<PAGE>
As filed with the Securities and Exchange Commission on May 12, 1995
Registration No. 33-59313
---------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
PRE-EFFECTIVE AMENDMENT NO. 1 TO
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>
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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 JUNE , 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").
The rights offering may be extended until _________, 1995, and the public
offering may be extended until _________, 1995.
(COVER PAGE CONTINUED ON NEXT PAGE)
____________________________
THE PURCHASE OF COMMON STOCK IN THE OFFERING INVOLVES A HIGH DEGREE OF RISK.
POTENTIAL PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER THE
HEADING "RISK FACTORS COMMENCING ON PAGE ___ OF THIS PROSPECTUS."
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>
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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. The Rights Offering and the Public Offering
are being offered on a best efforts basis, and no assurance can be given as to
the number of shares that may be sold.
On March 31, 1995, the Company completed a Private Placement Offering of
4,547,111 shares of its Common Stock, no par value, at a price of $1.35 per
share to several accredited investors as defined in SEC Regulation D, and the
Company raised approximately $5,669,000 in net proceeds in the private placement
(the "Private Placement Offering"). Such accredited investors are not included
as Record Date Holders for the Rights Offering. The Private Placement Offering
was undertaken in order to raise capital (i) in accordance with a Section 8(b)
Order (the "8(b) Order") issued by the FDIC, and entered into between Monarch
Bank, the wholly-owned subsidiary of the Company, and the FDIC, and a Section
1913 Order (the "1913 Order") issued by the California Superintendent of Banks
and agreed to by the Bank (collectively referred to herein as the "Orders"), and
(ii) to provide additional capital for prudent expansion of the Bank and Company
through continued growth of its present facility and possible future facilities.
As of December 31, 1994, the Bank's leverage capital ratio of approximately
2.09% was approximately $2,960,000 below the 7% level which is required under
the terms of the Orders. With the completion of the initial phase of the
Private Placement Offering on March 31, 1995 and the increase in capital of the
Bank by approximately $3,550,000 to approximately $4,846,000, the Bank now
exceeds the minimum capital requirements established by the Orders, as the
Bank's leverage capital ratio as of March 31, 1995 was 7.85%. The Company
retained $53,500 from the net proceeds of the Private Placement Offering for
the retirement of debt and $2,065,000 for general corporate purposes. The
Company anticipates retaining the net proceeds received from the completion of
this Offering.
This Offering is being undertaken in order to raise additional capital (i)
for general corporate purposes and to provide for prudent expansion of the
Company through continued growth of its present facility and possible future
facilities, and (ii) to allow shareholders to participate in the
recapitalization of the Company and the Bank at the same price per share as the
investors. Although the Company has had preliminary discussions regarding
possible acquisitions with a number of financial institutions, no agreements or
understandings have been reached at this time.
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."
PRIVATE PLACEMENT OFFERING AND CORRECTIVE ACTIONS
On March 31, 1995, the Company completed a Private Placement Offering of
4,547,111 shares of its Common Stock, no par value, at a price of $1.35 per
share to several accredited investors pursuant to SEC Regulation D. As a result
of the completion of the Private Placement Offering, the Company raised
approximately $5,669,000 in net proceeds contributed approximately $3.55 million
to the Bank, increasing the Bank's leverage capital ratio to 7.85% as of March
31, 1995, which was approximately $539,000 above the level required by the
Section 8(b) Order. The Company repaid debt in the amount of $53,500 and
retained approximately $2,065,000 for general corporate purposes. All investors
in the Private Placement Offering completed their purchases prior to the filing
of the Company's Registration Statement on Form SB-2.
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. If the FDIC and
the Superintendent on their next examinations find that the Company has
complied with all the terms of the Orders, the Orders may be lifted in the
discretion of the FDIC and the Superintendent. 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 end of the second quarter of 1995. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
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, Ranch Santa Fe, California,
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
<TABLE>
<S> <C>
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>
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<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."
Financial Advisors . . . . . . . The Company engaged Belle Plaine Partners,
Inc. and McAllen Capital Partners (the
"Financial Advisors") to provide financial
advice on and assistance in structuring the
financial aspects of the Private Placement
Offering and this Offering, identifying
potential investors in the Private Placement
Offering and assisting such investors in
complying with regulatory requirements. See
"The Offering."
Determination of Offering Price. . The price at which the shares of Common
Stock are offered and sold in this
Offering was established by the Board of
Directors, who received assistance in
setting such price from the Financial
Advisors. The Board of Directors 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. See
"Determination of Offering Price."
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, there were three
transactions totaling 26,691 shares of Common
Stock at prices of $1.50 to $.80 per share
between third parties and not involving the
Company, and excluding shares issued by the
Company in the Private Placement Offering.
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>
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<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>
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<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
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>
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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 March 31, 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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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 The Bank also has 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. See Note 11 to Consolidated
Financial Statements of December 31, 1994.
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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."
The Bank also has 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. See Note 11 to Consolidated Financial Statements of
December 31, 1994.
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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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."
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 Private Placement Offering, the Company may 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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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.
BEST EFFORTS OFFERING
Because the shares are being offered on a best-efforts basis, and there is no
minimum in the Offering, there is no assurance that all of the shares offered
hereby will be sold. If all or substantially all shares are not sold in the
Offering, the Company may not realize all of its plans for future growth and the
Company may have difficulty or be delayed in listing its shares with NASDAQ.
The offering price of the shares was independently established by the Company's
Board of Directors with assistance from the Financial Advisors. Since this
Offering is not underwritten or being sold through NASD member broker-dealers,
there has not been an independent review of matters covered by this Prospectus
as might be conducted by such members had they been affiliated with this
Offering. (See "THE OFFERING," "USE OF PROCEEDS" and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" herein.)
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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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. The Rights Offering may be extended to
__________________, 1995, and the Public Offering may be extended to ______,
1995.
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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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
and purchase and disposition of the Common Stock. 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. This summary is
not intended as tax advice, and is based on the Company's understanding of
federal income tax laws as currently interpreted. 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.
ISSUANCE OF RIGHTS
Section 305(a) of the Internal Revenue Code of 1986, (the "Code"),
generally provides that gross income does not include the amount of any
distribution by a corporation to its shareholders of stock or rights to acquire
stock of that corporation. Although there are exceptions to the general rule of
Section 305(a), this discussion assumes that the general rule of Section 305(a)
applies to the distribution of Rights to the shareholders of the Company. Under
Section 307 of the Code, the tax basis of the Rights in the hands of a
shareholder of the Company to whom the Rights were issued will be determined by
allocating the tax basis of the Common Stock with respect to which the
distribution was made between the existing shares of Common Stock the
shareholder holds (the "Old Stock") and the Rights in proportion to their
relative fair market values on the date of distribution. If the fair market
value of the Rights on the date of distribution is less than 15% of the fair
market value of the Old Stock, the tax basis of the Rights will be zero and the
tax basis of the Old Stock will be unchanged unless a shareholder makes an
irrevocable election to compute the basis of all Rights received in the manner
described in the preceding sentence. This election is made by attaching a
statement to such shareholder's federal income tax return filed for the taxable
year in which the Rights are received by a shareholder. The Company has not
obtained an independent appraisal of the valuation of the Old Stock or the
Rights and, therefore, each shareholder individually must determine how the
rules of Section 307 of the Code will apply in that shareholder's particular
situation. In either case, the holding period of such Rights will include the
period during which the shareholder has held the Old Stock.
EXERCISE OF RIGHTS
No gain or loss will be recognized by shareholders upon exercise of Rights
pursuant to the Offering. The holding period of the Common Stock acquired by a
shareholder upon exercise of the Rights will commence upon the exercise of the
Rights by the holder thereof. The tax basis of such shares will be equal to the
sum of the basis of the Rights exercised, if any, and the exercise price paid
for such shares. Persons who acquire Common Stock in the Public Offering will
take a basis for the shares equal to the Subscription Price and will have a
holding period that commences with the purchase.
EXPIRATION OF RIGHTS
Record Date Holders who allow the Rights received by them on the date of
distribution to expire unexercised will not recognize any gain or loss, and no
adjustment will be made to the basis of their common stock.
SALE OF COMMON STOCK
A shareholder selling Common Stock will recognize gain or loss equal to the
difference between the proceeds of sale and the basis of the Common Stock. Such
gain or loss will be capital gain or loss if the Common Stock is a capital asset
in the hands of the shareholder, and will be long term or short term depending
upon whether the shareholder's holding period is more than one year.
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 Private Placement Offering, and/or this 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. (See
"THE OFFERING -- TAX LIMITATION")
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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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.
The foregoing summary of certain federal income tax consequences
constitutes the opinion of the Company's accountants, Dayton & Associates,
and the Company's counsel, Knecht & Hansen. Such opinion is limited to the
federal income tax consequences applicable to stockholders and to the Company
upon the issuance of the Rights to Rights Holders upon the exercise or lapse of
such Rights.
TAX LIMITATION
As of December 31, 1994, the Company had 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. The completion of the Private Placement Offering resulted
in an "ownership change" within the meaning of Section 382 of the Code that will
restrict the ability of the Company to deduct previously incurred net operating
loss carryovers or utilize investment tax carryovers. In addition, if this
Offering were to cause an additional ownership change, or if future trading in
the Company's shares were to cause such an ownership change, the Company's
ability to use its net operating loss carryforwards in the future could be
further adversely affected (the "Section 382 Limitation"). The magnitude of the
Section 382 Limitation is dependent upon the value of the Company as defined by
the Code. A central point in this issue is whether any of the subsequent
capital infusion can be included in the valuation. Although regulations have
not been issued, the Internal Revenue Service has recently issued a private
letter ruling the interpretation of which may allow the Company to include the
subsequent capital infusion in the valuation and hence to retain a significant
portion of the net operating loss carryforwards. If the additional capital
infusion is not considered, the annual use of the net operating loss
carryforward will be reduced to approximately $60,000 per year. If the
additional capital infusion is considered, the annual use of the net operating
loss carryforward will be approximately $240,000 per year. Management is
currently evaluating the ruling to determine its applicability to the Company.
