently are discussed below.

FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991

On December 19, 1991, the FDIC Improvement Act was enacted into law.
Set forth below is a brief discussion of certain portions of this law and
implementing regulations that have been adopted or proposed by the Federal
Reserve Board, the Comptroller of the Currency ("Comptroller"), the Office of
Thrift Supervision ("OTS") and the FDIC (collectively, the "federal banking
agencies").

STANDARDS FOR SAFETY AND SOUNDNESS. The FDIC Improvement Act requires
the federal banking agencies to prescribe, by regulation, standards for all
insured depository institutions and depository institution holding companies
relating to internal controls, loan documentation, credit underwriting,
interest rate exposure and asset growth. Standards must also be prescribed
for classified loans, earnings and the ratio of market value to book value
for publicly traded shares. The FDIC Improvement Act also requires the
federal banking agencies to issue uniform regulations prescribing standards
for real estate lending that are to consider such factors as the risk to the
deposit insurance fund, the need for safe and sound operation of insured
depository institutions and the availability of credit. Further, the FDIC
Improvement Act requires the federal banking agencies to establish standards
prohibiting compensation, fees and benefit arrangements that are excessive or
could lead to financial loss.

In July 1992, the federal banking agencies issued a joint advance notice
of proposed rule making requesting public comment on the safety and soundness
standards required to be prescribed by the FDIC Improvement Act. The purpose
of the notice is to assist the federal banking agencies in the development of
proposed regulations. In accordance with the FDIC Improvement Act, final
regulations must become effective no later than December 1, 1993.

In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations,
which are effective March 19, 1993, require insured depository institutions
to adopt written policies establishing standards, consistent with such
guidelines, for extensions of credit secured by real estate. The policies
must address loan portfolio management, underwriting standards and
loan-to-value limits that do not exceed the supervisory limits prescribed by
the regulations.

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PROMPT CORRECTIVE REGULATORY ACTION. The FDIC Improvement Act requires
each federal banking agency to take prompt corrective action to resolve the
problems of insured depository institutions that fall below one or more
prescribed minimum capital ratios. The purpose of this law is to resolve the
problems of insured depository institutions at the least possible long-term
cost to the appropriate deposit insurance fund.

The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized (significantly exceeding the required minimum capital
requirements), adequately capitalized (meeting the required capital
requirements), undercapitalized (failing to meet any one of the capital
requirements), significantly undercapitalized (significantly below any one
capital requirement) and critically undercapitalized (failing to meet all
capital requirements).

In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of the FDIC
Improvement Act. Under the regulations, an insured depository institution
will be deemed to be:

* "well capitalized" if it (i) has total risk-based capital of 10% or
greater, Tier 1 risk-based capital of 6% or greater and a leverage
capital ratio of 5% or greater and (ii) is not subject to an order,
written agreement, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any
capital measure;

* "adequately capitalized" if it has total risk-based capital of 8%
or greater, Tier 1 risk-based capital of 4% or greater and a
leverage capital ratio of 4% or greater (or a leverage capital
ratio of 3% or greater if the institution is rated composite 1 under
the applicable regulatory rating system in its most recent report of
examination);

* "undercapitalized" if it has total risk-based capital that is less
than 8%, Tier 1 risk-based capital that is less than 4% or a
leverage capital ratio that is less than 4% (or a leverage capital
ratio that is less than 3% if the institution is rated composite 1
under the applicable regulatory rating system in its most recent
report of examination);

* "significantly undercapitalized" if it has total risk-based capital
that is less than 6%, Tier 1 risk-based capital that is less than
3% or a leverage capital ratio that is less than 3%; and

* "critically undercapitalized" if it has a ratio of tangible equity
to total assets that is equal to or less than 2%.

An institution that, based upon its capital levels, is classified as
well capitalized, adequately capitalized or undercapitalized may be
reclassified to the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, (i) determines that
the institution is in an unsafe or unsound condition or (ii) deems the
institution to be engaging in an unsafe or unsound practice and not to have
corrected the deficiency. At each successive lower capital category, an
insured depository institution is subject to more restrictions and federal
banking agencies are given less flexibility in deciding how to deal with it.

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As of March 31, 1995, the Bank had a total risk-based capital ratio of
17.34%, a Tier 1 risk-based capital ratio of 16.09% and a leverage capital
ratio of 7.85% and is considered to be adequately capitalized. Based solely
upon these ratios and the existence of the Section 8(b) Order, the Bank is
considered to be adequately capitalized as of March 31, 1995 under the prompt
corrective action provisions of the FDIC Improvement Act. A subsequent
reduction in the Bank's capital could cause it to fall within a lower capital
category and subject it to the mandatory and discretionary sanctions
applicable to that category. Further, as noted above, an institution that,
based upon its capital levels, is adequately capitalized or undercapitalized
can, under certain circumstances, be reclassified to the next lower capital
category.

OTHER ITEMS. The FDIC Improvement Act also, among other things, (i)
limits the interest paid on deposits deemed to be brokered, and limits the
unrestricted use of such deposits to only those institutions that are well
capitalized; (ii) requires the FDIC to charge insurance premiums based on the
risk profile of each institution; (iii) eliminates "pass through" deposit
insurance for certain employee benefit accounts unless the depository
institution is well capitalized or, under certain circumstances, adequately
capitalized; (iv) prohibits insured state chartered banks from engaging as
principal in any type of activity that is not permissible for a national bank
unless the FDIC permits such activity and the bank meets all of its
regulatory capital requirements; (v) directs the appropriate federal banking
agency to determine the amount of readily marketable purchased mortgage
servicing rights that may be included in calculating such institution's
tangible, core and risk-based capital; and (vi) provides that, subject to
certain limitations, any federal savings association may acquire or be
acquired by any insured depository institution.

The FDIC has regulations implementing the risk-based premium system
mandated by the FDIC Improvement Act. Under the regulations insured
depository institutions are now required to pay insurance premiums within a
range of 23 cents per $100 of deposits to 31 cents per $100 of deposits
depending on their risk classification. To determine the risk-based
assessment for each institution, the FDIC will categorize an institution as
well capitalized, adequately capitalized or undercapitalized based on its
capital ratios. A well capitalized institution is one that has at least a
10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio and
a 5% Tier 1 leverage capital ratio. An adequately capitalized institution
will have at least an 8% total risk-based capital ratio, a 4% Tier 1
risk-based capital ratio and a 4% Tier 1 leverage capital ratio. An
undercapitalized institution will be one that does not meet either of the
above definitions. The FDIC will also assign each institution to one of the
three subgroups based upon reviews by the institution's primary federal or
state regulatory, statistical analyses of financial statements and other
information relevant to evaluating the risk posed by the institution. As a
result, the assessment rates within each of three capital categories will be
as follows (expressed as cents per $100 of deposits):

Supervisory Subgroup
--------------------
A B C
- - -

Well capitalized . . . . . . . . . . . . . 23 26 29
Adequately capitalized . . . . . . . . . . 26 29 30
Undercapitalized . . . . . . . . . . . . . 29 30 31

The FDIC has recently announced a proposal to lower banks' deposit
insurance premiums. The plan would reduce assessments from their current
rates of 23 to 31 cents, or basis points, per every

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hundred dollars in insured deposits, to a rate of 4 to 31 basis points,
depending upon the condition of the bank. The FDIC estimates that up to 90%
of all banks will have substantial reductions in their premiums, bringing the
average Bank Insurance Fund premium to 4.5 cents, a reduction from the
current 23 cents. The new rates will not go into effect until the FDIC can
verify that the Bank Insurance Fund has reached the 1.25% recapitalization
level. Under the proposal, banks that are not well capitalized and
considered to be in sound condition may face a greater competitive
disadvantage than in the past due to larger differences in deposit insurance
assessments.

In addition, the FDIC has issued final and proposed regulations
implementing provisions of the FDIC Improvement Act relating to powers of
insured state banks. Final regulations issued in October 1992 prohibit
insured state banks from making equity investments of a type, or in an
amount, that are not permissible for national banks. In general, equity
investments include equity securities, partnership interests and equity
interests in real estate. Under the final regulations, non-permissible
investments must be divested by no later than December 19, 1996. The Bank
has no such non-permissible investments.

Regulations issued in December 1993 prohibit insured state banks from
engaging as principal in any activity not permissible for a national bank,
without FDIC approval. The proposal also provides that subsidiaries of
insured state banks may not engage as principal in any activity that is not
permissible for a subsidiary of a national bank, without FDIC approval.

The impact of the FDIC Improvement Act on the Bank is uncertain,
especially since many of the regulations promulgated thereunder have only
been recently adopted and certain of the law's provisions still need to be
defined through future regulatory action. Certain provisions, such as the
recently adopted real estate lending standards and the limitations on
investments and powers of state banks and the rules to be adopted governing
compensation, fees and other operating policies, may affect the way in which
the Bank conducts its business, and other provisions, such as those relating
to the establishment of the risk-based premium system, may adversely affect
the Bank's results of operations. Furthermore, the actual and potential
restrictions and sanctions that apply to or may be imposed on
undercapitalized institutions under the prompt corrective action and other
provisions of the FDIC Improvement Act may significantly adversely affect the
operations and liquidity of the Bank, the value of its Common Stock and its
ability to raise funds in the financial markets.

CAPITAL ADEQUACY GUIDELINES

The Federal Reserve Board and the FDIC have issued guidelines to
implement the risk-based capital requirements. The guidelines are intended
to establish a systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among banking
organizations, takes off-balance sheet items into account in assessing
capital adequacy and minimizes disincentives to holding liquid, low-risk
assets. Under these guidelines, assets and credit equivalent amounts of
off-balance sheet items, such as letters of credit and outstanding loan
commitments, are assigned to one of several risk categories, which range from
0% for risk-free assets, such as cash and certain U.S. Government securities,
to 100% for relatively high-risk assets, such as loans and investments in
fixed assets, premises and other real estate owned. The aggregated dollar
amount of each category is then multiplied by the risk-weight associated with
that category. The resulting weighted values from each of the risk
categories are then added together to determine the total risk-weighted
assets.

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<PAGE>

A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus
and retained earnings, qualifying noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchase credit card
relationships may be included, subject to certain limitations. At least 50%
of the banking organization's total regulatory capital must consist of Tier 1
capital.

Tier 2 capital may consist of (i) the allowance for possible loan and
lease losses in an amount up to 1.25% of risk-weighted assets; (ii)
cumulative perpetual preferred stock and long-term preferred stock and
related surplus; (iii) hybrid capital instruments (instruments with
characteristics of both debt and equity), perpetual debt and mandatory
convertible debt securities; and (iv) eligible term subordinated debt and
intermediate-term preferred stock with an original maturity of five years or
more, including related surplus, in an amount up to 50% of Tier 1 capital.
The inclusion of the foregoing elements of Tier 2 capital are subject to
certain requirements and limitations of the federal banking agencies.

The Federal Reserve Board and the FDIC have also adopted a minimum
leverage capital ratio of Tier 1 capital to average total assets of 3% for
the highest rated banks. This leverage capital ratio is only a minimum.
Institutions experiencing or anticipating significant growth or those with
other than minimum risk profiles are expected to maintain capital well above
the minimum level. Furthermore, higher leverage capital ratios are required
to be considered well capitalized or adequately capitalized under the prompt
corrective action provisions of the FDIC Improvement Act.

As of March 31, 1995, the Company and the Bank had total risk-based
capital ratios of 23.12% and 17.34%, Tier 1 risk-based capital ratios of
21.87% and 16.09% and leverage ratios of 10.67% and 7.85%, respectively.

CHANGES IN ACCOUNTING PRINCIPLES

In February 1992, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 109 "Accounting for Income Taxes," which supersedes SFAS No.
96 of the same title. SFAS No. 109 is effective for fiscal years beginning
after December 31, 1992, or earlier at the Bank's option. SFAS No. 109
employs an asset and liability approach in accounting for income taxes
payable or refundable at the date of the financial statements as a result of
all events that have been recognized in the financial statements and as
measured by the provisions of enacted tax laws. Adoption by the Bank of SFAS
No. 109 is not expected to have a material impact on the Bank's financial
statements.

In addition, in December 1991, the FASB issued SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," which is effective
for fiscal years ending after December 15, 1992 (December 15, 1995 in the
case of entities with less than $150 million in total assets). SFAS No. 107
requires financial intermediaries to disclose, either in the body of their
financial statements or in the accompanying notes, the "fair value" of
financial instruments for which it is "practicable to estimate that value."
SFAS No. 107 defines "fair value" as the amount at which a financial
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Quoted market prices,
if available, are deemed the best evidence of the fair value of such
instruments. Most deposit and loan instruments issued by financial
intermediaries are subject to SFAS No. 107 and

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<PAGE>

its effect will be to require financial statement disclosure of the fair
value of most of the assets and liabilities of financial intermediaries such
as the Bank. Management is unable to predict what effect, if any, such
disclosure requirements could have on the market price of the common stock of
the Bank or its ability to raise funds in the financial markets.

In May 1993, the FASB issued Statement of Financial Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), as
amended by SFAS 118. Under the provisions of SFAS No. 114, a loan is
considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. SFAS No. 114 requires
creditors to measure impairment of a loan based on the present value of
expected future cash flows discounted at the loan's effective interest rate.
If the measure of the impaired loan is less than the recorded investment in
the loan, a creditor shall recognize an impairment by creating a valuation
allowance with a corresponding charge to bad debt expense. This statement
also applies to restructured loans and changes the definition of in-substance
foreclosures to apply only to loans where the creditor has taken physical
possession of the borrower's assets. SFAS No. 114 applies to financial
statements for fiscal years beginning after December 15, 1994. Earlier
implementation is permitted. The Company is currently evaluating the impact
of the statement on its results of operations and financial position but does
not expect the statement will have a material impact on operation or the
Company's financial position.

In June, 1993, the FASB issued a new Financial Accounting Series
Statement addressing the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. Those investments would be classified in three
categories and accounted for as follows: (i) debt securities that the entity
has the positive intent and ability to hold to maturity would be classified
as "held to maturity" and reported at amortized cost; (ii) debt and equity
securities that are held for current resale would be classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings; and (iii) debt and equity securities not classified as
either securities held to maturity or trading securities would be classified
as securities available for sale, and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component
of shareholders' equity. The rule is effective for financial statements for
calendar year 1994, but may be applied to an earlier fiscal year for which
annual financial statements have not been issued.

The Bank has both investment securities classified as "held to maturity"
and investment securities classified as "available for sale." Securities
classified as available for sale are reported at their fair value at the end
of each fiscal quarter. Accordingly, the value of such securities fluctuates
based on changes in interest rates. Generally, an increase in interest rates
will result in a decline in the value of investment securities available for
sale, while a decline in interest rates will result in an increase in the
value of such securities. Therefore, the value of investment securities
available for sale and the Bank's shareholders' equity is subject to
fluctuation based on changes in interest rates. As a consequence, the Bank's
capital levels for regulatory purposes could change based solely on
fluctuations in interest rates and fluctuations in the value of investment
securities held for sale.

INTERSTATE BANKING ACT

On September 29, 1994, the President signed, the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act").
The Interstate Banking Act establishes full,

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<PAGE>

nationwide interstate banking and branching. Among other things, the
Interstate Banking Act permits eligible bank holding companies to acquire
banks located in any state, beginning September 29, 1995; allows a bank to
merge with a bank in another state, beginning June 1, 1997, provided neither
state takes legislative action before May 31, 1997 to "opt-out" (i.e.,
prohibit interstate mergers); prohibits an interstate merger, other than one
involving affiliated banks or initial entry into a state, if the resulting
holding company or bank would control more than 10 percent of the deposits
held by insured depository institutions nationwide or 30 percent of the
deposits held by depository institutions in any state affected by the merger;
permits states to prohibit interstate acquisitions of banks under five years
of age; permits a bank to establish de novo branches in any state in which
the bank does not maintain a branch only if the state adopts a law that
expressly permits all out-of-state banks to establish de novo branches in
such state (the state "opt-in" election); subjects national bank branches to
certain state laws regarding community reinvestment, consumer protection,
fair lending and the establishment of intrastate branches; allows foreign
banks to establish branches, either de novo or by acquisition and merger, in
any state outside the state in which the bank has its U.S. headquarters to
the same extent that a domestic bank may establish such branches; permits the
Comptroller of the Currency to continue to preempt the application of state
laws to national bank branches, but creates a new "notice and opportunity to
comment" procedure when the OCC is considering certain preemptions of state
law; and neither grants nor limits the authority of states to tax interstate
operations as permitted under the U.S. Constitution or other federal law.
The Company cannot predict the impact the Interstate Banking Act will have on
the banking industry or the business and value of the Company.

HAZARDOUS WASTE CLEAN-UP COSTS

Management is aware of recent legislation and court actions concerning
lender liability relating to hazardous waste clean-up costs and continued
liability. Based on a general survey of the Bank's loan portfolio,
conversations with local authorities and appraisers, and the type of lending
currently and historically done by the Bank (the Bank as a rule has not made
the types of loans generally associated with hazardous waste contamination
problems) management is not aware of any potential liability for hazardous
waste contamination.

OTHER REGULATIONS AND POLICIES

The federal regulatory agencies have adopted regulations that implement
Section 304 of FDICIA which requires federal banking agencies to adopt
uniform regulations prescribing standards for real estate lending. Each
insured depository institution must adopt and maintain a comprehensive
written real estate lending policy, developed in conformance with prescribed
guidelines, and each agency has specified loan-to-value limits in guidelines
concerning various categories of real estate loans.

Various requirements and restrictions under the laws of the United
States and the State of California affect the operations of the Bank.
Federal regulations include requirements to maintain non-interest bearing
reserves against deposits, limitations on the nature and amount of loans
which may be made, and restrictions on payment of dividends. The California
Superintendent of Banks regulates the number and locations of the branch
offices of bank. California law exempts banks from the usury laws.

Under the Financial Institutions Supervisory Act, the Federal Reserve
Board also has authority to prohibit a bank from engaging in business
practices which it considers to be unsafe or unsound. It is possible,
depending upon the financial condition of the bank in question and other
factors, that the

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<PAGE>

Federal Reserve Board could assert that the payment of dividends or other
payments might under some circumstances be such an unsafe or unsound practice.

Future cash dividends by the Bank to the Company will generally depend
upon the assessment of their respective Boards of Directors of the future
capital requirements of such institutions and other factors.

MONETARY POLICY

The earnings and growth of the Bank will be affected not only by general
economic conditions, both domestic and international, but also by the
monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve Board. The Federal Reserve Board can and
does implement national monetary policy, such as seeking to curb inflation
and combat recession, by its open market operations in U.S. Government
securities, limitations upon savings and time deposit interest rates, and
adjustments to the discount rates applicable to borrowings by banks which are
members of the Federal Reserve System. The actions of the Federal Reserve
Board influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
impact that future changes in fiscal or monetary policies or economic
controls may have on the Bank's business and earnings cannot be predicted.

Other legislation has been proposed or is pending before the United
States Congress which could affect the financial institution industry. Such
legislation includes proposals to further alter the structure, regulation,
and competitive relationships of the nation's financial institutions, to
reorganize the federal regulatory structure of the financial institution
industry, and to change the range of financial services which banks and bank
holding companies can provide. It cannot be predicted whether the pending or
proposed legislation will be adopted or what effect such legislation will
have on commercial banking in general or the business of the Bank in
particular.

It is impossible to predict with any degree of accuracy the competitive
impact these laws will have on commercial banking in general and the business
of the Bank in particular. However, there appears to be a lessening of the
historical distinction between the services offered by financial institutions
and other businesses offering financial services. It is anticipated that
banks will experience increased competition for deposits and loans and
increases in their cost of funds.

ADMINISTRATIVE ACTIONS

MEMORANDUM OF UNDERSTANDING. As a result of the deficiencies noted
above, on September 22, 1993, the Bank entered into the MOU with both the
FDIC and the Superintendent. Among other items the MOU set forth specific
requirements designed to address the Bank's problem loans and nonperforming
assets, as well as the correction of deficiencies in credit administration
and calculation of the loan loss reserve. Many of the corrective actions
required by the MOU were undertaken by the Bank prior to the effective date
of the MOU, and all of the above described activities have assisted the Bank
in complying with the terms of the MOU.

The MOU also required, among other things, that the Bank must have a
Tier 1 capital ratio of at least 7% by March 22, 1994. In an attempt to
comply with the capital requirements under the MOU, the Company entered into
a best-efforts Underwriting Agreement with Spectrum Securities, we prepared

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a Registration Statement on Form SB-2 and commenced an Rights and Public
Offering on May 13, 1994. At the conclusion of the Offering on October 15,
1994, Monarch Bancorp failed to raise the minimum of $2.5 million and the
funds held in the Impound Account at First Interstate Bank of California were
returned with interest to investors subscribing to the Offering. As a result
of the failure to receive the minimum amount in the Offering, the Bank was
not in compliance with the 7% Tier 1 requirement contained in the MOU. The
Orders described below superseded the MOU.

SECTION 8(B) ORDER

Following the conclusion of the 1994 FDIC examination of the Bank, for
the purpose of cooperating with the FDIC and without admitting or denying any
allegations, Monarch Bank, the wholly-owned subsidiary of the Company,
stipulated to the issuance of a Section 8(b) Order (the "8(b) Order"). The
8(b) Order became effective on December 23, 1994, and the 8(b) Order requires
the Bank to perform several actions within certain time frames. The 8(b)
Order includes the following requirements: (i) management shall have
qualifications and experience commensurate with each member's duties and
responsibilities of the Bank, and the qualifications of management shall be
assessed on its ability to comply with the requirements of the 8(b) Order,
operate the Bank in a safe and sound manner, comply with applicable laws and
regulations, and restore all aspects of the Bank to a safe and sound
condition; (ii) the Board of Directors shall increase its participation in
the affairs of the Bank, including the review and approval of several
reports, operating policies and committee actions; (iii) by no later than
April 30, 1995, the Bank shall have Tier 1 capital in an amount as to equal
or exceed 7% of the Bank's total assets, and thereafter, during the life of
the 8(b) Order, the Bank shall maintain Tier 1 capital in such an amount as
to equal or exceed 7% of the Bank's total assets, and the Bank shall adopt a
capital plan to meet the minimum risk-based capital requirements as described
in the FDIC rules and regulations; (iv) the Bank shall eliminate from its
books all assets classified loss on the recent examination, and to reduce
assets classified substandard according to the schedule contained in the 8(b)
Order, and the Bank shall eventually reduce the total of all adversely
classified assets; (v) prohibitions and restrictions concerning further
extensions of credit to borrowers whose assets have been adversely
classified; (vi) revise and implement an amended loan policy to improve
credit administration and underwriting procedures; (vii) reduce loan
concentrations; (viii) establish and maintain an adequate reserve for loan
losses, implement the policy for determining the adequacy of the loan loss
reserve, and the Board of Directors shall review the reserve at least once
each calendar quarter; (ix) prepare and implement a written plan and
comprehensive budget for all categories of income and expense to be
submitted to the FDIC and the Superintendent for review and comment and an
evaluation by the Board of Directors of the actual performance of the plan
and budget on a quarterly basis; (x) a correction, to the extent possible, of
certain violations of law contained in the examination report; (xi) adopt and
implement a policy to provide for adequate internal routine and control
policies consistent with safe and sound banking practices, develop and
implement an internal audit program that establishes procedures to protect
the integrity of the Bank's operational and accounting systems; (xii) file
amended Consolidated Reports of Condition as of March 31, 1994 and June 30,
1994, and thereafter file accurate Consolidated Reports of Condition; (xiii)
not pay cash dividends without the prior consent of the FDIC; and (xiv) file
written progress reports with the FDIC.

SECTION 1913 ORDER

As a result of a recent examination by the California State Banking
Department, the Bank agreed to a final order under California Financial Code
Section 1913 (the "1913 Order") with the California

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State Banking Department (the "Department") that is effective December 14,
1994. The 1913 Order provides that the Bank shall take certain actions,
including the following: (i) the Bank shall retain management acceptable to
the Department and the FDIC that shall operate the Bank in a safe and sound
manner and implement the provisions of the Order; (ii) the Bank shall adopt
and implement a comprehensive business plan to provide forward planning and
restoring the Bank to a sound condition, and such plan shall be submitted to
the Department and the FDIC for review and comment; (iii) by April 30, 1995,
the Bank shall increase its tangible shareholders equity by an amount which
equals or exceeds $2 million, and shall have tangible shareholders' equity
which equals or exceeds 7% of total tangible assets, and thereafter the Bank
shall maintain tangible shareholders' equity in such an amount as to equal or
exceed 7% of total tangible assets; (iv) the Bank shall charge-off all assets
that have been classified loss, and the Bank shall reduce assets classified
substandard according to the reduction schedule contained in the 1913 Order;
(v) the Bank shall maintain an adequate allowance for loan loss, the Board
shall review the adequacy of the allowance for loan loss at the end of each
calendar quarter; (vi) the Bank shall adopt and implement a budget for 1995,
which shall be acceptable to the Department and the FDIC; (vii) the Bank
shall adopt and implement written policies and procedures to ensure adequate
supervision of lending activities in a form acceptable to the Department and
the FDIC; (viii) the Bank shall not make any distributions to shareholders
except with the prior written approval of the Superintendent; (ix) the Bank
shall correct all violations of law; and (x) the Bank shall furnish a written
progress report to the Department and the FDIC.

Based on preliminary unaudited figures as of March 31, 1995, as a result
of the completion of the first phase of the Private Placement Offering, the
Bank's leverage capital ratio increased to approximately 7.85%, which was
approximately $538,000 above the 7% level required under the Orders. See
"Capitalization." However, no assurance can be given that the results of
subsequent operations and this Offering will maintain the 7% minimum imposed
under the Orders.

The Bank as of March 31, 1995 is in full compliance with the provisions
of the Orders relating to capital and capital ratios. Management of the Bank
has taken specific action to improve the Bank's credit administration
including the adoption of revised policies for lending and loan
administration, changes to staff to improve technical lending skills, and
reducing classified loans. The Board is increasing its participation in the
affairs of the Bank and the Bank has charged-off all assets classified loss
on the recent examination and is currently in compliance with the reduction
schedule of classified assets contained in the 8(b) Order. The Bank has not
extended any credit to an individual whose extension of credit has been
charged-off or classified loss, and the Loan Committee of the Bank will
approve any further renewal or extension of credit to a borrower whose loan
was classified substandard. The Bank has also amended its policies and
procedures. The Board of Directors will be reviewing the reserve for loan
losses and that additional provisions were made as of December 31, 1994 in
order to establish an adequate reserve for loan losses. The Bank has already
filed amended Consolidated Reports of Condition and Income.

However, compliance with the terms of the Orders will be determined by
the FDIC and the Superintendent during subsequent examinations of the Company
and the Bank. The FDIC and the Superintendent as of April 28, 1995 had not,
and have not at the date of this Prospectus, examined the Bank and made a
determination of the Bank's compliance with the Orders, and there can be no
assurance given that in its 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 statutory time
frames, and management of the Company believes the Bank will be examined
before the

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<PAGE>

end of the second quarter of 1995. In the event the FDIC and/or the
Superintendent determines that the Company or the Bank are not in compliance
with the terms of the Orders, or the FDIC and/or the Superintendent otherwise
determine that the Company or the Bank is engaging in unsafe or unsound
practices in conducting its business or otherwise violating any law, rule or
regulation, the FDIC and/or the Superintendent would have available to it
various remedies, including taking one or more of the enforcement actions
discussed below. There can be no assurance that the steps taken by the
Company and the Bank will be sufficient to terminate the Orders or that
enforcement actions will not be commenced in the future.

Although the Board of Directors of the Company believes the Bank is
currently in compliance with the Orders, if the Bank is not in compliance
with the Orders as determined by the FDIC and/or the Superintendent, the Bank
could be subject to further enforcement action.

LEGAL PROCEEDINGS

In the ordinary course of business, the Bank is subject to claims,
counter actions, and other litigation. No single action or similar group of
claims exceeds 10 percent of liquid assets (Cash and Federal Funds Sold).

At the present time, the Bank is a defendant in litigation brought by an
account holder related to the Bank's activities as custodian for
self-directed Individual Retirement Accounts administered by First Pension
Corporation and its successor, Summit Trust Services, both of which appear to
be insolvent. The litigation seeks damages of $32,000 against the Bank.
Based on facts known to them at this time, the Board of Directors, management
and the Bank's representatives do not believe to the best of their knowledge
that the Bank has any material liability to any account holder for which the
Bank acted as custodian. However, no assurance can be given that further
litigation involving the Bank will not result or that material liability may
not be incurred.

EMPLOYEES

At December 31, 1994, the Company and the Bank had 42 full-time
equivalent employees. The Company believes that its employee relations are
excellent.

COMPETITION

The banking business in California generally, and in the Bank's primary
service areas specifically, is highly competitive with respect to both loans
and deposits, and is dominated by a relatively small number of major banks
with many offices and operations over a wide geographic area. Among the
advantages such major banks have over the Bank are their ability to finance
wide-ranging advertising campaigns and to allocate their investment assets to
regions of higher yield and demand. Such banks offer certain services such
as trust services and international banking which are not offered directly by
the Bank (but which can be offered indirectly by the Bank through
correspondent institutions). In addition, by virtue of their greater total
capitalization, such banks have substantially higher lending limits than the
Bank. (Legal lending limits to an individual customer are based upon a
percentage of a bank's total capital accounts, and the Bank's legal lending
limits will be substantially increased as a result of this Offering.) Banks
also compete with money market funds and other money market instruments which
are not subject to interest rate ceilings.

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In order to compete with other competitors in their primary service
areas, the Bank attempts to use to the fullest extent the flexibility which
its independent status permits. This includes an emphasis on specialized
services, local promotional activity, and personal contacts by their
respective officers, directors and employees. The Bank offers highly
personalized banking services.

In addition, as a result of consolidations and mergers, such as the Bank
of America and Security Pacific National Bank merger, and the failure of some
financial institutions in the Bank's market area, the Bank, as the only
locally-owned Bank in Laguna Niguel, has recently experienced an increased
demand for its services in its local market area.

PROPERTIES

The Bank's office is located in a shopping/business center at 30000 Town
Center Drive, Laguna Niguel, California. The leased building is free
standing, and has approximately 8,500 square feet of space. The land and
building were leased on August 1, 1991 for a twenty (20) year term with three
10-year options. After the first five (5) years of the lease, the lease is
subject to annual cost of living increases; the annual rent, as of December
1994, was approximately $10,000 per month triple net. The facility is
equipped with a vault and safe-deposit boxes, eight (8) teller stations, two
(2) automatic teller machines, four (4) drive-up teller stations, a night
depository, and includes parking adjacent to the Bank.

An administrative office, located 27751 La Paz Road in Laguna Niguel, is
a free standing building with approximately 7,750 square feet of space. The
lease on this facility was renewed in June 1991 for five years. The monthly
rental as of December 31, 1994 was approximately $4,700.

The Company formerly occupied approximately 5,000 square feet of space
at 30100 Town Center Drive, Laguna Niguel. This facility has a 13 year lease
which started in 1983 and ends in June 1996. The facility was subleased in
1987 through September 1993 with an option to extend the sublease until June
1996. The original sublease was structured as a pass-through for income
approximately equal to expense. In late 1993 the Bank's tenant agreed to
exercise its option but at current market rates for similar property. As a
result of this renewal, which include free rent and a reduced rate, the Bank
recorded a projected loss on this property of $61,000 in December 1993 and
$20,000 in 1994. The Bank's expense and income for this sublease are the
same after the accounting adjustment for the projected difference in income
versus expense.

Rental income from subleased properties totaled approximately $69,000
and $118,000 in 1994 and 1993, respectively.

MANAGEMENT

DIRECTORS

The following table sets forth, as of March 31, 1995, as to each of the
directors of the Company, such person's age, such person's principal
occupation during the past five years, and the period during which such
person has served as a director of the Company and the Bank.

-52-

<PAGE>

<TABLE>
<CAPTION>
Director of Director
Principal Occupation Company of Bank
Name and Office Held Age For Past Five Years Since Since
- -------------------- --- -------------------- ----------- --------
<S> <C> <C> <C> <C>
Rice E. Brown, Director 57 President of Rice Brown 1988 1988
Financial Services

E. Lynn Caswell, Chairman 50 Commercial Banking and 1987 1987
of the Board, President Bank Holding Company
and Chief Executive Officer Management

Raymond B. Cox, Director 86 President, Cox Marketing 1983 1979
Associates

William C. Demmin, Director 49 Commercial Banking and 1993 1993
and Senior Vice President Bank Holding Company
and Chief Financial Officer(7) Management

Alfred H. Jannard, 54 Owner - Niguel Pharmacy 1993 1993
Director(8)

Cheryl Moore, Director(9) 48 Owner and retailer - 1993 1993
Something Moore

Margaret A. Redmond, Director 54 Vice President & Office 1986 1986
Manager of a Professional
Orthodontia Practice Firm

</TABLE>

The Company and the Bank have agreed to appoint Mr. John Rose as a
member of the Board of Directors subject to regulatory approval. Mr. Rose is
one of the Financial Advisors who assisted the Company in structuring and
completing the first phase of the Private Placement Offering. Mr. Rose has
an extensive background in banking and finance.

EXECUTIVE OFFICERS

The following table sets forth as to each of the persons who currently
serves as an Executive Officer of the Company and the Bank, such person's
age, such person's principal occupation during the

- -----------------

(7) Mr. Demmin has served as Senior Vice President and Chief Financial
Officer and Corporate Secretary for the Company and Bank since 1987.
His appointment to the Company and Bank Board of Directors is
effective as of May 15, 1993.

(8) Mr. Jannard, a long-time shareholder of the Company and a member of
the Bank's Advisory Board, was appointed to the Company and Bank
Board of Directors effective May 15, 1993. Mr. Jannard has owned
and operated Niguel Pharmacy since 1979 and is a long-time resident
of Laguna Niguel.

(9) Ms. Moore, a long-time shareholder of the Company and a member of the
Bank's Advisory Board, was appointed to the Company and Bank Board of
Directors effective May 15, 1993. Ms. Moore is a long-time resident of
Laguna Niguel and has owned and operated two businesses in Laguna
Niguel, most recently, Something Moore, Inc.

-53-

<PAGE>

past five years, such person's current position with the Bank, and the period
during which the person has served in such position.

<TABLE>
<CAPTION>
Year of Year of
Appoint- Appoint-
Position with Principal Occupation ment to ment
Name Age Company and Bank for Past Five Years Company to Bank
---- --- ---------------- -------------------- -------- --------
<S> <C> <C> <C> <C> <C>
E. Lynn Caswell(10) 50 Chairman of the Commercial Banking and 1987 1987
Board, President Bank Holing Company
and CEO Management

William Demmin(11) 50 Senior Vice Bank and Bank Holding 1987 1987
President and CFO Company Management

Louis Cumming(12) 55 Executive Vice Bank and Bank Holding -- 1995
President and Company Management
Chief Credit Officer

</TABLE>

COMMITTEES OF THE BOARD OF DIRECTORS

During 1994, the Board of Directors of the Company held seven (7)
meetings. The Bank, during 1994, held fifteen (15) regular meetings, one (1)
special meeting and seven (7) joint Executive Sessions. All Directors
attended at least 80% of the Board meetings of the Company and Bank.

The Bank Loan Committee, which is responsible for reviewing and
approving loans, held twenty-one (21) meetings during 1994. Members of the
Bank Loan Committee also function as the Bank's Investment Committee.

The Board of Directors Audit Committee held five (5) meetings in 1994,
and also met to review quarterly financial reports. The members of the Audit
Committee are: Rice E. Brown, Raymond B. Cox, Alfred H. Jannard, Cheryl
Moore and Margaret A. Redmond. The duties of the Committee

- -----------------

(10) On July 27, 1987, Mr. E. Lynn Caswell was appointed President and
Chief Executive Officer and a member of the Board of Directors of
the Company and the Bank, and on April 20, 1988 was appointed Chairman
of the Board of Directors. Mr. Caswell was formerly the President and
Chief Executive Officer of the Bank of San Diego, and Chief Operating
Officer of BSD Bancorp, its parent Company from 1984 to 1987, and he
has over 26 years of banking experience.