It is currently unclear whether the Internal Revenue Service would issue a
similar favorable ruling on behalf of the Company. The Company has reserved the
right in its sole judgment and discretion to limit the number of shares issued
as a result of exercises of Rights or in the Public Offering to reduce the risk
that additional Section 382 Limitations will apply. The Company will determine
whether to exercise this discretion by comparing the benefits of a successful
offering with any tax detriments associated with an ownership change.
An "ownership change" will occur if the aggregate percentage point
ownership increase for all 5% shareholders for a "testing period" exceeds 50
percentage points. For this purpose, a "5% shareholder" is any direct or
indirect holder, taking certain attribution rules into account, of 5% or more of
a corporation's stock. For this purpose, all holders of less than 5% are
collectively treated as a singe 5% shareholder. In general, the "testing
period" is the three-year period ending on the date an ownership change has
occurred. Such period may be less than three years and will begin the first day
of the most recent taxable year from which a net operating loss or excess credit
is carried forward. Once an "ownership change" has occurred, as of that date,
only subsequent ownership changes are tested. In determining the amount by
which 5% shareholders have increased their percentage, the percentage interest
of each 5% shareholder on the testing date is compared to the lowest percentage
interest of such shareholder at any time during the testing period. For
example, a shareholder whose percentage ownership increased from 6% to 20%
during the testing period will be considered to have had an increase of 14
percentage points. If the aggregate change of all 5% shareholders exceed 50
percentage points as of the end of the "testing period," then an "ownership
change" will have occurred.
The Company retains the discretion to reduce the number of shares of Common
Stock to be received by a Rights Holder or investor in the Public Offering. It
will exercise this discretion by comparing the benefits of a successful offering
with any tax detriments associated with an ownership change.
The foregoing summary of certain tax limitations constitutes the opinion of
the Company's accountants, Dayton & Associates.
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 is offering the shares
through its directors and executive officers on a "best efforts" basis. The
directors and executive officers will not be compensated in connection with
selling the shares, but they will be reimbursed for reasonable out-of-pocket
expenses, if any, incurred in connection with the Offering. It is not
expected, however, that any such expenses will be significant. The Company
does not intend to engage or compensate nor seek the assistance of any broker,
underwriter or securities dealer in connection with the Offering; however,
the Company may elect to use sales resources independent of the Company, and
consequently, the Company may in its sole discretion pay such fees, costs,
commissions and expenses of brokers, underwriters, dealers and other sales
personnel as necessary.
The Company engaged the Belle Plaine Partners, Inc. and McAllen Capital
Partners ("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
-18-
<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 principals of the Financial Advisors (Mr. John Eggemeyer of Belle
Plaine Partners and Mr. John Rose of McAllen Capital Partners) have extensive
experience in the banking industry and in providing consulting services to
financial institutions. Mr. Eggemeyer is currently Chairman of the Board of
Rancho Santa Fe National Bank since January of 1995, and since 1990 has been
President and principal owner of Belle Plaine Partners. Mr. Eggemeyer was also
a managing director of Mabon Securities Corp., a senior executive officer of TCF
Bank Illinois FSB, President of First Trust Company, President of Intra West
Financial Corporation, Chemical Bank, Norwest Bancorporation, and First National
Bank of Chicago. Mr. Eggemeyer is currently chairman of the Board of TCF Bank
Illinois FSB and a director of TCF Financial Corp. Mr. Eggemeyer has over
27 years of banking experience. Since January of 1994, Mr. Rose has been the
President and owner of McAllen Capital Partners and has also assisted several
financial institutions in providing consulting and recapitalization services.
Mr. Rose has also been Senior Vice President of River Valley Savings Bank,
President of Livingston Financial Group, a venture capital firm, and Senior Vice
President of ABN La Salle, North America, all located in Chicago, Illinois.
Mr. Rose is currently an executive officer of FNB Corporation, Pennsylvania.
Mr. Rose has over 20 years of banking experience.
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 a
warrant 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 warrant will
expire five years after issuance and will be exercisable after the first year.
The Company will attempt to convert the warrant to an option under the
Company's 1993 Stock option than under the same terms and conditions, except
that the term would be extended to ten (10) years. If this Offering is
completely sold, the warrant to the Financial Advisors will contain 425,937
shares. 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 the Financial Advisors, including liabilities under the
Securities Act of 1933, in connection with the offer and sale of the shares
of Common Stock.
On May 17, 1995, the Company and Belle Plaine Partners ("Belle Plaine")
agreed that Belle Plaine would act as the exclusive financial advisor to the
Company in connection with the Company's efforts to (a) acquire other financial
institutions or (b) effect a sale of the Company or a material amount of its
assets or liabilities (collectively, the "Transaction"). Belle Plaine will
provide certain services including (i) assisting the Company in the structuring
of financial aspects of the Transaction, (ii) identifying potential parties, and
(iii) negotiating terms of such transactions. The Company has agreed to pay
Belle Plaine $9,000 upon execution, $9,000 per quarter, certain fees ranging
from 1% to 3% per Transaction, and certain costs and expenses. Pursuant to the
agreement between the Company and Belle Plaine, the Company has agreed to hold
Belle Plaine harmless against all losses, claims, damages, and liabilities under
this agreement.
The price of the shares of Common Stock offered in the Private Placement
Offering and in this Offering was independently established by the Board of
Directors, with assistance from the Financial Advisors. The Board of Directors
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, and
other factors. (See "DETERMINATION OF OFFERING PRICE.")
The Company understands that its directors and officers, upon and after
the effective date of the Offering, may contact a 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 the potential investor.
Such directors or officers shall 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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<PAGE>
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, Rancho Santa Fe, California, 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.
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<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(1) 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
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.
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.
- ----------------
(1) High and low prices have been retroactively adjusted to account for the
One-For-Five Reverse Stock Split effective December 14, 1993.
-25-
<PAGE>
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.
There is no minimum number of shares to be purchased in this best-efforts
offering, and the actual results of the Offering may be in a range between the
amounts shown in the two columns in the following table. The table also
reflects shares that have already been issued in the Private Placement Offering.
-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
SOP (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>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATISTICAL DISCLOSURE
Average balances are based on the annual averages for 1994 and 1993 and are
representative of operations.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The following table sets forth the Company's condensed consolidated average
balances (monthly averages) of each principal category of assets, liabilities
and shareholders' equity for each of the past two years. All amounts are in
thousands as of December 31.
<TABLE>
<CAPTION>
ASSETS:
1994 1993
---- ----
<S> <C> <C>
Cash and due from banks 3,993 4,502
Due from banks - time 2,712 2,488
Investment securities - held to maturity 5,508 10,148
Investment securities - available for sale 11,537 0
Federal funds sold 3,817 8,167
Loans (net) 32,397 40,774
Premises and equipment (net) 730 568
Other real estate owned 1,313 1,037
Other assets 1,302 787
------ ------
Total Assets 63,309 68,471
------ ------
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand Deposits 46,148 47,329
Savings Deposits 7,369 8,308
Time Deposits 6,872 8,178
Other Debt 54 310
Other Liabilities 383 306
------ ------
Total Liabilities 60,826 64,431
Common Stock 7,367 7,326
Retained Earnings (Deficit) (4,884) (3,286)
------ ------
Total Equity 2,483 4,040
------ ------
Total Liabilities and Equity 63,309 68,471
------ ------
------ ------
</TABLE>
INTEREST RATES AND DIFFERENTIALS
The Company's consolidated earnings depend primarily upon the difference
between the income the Bank receives from its loan portfolio and investment
securities, and its cost of funds - principally, interest paid on savings and
time deposits. Interest rates charged on the Bank's loans are influenced
principally by the demand for such loans, the supply of money for lending
-28-
<PAGE>
purposes, and competitive factors. These factors are, in turn, affected by
general economic conditions and other factors beyond the Bank's control, such as
federal economic and tax policies, the general supply of money in the economy,
governmental budgetary actions, and the actions of the Federal Reserve Board.
Information concerning average interest-earning assets and
interest-bearing liabilities, along with the average interest rates earned and
paid thereon, is set forth in the following table. Loan income includes loan
fees as accounted for on a yield basis under SFAS No. 91.
<TABLE>
<CAPTION>
INTEREST RATES AND DIFFERENTIALS
(Dollars in Thousands)
YEAR ENDED 12/31/94 YEAR ENDED 12/31/93
--------------------------- ----------------------------
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE % BALANCE EXPENSE RATE %
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing
deposits placed with banks 2,712 111 4.09% 2,488 93 3.74%
Investment Securities (HTM) 5,508 258 4.68% 10,148 505 4.98%
Investment Securities (AFS) 11,537 535 4.64% 0 0 0.00%
Federal Funds Sold 3,817 155 4.06% 8,167 210 2.57%
Loans and Leases (net) (1) 32,397 2,879 8.88% 40,774 3,539 8.68%
------ ----- ----- ------ ----- -----
Interest-earning Assets: 55,971 3,938 7.04% 61,577 4,347 7.06%
NON INTEREST-EARNING ASSETS:
Cash and Due from Banks 3,993 4,502
Premises and equipment (net) 730 568
Other Real Estate owned 1,313 1,037
Other Assets 1,302 787
------ ------
Total 63,309 68,471
------ ------
------ ------
INTEREST-BEARING LIABILITIES:
Interest-bearing Demand
Deposits 32,590 723 2.22% 34,906 755 2.16%
Savings Deposits 7,369 153 2.08% 8,308 212 2.55%
Other Time Deposits 6,872 224 3.26% 8,178 272 3.33%
Long Term Debt 54 2 3.70% 78 6 7.69%
------ ----- ----- ------ ----- -----
Total Interest-bearing
Liabilities: 46,885 1,102 2.35% 51,470 1,245 2.42%
----- -----
Non-Interest bearing Demand 13,558 12,423
Non-Interest bearing Liabilities 383 538
Shareholders' equity 2,483 4,040
------ ------
63,309 68,471
------ ------
------ ------
Net Interest Income 2,836 3,102
----- -----
----- -----
Net Yield on Interest-
bearing Assets 5.07% 5.04%
----- -----
----- -----
<FN>
(1) Non-performing loans are included in average loans, and interest income
for loans includes loan fees. The Bank has no tax-exempt investments.
</TABLE>
-29-
<PAGE>
The following table sets forth changes in interest income and interest
expense, and the amount of change attributable to variances in volume and
variances in interest rates. The change in interest due to both volume and rate
has been allocated to volume and rate changes in proportion to the relationship
of the absolute dollar amounts of the change in each. Non-performing and
non-accrual loans are included in volume rate loan calculations and loan fees
based on a level yield basis. The Bank has no tax-exempt assets.
<TABLE>
<CAPTION>
INTEREST RATES AND DIFFERENTIALS
(Dollars in Thousands)
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1994 OVER 1993 1993 OVER 1992
---------------------------- ---------------------------
TOTAL CHANGE DUE TO TOTAL CHANGE DUE TO
INCREASE ------------- INCREASE -------------
(DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
---------- ------ ---- ---------- ------ ----
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans (660) (741) 81 (801) (339) (462)
Interest bearing deposits
with banks 18 8 10 53 65 (12)
Interest on investment
securities HTM (247) (219) (28) 68 235 (167)
Interest on investment
securities AFS 535 535 0 0 0 0
Interest on federal
funds sold (55) (143) 88 0 46 (46)
----- ----- ----- ----- ----- -----
Total Interest Income (409) (560) 151 (680) 7 (687)
----- ----- ----- ----- ----- -----
INTEREST EXPENSE
Interest bearing
demand deposits (32) (51) 19 140 239 (99)
Interest on savings
deposits (59) (22) (37) (31) 38 (69)
Interest on other
time deposits (48) (43) (5) (564) (256) (308)
Long Term Debt (4) (2) (2) (2) 0 (2)
----- ----- ----- ----- ----- -----
Total interest expense (143) (118) (25) (457) 21 (478)
----- ----- ----- ----- ----- -----
Net interest income (266) (443) 176 (223) (14) (209)
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
-30-
<PAGE>
INVESTMENT SECURITIES
Investment securities as presented are held by the Bank and are stated at
cost, adjusted for amortization of premiums and accretion of discounts. In
December 1993, the Bank implemented FASB 115, mark-to-market for its investment
securities. As of December 31, 1994 and 1993, respectively, the portfolio was
segregated as follows ($'000)
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Securities Available for Sale (AFS - FMV) 11,780 14,914
Securities Held to Maturity (HTM - cost) 4,358 3,285
------ ------
16,138 18,199
------ ------
------ ------
</TABLE>
In making its determination for classifying each security as available for
sale or held to maturity, the Bank considers several factors including: (i)
short-and mid-term liquidity needs; (ii) the need to have securities available
for pledging purposes for public deposits; (iii) the average life and interest
rate characteristics of the securities (fixed or adjustable rate); and (iv) the
probability of future market interest rate changes. Securities Held to
Maturity, as a rule, are fixed rate investments with short-term maturities in
1995 and into 1996; securities Available for Sale have either very short
maturities or are tied to floating rates that reprice annually or more
frequently.
The following table summarizes the "book" value of investment securities
(cost basis for securities Held to Maturity and current market value for
Available for Sale investments). All dollar amounts are in thousands:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
------ ------
<S> <C> <C>
U. S. Gov.'s and Agencies 10,844 15,047
Investment Funds (U.S. Government Securities) 5,191 3,002
------ ------
Other Securities 103 150
------ ------
16,138 18,199
------ ------
------ ------
</TABLE>
The following tables show the maturities, based on repricing dates and
contract dates, of investment securities at December 31, 1994, and the estimated
weighted average yields of such securities. All dollar amounts are in
thousands:
Maturities based on earliest repricing date
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1994
-----------------------
AMOUNT YIELD
------ -----
<S> <C> <C>
Maturing within one year 14,281 5.68%
Maturing after one year but within five years 1,857 5.88%
------
16,138 5.70%
------
------
</TABLE>
Maturities based on stated maturities only
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1994
-----------------------
AMOUNT YIELD
------ -----
<S> <C> <C>
Maturing within one year 5,191 5.62%
Maturing after one year but within five years 3,743 5.89%
Maturing after five years but within ten years 104 4.28%
Maturing after ten years 7,100 5.75%
------ -----
16,138 5.70%
------ -----
------ -----
</TABLE>
-31-
<PAGE>
The Bank does not have a securities Trading Account and does not intend to
trade securities.
Additional discussions concerning investments, including information
relating to derivatives and structured notes, are included in the MD&A section
for INVESTMENT ACTIVITIES and in the audited financial statements that are
included as a part of the December 31, 1994 Form 10-KSB.
LOAN PORTFOLIO
The following table sets forth the amount of loan financing outstanding at
the end of the following periods, according to type of loan. All dollar
amounts are in thousands:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
------ ------
<S> <C> <C>
Real estate construction 4,032 5,061
Real estate mortgage 12,226 12,138
Commercial 12,089 14,037
Installment 2,693 4,134
------ ------
31,040 35,370
Less: Deferred loan fees (52) (119)
Allowance for possible loan losses (1,137) (1,056)
------ ------
Total loans and leases 29,851 34,195
------ ------
------ ------
</TABLE>
With certain exceptions, the Bank is permitted under California law to make
loans to a single borrower in aggregate amounts up to 15% of the sum of the
Bank's shareholders' equity, allowance for loan losses, capital reserves, if
any, and debentures, if any, for unsecured loans (as defined for regulatory
purposes), and up to 25% of such sum for the aggregate of secured and unsecured
loans (as defined). As of December 31, 1994 these lending limits for the Bank
were approximately $307,000 for unsecured loans, and approximately $511,000 for
secured loans. The Bank sells participations in loans where necessary to stay
within lending limits or to otherwise limit the Bank's exposure in particular
credits. Where deemed appropriate to better utilize available funds, the Bank
may purchase participations in loans.
-32-
<PAGE>
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table sets forth the maturity distribution and/or interest
rate sensitivity of the Bank's loan portfolio (excluding residential mortgages
of 1-4 family residences and installment loans) as of December 31, 1994. All
dollar amounts are in thousands:
<TABLE>
<CAPTION>
ONE YEAR
ONE YEAR THROUGH OVER
OR LESS 5 YEARS 5 YEARS TOTAL
-------- -------- ------- ------
<S> <C> <C> <C> <C>
Real estate construction 3,652 380 0 4,032
Commercial and Financial 4,807 6,703 579 12,089
------ ------ ------ ------
8,459 7,083 579 16,121
------ ------ ------ ------
------ ------ ------ ------
Loans maturing after one year with:
Fixed interest rates 4,076 74
Variable interest rates 3,007 505
------ ------
7,083 579
------ ------
------ ------
</TABLE>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table shows Bank nonaccrual, past due and restructured loans.
All dollar amounts are in thousands:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
---- ----
<S> <C> <C>
Non-accrual loans 431 2,420
Loans past due 90 days or more
and still accruing interest 362 505
Restructured loans 0 0
Interest income that would have
been recorded under original terms 26 98
Income recorded during period 42 0
</TABLE>
There were no commitments to lend additional funds to borrowers listed
non-accrual or past due 90 days or more.
The Bank's policy concerning non-performing loans is to cease accruing
interest, and to charge off all accrued and unpaid interest on loans which are
past due as to principal and/or interest for at least 90 days, or at such
earlier time as Management determines timely collection of the interest to be in
doubt; except that in certain circumstances accrued interest is not charged off
on adequately secured loans which are deemed by Management to be fully
collectible. Additionally, loans which are 90 days or more past due may
continue accruing interest if they are both well secured and in the process of
being collected.
-33-
<PAGE>
POTENTIAL PROBLEM LOANS
Except as noted above, as of March 31, 1995, Management is not aware of any
borrowers who are experiencing severe financial difficulties, or in the normal
course of business, represent any identified loss potential. The Bank monitors
all loans and completes a monthly internal watch list, which is inclusive of
both loans past due and/or borrowers that have been identified as having special
difficulties. The watch list is reviewed by external credit examiners at least
quarterly and the results submitted to the Board.
LOAN CONCENTRATIONS
The Bank's loan portfolio is diverse, and as of March 31, 1995 there are no
specific concentrations to any one borrower or group of borrowers that are
engaged in similar activities which would cause them to be similarly impacted by
economic or other considerations.