(11) On August 10, 1987, Mr. William C. Demmin was appointed Senior Vice
President and Chief Financial Officer of the Company and the Bank.
From 1986 to 1987, Mr. Demmin served as Cashier of Commercial Center
Bank of Santa Ana, California and he had previously served as Senior
Vice President, Chief Financial officer, and Cashier of First American
Bank & Trust in Laguna Beach from 1983 to 1986. Mr. Demmin had
previously served Bank of America for 11 years, and he has over 27
years of banking experience.

(12) On April 28, 1995, Mr. Louis Cumming was appointed Executive Vice
President and Senior Credit Officer of the Bank. Mr. Cumming was
formerly the Executive Vice President and Senior Credit Officer of
Cuyamaca Bank from 1992 to April 1994, Senior Vice President
of First National Bank from 1989 to 1992, and he has over 30 years
of banking experience.

-54-

<PAGE>

include meetings and discussions with the Company's external auditors and
meetings with outside operational auditors who are engaged to perform
internal control audits and review and approval various financial reports.

The Company and Bank do not have Compensation or Nominating committees
and handle matters that might otherwise be delegated to these committees in
executive session; all Board members are included in the executive sessions.

COMMON STOCK OWNERSHIP DIRECTORS, EXECUTIVE OFFICERS, AND CERTAIN PRINCIPAL
SHAREHOLDERS

The following table lists of any known shareholders with a beneficial
ownership of five percent of the Company Sock as of March 31, 1995. All
shares of Common Stock, the only class of security outstanding.

Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Class
------------------- -------------------- ----------------
<S> <C> <C>
Peter Huizenga Testamentary 530,000 9.85%
Trust(13)
Huizenga Capital Management
Oak Brook, IL 60521

Robert A. Schoellhorn(14) 530,000 9.85%
Byan & Gross
Northbrook, IL 60062

Mutual Discovery Fund 530,000 9.85%
(Mutual Series Fund, Inc.)
Short Hills, NJ 07078

Basswood Partners 530,000 9.85%
Paramus, NJ 07652

Kenneth Gaspar 370,370 6.88%
Lisle, IL

Jerome White 333,333 6.19%
Donaldson, Lufkin & Jenerette
Chicago, IL 60606

</TABLE>

- --------------------

(13) Assuming regulatory approval of a change of control application, the
Huizenga Trust is expected to hold approximately 13.7% of the Common
Stock. Action is expected on the application in June 1995.

(14) Assuming regulatory approval of a change of control application, Mr.
Schoellhorn is expected to hold approximately 12.5% of the Common
Stock. Action is expected on the application in June 1995.

-55-

<PAGE>

SECURITY OWNERSHIP OF MANAGEMENT

The following table reflects as of March 31, 1995 the beneficial
ownership of management of the Company's Common stock including stock options
which have been vested or stock options that will be vested within 60 days.
All of the individuals, except Mr. Cumming, are directors of the Bank and
Company.

Mr. John Rose is expected to become a director of the Company and Bank
subject to regulatory approval and completion of the private placement. As
of March 31, 1995, Mr. Rose held 185,185 shares of common Stock or 3.47% of
the outstanding shares. Assuming the completion of the next closing of the
private placement, his ownership is projected to represent approximately
2.98%.

<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Owner Director Beneficial Ownership(15) Percent of Class
- ------------------------- ------------------------ ----------------
<S> <C> <C>
Rice E. Brown 12,345 .23%
E. Lynn Caswell(16) 53,415 .99%
Louis F. Cumming(17) -- --
Raymond B. Cox 23,689 .44%
William C. Demmin(8) 26,882 .50%
Alfred H. Jannard 11,840 .22%
Cheryl Moore 8,108 .15%
Margaret A. Redmond 26,396 .44%
------- -----
All seven (7) directors as a group 162,675 3.02%
</TABLE>

EXECUTIVE COMPENSATION

The Company's executive officers are E. Lynn Caswell, Chairman of the
Board, President and Chief Executive Officer; William C. Demmin, Senior Vice
President and Chief Financial Officer. The Company paid no salaries in 1994.

The following table reflects all compensation paid to Mr. E. Lynn
Caswell, the Company's and Bank's Chief Executive Officer. No other
executive officer received total annual salary and bonus of $100,000 or more.

- -----------------
(15) Beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (a) voting power, which
includes the power to vote, or to direct the voting power, of such
security; and/or (b) investment power, which includes the power to
dispose, or to direct the disposition of, such security. Beneficial
owner also includes any person who has the right to acquire
beneficial ownership of such security as defined above within 60 days
of the Record Date. The calculation includes vested stock options
totaling 51,320 option shares.

(16) Mr. Caswell and Mr. Demmin are also executive officers.

(17) Mr. Cumming is an executive officer of the Bank, but he does not hold
an officer position with the Company, nor is he a director of the
Company or the Bank. Mr. Cumming replaces Mr. Richard Cordova as
Senior Vice President and Chief Credit Officer of the Bank, who
resigned in April 1995.

-56-
<PAGE>

<TABLE>
<CAPTION>
Securities
Profit Other Annual Underlying
Name and Position Year Salary Sharing Compensation Options
- ----------------- ---- -------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C>
E. Lynn Caswell 1994 $128,182 $ -- $ -- --
1993 128,182 -- 21,324 55,620
1992 124,730 31,553 8,700 --

</TABLE>

Mr. E. Lynn Caswell executed an Employment Agreement dated July 23,
1987, and amended effective July 23, 1989, and July 23, 1991 with the Company
and the Bank. The Agreement is now effective for a three (3) year period
with automatic, subsequent three (3) year renewals, unless notice is given
thirty (30) days prior to the end of any given period. The Agreement
provides for a base salary with annual cost of living adjustments to a
maximum of 8%. Mr. Caswell's current base annual salary as of February 28,
1994 is $128,182. In addition, Mr. Caswell receives an automobile allowance,
reimbursement for various business expenses, use of the Bank's club
memberships, four weeks annual vacation, insurance, including disability and
life insurance equal to four (4) times annual salary, and other health and
Company benefits. Mr. Caswell is entitled to receive director's fees. A
profit sharing agreement equal to 10% of the pre-tax profit of the Bancorp,
as calculated in accordance with generally accepted accounting principles, is
payable to Mr. Caswell within three (3) months after the end of the fiscal
year. The Agreement may be terminated without cause by majority vote, or as
the result of a merger or corporate dissolution. Should the Agreement be
terminated, Mr. Caswell would receive no less than six (6) months base
salary, auto allowance, and insurance benefits. The profit sharing
arrangement of 10% of the pre-tax profit would be calculated and payable as
of the date of the termination of the Agreement.

STOCK OPTIONS

The Monarch Bancorp 1983 Stock Option Plan (the "Plan") was adopted on
May 24, 1983 and amended, by the Board of Directors in May 1988 and March
1989, and by Shareholders at the July 12, 1988 Annual Meeting of
Shareholders, to increase the number of authorized shares of the Company and
to reflect changes affecting stock options as contained in the Tax Reform Act
of 1986. The California Department of Corporations issued a permit for the
amended plan in March 1989. The Plan has been qualified as an incentive
stock option under Section 422A of the Internal Revenue Code of 1954, as
amended by the Economic Recovery Act of 1981 and the Tax Reform Act of 1986.
The 1983 Plan expired in March 1993.

The Monarch Bancorp 1993 Stock Option Plan was adopted on March 16, 1993
by the Board of Directors, and approved by Shareholders of the Company at the
June 7, 1993 Annual Meeting of Shareholders. The California Department of
Corporations issued a permit for the 1993 Plan, and the Company intends to
register with the Securities and Exchange Commission the shares reserved for
issuance under the 1993 Plan. The 1993 Plan allows for the issuance of
nonqualified and incentive stock options as defined under the Internal
Revenue Code, and provides for the issuance of up to 520,069 shares.

The 1993 Plan is similar to the 1983 Plan in several respects, except
that options may be granted to consultants and business associates of the
Company and the Bank, the 1993 Plan allows that an optionee has a right to
exercise vested options in the event of termination for cause for a period of
at

-67-
<PAGE>

least 30 days following such termination, and the 1993 Plan does not allow
for acceleration of unvested options for any reason.

The Company has agreed to grant to the Financial Advisors, in addition
to the cash compensation payable under the engagement letter, stock options
that will entitle the Financial Advisors to purchase shares equal to 5% of
the number of shares issued and outstanding following this Offering, at a
price of 120% of the offering price. The options will be for a term of ten
years and will be exercisable after the first year. The options will be
non-transferrable. The Board of Directors also intend to amend the Company's
1993 existing stock option plan in order to increase the number of shares
subject to the plan to an amount that is equal to 30% of the issued and
outstanding shares of the Company. The Board of Directors intends to cancel
existing stock options and substitute new stock options on prices, and for
terms, financially comparable to terms of the options described above for the
Financial Advisors.

OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants

Percent of Total
Options/SARs Options/SARs Granted to Exercise or Base Expiration
Name Granted (#) Employees in Fiscal Year Price ($/Sh) Date
- ---- ------------ ------------------------ ---------------- ----------
<S> <C> <C> <C> <C>
NONE

</TABLE>

Mr. Caswell received options to purchase 2,000 shares of the Company's
Common Stock in September 1993 at fair market value as defined in the
Company's 1993 Stock Option Plan. Mr. Caswell was one of nine individuals
who received options in 1993.

At the request of the Board of Directors, Mr. Caswell also voluntarily
canceled 53,620 options that had been granted in 1988. These options under
the terms of the 1983 Stock Option Plan had been fully vested over a five
year period, and were exercisable at an average price of $4.28 per share.
The Company reissued 53,620 options under the 1993 Stock Option Plan at $4.25
per share. The replacement options will be vested as to 1/5 per year over
five years and expire in September 2003.

AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End (#)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
E. Lynn Caswell -- -- 10,000/55,620 *

</TABLE>

-58-
<PAGE>

KSOP

On January 1, 1993 the Company and Bank completed the formation of the
Monarch Bank Employee Stock Ownership and Salary Deferral Plan ("KSOP") with
the first deduction from employee salaries on January 15, 1993. In 1992, the
KSOP obtained a $250,000 loan from another financial institution, which is
guaranteed by the Company, and acquired 53,360 shares of previously issued
Company stock at a price of $1.00 per share. In March 1993, the KSOP
acquired an additional 198,255 shares at $1.00 per share in a private
placement offering. Repayments on the loan are made by employee salary
deductions and from possible matching contributions by the Bank. Under the
terms of the KSOP, shares will be distributed to participants at the end of
each year, actual release of shares to the participants is contingent upon
the repayment progress of the loan. The amount of matching contributions
made by the Company was $19,920 in 1993 and $46,108 in 1994.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Some of the directors and executive officers of the Company and its
subsidiaries and the companies with which they are associated are customers
of, and have had banking transactions with, Monarch Bank in the ordinary
course of the Bank's business, and the Bank expects to have banking
transactions with such person in the future. In Management's opinion, all
loans and commitments to lend included in such transactions were made in
compliance with applicable laws on substantially the same terms including
interest rates and collateral, as those prevailing for comparable
transactions with other persons of similar creditworthiness and did not
involve more than a normal risk of collectability or present other
unfavorable features. The amount of all such loans and credit extensions, to
all executive officers, directors, and principal shareholders of the Company,
together with their associates, was $141,191 on December 31, 1994
constituting approximately 16% of the Bank's equity capital accounts on that
date.

The Bank's health and life insurance programs have been contracted,
based on a competitive bid, through Rice Brown Financial, which is owned by
Rice Brown, an insurance broker and a director of the Company and the Bank.

In 1989, the Bank sold its residual value in a matured lease to former
director Parker in exchange for a convertible debenture in another bank. The
debenture was converted into shares of common stock in July 1992; and the
Bank continues to hold this investment at a carrying value of $103,000. The
book value of the shares of such stock owned by the Bank is approximately
$165,942. The market price for the stock is not meaningful since it is very
thinly traded.

-59-
<PAGE>

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company's Articles of Incorporation, as amended, authorize the
issuance of 25,000,000 shares of no par value Common Stock and 5,000,000
shares of Preferred Stock. As of the date of this Prospectus, there are
5,341,434 shares of the Common Stock and no shares of the Preferred Stock
issued and outstanding.

COMMON STOCK

The holders of the Common Stock are entitled to one vote per share on
all matters requiring stockholder action, except that in connection with the
election of directors, the shares may be voted cumulatively if a candidate's
or candidates' name(s) have been properly placed in nomination prior to the
voting and a shareholder present at the meeting has given notice of his or
her intention to vote his or her shares cumulatively. If a shareholder has
given such notice, then all shareholders entitled to vote for the election of
directors may cumulate their votes. Cumulative voting entitles a shareholder
to give one or more nominees as many votes as is equal to the number of
directors to be elected multiplied by the number of shares owned by such
shareholder, or to distribute his or her votes on the same principle between
two or more nominees as he or she sees fit.

The holders of Common Stock have no preemptive or other Rights and there
are no redemption, sinking fund or conversion privileges applicable thereto.
The holders of Common Stock are entitled to receive dividends as and when
declared by the Board of Directors out of funds legally available therefor,
subject to the restrictions by its regulators. See "Business." Upon
liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities. All outstanding shares of Common Stock are fully paid and
nonassessable and the shares of Common Stock to be issued in the Offering
will, upon delivery and payment therefor in accordance with the terms of the
Offering, be fully paid and nonassessable.

The registrar and transfer agent for the Company's Common Stock is U.S.
Stock Transfer Company.

PREFERRED STOCK

The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is authorized to fix the number of shares of
any series of Preferred Stock and to determine the designation of any such
shares. The Board of Directors is also authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock and, within the limits and
restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series, to
increase or decrease (but not the number of shares of such series then
outstanding) the number of shares of any series subsequent to the issues of
shares of that series. The Board of Directors does not presently intend to
issue any Preferred Stock. Although it is not possible to state the actual
effects of any issuance of Preferred Stock upon the rights of holders of
other securities of the Company, such effects might include (i) restrictions
on Common Stock dividends if Preferred Stock dividends have not been paid;
(ii) dilution of the voting power and equity interest of warrant holders of
Common Stock to the extent

-60-
<PAGE>

that any Preferred Stock series has voting rights, or that any Preferred
Stock shares are convertible into Common Stock, or (iii) inability of current
holders of Common Stock to share in the Company's assets upon liquidation
until satisfaction of any liquidation preferences granted to the holders of
the Preferred Stock. In addition, the issuance of Preferred Stock under
certain circumstances may have the effect if discouraging an attempt to
change control of the Company by, for example, creating voting impediments to
the approval of mergers or other similar transactions involving the Company.

Subject to such preferential rights as may be determined by the Board of
Directors of the Company in the future in connection with the issuance, if
any, of shares of Preferred Stock, holders of Common Stock are entitled to
cast one vote for each share held of record and to cumulate votes for the
election of directors, to receive such dividends as may be declared by the
Board of Directors out of legally available funds and to share ratably in any
distribution of the Company's assets after payment of all debts and other
liabilities, upon liquidation, dissolution or winding up of the Company.
Shareholders do not have preemptive rights or other rights to subscribe for
additional shares, and the Common Stock is not subject to conversion or
redemption. The outstanding shares of Common stock are, and the shares of
Common Stock to be issued in the Offering, will be, upon delivery and payment
therefor in accordance with the terms of the Offering, fully paid and
nonassessable.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for
the Company by Knecht & Hansen, a partnership of professional corporations,
Newport Beach, California. Knecht & Hansen beneficially owns 3,200 shares of
Common Stock of the Company.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1994 and for each of the years then ended included in this Prospectus have
been audited by Dayton & Associates, independent auditors, as stated in
their report appearing herein (which report expresses an unqualified opinion
and includes an explanatory paragraph referring to the uncertainty of the
Company's ability to meet certain regulatory requirements), and have been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.

-61-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----
Independent Auditors' Report . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheet at December 31, 1994 and 1993 . . . . .

Consolidated Statements of Operations for the years ended
December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1994 and 1993 . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows for the years ended
December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . .

Notes to Consolidated Financial Statements . . . . . . . . . . . .

Unaudited Consolidated Balance Sheet at March 31, 1995 and 1994 .

Unaudited Consolidated Statement of Operations for the
three months ended March 31, 1995 and 1994 . . . . . . . . . . .

Unaudited Consolidated Statements of Cash Flows for the three
months ended March 31, 1995 and 1994. . . . . . . . . . . . . . .

Noted to Unaudited Consolidated Financial Statements . . . . . . .

<PAGE>

[Dayton & Associates Letterhead]

Board of Directors and Shareholders
Monarch Bancorp
Laguna Niguel, California

INDEPENDENT AUDITORS' REPORT

We have audited the accompanying consolidated balance sheets of Monarch
Bancorp and Subsidiaries as of December 31, 1994 and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Monarch
Bancorp and Subsidiaries as of December 31, 1993 were audited by other
auditors whose report dated January 28, 1994, except for Note 16, as to which
the date was April 14, 1994, on those statements included an explanatory
paragraph that addressed the matters discussed in Notes 2 and 15 to the
financial statements.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Monarch Bancorp and
Subsidiaries as of December 31, 1994, and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.

As discussed in Note 17, the 1994 financial statements have been restated.