SUMMARY OF LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES
The following table summarizes loan balances, loans charged off, the
provision for credit losses charged to expenses, the Reserve, and loan
recoveries. All dollar amounts are in thousands:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1994 1993
------ ------
<S> <C> <C>
RESERVE FOR POSSIBLE CREDIT LOSSES:
Balance - beginning of period 1,056 575
Loans charged-off:
Real estate 796 60
Construction 0 75
Commercial 167 599
Installment 29 81
------ ------
Total 992 815
RECOVERIES ON LOAN CHARGE-OFFS:
Real estate 40 8
Construction 0 0
Commercial 33 5
Installment 5 3
------ ------
Total 78 16
------ ------
Net loans and leases charged-off 914 799
Provision charged to operating expenses 995 1,280
------ ------
Balance - end of period 1,137 1,056
------ ------
------ ------
LOANS:
Average loans outstanding during period 32,397 40,774
Total loans at end of period 29,851 34,195
RATIOS:
Net loans charged-off to average loans 2.82% 1.96%
Reserve as a percent of end of period loans 3.81% 3.09%
</TABLE>
-34-
<PAGE>
The Bank entered 1994 having made a large increase in the Reserve in
December 1993 based on borrowers' information currently available and based on
preliminary economic information that suggested that the recession was showing
signs of improvement. The economy was in fact improving in many areas of the
county -- but not in the local area. The Bank's local market was hit very
severely by the tail end of the recession and, in several instances, in 1994
commercial borrowers who had never reported financial difficulties or were past
due simply declared bankruptcy. In several other cases, individuals who lost
their long-term jobs stopped making payments. In 1994 the Bank charged
$542,000 to loan losses concurrent with the acquisition of two properties as
OREO. These losses were both related to a severe drop in the actual and
appraised value of real estate. The two properties that were acquired as OREO
were properties that were originally valued on a cost basis at $2.3 million and
$1.3 million, respectively -- this is the property level that was most severely
hit by the recession. Properties at this value represent an exception for the
Bank's loan portfolio, and Management does not feel there are other large loans
with similar problems in the current portfolio that have not been adequately
considered in the analysis of the Reserve.
While comparative data is not available for December 31, 1994, an Orange
County peer group summary done by Grant Thornton LLP using September 30, 1994
Call Report data shows the following comparisons:
<TABLE>
<CAPTION>
TOTAL ASSETS OF
MONARCH GREATER THAN $50MM AND
LESS THAN OR EQUAL TO $125MM
------- ----------------------------
<S> <C> <C>
Loan Loss Reserve/Gross Total Loans 3.66% 2.81%
Loan/Deposit Ratio 50.90% 70.40%
Loan Loss Reserve/Non-Perfoming Loans 143.38% 140.19%
Non-accrual Loans/Gross Loans 1.39% 3.23%
</TABLE>
The same ratios for banks with total assets of less than $50 million and
those with more than $126 million show similar patterns for problem loans and
generally high reserves. Based on preliminary reports for other banks for
December 1994, other banks are also seeing a decrease in the volume of problem
loans and a settling of the Reserve levels from recent very high levels.
The Bank has not been active in areas that involve hazardous waste,
and based on portfolio reviews by the Bank and during credit review processes
including regulatory examinations, NO loans have been identified that would
appear to be of concern because of hazardous material.
The Bank makes a variety of loans available to its customers. It also
attempts to control or reduce the risks associated with different forms of
lending by (i) employment of experienced loan officers; (ii) loan committee
review and approval of all loans of $250,000 or more to any one borrower; (iii)
loan committee review and approval of any loan which represents an exception to
loan policy and/or of any new or renewed loan to a borrower who has a loan
internally or externally classified as special mention or worse; and (iv) by
limiting loan activity to loan types that are within the experience level of
loan officers and the loan committee. As an additional
-35-
<PAGE>
control for construction lending, the Bank also uses a professional outside
source for all fund control disbursements.
The Bank's Adequacy Analysis of the Reserve for Loan Losses was prepared
using November 30, 1994 data, with specific changes as part of the 1994 audit to
reflect known changes in the portfolio, shows (dollars in thousands or %):
<TABLE>
<CAPTION>
UNCLASSIFIED RESERVE % RESERVE $
------------ --------- ---------
<S> <C> <C> <C>
Commercial Loans 6,563 1.00% 66
Construction Loans 4,222 1.00% 42
Land Loans 1,623 1.00% 16
SBA Loans 441 1.00% 4
Cash Secured Loans 387 0.00% 0
Real Estate Loans 11,715 1.00% 111
Installment Loans 2,328 1.00% 23
Home Equity Lines 809 2.00% 14
Redi-Credit 234 2.00% 5
Overdrafts 13 1.00% 0
MB Credit Cards 109 1.00% 1
------ ------- ------
28,444 1.00% 282
CLASSIFIED LOANS:
Substandard 2,764 10.60% 265
Doubtful 479 50.00% 240
Loss 8 100.00% 8
------ ------- ------
3,251 16.00% 513
------ ------- ------
Total Loans 31,695 2.50% 795
</TABLE>
The Adequacy Analysis also allows for economic uncertainties and other
possible unknown factors which are included in the $342,000 difference between
the $785,000 calculated reserve and the actual reserve of $1,137,000 in December
1994. Reserves for unclassified loans are calculated based on historic reviews
of charge off activity for similar loan types and other factors including an
assessment of actual collateral and payment history for these loans. Reserves
for classified loans are based on a loan by loan review and estimate of possible
loss should the borrower be unable to fully repay the loan. During December
1994, the one small loan identified as a loss was charged off. The Reserve
analysis was reviewed and confirmed by a firm the Bank uses to perform a
detailed review of loans and of the Reserve, and by the full Board. It was also
carefully reviewed as part of the due diligence done as part of their work in
conjunction with structuring and completing the private placement for the
Company's common stock.
DEPOSITS AND LIABILITY MANAGEMENT
The Bank provides a range of deposit types to meet the needs of the local
community. Time deposits, which are normally sensitive to competitive rate
changes, are generally used to expand or contract the overall liability
position needed to meet the various management ratios
-36-
<PAGE>
established for liquidity, capital, loans to deposits, and other funding
measurements. As a policy, the Bank does not accept or solicit brokered
deposits.
The following tables show the average amount of interest bearing and
non-interest bearing deposits and rates as of December 31, 1994 and 1993,
respectively. All dollar amounts are in thousands:
<TABLE>
<CAPTION>
1994 1993
AVERAGE AVERAGE
----------------- -----------------
BALANCE RATE BALANCE RATE
------- ----- ------- -----
<S> <C> <C> <C> <C>
Non-interest bearing deposits 13,558 0.00% 12,423 0.00%
Interest bearing demand deposits 32,590 2.22% 34,906 2.16%
Savings deposits 7,369 2.08% 8,308 2.55%
Time deposits 6,872 3.26% 8,178 3.33%
------ ----- ------ -----
Total (1) 60,389 1.82% 63,815 1.94%
------ ----- ------ -----
<FN>
(1) Includes non-interest bearing deposits for both amount and rates. Rates
represent weighted averages.
</TABLE>
The average rates are somewhat deceptive in showing a lowering of cost of
funds, as rates showed a measurable increase in the last few months of 1994.
The cost of funds is also impacted by increases in non-interest bearing deposits
which was part of the Bank's 1994 and 1995 business plan as one way to control
cost of funds.
The following table shows the maturity schedule of time certificates of
deposit of $100,000 or more as of December 31, 1994. All dollar amounts are in
thousands:
<TABLE>
<S> <C>
3 months or less 1,659
Over 3 months through 6 months 601
Over 6 months through 12 months 0
Over 1 year 0
-----
Total 2,260
-----
-----
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table presents the key ratios for the Company based on
average assets, average equity, and net income for the years 1994 and 1993
<TABLE>
1994 1993
------- -------
<S> <C> <C>
Return on assets (2.9%) (2.0%)
Return on equity (74.5%) (33.2%)
Equity to assets 3.9% 5.9%
</TABLE>
-37-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
Economic conditions in 1994 continued to show the effects of a prolonged
recession in the local market; however, most current information during the
first quarter of 1995 suggests that the local economy is finally starting to
recover. This recovery includes improvements in employment data and an apparent
bottoming of the declines in real estate values. The bankruptcy of Orange
County will impact certain areas of the local economy, but the full extent of
the impact has not as yet been determined.
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.
-38-
<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>
While the Bank has divided its portfolio into HTM and AFS components,
each security was purchased with the full intent of holding to maturity based on
an overall yield and position in the Bank's laddered cash flow from investments.
Changes in prices for the bond market are not expected to impact the AFS
portfolio except for FASB 115 accounting adjustments to equity, and Banking
regulators do not include such adjustments, either positive or negative, in
their capital ratio calculations. To reinforce or support its intent to hold
all securities to maturity, the Bank has been very aware of its current and
projected cash liquidity versus funding needs and/or possible large decreases in
deposits. Anticipated loan growth in 1995 is expected to be funded from very
short-term investments and some increases in deposits which will be stressed as
part of relationship banking. The Bank has been able to maintain a strong core
deposit base during 1994 and the start of 1995 during a period of generally
negative press on community banks as a group, and during a period when the Bank
was placed under regulatory orders and saw its capital levels slip below
acceptable levels. The increase in capital in March 1995 should allow the Bank
to continue to maintain its core deposits and attract new deposits at market
rates for growth.
The Bank, as part of its investment portfolio, holds derivative
securities. These securities include three Collateralized Mortgage
Obligations (CMOs) which total approximately $2,487,055 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 SLMA security paid interest at 5.3% until March 30, 1995 when the
rate increased to 5.6%, until March 30, 1996 when the rate increases to 6.25%,
until March 30, 1997 when the rate increases to 7.25%, until March 30, 1998 when
the rate increase to 8.25%. The security matures on March 30, 1999 but is
subject to call in whole or in part each semi-annual interest payment date.
This security is carried as held to maturity. The Bank in establishing its held
to maturity portfolio has considered its intent and ability to hold this
investment to maturity versus possible liquidity needs, and the Bank does not
expect to realize any loss or gain on this security. The book value of this
security as of March 31, 1995 was $2.5 million while the market value was $2.45
million. The Bank's Investment Committee makes every effort to keep informed
about both the perceived and real risks of derivative securities, and has set
general limits on the types of derivatives the Bank can purchase at the most
basic levels which include step-up notes and CMO's.
As of March 31, 1995, the three CMO's have the following characteristics
including a projected gain or loss given a change in interest rates of plus or
minus 100 basis points:
<TABLE>
<CAPTION>
Gain/ Book Modified Gain/Loss Gain/Loss
Class. Rate Cost ($) Market ($) Loss ($) Yield Duration * +100 bp -100 bp
- ------ ---- -------- ---------- -------- ----- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AFS ARM 1,004,330 998,090 (6,240) 7.2% 4.51 (7,188) (2,127)
HTM FX 1,008,380 971,835 (36,545) 6.9% 2.46 (46,525) (19,528)
HTM FX 498,905 488,939 (9,966) 4.2% 0.97 (21,891) 13,370
</TABLE>
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):
<TABLE>
<CAPTION>
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.
-39-
<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.
There are no loans, classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed which represent or
result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity, or capital resources, nor
are there material credits about which management is currently aware of any
information which causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms.
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
On May 13, 1994, pursuant to an order from the Securities and Exchange
Commission, Monarch Bancorp commenced an offering of a minimum of 833,333 shares
and a maximum of 2,333,333 shares of Common Stock at a price of $3.00 per share.
The offering was undertaken in order to raise additional capital (i) in
accordance with the Memorandum of Understanding (the "MOU"), an agreement
entered into between Monarch Bank (the wholly-owned subsidiary of the Company),
the Federal Deposit Insurance Corporation, and the California Superintendent of
Banks ("Superintendent"), and (ii) to provide additional capital for prudent
expansion of the Bank through continued growth of its present facility and
possible future facilities. The MOU required the Bank to have a leverage
capital ratio of 7%, and as of December 31, 1993, the Bank had a leverage
capital ratio of 4.63%. The offering was underwritten by Spectrum Securities,
Inc. 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 in the offering. Direct and indirect offering expenses of
approximately $360,000 were written off in the 4th quarter of 1994. 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.
-40-
<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. Mortgage loan repayments are based on
a six moving average for repayments or approximately 3% per month and uses PSA
speeds for projecting repayments on mortgage-backed investment securities.
No attempt has been made to spread interest-bearing transactional based demand
accounts over future periods since the Bank does not have sufficient information
to predict the relative interest rate changes for rate sensitive assets versus
rate sensitive transactional accounts. Preliminary studies of Bank information
suggest both a repricing delay in the relative changes in rates on earning
assets versus interest-bearing demand accounts. The Bank is implementing new
reporting systems for interest rate risk (IRR) using proposed guidelines
detailed in FDICIA 305. This pending regulation establishes new tests for IRR.
Banks who exceed the target levels of IRR will be required to do expanded,
detailed IRR reporting as part of their quarterly Call Reports and may be
subject to requirements to increase their capital to compensate for higher than
targeted IRR. The Bank as of the first quarter of 1995 passes the proposed
regulatory tests and would not be subject to either the additional reporting
requirements or additional capital requirements. The final guidelines for
FDICIA 305 are expected to be implemented sometime in 1995, and the Bank, as
approved by the Board of Directors in its Asset Liability Management Policy,
plans to consistently limit IRR to a level that would preclude any additional
capital requirements. 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
Cumulative GAP as % 97% 90% 110% 142% 143%
As % of Total Assets 1% 5% 6% 26% 27%
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.
-41-
<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.
The average yield on earning assets of 7.04% and 7.06% were consistent for
the year 1994 and 1993, respectively. This static yield during a period when
interest rates were being increased by the Federal Reserve is tied to the
progressive decrease in loan volumes. Loan interest and fee income decreased
by approximately $660,000 in 1994; however, approximately $741,000 of the
decrease was attributed to a decrease in volume while rate increases accounted
for an increase of approximately $81,000 for loans. In part this decreased
income was offset by an increase in both volume and yield on investments,
Federal Funds Sold, and Certificates of Deposit purchased from other financial
institutions which on a combined basis increased by approximately $251,000.
This combined investment income improved by approximately $181,000 from volume
increases and approximately $70,000 from rate increases.
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.
Based on a review of changes in volumes and rate, the Bank's cost of funds
in 1994 decreased by approximately $118,000 due to a volume drop in average
interesting-bearing deposits of approximately $4.6 million. Changes in rates
accounted for approximately $25,000 in the decrease in cost of funds. During
1994, the Bank and the banking industry were much slower in adjusting deposit
rates in an increasing rate market than they were in increasing rates on the
asset side of the balance sheet.
-42-
<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 acquired a mandatory convertible debenture in another financial
institution in 1989 when it sold its residual value in a matured lease. The
debenture was converted to common stock in 1993 at approximately par. The
market for this institution stock, like most financial institutions, was
negatively impacted by the recession and a generally poor perception by
investors in the past year for California community bank stocks. This
institution has a very lightly traded stock that is not listed on an exchange;
however, this institution has been consistently profitable in the past few
years. While its book value supports the original $150,000 cost value, the lack
of a current market and limit recent trades suggest a current "fair market"
value of $103,000. This financial institution paid a dividend in 1995 based
on 1994 financial results and appears to be well structured for very positive
growth and stock appreciation in 1995.
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 of $2.5 million 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.
-43-
<PAGE>
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.
CAPITAL AND REGULATORY MATTERS
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.
Several factors are expected to assist the Company and Bank in returning to
a consistent level of profitability including: (1) the Company and Bank were
recapitalized on March 31, 1995 and both now exceed the regulatory commitments
and meet the "well capitalized" definition that provides a public relations and
general psychological plus in working with new customers for both loan and
deposit business; (2) the Company has maintained over $2 million in cash as an
earning asset, and based on a projected investment yield of 6.0% will earn over
$120,000 per year which is well in excess of its anticipated expenses; (3) on a
net/net basis, the Bank's capital was also increased on March 31, 1995 and this
$3.6 million cash increase has been invested in short and mid-term securities at
an average yield of 7.0% providing the Bank with a new earning asset of
approximately $250,000 per year; (4) the historic loan losses from the past two
years are not expected to continue in 1995, and the Reserve for Loan Losses has
been increased to adequately cover all known or expected loan losses; (5) the
Bank has included in its budget approximately a $10,000 per month Provision for
Loan Loss expense starting in the second quarter of 1995 in anticipation of new
loan growth and to insure to the best of management's ability to keep an
adequately funded Reserve for both known and unknown but possible events; (6)
as of the end of the first quarter of 1995 and the start of the second quarter,
the Bank's loan to deposit ratio averaged 50%, but it is projected to increase
to approximately 65% later in the year with a corresponding increase in relative
loan interest and fees versus investments yields; (7) loan quality is, and
remains a top priority of management, and the Bank has completed virtually a
100% change in its loan staff to increase the level of technical skills and
overall credit administration detail; and (8) the Bank is so structured that it
can increase business volumes without increases in staffing or other overhead
expenses so most, if not, all new business should provide a measurable increase
directly to the bottom line. (See "RISK FACTORS - Financial Condition and
Operations; Loss in 1993 and 1994, Existing and Potential Enforcement Factors
Concerns Relating to Real Estate Loans, Asset Quality, Interest Rate Risks and
Risk of Failure to Meet Capital Requirements").
While the Bank and Company appear to have reasonable prospects to generate
increasingly improved earnings, management is aware that this will be a
progressive building project and that there are no quick fixes in rebuilding a
good quality loan portfolio. In the short term, income from the new equity
that was booked on March 31, 1995 provides a solid base earning asset.
The Company retained just over $2 million in cash from the private
placement.
The private placement has increased the number of shareholders by
approximately 26 with the largest single shareholder projected to hold under
approximately 10% 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 is investigating opportunities to expand.
(See "USE OF PROCEEDS".)
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.
On March 31, 1995, the Company completed a Private Placement Offering of
4,547,111 shares of its Common Stock, no par value, at a price of $1.35 per
share to several accredited investors as defined in SEC Regulation D. The
Company raised approximately $5,669,000 in net proceeds in the Private Placement
Offering.
The following table lists investors in the Private Placement Offering and
any known shareholders with a beneficial ownership of five percent of the
Company Stock as of June 15, 1995. All shares are Common Stock, the only class
of security outstanding.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Class
------------------- -------------------- ----------------
<S> <C> <C>
Peter Huizenga Testamentary Trust 530,000 9.85%
Huizenga Capital Management
Oak Brook, IL 60521
Robert A. Schoellhorn 530,000 9.85%
c/o Bryan & 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%
Chicago, IL 60606
</TABLE>
-44-
<PAGE>
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.
The Company and Bank are not aware of any other current regulatory
recommendations or specific pending changes in banking regulations which, if
they were implemented, would have a material effect on the Company or the Bank's
liquidity, capital resources or results of operations.
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.
INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
TRENDS, EVENTS, OR UNCERTAINTIES LIKELY TO HAVE A MATERIAL IMPACT ON LIQUIDITY
The capital provided from the private placement on March 31, 1995, which
allowed the Bank to meet and exceed its regulatory commitments to reach a 7.0%
leverage capital ratio and which provided the Company with approximately $2
million in cash reserves for operating capital and possible future growth, had
both direct and indirect impacts on Bank and Company liquidity. While operating
under both regulatory orders and being classified as "undercapitalized" by
regulatory standards, the Bank was limited in its ability to grow under the
provisions of FDIC Section 38 which sets limits on bank asset growth and other
areas of operation when a bank's capital is below 4.0%. By recapitalizing, the
Bank is no longer subject to the limitations of Section 38 and can disclose to
existing and potential depositors that it meets all of the regulatory capital
requirements.
INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY
During 1994 and the in the first quarter of 1995, the Bank was able to
maintain high levels of cash liquidity including cash , Federal Funds Sold, and
short term investment securities. After March 31, 1995, the Bank has both
strong cash liquidity and more options for growth. Prior to March 31, 1995, the
Company had limited liquidity that was not adequate to meet the payments on
$53,500 in notes that matured in August 1995. These notes were fully repaid on
March 31,1995 leaving the Company with no outstanding debt and over $2 million
in operating cash which is more than adequate to provide income in excess of any
anticipated expenses.