/s/ Dayton & Associates

February 7, 1995, except for Note 16 as to
which the date is March 31, 1995 and
Note 17 as to which the date is April 25, 1995
Laguna Hills, California

F-1
<PAGE>

MONARCH BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
December 31,
------------------------
ASSETS 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks (Note 10) $4,761,921 $3,165,840
Federal funds sold 5,891,000 5,180,000
-------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 10,652,921 8,345,840

Interest bearing deposits with other banks 1,382,000 3,555,000

Investment securities - Held to Maturity, at cost (fair value of $4,123,460 in 1994
and $3,274,065 in 1993) (Note 3) 4,357,946 3,284,615

Investment securities - Available for Sale, at fair value (cost of $12,136,884 in 1994
and $14,860,849 in 1993) (Note 3) 11,780,442 14,914,284

Loans (Notes 4, 11, and 14):
Real estate - mortgage 12,226,201 12,137,836
Real estate - construction 4,031,698 5,061,255
Commercial 12,088,885 14,036,569
Installment 2,693,276 4,133,834
-------------------------------------------------------------------------------------------------------------------
Gross loans 31,040,060 35,369,494
Less: Deferred loan fees (52,226) (118,971)
Allowance for possible loan losses (1,136,971) (1,055,347)
-------------------------------------------------------------------------------------------------------------------
Net loans 29,850,863 34,195,176

Premises and equipment, net (Note 5 and 14) 650,057 806,127
Other real estate owned 617,275 1,293,390
Accrued interest receivable and other assets 682,451 724,972
-------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $59,973,955 $67,119,404
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest bearing $14,790,641 $12,998,958
Interest bearing demand 30,774,961 35,241,213
Savings 6,235,646 8,305,703
Time certificates of deposit of $100,000 or more 2,260,550 2,742,058
Other time deposits 4,581,503 4,427,395
-------------------------------------------------------------------------------------------------------------------
Total deposits 58,643,301 63,715,327

Notes payable (Note 6) 53,500 53,500
Other borrowing (Note 9) 172,856 210,911
Accrued interest payable and other liabilities 402,776 216,414
-------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 59,272,433 64,196,152

Commitments and contingencies (Note 10)

Shareholders' equity (Notes 1, 2, 7, 9, 12, and 15)
Preferred stock, no par value, 5,000,000 shares authorized, none issued at
December 31, 1994 or 1993, respectively

Common stock, no par value, 25,000,000 shares authorized, 794,324 shares
outstanding at December 31, 1994 and 1993, respectively 7,367,601 7,367,601

Accumulated deficit (6,136,790) (4,286,873)

Unrealized appreciation (depreciation) on investment securities available
for sale (Note 3) (356,433) 53,435

Deferred charge related to KSOP (172,856) (210,911)
-------------------------------------------------------------------------------------------------------------------
Net Shareholders' equity 701,522 2,923,252
-------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $59,973,955 $67,119,404
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-2
<PAGE>

MONARCH BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993
---- ----
<S> <C> <C>
Interest Income
Interest and fees on loans $2,877,686 $3,539,083
Interest on interest bearing deposits in other banks 111,440 93,304
Interest on investment securities 793,562 504,704
Interest on federal funds sold 154,919 210,462
----------- -----------
Total interest income 3,937,607 4,347,553

Interest Expense:
Interest expense on deposits 1,100,405 1,238,711
Interest expense on notes payable and other borrowings 1,796 5,845
----------- -----------
Total interest expense 1,102,201 1,244,556

Net Interest Income 2,835,406 3,102,997

Provision for Possible Loan Losses (Note 4) 995,001 1,280,000
----------- -----------

Net Interest Income After Provisions for Possible Loan Losses 1,840,405 1,822,997

Other Income:
Overdraft service charges 230,186 277,915
Deposit service charges 170,846 164,450
Rental income 70,502 118,380
Data processing income 122,487 116,978
Late charges on loans 20,177 42,767
Service charges, commissions, and other fees 81,988 88,466
Gain (loss) on investments (47,000) 39,974
Gain on sale of assets (Note 14) 0 111,482
----------- -----------
Total other income 649,186 960,412

Other Operating Expenses:
Salaries and employee benefits 1,788,271 1,839,277
Office operations 676,431 799,028
Occupancy expenses (Note 14) 614,768 988,324
Professional services 276,004 236,301
Public offering expenses (Note 16) 365,641 0
Other real estate owned 242,589 86,358
Advertising and business promotion 110,294 124,135
Other 263,910 49,862
----------- -----------
Total other operating expenses 4,337,908 4,123,285

Loss Before Provision for Income Taxes (1,848,317) (1,339,876)
Provision for Income Taxes (Note 8) 1,600 1,600
----------- -----------
Net Loss ($1,849,917) ($1,341,476)
----------- -----------
----------- -----------

Weighted average number of common and common equivalent shares
outstanding (Note 1) 794,324 785,986

Per share information:
Net loss per share ($2.33) ($1.71)
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

MONARCH BANCORP
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Years ended December 31, 1994 and 1993

Net Unrealized
Appreciation
Deferred (Depreciation)
charge on Securities
Common Stock Accumulated related Available Shareholders'
Shares Amount Deficit to KSOP for Sale Equity
------------ ---------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 737,297 $7,083,466 ($2,945,397) ($250,000) $ 0 $3,888,069

Exercise of stock options (Note 7) 4,000 19,000 0 0 0 19,000

Stock purchases (Note 7) 52,783 264,097 0 0 0 264,097

Conversion of debt 244 1,038 0 0 0 1,038

Repayment of KSOP debt (Note 9) 0 0 0 39,089 0 39,089

Unrealized appreciation on investment
securities Available for Sale (Note 3) 0 0 0 0 53,435 53,435

Net loss 0 0 (1,341,476) 0 0 (1,341,476)
- -----------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1993 794,324 7,367,601 (4,286,873) (210,911) 53,435 2,923,252

Repayment of KSOP debt (Note 9) 0 0 0 38,055 0 38,055

Net change in unrealized depreciation on
investment securities Available for
Sale (Note 3) 0 0 0 0 (409,868) (409,868)

Net loss 0 0 (1,849,917) 0 0 (1,849,917)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 794,324 $7,367,601 ($6,136,790) ($172,856) ($356,433) $ 701,522
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4

<PAGE>

MONARCH BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31,
1994 1993
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss ($1,849,917) ($1,341,476)
Adjustments to reconcile net loss to net cash used in operating activities
(Loss) gain on investment securities 47,000 (39,974)
Provision for possible loan losses 995,001 1,280,000
Provision for possible losses on real estate owned 200,000 64,026
Depreciation 186,658 172,971
Amortization of bond discounts (44,316) 96,002
Deferred gain on sale leaseback 0 (110,938)
Deferred loan fees (175,110) (264,027)
(Increase) decrease in accrued interest receivable and other assets 42,521 (29,346)
Increase in accrued interest payable and other liabilities 186,362 18,878
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (411,801) (153,884)

CASH FLOWS FROM INVESTING ACTIVITIES:

Net decrease ( increase) in interest-bearing deposits in other banks 2,173,000 (2,470,000)
Securities held to maturity:
Proceeds from maturities 4,140,452 2,220,848
Purchases (5,201,119) (16,824,280)
Proceeds from the sale of investment securities 0 3,685,850
Securities available for sale:
Proceeds from maturities 3,301,435 0
Purchases (996,562) 0
Net decrease in loans 2,338,073 8,958,081
Purchases of premises and equipment (30,588) (521,345)
Proceeds from sale of real estate owned 2,066,217 634,955
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) in investing activites 7,790,908 (4,315,891)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase (decrease) noninterest bearing demand 1,791,683 (1,325,515)
Net increase (decrease) in interest-bearing demand, savings deposits,
and other time deposits (6,382,201) 2,387,459
Net decrease in time deposits of $100,000 or more (481,508) (1,310,000)
Payments on maturing debt 0 (35,500)
Proceeds from the issuance of common stock 0 284,135
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (5,072,026) 579
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,307,081 (4,469,196)
Cash and cash equivalents at beginning of year 8,345,840 12,815,036
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $10,652,921 $8,345,840
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------

NON-CASH ACTIVITIES:

Property acquired through foreclosure $ 2,180,926 $1,357,416
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Transfer of securities to available for sale $0 $14,860,849
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Adjustments to securities available for sale ($409,868) $53,435
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Repayment of KSOP debt $38,055 $39,089
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
MONARCH BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
Monarch Bancorp (the Company) and its wholly owned subsidiaries, Monarch Bank
(Bank) and M. B. Mortgage Co. M. B. Mortgage is currently inactive. All
significant intercompany balances and transactions have been eliminated.

STATEMENTS OF CASH FLOWS: For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks and federal funds sold.
Interest paid for the years ended December 31, 1994 and 1993 was
approximately $1,082,000 and $1,116,000, respectively. Income taxes paid
for the years ended December 31, 1994, and December 31, 1993 was $1,600,
respectively.

INVESTMENT SECURITIES: As of December 31, 1993, the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement addresses the
accounting and reporting for investments in equity securities that have
readily determinable fair values, and all investments in debt securities.
Under this statement, securities are classified into three categories as
follows:

HELD-TO-MATURITY SECURITIES (HTM) - Securities that the Company has
the positive intent and ability to hold to maturity. These securities
are to be reported at amortized cost.

TRADING SECURITIES - Securities that are bought and held principally
for the purpose of selling them in the near term. These securities
are to be reported at fair value with unrealized gains and losses included
in earnings.

AVAILABLE-FOR-SALE SECURITIES (AFS) - Securities not classified
as either held-to-maturity or trading securities. These securities are
to be reported at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders' equity
(net of tax effects).

LOANS: Loans are stated at amounts advanced less payments received.
Interest income on loans is accrued daily as earned using the
"simple-interest" method, except when a loan is 90 days delinquent (unless
well secured and in the process of being collected) or where reasonable doubt
exists as to the collectibility of the interest, in which case the accrual of
income is discontinued and any previously accrued interest is reversed.

The adequacy of the allowance for possible loan losses is determined by
management based on a number of factors, including loan loss experience,
review of problem loans, quality of the portfolio, and current economic
conditions. Loans which are considered to be uncollectible are charged to the
allowance for possible loan losses, and subsequent recoveries are added to
the allowance. The allowance is also increased (decreased) by credits for
loan losses charged against (returned to) income. Management believes the
allowance for possible loan losses reflects all losses inherent in the loan
portfolio.

Loan origination fees offset by certain direct loan origination costs are
deferred and amortized over the expected lives of the related loans as an
adjustment of yield.

PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation and amortization which are charged to expense on a
straight-line basis over the estimated useful lives of the assets which range
from 5-10 years or, in the case of leasehold improvements, over the terms of
the leases, if shorter.

OTHER REAL ESTATE OWNED: Other real estate owned (acquired through
foreclosure or deed in lieu) is carried at fair value less estimated selling
costs. Any reduction to fair value at the time of acquisition is recorded as
a charge

F-6

<PAGE>

against the allowance for possible loan losses. Any subsequent reduction is
recorded as expense. Gains or losses upon disposition are reflected in
current operations. Loans that are in foreclosure proceedings or that
represent "insubstance foreclosures" are carried as loans as required by bank
regulatory guidelines.

INCOME TAXES: As of January 1, 1993, the Company adopted SFAS No. 109,
"Accounting for Income Taxes". This statement requires an asset and
liability approach for computing deferred income taxes. A deferred tax asset
is recognized for temporary differences which will result in future
deductible amounts and carryforwards. A deferred tax liability is recognized
for temporary differences which will result in future taxable amounts. In
the event the future consequences of differences between financial reporting
bases and the tax bases of the Company's assets and liabilities result in a
deferred tax asset, SFAS 109 requires an evaluation of the probability of
being able to realize the future benefits indicated by such asset. A
valuation allowance related to a deferred tax asset is recorded when it is
more likely than not that some portion or all of the deferred tax asset will
not be realized. The impact of adopting this standard was not significant.

NEW ACCOUNTING STANDARDS: In May 1993, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan", which was amended by SFAS
No. 118 in October 1994. This statement amends FASB statements Nos. 5,
"Accounting for Contingencies," and 15, "Accounting by Debtors and Creditors
for Troubled Debt Restructurings". This statement prescribes that a loan is
impaired when it is probable that a creditor will be unable to collect all
amounts due (principal and interest) according to the contractual terms of
the loan agreement. Measurements of the impairment can be based on the
expected future cash flows of an impaired loan which are to be discounted at
the loan's effective interest rate or impairment can be measured by reference
to an observable market price, if one exists, or the fair value of the
collateral for a collateral-dependent loan. Creditors may select the
measurement method on a loan-by-loan basis except that collateral dependent
loans for which foreclosure is probable must be measured at the fair value of
the collateral. Additionally, the statement prescribes measuring impairment
of a restructured loan by discounting the total expected future cash flows of
the loan's effective rate of interest in the original loan agreement.
Finally, the impact of initially applying the statement is reported as a part
of bad-debt expense. The Company must adopt this standard by 1995. The
Company has not yet determined the effects of adopting this standard.

In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair Value
of Financial Instruments." Implementation of SFAS No. 107 is required for
fiscal years ending after December 15, 1992 for institutions with assets
greater than $150 million, and for fiscal years ending after December 15,
1995 for all other institutions, however, earlier adoption is permitted.
SFAS No. 107 requires disclosures about fair value for all financial
instruments. The Company will implement the new standard in 1995.

RECLASSIFICATIONS: Certain reclassifications have been made to the 1993
financial statements to conform to the 1994 presentation.

SHARES OF COMMON STOCK: In December 1993, the Company completed a 1-for-5
reverse stock split and reduced the authorized and issued shares of common
stock of the Company.

EARNINGS PER SHARE: Earnings per share information is based on average
shares outstanding during the year plus the effect of dilutive stock options.

2. REGULATORY MATTERS

Following the conclusion of a joint, second quarter 1994 FDIC and California
State Banking Department (Superintendent) examination of the Bank, Monarch
Bank stipulated to the issuance of a Section 8(b) Order and a California
Financial Code Section 1913 Order (the "Orders") which became effective on
December 23, 1994 and December 14, 1994, respectively. The Orders are
similar in content and require the Bank to perform several actions within
certain time frames and include the following: (i) to have and retain
management who are acceptable to the Superintendent and the FDIC and who are
qualified to restore the Bank to a safe and sound

F-7

<PAGE>

condition; (ii) the Board of Directors to increase its participation in the
affairs of the Bank; (iii) by no later than April 30, 1995, the Bank shall
have Tier 1 capital in an amount as to equal or exceed 7% of the Bank's total
assets and to adopt a capital plan to meet the minimum risk-based capital
requirements as described in FDIC rules and regulations; (iv) to eliminate
from its books all assets classified loss in the 1994 examination and to
reduce assets classified substandard according to defined schedules; (v)
prohibits and restricts further extensions of credit to borrowers whose
assets were adversely classified in the 1994 examination; (vi) requires the
Bank to revise and amend its loan policy and improve credit administration
procedures; (vii) to reduce loan concentrations; (viii) to establish and
maintain an adequate reserve for loan losses and revise the Bank's policy for
determining the adequacy of the loan loss reserve; (ix) to prepare and
implement a written plan and budget for review and comment by the FDIC and
for the Board's review versus actual performance on a quarterly basis; (x)
to correct, to the extent possible, certain violations of law contained in
the examination report; (xi) to adopt and implement a policy to provide for
adequate internal controls and an internal audit program; (xii) to file
amended Call Reports where needed; (xiii) to not pay cash dividends without
the prior consent of the FDIC and Superintendent; and (xiv) to file written
progress reports with the FDIC and Superintendent.

The Bank, as a result of the 1994 examinations, was also notified by the FDIC
that the Bank had fallen within the undercapitalized capital category under
Section 38 of the FDIC Act. The Bank is subject to mandatory restrictions
under Section 38 including the submission of a capital restoration plan and
restrictions on asset growth, acquisitions, new activities, new branches,
payment of dividends, or making other capital distributions or management
fees.

The Bank has filed and the FDIC has approved a capital restoration plan, and
Monarch Bancorp has executed a guarantee of the capital plan.

Failure on the part of the Bank to meet the terms of the Orders or capital
restoration plan may subject the Bank to significant regulatory sanctions.
The financial statement impact, if any, that might result from the failure of
the Bank to comply with the Orders or capital restoration plan cannot
presently be determined. Accordingly, no adjustments that may result from
the ultimate resolution of this uncertainty have been made in the
accompanying consolidated financial statements. (Refer to Note 16 concerning
a subsequent event that increased capital.)

3. INVESTMENT SECURITIES

Investment securities consist of the following at December 31:

<TABLE>
<CAPTION>
1994
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
US Government Securities $ 246,379 $ - $ (2,984) $ 243,395
US Agency Securities 2,500,000 - (151,250) 2,348,750
Mortgage-backed Securities 1,507,730 - (80,252) 1,427,478
Other securities 103,837 - - 103,837
----------- --- --------- -----------
$ 4,357,946 $ - $(234,486) $ 4,123,460
----------- --- --------- -----------
----------- --- --------- -----------
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed Securities $ 6,946,300 $ - $(356,442) $ 6,589,858
US Government fund 5,190,584 - - 5,190,584
----------- --- --------- -----------
$12,136,884 $ - $(356,442) $ 11,780,442
----------- --- --------- -----------
----------- --- --------- -----------
</TABLE>

F-8

<PAGE>

<TABLE>
<CAPTION>
1993
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
US Government Securities $ 250,000 $ 4,923 - $ 254,923
US Agency Securities 750,038 - (777) 749,261
Mortgage-backed Securities 2,133,740 2,841 (17,537) 2,119,044
Other securities 150,837 - - 150,837
----------- ------- ------- -----------
$ 3,284,615 $ 7,764 $(18,314) $ 3,274,065
----------- ------- ------- -----------
----------- ------- ------- -----------
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
US Agency Securities $ 5,001,615 $ - $ - $ 5,001,615
Mortgage-backed Securities 6,856,996 58,516 (5,081) 6,910,431
US Government fund 3,002,238 - - 3,002,238
----------- ------- ------- -----------
$14,860,849 $58,516 $(5,081) $14,914,284
----------- ------- ------- -----------
----------- ------- ------- -----------
</TABLE>

Adjustments in book value of ($356,442) and $53,435 were recorded on December
31, 1994 and 1993, respectively in order to mark the AFS securities to
estimated fair value, and a similar net unrealized gain (loss) was recorded
to shareholders' equity.

The amortized cost and estimated fair value of HTM securities and AFS
securities at December 31, 1994, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because of the
payment stream associated with mortgage-backed securities.

<TABLE>
<CAPTION>
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST (HTM) FAIR VALUE (HTM) COST (AFS) FAIR VALUE (AFS)
------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ 5,190,584 $ 5,190,584
Due after one year through five years 2,746,379 2,592,145 996,570 996,563
Due after five years through ten years 103,837 103,837 - -
Mortgage-backed securities 1,507,730 1,427,478 5,949,729 5,593,295
---------- ---------- ----------- -----------
$4,357,946 $4.123,460 $12,136,883 $11,780,442
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>

There were no sales of securities in 1994, gross realized gains and gross
realized losses on sales of securities were:

<TABLE>
<CAPTION>
1993
--------
<S> <C>
Gross realized gains:
U.S. Government and agency securities $40,487
-------
-------
Gross realized losses:
U.S. Government and agency securities $ 513
-------
-------
</TABLE>

At December 31, 1994 and 1993, investment securities with a carrying amount
of approximately $2,271,000 and $2,730,000, respectively, were pledged as
collateral to secure public deposits.

4. LOANS

Most of the loans made by the Bank are to customers located in the Orange
County, California area. Mortgage and construction loans are collateralized
by real estate trust deeds. The Bank generally requires security in the form of

F-9

<PAGE>

assets, including real estate, on commercial and installment loans. The
ability of the Bank's customers to honor their loan agreements is dependent
upon the general economy of the Bank's market area.

Following is a summary of transactions affecting the allowance for possible
loan losses:

<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Beginning balance $1,055,347 $ 575,294
Provision for loan losses 995,001 1,280,000
Amounts charged off (991,694) (815,233)
Recoveries 78,317 15,286
---------- ----------
Ending balance $1,136,971 $1,055,347
---------- ----------
---------- ----------
</TABLE>

Loans aggregating approximately $362,000 and $505,000 were past due 90 days
or more but were accruing interest, and loans aggregating approximately
$431,000 and $2,420,000 were on non-accrual as of December 31, 1994 and 1993,
respectively. Interest income that was not recognized because accrual of
interest on the related loan had been discontinued amounted to approximately
$26,000 and $98,000 for the years ended December 31, 1994 and 1993,
respectively.

The Bank's lending is concentrated in Orange County and surrounding areas,
which have experienced adverse economic conditions, including declining real
estate values. Although management believes the level of its allowance for
possible loan losses and the carrying value of its other real estate owned as
of December 31, 1994 is appropriate, additional decline in the local economy
may result in losses that cannot reasonably be predicted at this time.

In the ordinary course of business, the Bank has granted loans to certain
officers and directors and the companies with which they are associated.
Changes in the aggregate of loans outstanding to a total of five (5) such
individual parties are as follows:

<TABLE>
<S> <C>
Balance, January 1, 1993 $ 559,924
Additions 22,391
Deletions (296,263)
---------
Balance, December 31, 1993 286,052
Additions 73,701
Deletions (218,562)
---------
Balance, December 31, 1994 $ 141,191
---------
---------
</TABLE>

In the opinion of management, all extensions of credit to related parties are
on terms similar to transactions with nonaffiliated parties and none of the
loans to insiders were past due as of December 31, 1994.

5. PREMISES AND EQUIPMENT

The components of premises and equipment at December 31, are as follows:

<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Furniture, fixtures and equipment $ 989,769 $1,144,230
Leasehold improvements 13,774 25,930
---------- ----------
1,003,543 1,170,160
Less accumulated depreciation
and amortization (353,486) (364,033)
---------- ----------
$ 650,057 $ 806,127
---------- ----------
---------- ----------
</TABLE>

Depreciation expense was $186,658 and $172,971 for the years ended December
31, 1994 and 1993, respectively. During 1988, the Bank sold and leased back
certain of its furniture and equipment (Note 14).

F-10
<PAGE>

In December 1993, the Bank began to renegotiate the option period on a
sublease at a reduced rate and recorded a $61,000 projected loss; an
additional loss on the differential between projected future income and
expense of $19,522 was recorded in 1994 at the completion of the negotiations
(Note 10).

6. NOTES PAYABLE

Convertible subordinated debentures totaling $53,500 were outstanding
for years ended December 31, 1994 and 1993, respectively

The convertible subordinated debentures were issued in 1988 and 1989
pursuant to a private placement offering. These debentures mature in August
1995 and require semiannual interest payments at a floating rate equal to one
percent less than prime rate. One member of the Board of Directors owns
$3,500 of the outstanding debentures.

The debentures outstanding at December 31, 1994 are convertible into
shares of the Company's common stock at a price equal to the Company's market
value on the last day of the month previous to the date of conversion. The
debentures are subordinate to senior indebtedness of the Company (as defined)
and may be redeemed by the Company at any time at face value plus accrued
interest.

7. SHAREHOLDERS' EQUITY

During 1993, shareholders' equity was increased from the exercise of stock
options, conversion of debt, and a private placement. During the year ended
December 31, 1993 these changes were as follows:

<TABLE>
<S> <C>
Exercise of stock options $ 19,000
Option price $ 4.75
Number of options exercised (shares issued) 4,000

Conversion of debt $ 1,038
Conversion price $ 4.25
Shares issued 244

Private placement $264,097
Price $ 5.00
Shares issued 52,783
</TABLE>

8. INCOME TAXES

The provision for income taxes consists of the following for the years
ended December 31:

<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Current:
Federal $ -- $ --
State 1,600 1,600
------ ------
$1,600 $1,600
------ ------
------ ------
</TABLE>

F-11
<PAGE>

The provision for income taxes differs from that which would result from
applying the U. S. statutory rate as follows:

<TABLE>
<CAPTION> 1994 1993
---- ----
<S> <C> <C>
Expected (benefit) provision at 34% statutory rate $(629,972) $(455,558)
Provision for state income taxes, net of Federal Benefit 1,600 1,600
Addition to Valuation Allowance 629,972 --
Unbenefited net operating loss -- 455,558
--------- ---------
Provision for income taxes $ 1,600 $ 1,600
--------- ---------
--------- ---------
</TABLE>

As of December 31, 1994, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $2,679,000. Expiration dates of
the loss carryforwards are as follows:

<TABLE>
<CAPTION>
EXPIRATION DATE AMOUNT
--------------- ------
<S> <C>
2000 $ 35,000
2001 87,000
2002 255,000
2004 1,000
2005 16,000
2006 11,000
2007 57,000
2008 1,010,000
2009 1,207,000
----------
$2,679,000
----------
----------
</TABLE>

The Company has a California net operating loss carryforward of approximately
$1,134,000 at December 31, 1994 which will expire in the year ending
December 31, 1998.

At December 31, 1994, the Company also has investment tax credit carryovers
of approximately $333,000 to offset against future federal tax liabilities.
Carryforward amounts expire at various dates beginning in 2000.

The components of the Company's deferred tax assets and liabilities at
December 31, are:

<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Loan Loss Reserves $ 360,000 $ 368,000
Net Operating Loss Carryforward 997,000 542,000
Other Assets/liabilities 210,000 --
Federal Income Tax Credit Carryforward 333,000 333,000
----------- ----------
Total Assets 1,900,000 1,243,000

Valuation Allowance (1,900,000) (1,195,000)
----------- ----------
Total Deferred Asset -- 48,000

Other assets/liabilities -- (48,000)
----------- ----------
Total Deferred Liability -- (48,000)
----------- ----------
Net Deferred Taxes $ -- $ --
----------- ----------
----------- ----------
</TABLE>

F-12
<PAGE>

Pursuant to the Tax Reform Act of 1986, use of the Company's net operating
loss carryforwards may be substantially limited if a cumulative change in
ownership of more than 50% occurs within any three year period. As of
December 31, 1994, such cumulative change was less than 50%.

9. BENEFIT PLANS

The Company has a stock option plan which provides that options for up
to 30% of the outstanding shares of the Company's common stock may be granted
to full-time salaried officers, key employees and directors of the Company.
Options are not to be granted for less than the fair market value of the
stock at the date of grant and are exercisable for five or ten years from the
date of grant. Options outstanding are exercisable at values ranging from
$4.25 to $5.00 per share.

A summary of the changes in outstanding options follows

<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Balance, at January 1 113,016 104,016
Options granted 0 22,000
Options exercised 0 (4,000)
Options canceled (4,000) (9,000)
------- -------
Balance, at December 31 109,016 113,016
------- -------
------- -------
</TABLE>

Options for approximately 50,000 shares were exercisable at December 31, 1994.

During 1992 the Company and Bank adopted the Monarch Bancorp and Monarch Bank
Employee Stock Ownership and Salary Deferral Plan ("KSOP"), which is
available to all employees, with the first deduction from employees' salaries
on January 15, 1993. In 1992 the KSOP obtained a $250,000 loan from another
financial institution, which is guaranteed by the Company, and acquired
10,672 shares of previously issued Company stock at a price of $5.00 per
share. In March 1993, the KSOP acquired an additional 39,651 shares at $5.00
per share in a private placement offering. Repayments on the loan are made by
employee salary deductions and from possible matching contributions by the
Bank. The loan has a term of five years and an interest rate of 8%.
Matching Bank contributions totaled $46,108 and $19,920 in 1994 and 1993
respectively.

10. COMMITMENTS AND CONTINGENCIES

The Company conducts operations from leased facilities under operating
leases which expire on various dates through 2001. The Company has three ten
year options to renew the lease on its branch facility.

The following is a schedule of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease
terms in excess of one year as of December 31, 1994:

YEAR ENDING
DECEMBER 31 AMOUNT
----------- --------
<S> <C>
1995 $ 257,489
1996 187,762
1997 123,218
1998 123,218
1999 123,218
Thereafter 195,096
----------
$1,010,001
----------
----------
</TABLE>

Minimum rental payments are subject to increase based on changes in the consumer
price index. Annual rental expense from operating leases was approximately
$297,000 and $701,000 in 1994 and 1993, respectively.

F-13
<PAGE>

Sublease rental income for the years ended December 31, 1994 and 1993 totaled
approximately $69,000 and $118,000, respectively. The sub-lease matured in
1993 and was renegotiated at a lower rate in mid-1994 and extended to June
1996 to coincide with the Bank's lease commitment on the property. A
projected loss of approximately $61,000 on this sublease was recorded in
1993 and an additional $20,000 in 1994 to recognize the estimated difference
(loss) in rental income to be collected under one sublease agreement versus
rent required to be paid under the Company's master lease.

The Bank is required to maintain reserve balances with the Federal
Reserve Bank. The required balance at December 31, 1994 was approximately
$530,000.

The Bank is a defendant in litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel,
believes that the liabilities, if any, arising from such litigation or claims
will not be material to the Company's consolidated financial position.

The Company and Bank executed a three year Employment Agreement
effective July 23, 1991 with an executive officer that provides for a base
salary with annual cost of living adjustments and other defined benefits.
Should the Employment Agreement be terminated without cause, or as a result
of merger or corporate dissolution, the executive would receive not less than
six months base salary and benefits nor more than one year's base salary.
This agreement was extended for an additional year or until July 1995 by the
Board of Directors.

11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to fund
commercial and construction loan agreements and standby letters of credit.

These instruments involve credit risk in excess of the amounts
recognized as loans in the consolidated balance sheets. As of December 31,
1994 and 1993 the Bank had outstanding commitments under standby letters of
credit of approximately $10,000 and $252,000, respectively, and commitments
to fund personal lines of credit and commercial and construction loans of
approximately $4,055,000 and $5,933,000, respectively, which represents the
Bank's maximum exposure to credit loss in the event of nonperformance by the
other party. Credit policies and collateral requirements for these
commitments are similar to those for loans already outstanding (Note 4).

Commitments generally have fixed expiration dates. The Bank minimizes
interest rate risk associated with these instruments through variable rate
structures.

12. RESTRICTIONS ON PAYMENT OF DIVIDENDS

As of December 31, 1994, the Company was not eligible to pay dividends because
of the accumulated deficit in shareholders' equity.

The Bank is subject to certain restrictions under regulations governing state
banks which limit its ability to transfer funds to the Company through
intercompany loans, advances, or cash dividends. As of December 31, 1994,
the Board under the terms of certain regulatory Orders (Note 2) may not pay
dividends without the prior approval of the FDIC and State Superintendent of
Banks

F-14
<PAGE>

13. CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION

<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS DECEMBER 31,
- ------------------------ ----------------
1994 1993
---- ----
<S> <C> <C>
ASSETS:
Cash $ 21,750 $ 24,918
Investment in bank subsidiary 907,473 3,163,813
----------- ----------
$ 929,223 $3,188,731
----------- ----------
----------- ----------
Liabilities:
Notes payable $ 53,500 $ 53,500
Other borrowing 172,856 210,911
Other liabilities 1,345 1,070
----------- ----------
227,701 265,481
Shareholders' equity 701,522 2,923,249
----------- ----------
$ 929,223 $3,188,730
----------- ----------
----------- ----------
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS 1994 1993
- ---------------------------------- ---- ----
<S> <C> <C>
Total Interest income $ 516 $ 1,482

Interest expense 1,796 5,845
Other 2,165 732
----------- ----------
Total Expenses 3,961 6,577
----------- ----------

Loss before equity in undistributed
earnings of bank subsidiary (3,445) (5,095)

Equity in undistributed losses
of bank subsidiary (1,771,470) (1,335,465)
----------- ----------
Net loss $(1,774,915) $(1,340,560)
----------- ----------
----------- ----------

<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS 1994 1993
- ---------------------------------- ---- ----
<S> <C> <C>
Net loss $(1,774,915) $(1,340,560)
Net adjustments to loss 1,771,470 1,335,465
----------- ----------
Cash flows from operating activities (3,445) (5,095)
Cash flows from investing activities 277 (280,726)
Cash flows from financing activities 0 248,636
----------- ----------

Net decrease in cash (3,168) (37,185)
Cash beginning of year 24,918 62,103
Cash end of year $ 21,750 $ 24,918
----------- ----------
----------- ----------
</TABLE>

14. RELATED PARTY TRANSACTIONS

During 1989 and prior years, the Bank executed certain transactions with
a former director and shareholder and a company controlled by that former
director as follows:

In 1988, the Bank sold and leased back substantially all of its furniture
and equipment. This transaction was brokered through a company
controlled by the former director. The excess of sales proceeds over
carrying cost, aggregating $740,061, was deferred and recognized ratably
over the leaseback term (five years) on a

F-15
<PAGE>
straight-line basis. Amortization of this excess amounted to
approximately $110,000 in 1993. The lease was accounted for as an
operating lease with monthly payments of $39,249 due over a five-year
term. The Bank pledged certain investment securities to secure payment
of rental and other amounts due under the lease agreement (Note 3). This
lease matured in September 1993 and the Bank exercised its option and
repurchased these assets at a cost of approximately $377,000.

In 1989, the Bank sold its residual value in a matured lease to the
former director in exchange for a convertible debenture in another
bank. The debenture was converted into shares of common stock in
July 1992; and the Bank continues to hold this investment at a market
value of $103,000.

The Bank's health and life insurance programs have been contracted based
on competitive bids through Rice Brown Financial. Mr. Brown is an insurance
broker and a director of the Company and the Bank.

15. RISK-BASED CAPITAL STANDARDS

The Bank is required to maintain certain regulatory capital ratios. These
ratios at December 31, 1994 were as follows:

<TABLE>
<CAPTION>
MINIMUM MONARCH
RATIO BANK
------- -------
<S> <C> <C>
Tier 1 leverage capital ratio 4.0% 2.1%
Tier 1 risk-based capital ratio 4.0% 4.1%
Total risk-based capital 8.0% 4.8%
</TABLE>

During 1994, the Bank was notified by the FDIC that its capital had fallen
within the undercapitalized category under Section 38 of the FDIC Act.
Section 38 requires or permits the FDIC to take certain mandatory and
discretionary actions when an institution becomes undercapitalized for prompt
corrective action purposes. At December 31, 1994, the Bank was subject to
mandatory restrictions of Section 38 including submission of a capital
restoration plan and restrictions on asset growth, acquisitions, new
activities, new branches, payment of dividends, or making any other capital
distribution or management fees. As a result of such notification, the Bank
filed a capital plan with the FDIC and Monarch Bancorp executed a guarantee
of the capital plan.

At periodic intervals, the FDIC routinely examines the Company's consolidated
financial statements as part of their legally prescribed oversight of the
banking industry. Based on these examinations, the regulators can direct
that the Bank's financial statements be adjusted in accordance with their
findings.

16. SUBSEQUENT EVENTS

As part of Monarch Bank's Capital Restoration Plan that was filed in December
1994, the Company on December 20, 1994 engaged Belle Plaine Partners, Inc.,
and McAllen Capital Partners (the Financial Advisors) as advisors in
connection with the recapitalization of the Company and Bank. The Financial
Advisors assisted the Company in structuring and promoting a Private
Placement Stock Offering (the Offering) for a minimum of 2,592,593 shares up
to a maximum of 5,555,556 shares of its common stock at a price of $1.35 per
share. The Offering was directed to "accredited investors" as defined in
Rule 501(a) of Regulation D of the Securities and Exchange Commission. The
Offering terminates on April 30, 1995.

On March 31, 1995, the Company had a first closing of the Offering for
approximately $6,139,000 and issued 4,547,111 new shares of common stock.
Proceeds from the Offering were used to pay approximately $470,000 in
Offering expenses; $3,550,000 to increase the Company's investment in Monarch
Bank; $53,500 to retire Company debt; and approximately $2,065,000 in cash is
being held by the Company for future operating needs or investments.

F-16
<PAGE>

As a result of the capital increase for the Bank, the Bank's Tier 1 capital
ratio, as of March 31, 1995 was 8.16%. The increase in the Bank's capital
meets or exceeds the Bank's regulatory commitments to the FDIC and
Superintendent to increase the Bank's ratio for Tier 1 capital to total
assets to equal or exceed 7.0%.