CAPITAL COMMITMENTS
The Board and Management of the Company have agreed to proceed with a
shareholders rights offering as soon as possible after March 31, 1995 to allow
interested shareholders to participate in purchasing stock on similar terms and
the same price as used in the March 1995 private placement. The expected
rights offering will also be so structured to allow public purchase of
unexercised rights. Funds from the proposed rights and public offering will
further increase the capital levels of the Company and provide additional direct
support for the Bank for possible future expansion. Neither the Company nor
the Bank have any immediate or specific capital expenditures that will draw on
current cash reserves.
TRENDS, EVENTS, OR UNCERTAINTIES LIKELY TO HAVE A MATERIAL IMPACT ON REVENUES OR
INCOME
The Bank and Company have carefully followed the bankruptcy proceedings for
Orange County in an attempt to understand what impact, if any, it will have on
the overall local economy and more specifically on the short-term business
activity as the individuals and business are attempting to recover from the
longest and most severe local recession in recent memory. News reports and
reports by local economic groups suggest that the impact will not be material
overall; however, some reports suggest that real estate values have seen some
additional decline because of uncertainties. Based on available information,
Management feels that there will be some repercussions from the bankruptcy for
firms and individuals who had direct dealings with the County and whose payments
have been frozen and/or cut. As of June, the Bank has only had one borrower
whose loan payments are past due because of the bankruptcy and a workout plan
has been implement for this borrower for full repayment of principal and
interest. The decline in real estate values attributed to the bankruptcy is
still being mooted but does not appear to have sufficient impact to jeopardize
any of the Bank's collateral value. First quarter surveys of business suggest
that employment will be up in 1995, that profits and overall business will
continue to improve, and that a trend of businesses who were looking to relocate
outside of Orange County has significantly decreased. While local economic
conditions appear to be improving, a national economic slowdown or "bumpy
landing" could be exacerbated by the failure of the County to promptly and
clearly resolve its bankruptcy status. A slow or weak local economy will
imped the Bank's ability to develop the volume of loans under prudent
underwriting standards that are required to make a significant increase in net
interest income.
-45-
<PAGE>
CAUSES FOR MATERIAL CHANGE FROM PERIOD TO PERIOD IN MARCH 31, 1995 FINANCIAL
STATEMENTS
The first quarter $182,000 profit had three components (1) a $171,000
recovery (net of expenses) for a fidelity bond claim from a prior period loss;
(ii) a recapture of a prior year tax payment for $7,000; and (iii) a small
operating profit for the quarter. The Bank also accrued $30,000 in expenses in
March for a negotiated legal settlement; this settlement was paid in April.
The $3.6 million in new capital and cash received on March 31, 1995
provides a material base for income in future quarters had no real financial
impact for the quarter except in increasing total deposits (the Company has
maintained its deposit accounts with the Bank including $2 million for the
private placement) and total assets as of the last day of the quarter.
Increasing interest rates allowed the Bank to increase the comparative
quarterly Net Interest Income by $73,000. Using quarter end data, which is
generally consistent with quarterly averages, the major components of earning
assets show (dollars in thousands):
<TABLE>
<CAPTION>
March March
1995 1994
------ ------
<S> <C> <C>
Federal Funds Sold 10,250 4,030
Net Loans 29,383 33,914
Investments 17,733 22,256
------ ------
Earning Assets 57,366 60,200
</TABLE>
In mid-March 1994, the average prime rate was 6.0%, the Fed Funds rate was
3.25%, the yield on the investment portfolio was 4.87%. Since March 1994
interest rates were progressively increased by the Federal Reserve, and in March
1995 the average for prime rate was 9.0%, the Federal Fund rate was near 6.0%,
and the Bank's investment portfolio was yielding just over 6.0%
EXPENSE
Expenses for deposits have also been impacted by the overall increase in
interest rates for the first quarter of 1995 when compared to the same period in
1994 but at a much slower rate. Since 1993 the Bank has very carefully
maintained interest rates on deposits to retain core banking relationships
rather than to attract new depositors during a period when the Bank needed to
control its capital ratios and during a period of very slow loan demand. As the
Bank resumes its growth following the March 31, 1995 recapitalization, it
expects to see its cost of funds increase as it raises rates to attract new
deposits at a time when most banks and financial institutions are becoming far
more rate competitive for insured deposits. Banks are also competing for an
increasingly small share of the deposit pool as many investors have moved funds
to non-insured deposit products. As of June 1995, it appears that deposit
interest rate increases have stalled and the markets are now speculating when
the Federal Reserve will next lower rates.
NON-INTEREST INCOME
The net settlement for the bond claim is included in Other Income, and this
$171,000 accounts for a majority of the $189,000 increase in Non-interest
Income. During the past year, the Bank has consistently worked to increase its
normal service charge income by reducing the level of waived charges. Specific
income generated in the first quarter of 1995 from NSF checking activities
showed a marginal increase over the same period in 1994. NSF activity has been
consistent for several years with no measurable losses from this deposit
activity. The Bank continues to call each NSF customer and to work with each
customer to insure their checks are covered; in some instances the Bank will
allow a short term overdraft for customers who have other compensating balances
or who have known financial strengths.
Operating Expenses
SALARY AND BENEFITS increased for the comparative periods by $26,000;
however, this includes unequal adjustments for the cash surrender value of Bank
owned insurance policies on senior officers. Actual salary expenses were
approximately $14,000 higher in the first quarter of 1995 than the same period
in 1994 because of the addition of a new, experienced VP level loan officer at
the start of 1995 before other staffing changes were completed later in the
quarter. The increased salary expense is directly related to staffing changes
being made to improve credit administration. The Bank instituted a full salary
freeze in mid-1993 and this freeze has been continued through the first quarter
of 1995. A $55,000 comparative increase in OFFICE OPERATIONS for the first
quarter of 1995 is reflective of a $50,000 extra ordinary recovery in 1994. On
a direct comparison basis, operations expenses have been relatively flat for the
two comparative quarters. DEPRECIATION EXPENSE has declined by $9,000 for the
comparative quarters as older but functional equipment becomes fully
depreciated. PROFESSIONAL SERVICES expenses increased for the comparative
quarters because of increased costs relating to regulatory issues. OTHER
expenses includes the $30,000 accrued expense for a legal settlement that was
negotiated in February and March and paid in April 1995.
Allowance for Loan Losses
The Bank made a major increase in its Allowance for Loan Losses in December
1994 based on a careful analysis of the existing portfolio, on a contingent
factor for the possibility of new problem assets as a result of the carryover
from the recession, and on a careful review of the Bank as part of the due
diligence process in the structuring the private placement.
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<PAGE>
The Bank has taken, and is taking, specific steps to improve credit
administration and its focus on credit quality including but not limited to:
specific staffing changes to improve technical lending skills; increased
emphasis in anticipatory analysis of the adequacy of the Allowance for Loan
Losses for unknown credit problems that could arise at the end of a recession
and slow start of a recovery cycle; and investing time and expense in revising
and updating written policies and procedures.
While progress is being made in credit administration, nonperforming loans
are still higher than desired.
Summary of Loan Loss Experience
Charge offs, recoveries, problem loan, and loan related data is detailed
in the following table:
<TABLE>
<CAPTION>
MARCH '95
<S> <C>
Allowance for loan losses December 31, 1994 1,137,000
Charge offs - commercial loans 163,000
Recoveries - real estate 6,000
----------
Net charge offs 157,000
----------
OREO 617,000
Nonaccrual Loans 454,000
Accruing loans past due 90 + 487,000
Allowance for Loan Losses 980,000
Period-end Gross Loans 30,413,000
Average Gross Loans 30,723,000
Net charge-offs to average loans .005%
</TABLE>
No provision expenses were made during the first quarter of 1995 to
increase the Allowance for Loan Losses because of (i) the large increase that
was made as of December 1994 was made in anticipation of probable losses for the
first quarter of 1995 at a time when; (ii) the Bank had a very low volume of
lending in the first quarter of 1995 and actually reduced total loan
outstandings. In the first quarter of 1995, much of Management's attention was
focused on compliance with regulatory orders which were signed in December 1994
and on completion of the private placement.
The Bank' one OREO property has been written down to 90% of the lower of
the appraised value or expected market value. The property is located in an
exclusive residential area that was especially hard hit by the large drop in
million dollar residences in California over the past few years. The Bank has
had several offers on this property and, as of June 15 1995, was in process of
opening an escrow to a qualified buyer. The Bank does not anticipate any loss
on the sale of this property other than writedowns that were made in 1994.
Nonaccrual loans and loans past due 90 + days are generally collateralized
and/or in the process of collection. As of May 1995, the Bank expects
possible charge offs from known problem loans of approximately $350,000 if it is
not successful in structuring workout plans with certain borrowers by the end of
the second quarter. Charge off and recovery activity for the balance of the
year are expected to be immaterial for the balance of the year unless new,
unknown problems are discovered. In reviewing the current portfolio,
Management has considered (i) the level of historic losses; (ii) the substantial
shrinkage of the loan portfolio and the lack of
significant new loan activity in the past two years; (iii) the value of
collateral supporting the loans; (iv) known or suspected problems with
borrowers; and (v) the impact that changes in staff and credit administration is
having on both the management of the currrent portfolio and new loans. Should
the Bank charge off all of the possible $350,000 the Allowance for Loan Losses
would total approximately $640,000 or 2.3% of projected total loans as of the
end of the quarter.
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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<PAGE>
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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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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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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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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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.
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 March 31, 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).
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 Superintindent have not 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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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. If the FDIC and/or the
Superintendent determines that the Bank is subject to further enforcement action
or takes other material adverse actions against the Bank, the Company will
comply with federal securities laws and any material adverse action against the
Company or other adverse change will require an affirmative resolicitation,
notwithstanding that subscriptions may not be revoked as described in the
"OFFERING" herein.