Two investors have filed with the Federal Reserve and the State Superintendent
of Banks to allow two of the new investors to acquire interests of between
10% and 15% of the Company. Subject to regulatory approval, the Company
currently expects to complete the Offering with the additional sale of
approximately 878,000 shares of common stock. Completion of an additional
closing would provide approximately $1,185,000 in additional capital. Once
the Offering has closed, the Company expects to conduct a shareholders'
rights offering for shareholders of record prior to the Offering.

As discussed in Note 8, pursuant to the Tax Reform Act of 1986, use of the
Company's net operating loss carryforwards may be substantially limited if a
cumulative change in ownership of more than 50% occurs within any three year
period. The recapitalization of ownership pursuant to the first closing of
the offering on March 31, 1995, will result in an ownership change in excess
of 50%, which will substantially limit the use of the Company's net operating
loss and tax credit carryforwards. The extent of this limitation has not
been determined at this time.

17. RESTATEMENT OF 1994 FINANCIAL STATEMENTS

Subsequent to the original issuance of the 1994 financial statements, the
Bank discovered a significant possible loss in a real estate loan. The
economic events that resulted in this loss were present at December 31, 1994
and, accordingly, the 1994 financial statements have been restated to include
an additional $200,000 in the provision for possible loan losses.

F-17

<PAGE>

PART 1 ITEM 1
FINANCIAL STATEMENTS

MONARCH BANCORP
CONDENSED, CONSOLIDATED BALANCE SHEET
(UNAUDITED)

(000's omitted)

31-MAR-95
---------
<S> <C>
ASSETS
Cash and due from banks $ 3,835
Interest bearing deposits and
investment securities 17,733
Federal funds sold 10,250
Loans and leases (net) 29,383
Premises and equipment 632
Other real estate owned 617
Other assets 871
--------
Total assets $ 63,321
--------
--------

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits $ 58,643
Notes payable 0
Other borrowings 163
Deferred gain on sale of assets 0
Accrued interest payable and other liabilities 412
--------
TOTAL LIABILITIES 56,553

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
Accumulated deficit (5,955)
Unrealized appreciation (depreciation) on
investment securities available for sale (150)
Deferred charge related to KSOP (163)
--------
TOTAL SHAREHOLDERS' EQUITY 6,768

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 63,321
--------
--------
</TABLE>

(see accompanying notes)

F-18

<PAGE>

MONARCH BANCORP
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

FOR THE THREE MONTH PERIOD ENDED
--------------------------------
31-MAR-95 31-MAR-94
(000's omitted) --------- ---------
<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)

F-19

<PAGE>

MONARCH BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THREE MONTH PERIOD ENDED
----------------------------
31-MAR-95 31-MAR-94
--------- ---------
(000's omitted)
<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)

F-20

<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.

F-21

<PAGE>

PART II

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article Six of the Registrant's Articles of Incorporation, as amended,
provides that the liability of the directors of the corporation for monetary
damages shall be eliminated to the fullest extend permissible under
California law and that the corporation is authorized to provide for the
indemnification of agents (as defined in Section 317 of the California
General Corporation Law) of the corporation in excess of that expressly
permitted by such Section 317 for breach of duty to the corporation and its
shareholders to the fullest extent permissible under California law.

Article VI of the Registrant's Bylaws, as amended, provides, in
pertinent part, that each person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another foreign or
domestic corporation or other entity, shall be indemnified by the Registrant
to the full extent permitted by the General Corporation Law of the State of
California or any other applicable laws. Article VI also authorizes the
Registrant to enter into one or more agreements with any person which
provides for indemnification greater or different than that provided for in
that Article.

Both the Registrant and its wholly-owned subsidiary, Monarch Bank, have
entered into indemnification agreements with their respective officers and
directors.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted pursuant to the foregoing provisions to
directors, officers or persons controlling the Registrant, the Registrant has
been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in said Act and is
therefore unenforceable.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)

Registration fee. . . . . . . . . . . . . . . . . $ 1,479.08
Printing and engraving fees . . . . . . . . . . . 15,000.00*
Accounting fees and expenses. . . . . . . . . . . 10,000.00*
Legal fees and expenses . . . . . . . . . . . . . 45,000.00*
Blue Sky fees and expenses. . . . . . . . . . . . 5,000.00*
Consulting fees . . . . . . . . . . . . . . . . . 214,000.00
Transfer agent and registrar fees . . . . . . . . 5,000.00
Miscellaneous . . . . . . . . . . . . . . . . . . 5,000.00
---------------
Total $ 300,479.08*

*Estimated. . . to be filed by amendment

- -------------

(1) Unless otherwise noted, based upon the offering of 3,177,296 shares
of Common Stock at $1.35 per share.

II-1

<PAGE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

On March 31, 1995, the Company completed a private placement offering to
several accredited investors pursuant to SEC Regulation D. The Company sold
an aggregate of 4,547,111 shares of Common Stock for an aggregate
consideration of $6,139,000. These sales were made in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of 1933.
All of the purchasers acquired the shares for investment, and there was no
general advertising or general solicitation in connection with the offer and
sale of the shares. The Company believes that each investor was given or had
access to detailed financial and other information with respect to the
Company. Selling commissions of $30,000 were paid to Keefe, Bruyette &
Woods, and certain financial advisor fees totalling approximately $306,950
were paid to Belle Plaine Partners, Inc. and McAllen Capital Partners.

In March 1993, the Company sold an aggregate of 264,136 shares of the
Company to ten sophisticated investors at a price of $264,136. These sales
were made in reliance upon the exemption from registration under Section 4(2)
of the Securities Act. All of the purchasers acquired the shares for
investment, and there was no general advertising or general solicitation in
connection with the offer and sale of the shares. The Company believes that
each purchaser was given or had access to detailed financial and other
information with respect to the Company. No underwriting or selling
commissions were paid in connection with these sales.

In December 1991, the Company sold an aggregate of 300,000 shares of the
Company to three sophisticated investors at a total aggregate offering price
of $300,000. The sale was made through the purchase and conversion to newly
issued shares of Common Stock of a $200,000 note and the purchase of
additional newly-issued shares of Common Stock. These sales were made in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act. All of the purchasers acquired the shares for investment,
and there was no general advertising or general solicitation in connection
with the offer and sale of the shares. The Company believes that each
purchaser was given or had access to detailed financial and other information
with respect to the Company. No underwriting or selling commissions were
paid in connection with these sales.

In 1992, a total of 287,979 warrants to purchase 287,979 shares of
Common Stock of the Company were exercised by certain shareholders of the
Company for an aggregate exercise price of $244,782. The warrants were
issued as part of an offering of units of the Company in 1988. A total of
554,912 units were sold in the 1988 Offering in reliance on Section 3(9)(11)
of the Securities Act. All of the purchasers acquired the shares for
investment. The Company believes that each purchaser was given or had access
to detailed financial and other information with respect to the Company. No
underwriting or selling commissions were paid in connection with the exercise
of the warrants.

ITEM 27. EXHIBITS

2.1 Plan of Reorganization and Merger Agreement. (Exhibit A of Reorganization
Statement No. 2-84426 incorporated by reference)

3.1 Articles of Incorporation of the Company (Exhibit 3.11 of Registration
Statement No. 2-84426 incorporated by reference)

II-2

<PAGE>

3.2 Bylaws of the Company (Exhibit 3.2 of Registration Statement No. 2-84426
incorporated by reference)

3.3 Amended Articles of Incorporation approved in the July 1988 Shareholders
Meeting (Exhibit 3.3 of 12/31/89 Annual Report on Form 10-K incorporated
by reference)

3.4 Amended Bylaws approved on October 19, 1988 (Exhibit 3.4 of 12/31/89
Annual Report on Form 10-K incorporated by reference)

3.5 Amended Articles of Incorporation of Company effective December 14, 1993
(Exhibit 3.5 of Registration Statement No. 33-76114 incorporated by
reference)

3.6 Amended Articles of Incorporation of Company effective April 8, 1994
(Exhibit 3.6 of Registration Statement No. 33-76114 incorporated by
reference)

4.1 Form of Indenture (Exhibit 4.1 of Registration Statement No. 2-85442
incorporated by reference)

4.2 Warrant Agreement for warrants issued in June 1988 at the close of the
California Offering (Exhibit 4.1 of 12/31/89 Annual Report on Form 10-K
incorporated by reference)

4.3 Convertible subordinated note issued in September 1988 (Exhibit 4.2 of
12/31/89 Annual Report on Form 10-K incorporated by reference)

4.4 Specimen Certificate of Common Stock of the Company (Exhibit 4.4 of
Registration Statement No. 33-76114 incorporated by reference)

5.1 Opinion of Knecht & Hansen as to the legality of the securities being
registered

8.1 Opinion and Consent of Knecht & Hansen as to Federal Income Tax Matters

10.1 Monarch Bancorp 1983 Stock Option Plan; Form Incentive Stock Option
Agreement and Form Nonstatutory Stock Option Agreement (Exhibit 10.2 of
Registration Statement No. 2-85442 incorporated by reference)

10.2 Headquarters Office Lease (Exhibit 10.3 of Registration Statement No.
2-85442 incorporated by reference)

10.3 27751 La Paz Lease (Exhibit 3.5 of 12/31/84 Annual Report on Form 10-K
incorporated by reference)

10.4 30140 Town Center Drive Lease (Exhibit 3.6 of 12/31/84 Annual Report on
Form 10-K incorporated by reference)

10.5 Lease agreement for Bank assets sold and leased back from Parker North
American in 1988 (Exhibit 10.4 of 12/31/89 Annual Report on Form 10-K
incorporated by reference)

II-3

<PAGE>

10.6 Amended Stock Option Plan as approved at the July 1988 Shareholders'
Meeting (Exhibit 10.5 of 12/31/89 Annual Report on Form 10-K incorporated
by reference)

10.7 1993 Stock Option Plan as approved at the June 1993 Annual Shareholders
Meeting (Exhibit 10.7 of Registration Statement No. 33-76114 incorporated
by reference)

11.1 Statement re computation of per share earnings

13.1 The Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 1993 incorporated herein by reference

13.2 The Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 1994 incorporated herein by reference

13.3 Annual Report to Stockholders of Registrant for the year ended December
31, 1993, incorporated by reference to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1993

13.4 Annual Report to Stockholders of Registrant for the year ended December
31, 1993, incorporated by reference to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1994

13.5 Quarterly Report on Form 10-QSB for the quarter ended March 31, 1994
incorporated herein by reference

13.6 Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995
incorporated herein by reference

21.1 Subsidiaries of the Company

23.1 Consent of Knecht & Hansen (See Exhibit 5.1)

23.2 Consent of Dayton & Associates and Deloitte & Touche

24.1 Power of Attorney (See Signature Page)

28.1 Form of Rights Offering Subscription Agreement

28.2 Form of Public Offering Subscript on Agreement

28.3 February 15, 1988 California Offering Circular (Exhibit 28.1
of 12/31/87 Form 10-K incorporated by reference)

28.4 Registration No. 33-76114 declared effective May 13, 1994
incorporated by reference

28.5 Engagement Letter

II-4

<PAGE>

ITEM 28. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 24 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted against the registrant
by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes as follows:

1. To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement; and (iii) include any additional or changed material information
on the plan of distribution.

2. For purposes of determining any liability under the Securities Act,
to treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of such securities at that time to be
the initial bona fide offering thereof.

3. To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.

The undersigned registrant hereby undertakes to supplement the
prospectus, after the end of the Rights Offering period, to include the
results of the Rights Offering, the transactions by the underwriters during
the subscription period, subscription offer, the transactions by the
underwriters during the subscription period, the amount of unsubscribed
securities that the underwriters will purchase and the terms of any later
reoffering. If the underwriters make any public offering of the securities
on terms different from those on the cover page of the prospectus, the
registration will file a post-effective amendment to state the terms of such
offering.

II-5

<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement or amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Laguna Niguel, State
of California, on May 10, 1995.

MONARCH BANCORP

By: /s/ E. Lynn Caswell
----------------------------
E. Lynn Caswell
Chairman of the Board and
Chief Executive Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints E. LYNN CASWELL and WILLIAM C. DEMMIN his true
and lawful attorneys-in-fact and agents, each with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Registration Statement,
and to file the same, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement or amendment thereto has been signed by the following
persons in the capacities and on the date indicated.

Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Rice E. Brown Director May 10, 1995
- -------------------------------
Rice E. Brown

/s/ E. Lynn Caswell
- ------------------------------- Chairman, President and May 10, 1995
E. Lynn Caswell CEO (Principal Executive Officer)

/s/ Raymond B. Cox Director May 10, 1995
- -------------------------------
Raymond B. Cox

/s/ William C. Demmin
- ------------------------------- Senior Vice President, May 10, 1995
William C. Demmin Corporate Secretary and Director
(Principal Financial and Accounting Officer)

</TABLE>

II-6

Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Alfred H. Jannard Director May 10, 1995
- -------------------------------
Alfred H. Jannard

/s/ Cheryl Moore Director May 10, 1995
- -------------------------------
Cheryl Moore

/s/ Margaret Redmond Director May 10, 1995
- -------------------------------
Margaret Redmond

</TABLE>

II-7

<PAGE>

[KNECHT & HANSEN LETTERHEAD]

May 10, 1995

Monarch Bancorp
30000 Town Center Drive
Laguna Niguel, California 92677

Re: Registration Statement on Form SB-2
Monarch Bancorp
Legality of Securities
-----------------------------------

Gentlemen:

We have examined the Registration Statement on Form SB-2 to be filed
by Monarch Bancorp (the "Company") with the Securities and Exchange Commission
(the "Registration Statement") in connection with the registration under the
Securities Act of 1993, as amended (the "Act"), of 3,177,296 shares of Common
Stock (the "Shares") of the Company.

In addition, we have examined such corporate records, certificates
and documents and have made such examinations of law as we have deemed
relevant. In our examination of such documents and records, we have assumed
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals, and conformity with the originals of all documents
submitted to us as copies. In rendering this opinion we have assumed without
investigation the accuracy and validity of information supplied to us by the
Company.

On the basis of the foregoing, it is our opinion that:

1. When, as and if the Registration Statement shall have become
effective pursuant to the provisions of the Act, and the shares of Common Stock
shall have been duly issued and delivered in the manner contemplated by the
Registration Statement, the Shares will be legally issued, fully paid and
nonassessable.

The foregoing opinion is limited to the federal laws of the United
States and the laws of the State of California, and we are expressing no
opinion as to the effect of the laws of any other jurisdiction.

We hereby consent to the use of our name in the Prospectus under the
heading "Legal Matters."

Very truly yours,

KNECHT & HANSEN

By: /s/ Loren P. Hansen
--------------------------
Loren P. Hansen

<PAGE>

[KNECHT & HANSEN LETTERHEAD]

May 10, 1995

Monarch Bancorp
30000 Town Center Drive
Laguna Niguel, California 92677

Re: Registration Statement on Form SB-2
Monarch Bancorp
Federal Income Tax Consequences
-----------------------------------

Gentlemen:

We have acted as counsel to Monarch Bancorp (the "Company") in
connection with the Company's offering (the "Offering') of 3,177,296 shares,
in connection with the Company's preparation of the Prospectus (the
"Prospectus") included within the Company's Registration Statement on Form SB-2
pertaining to the Offering, filed with the United States Securities and Exchange
Commission (the "SEC"). In that capacity, we hereby confirm to you our opinion
as set forth under the caption "The Offering -- Certain Federal Income Tax
Consequences."

We hereby consent to the use of our name in the Prospectus under
the heading "The Offering -- Certain Federal Income Tax Consequences."

Very truly yours,

KNECHT & HANSEN

By: /s/ Loren P. Hansen
-------------------
Loren P. Hansen

<PAGE>

STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS

SEE FINANCIAL STATEMENTS ATTACHED
TO PROPOSED PROSPECTUS

<PAGE>

SUBSIDIARIES OF THE COMPANY

SUBSIDIARIES OF MONARCH BANCORP

Monarch Bank, incorporated under the laws of the State of California on
October 3, 1979, became a subsidiary of Monarch Bancorp on June 18, 1994.

SUBSIDIARIES OF MONARCH BANK

M.B. Mortgage Company, Inc. was incorporated under the laws of the State of
California on November 8, 1983. This company is wholly-owned by the Bank and
is inactive.

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the inclusion of our Independent Auditor's Report dated
February 7, 1995 regarding the consolidated balance sheets of Monarch Bancorp
as of December 31, 1994 and December 31, 1993, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended, and the reference to our firm as "experts", in the Form SB-2 filed
with the Securities and Exchange Commission.

/s/ Dayton & Associates

May 10, 1995
Laguna Hills, California

<PAGE>
Label:

MONARCH BANCORP

SHAREHOLDER/RIGHTS HOLDER SUBSCRIPTION RIGHTS AGREEMENT

(page one of three pages)

PLEASE READ THE INSTRUCTIONS TO THIS SHAREHOLDER/RIGHTS HOLDER SUBSCRIPTION
RIGHTS AGREEMENT CAREFULLY. AN IMPROPERLY COMPLETED SHAREHOLDER/RIGHTS HOLDER
SUBSCRIPTION RIGHTS AGREEMENT COULD PREVENT OR DELAY YOU FROM EXERCISING YOUR
SUBSCRIPTION RIGHTS.

The undersigned, having received and read the Prospectus dated ___________,
1995 (the "Prospectus") understand that as holders of the number of shares of
Monarch Bancorp (the "Company") Common Stock shown as the upper number on the
label above or as holders of the Rights issued to such shareholders, the
undersigned are entitled to subscribe for the number of shares of the Company's
Common Stock shown as the lower number on the label above on a Subscription
Rights basis, at a price of $1.35 per share. The undersigned understand that
simultaneously with a subscription for the number of shares covered by
Subscription Rights (shown as the lower number on the label above), the
undersigned may subscribe for an additional number of shares up to 3,177,296
shares being offered by the Company on a preferential basis at a price of $1.35
per share.

Upon the terms and subject to the conditions specified in the Prospectus,
the undersigned hereby subscribe for the following shares (check each
appropriate space):

A. ____ Subscription Rights -- FULL Exercise. Subscription is hereby
made for ALL shares covered by the Subscription Rights (shown as
the lower number on the label above). If Box A is checked,
please complete the following item:

1. Purchase Price ($______ times the lower number shown on the
label above): $________

B. ____ Subscription Rights -- PARTIAL Exercise. Subscription is hereby
made for LESS THAN ALL the shares covered by the Subscription
Rights. If Box B is checked, please complete the following
two (2) items:

1. Number of Shares Subscribed For: __________________
2. Purchase Price
($______ times the number of shares): $_________

C. ____ Non-Rights Subscription -- ADDITIONAL Exercise. In addition to
the full exercise of Subscription Rights indicated in Box A,
subscription is hereby made for an additional number of shares on
a preferential basis. The undersigned acknowledge that the
Company reserves the right to accept or reject this subscription,
in whole or in part, in its sole discretion. If Box C is
checked, please complete the following two (2) items:

1. Number of Additional Shares Subscribed for: _______________
2. Purchase Price
($______ times the number of shares): $_________

<PAGE>

TO TRANSFER YOUR SUBSCRIPTION RIGHTS OR SOME OR ALL OF YOUR UNEXERCISED RIGHTS
OR TO EXERCISE OR SELL RIGHTS THROUGH YOUR BANK OR BROKER: For value received,
___________ Rights (________ multiplied by the upper number on the label on the
front page) are hereby assigned to (please print name and address and tax
identification or social security number of transferee in full):

Name: _________________________________________
(Please Print)

Address: _______________________________________

_______________________________________________
(Including Zip Code)

Tax Identification or Social Security Number ________________________

If the number of Rights being transferred is less than all of the Rights
represented by this Shareholder/Rights Holder Subscription Rights Agreement:

/ / For Value received, _______________ Rights (_______ multiplied by the
upper number on the label on the front page) are hereby assigned to
(please print name and address and tax identification or social
security number of transferee in full)

Name: _________________________________________
(Please Print)

Address: _______________________________________

_______________________________________________
(Including Zip Code)

Tax Identification or Social Security Number ________________________

/ / Deliver to the undersigned a new Shareholder/Rights Holder
Subscription Rights to which the undersigned is entitled.

IMPORTANT: RIGHTS HOLDERS SIGN HERE AND, IF RIGHTS ARE BEING
SOLD OR EXERCISED, COMPLETE ATTACHED SUBSTITUTE FORM W-9

_____________________________________________________
(Signature(s) of Registered Holder(s)

Dated: _________________________, 1995

Must be signed by the registered holder(s) as name(s) appear(s) on the books of
the Company's transfer agent with Respect to the shares on the label to this
Shareholder/Rights Holder Subscription Rights Agreement. If signature is by
trustee(s), executor(s), administrator(s), guardian(s), attorney(s)-in-fact,
agent(s), officer(s) of a corporation or another acting in a fiduciary or
representative capacity, please provide the following information.

Name(s) __________________________________________________
(Please Print)

Capacity (Full Title) ________________________________________

Address __________________________________________________

_________________________________________________________
(Including Zip Code)

Area Code and
Telephone Number ________________________________________
(Home)

_____________________________________________
(Business)

Tax Identification or
Social Security Number ____________________________________

<PAGE>

GUARANTEE OF SIGNATURE

Authorized Signature __________________________________

Name __________________________________________________
(Please Print)

Title _________________________________________________

Name of Firm __________________________________________

Address _______________________________________________

____________________________________________________
(Including Zip Code)

It is agreed that by executing this Shareholder/Rights Holder Subscription
Rights Agreement, the undersigned acknowledge and agree to all of the terms and
conditions of the Offering as contained in the Prospectus.

IMPORTANT: In order to exercise your Subscription Rights, in whole or
in part, or subscribe for an additional number of shares on a preference
basis, this Shareholder/Rights Holder Subscription Rights Agreement (or a
guaranty of delivery as set forth in the Prospectus) must be fully completed
and signed and delivered together with payment for the shares subscribed for
hereby to: Monarch Bank, 30000 Town Center Drive, Laguna Niguel, California
92677, Attention: William C. Demmin, by 5:00 p.m., local time, on
_____________, 1995, unless extended. Payment should be made by bank
certified or cashier's check, personal check or money order payable to
"Monarch Bank - Escrow Agent." Please return the top two (2) copies of the
Shareholder/Rights Holder Subscription Rights Agreement with your payment and
retain the third copy for your records. The undersigned understand that once
a Shareholder/Rights Holder Subscription Rights Agreement has been delivered
to Monarch Bank, it may not be revoked.

(If your shares are held in joint ownership, all joint owners should
sign the Shareholder/Rights Holder Subscription Rights Agreement.)

______________________________________ ______________________________________
Signature (Subscriber)/Date Signature (Subscriber)/Date

______________________________________ ______________________________________
Social Security No./Taxpayer I.D. No. Social Security No./Taxpayer I.D. No.

______________________________________ ______________________________________
(Area Code) Telephone No. (Area Code) Telephone No.

<PAGE>

IMPORTANT TAX INFORMATION

In the event Monarch Bancorp does not sell you all or any portion of the
shares of Common Stock that you have subscribed for, Monarch Bank, Monarch
Bancorp's Subscription Agent (the "Subscription Agent"), will refund the
subscription price for such shares, together with the interest earned
thereon. Under federal income tax law, you are required to provide the
Subscription Agent with your correct Taxpayer Identification Number ("TIN")
on Substitute Form W-9 below. If you are an individual, the TIN is your
social security number. If the Subscription Agent is not provided with the
correct TIN, you may be subject to a $50 penalty imposed by the Internal
Revenue Service. In addition, payments of interest that are made to you in
connection with any refund of the purchase price submitted by you may be
subject to backup withholding. See the accompanying Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 for
additional instructions.

Certain Persons (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to qualify as an
exempt recipient, that person must submit a statement, signed under penalties
of perjury, attesting to that individual's exempt status. Such statements
can be obtained from the Subscription Agent.

If backup withholding applies, the Subscription Agent is required to
withhold 31% of any interest payment made to you. Backup withholding is not
an additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained.

To prevent backup withholding on payments that are made to you in
connection with any refund of the purchase price submitted by you, you are
required to notify the Subscription Agent of your correct taxpayer
identification number by completing the form below certifying that the
taxpayer identification number provided on the Substitute Form W-9 is correct
(or that you are awaiting a taxpayer identification number).

You are required to give the Subscription Agent the social security
number or employer identification number of the person subscribing for the
shares of Common Stock. If the shares are being subscribed for by more than
one person, consult the accompanying Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 for additional guidance on which
number to report.

SUBSCRIPTION AGENT'S NAME: MONARCH BANK

SUBSTITUTE Part 1 - PLEASE PROVIDE YOUR TIN IN Social Security Number
FORM W-9 THE BOX AT RIGHT AND CERTIFY BY OR______________________
SIGNING AND DATING BELOW Employer I.D. Number

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

SUBSCRIPTION AGENT'S
REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER (TIN)
________________________________________________________________________________
Part 2 - Check the box if you are NOT subject to backup withholding under the
provisions of Section 3406(a)(1)(C) of the Internal Revenue Code because (1) you
have NOT been notified that you are subject to backup withholding as a result of
failure to report all interest on dividends or (2) the Internal Revenue Service
has notified you that you are no longer subject to backup withholding. / /
________________________________________________________________________________

CERTIFICATION: UNDER PENALTIES OF PERJURY, I Part 3
CERTIFY THAT THE INFORMATION PROVIDED ON THIS Awaiting TIN / /
FORM IS TRUE, CORRECT AND COMPLETE.

SIGNATURE ________________________ DATE ___________________

NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU IN CONNECTION WITH ANY REFUND OF THE
PURCHASE PRICE SUBMITTED BY YOU.

YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE
BOX IN PART 3 OF THE SUBSTITUTE FORM W-9

CERTIFICATE OF AWAITING TAX IDENTIFICATION NUMBER

I certify under penalties of perjury that a taxpayer identification number
has not been issued to me and either (a) I have mailed or delivered an
application to receive a taxpayer identification number of the appropriate
Internal Revenue Service Center or Social Security Administration Office, or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number within
sixty (60) days, 31% of all reportable payments made to me thereafter will be
withheld until I provide a number.

Signature ____________________________ Date _________________________________

ORIGINAL - Return to Monarch Bank

<PAGE>

GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9

Page 2

GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
SUBSCRIPTION AGENT--Social security numbers have nine digits separated by two
hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits
separated by only one hyphen: i.e. 00-0000000. The table below will help you
determine the number to give the subscription agent.

Give the Give the EMPLOYER
SOCIAL SECURITY IDENTIFICATION
For this type of account: number of - For this type of account: number of-
- -------------------------- ---------------------------- ------------------------- ---------------------
<S> <C> <C> <C>
1. An individual's The individual 9. A valid trust, estate, Legal entity (Do not furnish
account or pension trust the identifying number of the
personal representative or
2. Two or more The actual owner of the trustee unless the legal entity
individuals (joint account or, if combined itself is not designated in the
account) funds, any one of the account title.) (5)
individuals (1)

3. Husband and wife The actual owner of the 10. Corporate account The corporation
(joint account) account or, if joint funds,
either person (1) 11. Religious, The organization
charitable, or
4. Custodian account of The minor (2) educational
a minor (Uniform Gift organization account
to Minors Act)
12. Partnership account The partnership
5. Adult and minor (joint The adult or, if the minor held in the name of
account) is the only contributor, the the business
minor (1)
13. Association, club, or The organization
6. Account in the name The ward, minor, or other tax-exempt
of guardian or incompetent person (3) organization
committee for a
designated ward, 14. A broker or The broker or nominee
minor, or incompetent registered nominee
person
15. Account with the The public entity
7. a. The usual The grantor-trustee (1) Department of
revocable savings Agriculture in the
trust account name of a public
(grantor is also entity (such as a
trustee) State or local
government, school
b. So-called trust The actual owner (1) district, or prison)
account that is not that receives
a legal or valid agricultural program
trust under State payments
law

8. Sole proprietorship The owner (4)
account

<FN>
- -------------------

1. List first and circle the name of the person whose number you furnish.
2. Circle the minor's name and furnish the minor's social security number.
3. Circle the ward's, minor's, or incompetent person's name and furnish such
person's social security number.
4. Show the name of the owner.
5. List first and circle the name of the legal trust, estate, or pension trust.
</TABLE>

NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.

<PAGE>

GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9

For information only. This document does not need to be completed or
returned to the subscription agent.

(Adapted to apply to the subscription of shares of Monarch Bancorp in the
offering described in its Prospectus dated __________, 1995 from the
Instructions to Form W-9, as is issued by the Internal Revenue Service.
Section references are to the Internal Revenue Code.)

PURPOSE OF FORM W-9

Use the Substitute Form W-9 to report the taxpayer identification number
(TIN) of the subscriber to the subscription agent.

Beginning January 1, 1993, payers, such as the subscription agent, must
generally withhold 31% of taxable interest, dividend, and certain other
payments if you fail to furnish payers with the correct taxpayer
identification number (this is referred to as backup withholding). For most
individual taxpayers, the taxpayer identification number is the social
security number.

You must use the Substitute Form W-9 to certify that the taxpayer
identification number you are giving the subscription agent is correct.

BACKUP WITHHOLDING

You are subject to backup withholding if:

(1) You fail to furnish your taxpayer identification number to the
subscription agent; OR

(2) The Internal Revenue Service notifies the subscription agent that you
furnished an incorrect taxpayer identification number.

(See "Subscribers Exempt from Backup Withholding.")

ACCOUNT NUMBERS

If you have more than one account with the same subscription agent (for
example, a savings account and a certificate of deposit at the same bank),
the subscription agent may request a separate Form W-9 for each account
depending on how the payer's records are kept.

WHAT NUMBER TO GIVE THE SUBSCRIPTION AGENT

Give the subscription agent the social security number or employer
identification number of the record owner of the account. If the account
belongs to you as an individual, give your social security number. If the
account is in more than one name or is not in the name of the actual owner,
see the chart below for guidelines on which number to report.

OBTAINING A NUMBER

If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local
office of the Social Security Administration or the Internal Revenue Service
and apply for a number. Complete box entitled "CERTIFICATE OF AWAITING TAX
IDENTIFICATION NUMBER." When you get a number, submit a new Form W-9 to the
subscription agent.

PENALTIES

1. PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER--If you fail
to furnish your taxpayer identification number to the subscription agent,
you are subject to a penalty of $50 for each such failure unless your
failure is due to reasonable cause and not to willful neglect.

2. CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING--If you
make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.

3. CRIMINAL PENALTY FOR FALSIFYING INFORMATION--Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.

SUBSCRIBERS EXEMPTION FROM BACKUP WITHHOLDING

Subscribers specifically exempted from backup withholding on ALL payments
include the following:

- - A corporation.

- - A financial institution.

- - An organization exempt from tax under Section 501(a), or an individual
retirement plan.

- - The United States or any agency or instrumentality thereof.

- - A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.

- - A foreign government, a political subdivision of a foreign government,
or any agency or instrumentality thereof.

- - An international organization or any agency or instrumentality thereof.

- - A registered dealer in securities or commodities registered in the U.S.
or a possession of the U.S.

- - A real estate investment trust.

- - A common trust fund operated by a bank under Section 584(a).

- - An exempt charitable remainder trust, or a non-exempt trust described
in Section 5947(a)(1).

- - An entity registered at all times under the Investment Company Act of
1940.

- - A foreign central bank.

Exempt subscribers described above should file the Substitute Form W-9 to
avoid possible erroneous backup withholding. Because certain payments exempt
from backup withholding re nevertheless subject to information reporting, if
you file this form with the subscription agent, furnish your taxpayer
identification number and write "exempt" on the face of the Substitute Form
W-9.

PRIVACY ACT NOTICE -- Section 6109 requires most recipients of dividends,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to the IRS. The IRS uses the numbers for
identification purposes. Payers must be given the number whether or not
recipients are required to file tax returns. Beginning January 1, 1984,
payers, such as the subscription agent, must generally withhold 31% of
taxable interest, dividend, and certain other payments to a payee who does
not furnish a taxpayer identification number to a payer. Certain penalties
may also apply.

<PAGE>

MONARCH BANCORP
SUBSCRIPTION AGREEMENT

The undersigned, having received and read your Prospectus dated
_______________, 1995 (the "Prospectus"), do hereby subscribe for the number
of shares of the Common Stock of Monarch Bancorp (the "Company") set forth in
the space below, upon the terms and subject to the conditions specified in
the Prospectus, at a purchase price of $1.35 per share.

NUMBER OF SHARES SUBSCRIBED FOR: _______________________________________________

PURCHASE PRICE ($____ times the number of shares): $____________________________

Shares purchased by the undersigned shall be registered as follows:

_____________________________________ _______________________________________
Name of Subscriber Name of Subscriber
(Please Print or Type) (Please Print or Type)

_____________________________________ _______________________________________
Social Security No. or Social Security No. or
Taxpayer I.D. No. Taxpayer I.D. No.

________________________________________________________________________________
Mailing Address

________________________________________________________________________________
City State Zip Code

___________________________________
Area Code/Telephone Number

(If shares are to be issued in more than one name, please specify
whether ownership is to be as tenants in common, joint tenants, community
property, etc. If certificate for shares are to be issued in the name of one
person for the benefit of another, please indicate whether registration
should be a trustee or custodian for such other person.)

It is agreed that by executing this Subscription Agreement, the
undersigned acknowledge and agree to all of the terms and conditions of the
Offering as contained in the Prospectus. The undersigned acknowledge that
the Company reserves the right to accept or reject this subscription, in
whole or in part, in its sole discretion.

All subscription funds will be deposited in a Subscription Account
established by the Company at Monarch Bank, wholly-owned subsidiary of the
Company (the "Subscription Agent"). Until released to the Company,
subscription funds will be invested in such short-term investments as the
Company directs. In the event the number of shares subscribed for in the
Offering, after giving effect to any limitation on the number of shares that
may be purchased by any subscriber, is equal to or greater than 3,177,296 the
Company will promptly notify each subscriber as to the actual number of
shares purchased by such subscriber, if any. In the event the Company
rejects all or any portion of any subscription, the Subscription Agent will
refund, by mail promptly after the Public Offering Expiration Date, all or
the appropriate portion of the amount remitted, together with interest
thereon. The funds deposited in the Subscription Account for shares of
Common Stock that are ultimately purchased by subscribers, together with all
interest earned thereon, will become the property of the Company at the time
it mails the notice to such subscribers that such shares have been purchased.

If your shares are to be held in joint ownership, all joint owners
should sign this Subscription Agreement.

IMPORTANT: TO BE EFFECTIVE, YOUR COMPLETED AND SIGNED SUBSCRIPTION
AGREEMENT AND PAYMENT FOR THE SHARES SUBSCRIBED FOR HEREBY OR PAYMENT WITH
GUARANTY OF DELIVERY AS SET FORTH IN THE PROSPECTUS MUST BE RECEIVED BY THE
SUBSCRIPTION AGENT BEFORE 5:00 P.M., LOCAL TIME, ON _______________, 1995,
UNLESS EXTENDED (THE "OFFERING EXPIRATION DATE"). COMPLETED SUBSCRIPTION
AGREEMENTS AND PAYMENT MUST BE DELIVERED TO: Monarch Bank, 30000 Town Center
Drive, Laguna Niguel, California 92677, Attention: William C. Demmin.
Payment should be made by bank certified or cashier's check, personal check
or money order payable to "Monarch Bank - Escrow Agent." Please return the
top two (2) copies of the Subscription Agreement with your payment and retain
the third copy for your records. ONCE A SUBSCRIPTION AGREEMENT HAS BEEN
DELIVERED TO THE SUBSCRIPTION AGENT, IT MAY NOT BE REVOKED.

_____________________________________ _______________________________________
Signature of Subscriber/Date Signature of Subscriber/Date

_____________________________________ _______________________________________
Social Security No./Taxpayer I.D. No. Social Security No./Taxpayer I.D. No.