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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<PAGE>
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.
CHANGE IN ACCOUNTANTS
On October 4, 1994, the Board of Directors of Monarch Bancorp through its
Audit Committee dismissed Deloitte & Touche as its auditors.
Deloitte & Touche's report dated January 28, 1994 (except for Note 16 as to
which the date is April 14, 1994) on the Company's financial statements for the
year-ended December 31, 1993 did not include an adverse opinion or disclaimer
opinion nor was it qualified as to audit scope or accounting principles; the
report did include a statement of uncertainty relating to a Memorandum of
Understanding between the Company's wholly-owned subsidiary, Monarch Bank, and
the Federal Deposit Insurance Corporation and the California State Banking
Department that required the Bank to meet certain prescribed requirements. The
report dated January 29, 1993 for the year-ended December 31, 1992 did not
contain an adverse opinion or a disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
During the Company's fiscal years ended December 31, 1993 and December 31,
1992, and the subsequent interim period, there were no disagreements with
Deloitte & Touche on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
Deloitte & Touche's satisfaction, would have caused it to make reference to the
subject matter of the disagreement in connection with its report.
On October 9, 1994, the Board of Directors Audit Committee of the Company
engaged the firm of Dayton & Associates, Laguna Hills, California as auditors to
examine the books and accounts of the Company for the fiscal year ended December
31, 1994. The Company has not during its fiscal years ended December 31, 1993
and December 31, 1992, and the subsequent interim period, consulted with Dayton
& Associates regarding the application of accounting principles to a specific
transaction or the type of audit opinion that might be rendered on the Company's
financial statements.
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.
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<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 has 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. Since January 1994, Mr. Rose has been President and owner
of McAllen Capital Partners, Chicago, Illinois and Mr. Rose is also currently an
executive officer of FNB Corporation, Pennsylvania. From February 1992 to
December 1993, Mr. Rose was Senior Vice President of River Valley Savings Bank,
Chicago, Illinois. From May 1988 to January 1992, Mr. Rose was President of
Livingston Financial Group, Chicago, Illinois, a venture capital firm, and Mr.
Rose has over 20 years of banking experience.
EXECUTIVE OFFICERS
The Company's directors are elected on a one year basis to serve until the
next annual meeting of shareholders and until their successors are elected and
have qualified.
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. Mr. Demmin was promoted to Executive Vice
President of the Company and the Bank in April 1995.
(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.
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<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 Holding Company
and CEO Management
William Demmin(11) 50 Executive 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.
Mr. Demmin was promoted to Executive Vice President of the Company and
the Bank in April 1995. 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.
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<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.
<TABLE>
<CAPTION>
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.
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<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. 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, Executive 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.
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<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 "1983 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 1983 Plan in March 1989. The 1983 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 (the "1993 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.
The 1983 and the 1993 Plans provided for an aggregate total of 204,030
shares or 25.7% of the issued and outstanding shares of the Company as of March
30, 1995, or 3.82% of the issued and outstanding shares of the Company as of the
Record Date. The Board of Directors on May 16, 1995 approved a proposed
amendment to the 1993 Plan, subject to the approval of the California
Commissioner of Corporations and the holders of a majority of the issued and
outstanding shares of the Company, that would increase the number of shares that
are subject to the 1993 Plan to approximately 10% of the issued and outstanding
shares of the Company following completion of this Offering.
On March 31, 1995, the Company completed a Private Placement Offering of
4,547,111 shares of its Common Stock at a price of $1.35 per share to several
accredited investors as defined in SEC Regulation D. If the Company
successfully completes this Offering and sells an additional 3,177,296 shares of
Common Stock, the Company will have 8,518,730 shares of the Company's Common
Stock issued and outstanding, and the Company would then increase the number of
shares in the 1993 Plan to 851,873 shares.
The 1993 Plan is similar to the 1983 Plan in several respects, except
that options may be granted to consultants and business associates of the
Company and the Bank, the 1993 Plan allows that an optionee has a right to
exercise vested options in the event of termination for cause for a period of
at
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<PAGE>
least 30 days following such termination, and the 1993 Plan does not allow
for acceleration of unvested options for any reason.
The Company has agreed to grant to the Financial Advisors, in addition
to the cash compensation payable under the engagement letter, warrants that will
entitle the Financial Advisors to purchase shares equal to 5% of the number of
shares issued and outstanding following this Offering, at a price of 120% of the
offering price. The warrants will be for a term of five years and will be
exercisable after the first year. The options will be non-transferrable. The
Company has agreed to convert the warrants to stock options under the same terms
and conditions as the warrants except that the term will be extended to ten (10)
years. The Board of Directors intends to cancel existing stock options and
substitute new stock options on prices, and for terms, financially comparable
to terms of the options described above for the Financial Advisors.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
<TABLE>
<CAPTION>
Percent of Total
Options/SARs Options/SARs Granted to Exercise or Base Expiration
Name Granted (#) Employees in Fiscal Year Price ($/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 $4.25
per share. The replacement options will be vested as to 1/5 per year over
five years and expire in September 2003.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End (#)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
E. Lynn Caswell -- -- 10,000/55,620 *
</TABLE>
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<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.
DESCRIPTION OF PLAN AND TRUST
On May 16, 1995, the Board of Directors of the Company approved the 1995
Directors Deferred Compensation Plan (hereinafter "the Plan"). The Plan is
effective for fees earned on and after July 1, 1995, subject to shareholder
approval. Full power to construe, interpret and administer the Plan is vested
with the Administrative Committee (hereinafter "the Committee"), which consists
of all non-director executive officers of the Company. The Board of Directors
also approved a trust agreement for deferred amounts, the Directors Deferred
Compensation Trust Agreement.
Approval of the Plan and Trust is subject to shareholder approval in order
to assure that the Plan qualifies for exemption from short-swing profit
liability pursuant to Rule 16b-3 of the SEC. If stockholders do not approve the
Plan, the Board will consider whether to implement the Plan or may seek a ruling
that the Rule 16b-3 exemption is not required.
The Plan allows amendments to be made by the Board from time to time,
provided that no such amendment may (without a director's consent) alter rights
to payments of amounts already credited to accounts or delay the time at which
deferred amounts were scheduled to be paid under the Plan. The Company intends
to maintain the Plan and Trust in a manner that will allow ongoing availability
of the exemption under SEC Rule 16b-3 (unless a ruling is received indicating
that such exemption is not necessary and therefore currently intends to submit
to stockholders for approval any amendments which would materially increase the
benefits available under the Plan or the number of shares of common stock of the
Company ("Company Stock") which may be issued under the Plan, or materially
modify the requirements for participation in the Plan.
The Plan allows all directors of the Company and Monarch Bank, including
employee directors, (currently a total of 7 persons), to elect by written notice
to defer payment of all or a portion of their director's fees for the next
succeeding calendar year, and of all or any portion of any grant of Company
Stock to the director made on or after the election. Participation in the Plan
is voluntary and directors may change their elections annually. The Plan allows
optional deferral of existing fees and awards of Company Stock, with investment
of such deferrals in Company Stock. Elections with respect to deferred amounts
are to be made in writing by the director prior to the latest to occur of the
following: (i) the beginning of the calendar year for which the fees are to be
earned; (ii) the director's first day of board service in the year; or (iii) the
first day of the calendar month next following the date the director first
becomes eligible to participate in the Plan; provided that directors who file
Form 4 reports with the SEC cannot make elections later than six months prior to
the date on which any fees deferred by the director are invested in the Company
Stock.
The Company will establish on its books a separate account for each of its
directors who participates in the Plan. All deferred amounts are invested in
Company Stock and the value of a director's account is measured by the value of
and income from the Company common stock. At the time a director makes his or
her first election, the director may also choose to have
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<PAGE>
deferred amounts contributed to a trust commonly known as a "rabbi" trust,
established to aid in the accumulation of assets for payment of deferred
amounts. Separate accounts are to be set up for each director who elects to
make deferrals, and the Company may, in its discretion, contribute to the trust
an amount equal to the deferred amount, if it is done within five business days
after the deferred amount would otherwise be paid to the director.
The Company will pay all administrative expenses of the Plan for its
participating directors as well as the applicable portion of trustee's fees and
expenses, currently estimated at $1,000 per year. (If the Company does not pay,
the trust is liable for the expenses.) All income received by the trust, net of
expenses and taxes (if any) will be reinvested in Company Stock.
Not later than the next regularly scheduled meeting of the Committee
following a director's termination of service, the Committee must direct the
trustee to commence distribution of the amounts credited to such director's
account and direct the trustee as to the form of payment (whether in cash or in
Company Stock). Amounts held in the account are paid in a lump sum or in annual
installments, consistent with the method of payment selected by the director at
the time the deferral election was initially made. In the event of an
"unforeseen emergency", such as a severe financial hardship to the director
resulting from a sudden and unexpected illness or accident of the director,
beneficiary or dependent, (as defined by Section 152(a) of the Internal Revenue
Code), the Committee may determine the amount to be paid from the deferred
amount.
In the event of death, a director's payment shall be made to the persons
named in the last written instrument signed by the director and received by the
Committee prior to the director's death, and in the event the director fails to
name any person, the amounts shall be paid to the director's estate or the
appropriate distributee thereof.
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.
Pursuant to Federal and state statutes and regulations, the Board of
Directors of the Company is required to insure that all ongoing and future
transactions with related parties are on terms no less favorable than could be
obtained from independent third parties, and that any such transactions will be
approved by a majority of disinterested directors of the Company.
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<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
-73-
<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 balance sheet of the Company as of December 31, 1994 and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the two years in the period ended December
31, 1994 included in this Prospectus have been audited by Dayton & Associates,
independent auditors, as stated in their report appearing herein, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
-74-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet at December 31, 1994. . . . . . . . . .
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 sheet 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 each of the two years in the period ended December 31, 1994.