_____________________________________ _______________________________________
(Area Code) Telephone Number (Area Code) Telephone Number

<PAGE>

March 1, 1995

E. Lynn Caswell
President and Chairman of the Board
Monarch Bancorp
27751 La Paz Road
Laguna Niguel, CA 92677

Re: Amended Engagement to render advisory
services with regard to recapitalization

Dear Mr. Caswell:

This letter hereby amends the letter dated January 13, 1995 and sets
forth the revised terms under which Monarch Bancorp ("Bancorp"), parent of
Monarch Bank ("Bank") has engaged Belle Plaine Partners, Inc. and McAllen
Capital Partners ("Financial Advisors") as its exclusive financial advisors
in connection with the recapitalization of Bancorp and its principal
subsidiary, Monarch Bank (the "Bank"). The parties presently contemplate
that the recapitalization (the "Transaction") shall be accomplished through
the sale by the Bancorp of an aggregate of not less than $3,500,000 (and not
more than $7,500,000, unless otherwise agreed by Bancorp) of its common stock
to one or more investors ("Investors") . The Transaction shall be structured
as a private placement ("Private Placement") by Bancorp, followed by a Rights
Offering, on terms and conditions (including a 30-day rights exercise period)
satisfactory to the Bancorp and the Financial Advisors. The parties agree
that the Private Placement (which may provide for closing in multiple phases)
will offer an aggregate of not less than $3,500,000 (and not more than
approximately $7,500,000), and the Rights Offering will offer an aggregate
of not more than approximately $2,144,000. Rights issued in the Rights
Offering would be non-transferrable, and Investors would not receive such
rights. To the extent that certain shareholders (other than Investors)
desire to purchase more than their pro rata share of the Rights Offering,
they would be allowed to do so up to their pro rata share of the aggregate of
the Rights Offering and the Private Placement, to the extent that sufficient
shares are available after satisfaction of exercised rights. Any remaining
shares would be made available for purchase by the Investors.

We believe that this Transaction offers several advantages for Bancorp
and its shareholders, including the following:

- SPEED - Since the Private Placement mechanism will be used, and control
approvals or non-disapprovals, as appropriate, will be sought from all
necessary regulatory agencies by the Financial Advisors and Investors,
Financial Advisors believe that the initial phase of the
recapitalization of the Bancorp and the Bank can be completed by the end
of March, 1995, and look forward to completion of the second phase of
the Private Placement by May 31, 1995 and to Bancorp's commencement of
the Rights Offering and as soon as possible thereafter.

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E. Lynn Caswell
March 1, 1995
Page 2

- PARTICIPATION BY BANCORP SHAREHOLDERS - While Bancorp shareholders will
not be required to participate in the recapitalization, they will be
given a meaningful opportunity to do so. This will allow those who
invest to have the opportunity to share in the anticipated growth and
recovery of the Bancorp.

The Bancorp and Financial Advisors have agreed, subject to adjustment in
the event that material developments materialize which have not been
anticipated, that the Transaction would be conducted at a price equal to the
adjusted book value per share of Bancorp, subject to such adjustments as they
deem appropriate after completion of a due diligence evaluation of Bancorp by
Financial Advisors and their consultants. The Financial Advisors have
completed a due diligence review of the assets, liabilities, income and
expenses of the Bancorp and the Bank. Based thereon, the parties agree that
such adjusted book value per share equates to a price of $1.35 per share,
subject to change only upon occurrence or discovery of materially adverse
events or information regarding Bancorp's business or financial statement.
Bancorp shall take such actions (within its control) as may be necessary or
appropriate, at its sole expense, to register the shares of Common Stock and
warrants offered pursuant to the transactions described herein under the
Securities Act of 1933, and to qualify such shares for resale under at least
the Blue Sky laws of California and Illinois, not later than one year
following the closing of the Private Placement. To the extent that such
shares and warrants have not been so registered and qualified by such date,
the Bancorp agrees that, upon demand by any Investor, it shall take all
actions necessary or appropriate (within its control) to so register and
qualify the shares and warrants, at its sole expense. To the extent that it
can do so legally, Bancorp shall register and qualify the shares and warrants
on a "piggy-back" basis in connection with any registration of securities
conducted by Bancorp after the date hereof (other than in connection with the
Rights Offering). Other terms governing this engagement are as follows:

1. The Financial Advisors will render such services as you shall
reasonably request which shall include: (I) reviewing the financial
condition and prospects of the Bancorp and advising the board of directors
regarding the Private Placement and the Rights Offering; (ii) assisting the
Bancorp in the structuring of the financial aspects of the Private Placement
and the Rights Offering; (iii) assisting the Bancorp in the preparation of a
memorandum for use by the standby investors (the "Memorandum") in the Private
Placement describing the Bancorp; (iv) identifying potential standby
investors; and (v) assisting Investors to evaluate the need for, and to make,
any necessary applications or notices to regulatory agencies. Financial
Advisors shall not effect the sale of securities to the Investors; offers or
sales to Investors shall be made only by the Bancorp or a properly licensed
broker-dealer (the "Broker-Dealer") retained by Bancorp with the concurrence
of Financial Advisors. Pursuant to previous understandings between Bancorp
and Financial Advisors, Financial Advisors have delivered a preliminary list
of investors it believes would be interested in the investment to Bancorp on
or before December 23, 1994. Investors have delivered commitments for
investment in the Private Placement in excess of the minimum in the Private
Placement. Those investors that anticipated ownership in excess of 10% of
the Common Stock to be outstanding after their investment have submitted
applications for

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E. Lynn Caswell
March 1, 1995
Page 3

approval/non-disapproval related to their investment, which
they anticipate amending/supplementing on or before March 10, 1995. Any
Investors' control applications or notices (excluding therefrom the
respective Investor's financial statements or other information that the
Investor reasonably requests be kept confidential) and supplements or
amendments thereto shall be sent to Bancorp for review and comment three (3)
business days prior to filing thereof. Copies of comments letters or
requests for additional information from any regulatory agency with regard to
such applications or notices shall be provided to Bancorp's counsel. The
parties hereto anticipate that Bancorp may structure the Private Placement to
allow for acceptance of subscriptions in two phases, the initial phase of
which would allow for investors to invest up to approximately (but less than)
10% of the then to be outstanding shares, while the second phase shall
provide for acceptance of the remainder of subscriptions after, and subject
to, satisfaction of any requirements for regulatory approval/non-disapproval.
Investors shall fund their commitments as soon as possible. The initial
phase of funding shall be set to occur during March, 1995 and the second
phase shall be set to occur no later than May 31, 1995 (assuming all
regulatory matters can be cleared within such time frame). Financial
Advisors shall terminate their obligations hereunder only in the event a
material adverse change (as commonly understood) in the condition of Bancorp
or the Bank occurs.

2. Upon the Financial Advisors' request, you will furnish us with such
material regarding the business and financial condition of the Bancorp as we
request, all of which, including the Memorandum, will be accurate and
complete in all material respects at the time furnished. Although Financial
Advisors may assist the Bancorp in connection with the preparation of the
Memorandum, Bancorp shall assume sole responsibility for the accuracy and
completeness thereof, and Financial Advisors shall bear no responsibility
therefor. The Bancorp will also use its best efforts to assure that its
personnel, consultants, experts and accountants are made available to the
Financial Advisors upon the Financial Advisors' reasonable request. During
the term of this agreement, the Bancorp shall promptly notify the Financial
Advisors of any material events or developments relating to the financial
condition or business operations or prospects of the Bancorp and promptly
deliver to the Financial Advisors copies of all filings made by the Bancorp
with any regulatory agency and copies of all press releases issued by the
Bancorp. We are relying, and shall continue to rely, without independent
verification, on the accuracy and completeness of all information furnished
to us by the Bancorp or any other party or potential party to any transaction
contemplated by this agreement, as well as the filings made by Bancorp
pursuant to the Securities Act of 1933 and the Securities Exchange Act of
1934. The Financial Advisors agree to keep any non-public information
acquired from Bancorp in connection with this engagement confidential so long
as it remains non-public, unless disclosure is required by law or requested
by any governmental or regulatory agency or body, and the Financial Advisors
will not make any use thereof, except in connection with our services
hereunder for the Bancorp. Any advice rendered by us pursuant to this letter
shall not be disclosed in any manner without our written approval and will be
treated by the Bancorp and us as confidential. Financial Advisors shall
promptly notify the Bancorp in the event the Financial Advisors have any reason

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E. Lynn Caswell
March 1, 1995
Page 4

to believe that the investors issuing standby commitments as
contemplated herein are unwilling or unable to consummate their standby
commitments.

3. I. In consideration of the advisory services to be provided
hereunder, the Bancorp agrees to pay to the Financial Advisors the following
fees:

A. A structuring fee equal to 5.0% of the aggregate amount of
purchase commitments from Investors (the "Structuring Fee"), and

B. Warrants ("Warrants") to purchase an aggregate amount of
Common Stock equal to 5% of the Common Stock to be outstanding
following completion of the Private Placement and Rights
Offering. The Warrants shall be exercisable for a term of
five (5) years at a price equal to 120% of the price at which
Common Stock is sold in the Transaction. Upon request by the
Financial Advisors, the Warrants, and the stock to be issued
thereunder, shall be registered under the Securities Act of 1933.
In all other respects, the terms of the Warrants shall be
consistent with the administrative standards applied by the
California Department of Corporations with regard to
underwriter's warrants. Bancorp will use its best efforts to
exchange the Warrants for options under Bancorp's Stock Option
Plan (as the same may be amended from time to time) under the
same terms and conditions as the Warrants, except for an
extension of the term to ten (10) years.

II. The fees earned hereunder shall be due and payable as
follows:

A. The Structuring Fee (3IA) shall be payable upon funding of the
purchase commitments to the Bancorp in the Private Placement,
subject to conditions reasonably acceptable to the Bancorp.
To the extent that purchase commitments are funded in phases,
the Structuring Fee shall be payable upon each such funding,
but no sooner than when Bancorp receives funding of at least
the minimum in the Private Placement. However, if Bancorp
abandons the Private Placement after receiving standby purchase
commitments, the Structuring Fee shall thereupon be immediately
payable as though such standby purchase commitments had been
accepted in full, unless Bancorp was required to abandon the
Private Placement by regulatory action.

B. The Warrants (3IB) shall be issued at the closing of the
Rights Offering (or, if the Bancorp does not commence the Rights
Offering within eight months following the Private Placement,
upon the expiration of such eight month period).

4. The Bancorp will promptly reimburse the Financial Advisors, upon
their written demand from time to time, for all of their out-of-pocket expenses
incurred by the Financial Advisors in connection with this engagement, including
fees and disbursements of counsel and consultants retained by the Financial
Advisors in connection with this engagement. Expenses for

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E. Lynn Caswell
March 1, 1995
Page 5

the due diligence consultant, to be selected by agreement of
Financial Advisors and Bancorp, shall be paid directly to such due diligence
consultant by Bancorp. The aggregate amount of all such expenses (including
the due diligence consultants' fees paid directly by Bancorp at the request
of Financial Advisors) for which Bancorp shall be responsible shall not
exceed $75,000. To the extent corporate due diligence has not been completed
previously, Financial Advisors shall cause such due diligence to be completed
after execution of this letter, at a cost (includable in the $75,000 figure)
not to exceed $15,000 (plus travel expenses). Expenses, fees and commissions
of the Broker-Dealer shall be paid directly by Bancorp (without charge
against the $75,000 figure) to the extent such expenses, fees and commissions
do not exceed $30,000; to the extent they exceed $30,000, they shall be paid
by Financial Advisors.

5. The Bancorp and the Financial Advisors have previously entered into
an Indemnification Agreement (substantially in the form attached hereto as
Appendix A) providing for the indemnification by the Bancorp of the Financial
Advisors and certain related entities and persons. Nothing in this letter
agreement shall limit or affect the Bancorp's indemnification obligations as
provided in such indemnification agreement, which shall apply to the
transactions provided in this letter to the same extent that it applied to
previous agreements between Bancorp and the Financial Advisors. Further, no
termination or modification hereof, or completion of the Financial Advisors'
engagement hereunder, shall limit or affect such indemnification agreement.
If requested by the Broker-Dealer, Bancorp shall enter into substantially
similar indemnification agreements therewith.

6. The Financial Advisors' services hereunder may be terminated by the
Bancorp or the Financial Advisors at any time upon thirty days' written
notice, provided that the Financial Advisors shall be entitled to any fees
and Warrants payable pursuant to Section 3 hereof in the event that the
Bancorp completes an acquisition, reorganization or capital transaction
pursuant to a definitive agreement entered into within two years following
the termination of this letter agreement with any party as to which the
Financial Advisors advised the Bancorp or with whom the Bancorp or the
Financial Advisors engaged in discussions regarding such a possible
transaction prior to the termination of this letter agreement. In addition,
if either party terminates this Agreement, then the Financial Advisors shall
remain entitled to immediate reimbursement of the fees and expenses described
in Section 4 hereof, to the extent the same have been incurred on or prior to
the date of such termination. Furthermore, the provisions of this Section 6,
and Sections 2, 5 and 8 shall survive any termination of this agreement.

7. In the event that the Bancorp (or Bank) elects to acquire other
financial institutions or their holding companies, effect a sale (which shall
include a merger, consolidation, sale of substantially all the assets of
Bancorp or Bank, or assumption of Bank's deposit liabilities),
recapitalization, restructuring and/or financing of the Bancorp or Bank (any
and all of which are referred to herein as a "Sale") during the period of our
engagement hereunder, neither the Bancorp nor Bank or any representative
thereof, other than the Financial Advisors, will initiate discussions
regarding a Sale except through the Financial Advisors. If the Bancorp or
Bank

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E. Lynn Caswell
March 1, 1995
Page 6

receives an inquiry regarding a Sale, it will promptly advise the
Financial Advisors of such inquiry in order that we can evaluate such
prospective party and its interest and assist the Bancorp in any resulting
negotiations. No such fee shall be payable in connection with a Sale to the
extent that the other party to such Sale is advised by Financial Advisors, or
was a client of Financial Advisors within the twelve (12) month preceding the
execution of a definitive agreement governing such sale.

8. It is understood that, if the Bancorp or Bank completes a Sale in
lieu of the Transaction for which the Financial Advisors are entitled to
compensation pursuant to this agreement, the Financial Advisors and the
Bancorp will negotiate in good faith acceptable compensation for the
Financial Advisors which will take into account, among other things, the
results obtained and the custom and practice among investment bankers acting
in similar situations.

9. Except as expressly provided herein, no fee paid or payable to the
Financial Advisors or any of its affiliates shall be credited against any
other fee paid or payable to the Financial Advisors or any of its affiliates.

10. This letter agreement, together with the related indemnification
agreement, embodies the sole terms of the agreement between the Bancorp and
the Financial Advisors with respect to the subject matter hereof and
supersedes all previous agreements (other than the indemnification
agreement), whether oral or written, between the Bancorp and the Financial
Advisors with respect to the subject matter hereof. This letter agreement
shall be governed by and construed in accordance with the laws of the State
of California without regard to principles of conflict of laws. Any right to
trial by jury with respect to any claim or proceeding is waived. Any legal
action or proceeding with respect to this engagement or any transaction or
conduct in connection herewith shall be brought in the courts of the State of
California, and, by execution and delivery of this letter agreement, the
Bancorp and Financial Advisors hereby accept for themselves and in respect of
their property, generally and unconditionally the jurisdiction of the
aforesaid courts.

11. This agreement may be executed in counterparts, each of which shall
be deemed an original and all of which shall constitute one and the same
instrument.

12. The Bancorp expressly acknowledges that the Financial Advisors have
been retained solely as advisors to the Bancorp, and not as advisors to or
agents of any other person, and that the Bancorp's engagement of the
Financial Advisors is not intended to confer rights upon any persons not a
party hereto (including shareholders, employees or creditors of the Bancorp)
as against the Financial Advisors, the Financial Advisors' affiliates or
their respective directors, officers, agents and employees. In addition, the
Bancorp understands the Financial Advisors will not act as a broker or dealer
with respect to any securities of the Bancorp.

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E. Lynn Caswell
March 1, 1995
Page 7

13. The Chief Executive Officer of Bancorp and Bank was instrumental in
the negotiations leading to this agreement, and is a material consideration
in Financial Advisors' decision to accept this engagement and to its
estimation of the success of the Bank and Bancorp thereafter. Accordingly,
Financial Advisors do not plan to initiate a change in the Chief Executive
Officer of the Bancorp and the Bank. Please be advised that the Financial
Advisors would also not support such a change, and would, with the Board of
Directors of the Bancorp and the Bank, strongly resist such a proposal or
requirement if made by other parties. However, if the Financial Advisors and
Board of Directors of the Bancorp and the Bank fail to resist such a
management change after diligent effort, the Financial Advisors agree not to
contend that such change constitutes an adequate reason to fail to complete
the transactions contemplated in this matter as described herein, and would
support a decision by the Board of Directors of Bancorp to reach a fair and
equitable settlement, subject to applicable law or regulation with the Chief
Executive Officer if they determine his employment must be terminated to
resolve regulatory issues.

14. Financial Advisors understand that the Board of Directors of the
Bancorp proposes to either amend its existing stock option plan, or cancel
such plan and establish a new stock option plan, to take into account the
number of shares of its common stock to be outstanding following completion
of the Private Placement and Rights Offering. As a part of such proposal,
Financial Advisors understand that the Board of Directors of Bancorp intends
to cause cancellation of existing stock options and substitution therefor of
new stock options on prices, and for terms, financially comparable to the
terms of the Warrants, or any options substituted therefor. Financial
Advisors intend to support such proposal.

Please confirm that the foregoing is in accordance with your
understanding by signing and returning to us the duplicates of this
agreement and the related indemnification agreement which shall thereupon
constitute being binding agreements. This letter agreement supersedes all
prior agreements between the parties hereto.

Very truly yours,

Belle Plaine Partners, Inc. McAllen Capital Partners, Inc.

By: ________________________________ ______________________________

Name: ________________________________ ______________________________

Title: ________________________________ ______________________________

Accepted and agreed: Monarch Bancorp

By: _____________________________________________________________
E. Lynn Caswell, President and Chairman of the Board