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.
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 each of the two years in the period ended December 31, 1994,
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
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Cash and due from banks (Note 10) $4,761,921
Federal funds sold 5,891,000
-----------------------------------------------------------------------------------------------------
Total cash and cash equivalents 10,652,921
Interest bearing deposits with other banks 1,382,000
Investment securities - Held to Maturity, at cost (fair value of $4,123,460)
(Note 3) 4,357,946
Investment securities - Available for Sale, at fair value (cost of $12,136,884)
(Note 3) 11,780,442
Loans (Notes 4, 11, and 14):
Real estate - mortgage 12,226,201
Real estate - construction 4,031,698
Commercial 12,088,885
Installment 2,693,276
-----------------------------------------------------------------------------------------------------
Gross loans 31,040,060
Less: Deferred loan fees (52,226)
Allowance for possible loan losses (1,136,971)
-----------------------------------------------------------------------------------------------------
Net loans 29,850,863
Premises and equipment, net (Note 5 and 14) 650,057
Other real estate owned 617,275
Accrued interest receivable and other assets 682,451
-----------------------------------------------------------------------------------------------------
TOTAL ASSETS $59,973,955
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------
Deposits:
Noninterest bearing $14,790,641
Interest bearing demand 30,774,961
Savings 6,235,646
Time certificates of deposit of $100,000 or more 2,260,550
Other time deposits 4,581,503
-----------------------------------------------------------------------------------------------------
Total deposits 58,643,301
Notes payable (Note 6) 53,500
Other borrowing (Note 9) 172,856
Accrued interest payable and other liabilities 402,776
-----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 59,272,433
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
Accumulated deficit (6,136,790)
Unrealized appreciation (depreciation) on investment securities available
for sale (Note 3) (356,433)
Deferred charge related to KSOP (172,856)
-----------------------------------------------------------------------------------------------------
Net Shareholders' equity 701,522
-----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $59,973,955
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</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
<TABLE>
<CAPTION>
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
<TABLE>
<CAPTION>
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. Securities classified as
available for sale are those debt securities that the Bank intends to hold
for an indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as available for sale would be based
on various factors, including significant movements in interest rates,
changes in the maturity mix of the Bank's assets and liabilities, liquidity
needs, regulatory capital considerations, and other similar factors.
Securities available for sale are carried at fair value. Unrealized gains
or losses are reported as increases or decreases in stockholder's equity,
net of the related deferred tax effect. Realized gains or losses,
determined on the basis of the cost of specific securities sold, are
included in earnings.
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.
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>
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 investment securities with a carrying amount of
approximately $2,271,000 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>
Additions represent new loans or advances made in the normal business
process of the Bank. Deletions represent repayments of loans from normal
monthly reduction on installment type loans and final payments on other loans.
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
----------
<S> <C>
Furniture, fixtures and equipment $ 989,769
Leasehold improvements 13,774
----------
1,003,543
Less accumulated depreciation
and amortization (353,486)
----------
$ 650,057
----------
----------
</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.
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:
<TABLE>
<CAPTION>
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 and
results of operations.
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
----
<S> <C>
ASSETS:
Cash $ 21,750
Investment in bank subsidiary 907,473
-----------
$ 929,223
-----------
-----------
Liabilities:
Notes payable $ 53,500
Other borrowing 172,856
Other liabilities 1,345
-----------
227,701
Shareholders' equity 701,522
-----------
$ 929,223
-----------
-----------
</TABLE>
<TABLE>
<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)
<TABLE>
<CAPTION>
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)
<TABLE>
<CAPTION>
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.
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 Restructuring". 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.
F-21
<PAGE>
NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING AGENT. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SUMMARY CONSOLIDATED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . 8
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
DETERMINATION OF OFFERING PRICE. . . . . . . . . . . . . . . . . . . . . 24
MARKET FOR COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . 24
DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . 73
THE FINANCIAL ADVISORS . . . . . . . . . . . . . . . . . . . . . . . . .
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<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 (Exhibit 5.1 of Registration Statement No. 33-59313 incorporated
by reference)
8.1 Opinion and Consent of Knecht & Hansen as to Federal Income Tax Matters
(Exhibit 8.1 of Registration Statement No. 33-59313 incorporated by
reference)
8.2 Opinion and Consent of Dayton & Associates 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 (Exhibit 11.1 of
Registration Statement No. 33-59313 incorporated by reference)
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, 1994
incorporated herein by reference
21.1 Subsidiaries of the Company (Exhibit 21.1 of Registration Statement No.
33-59313 incorporated by reference)
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 (Exhibit 28.5 of Registration Statement No. 33-59313
incorporated by reference)
28.6 Amended Engagement Letter
28.7 Agreement with Belle Plaine Partners
28.8 Warrant Agreement
28.9 Deferred Compensation Plan and Trust
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 June 21, 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Rice E. Brown Director June 21, 1995
- -------------------------------
Rice E. Brown
/s/ E. Lynn Caswell
- ------------------------------- Chairman, President and June 21, 1995
E. Lynn Caswell CEO (Principal Executive Officer)
/s/ Raymond B. Cox Director June 21, 1995
- -------------------------------
Raymond B. Cox
/s/ William C. Demmin
- ------------------------------- Executive Vice President, June 21, 1995
William C. Demmin Corporate Secretary and Director
(Principal Financial and Accounting Officer)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Alfred H. Jannard Director June 21, 1995
- -------------------------------
Alfred H. Jannard
/s/ Cheryl Moore Director June 21, 1995
- -------------------------------
Cheryl Moore
Director , 1995
- ------------------------------- ------
Margaret Redmond
</TABLE>
II-7
<PAGE>
June 22, 1995
Monarch Bancorp
30000 Town Center Drive
Laguna Niguel, California 92677
RE: REGISTRATION STATEMENT ON FORM SB-2
MONARCH BANCORP
FEDERAL INCOME TAX CONSEQUENCES
To whom it may concern:
We have acted as accountants 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".
Sincerely,
/s/ David L. Dayton
- -------------------
Dayton & Associates
by David L. Dayton
DLD/th
<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 sheet of Monarch Bancorp as
of December 31, 1994, and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for each of the two years in the
period ended December 31, 1994, and the reference to our firm as "experts", in
the Form SB-2 filed with the Securities and Exchange Commission.
/s/ Dayton & Associates
June 22, 19095
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. BY EXECUTING THIS AGREEMENT, THE SUBSCRIBER IS NOT WAIVING
ANY RIGHTS UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF
1934.
The undersigned, having received 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>
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.
<TABLE>
<CAPTION>
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
BY EXECUTING THIS AGREEMENT, THE SUBSCRIBER IS NOT WAIVING ANY RIGHTS UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934.
The undersigned, having received 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>
May 31, 1995
Mr. E. Lynn Caswell
President and Chief Executive Officer
Monarch Bank
30000 Town Center Drive
Laguna Niguel, California 92677
Re: AMENDED ENGAGEMENT LETTER TO RENDER
ADVISORY SERVICES WITH REGARD TO RECAPITALIZATION
Dear Mr. Caswell:
This letter hereby amends the letter dated March 1, 1995 and sets
forth the revised terms under which Monarch Bancorp (the "Bancorp"), parent of
Monarch Bank (the "Bank"), has engaged Belle Plaine Partners, Inc. and McAllen
Capital Partners (the "Financial Advisors") as its exclusive Financial Advisors
in connection with the recapitalization of the Bancorp and its principle
subsidiary, the Bank. The parties hereby make the following amendments to the
March 1, 1995 amended engagement letter.
FIRST PARAGRAPH, SECOND SENTENCE IS HEREBY AMENDED TO READ IN FULL AS FOLLOWS:
"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 $3.5 million and not more than $10 million, unless
otherwise agreed by the Bancorp, of its Common Stock to one or more investors
("Investors").
FIRST PARAGRAPH, FOURTH SENTENCE IS HEREBY AMENDED TO READ IN FULL AS FOLLOWS:
"The parties agree that the Private Placement (which may provide for
closing in multiple phases) will offer an aggregate of not less than $3.5
million and not more than $7.5 million and the Rights Offering will offer an
aggregate of not more than approximately $4.3 million.
PARAGRAPH 3.I.A. IS HEREBY AMENDED TO READ IN FULL AS FOLLOWS:
"A structuring fee equal to 5.0% of the aggregate amount of purchase
commitments from Investors (the "Structuring Fee") in connection with both the
Private Placement Offering and the Rights and Public Offering."
<PAGE>
Mr. E. Lynn Caswell
May 31, 1995
Page 2
PARAGRAPH 3.II.A. IS HEREBY AMENDED TO READ IN FULL AS FOLLOWS:
"A. The Structuring Fee (as described in 3.I.A.) shall be payable
upon funding of the purchase commitments to the Bancorp in the Private Placement
Offering and the Rights and Public Offering, 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 Offering and upon the closing of the Rights and Public Offering.
However, if Bancorp abandons the Private Placement Offering 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 Rights Offering by regulatory
action."
Please confirm that the foregoing is in accordance with our
understanding by signing and returning to us the duplicates of this agreement.
This amendment supersedes all prior agreements between the parties hereto.
Very truly yours,
BELLE PLAINE PARTNERS, INC. MCALLEN CAPITAL PARTNERS, INC.
By: /s/ John Eggemeyer By: /s/ John Rose
------------------------------ ----------------------------
John Eggemeyer, President John Rose, President
ACCEPTED AND AGREED:
MONARCH BANCORP
By: /s/ Lynn Caswell
-----------------------------
E. Lynn Caswell, President and
Chief Executive Officer
<PAGE>
May 17, 1995
Monarch Bancorp
30000 Town Center Drive
Laguna Niguel, California 92677
Attn: Mr. E. Lynn Caswell, President
Dear Lynn:
This letter will confirm that Monarch Bancorp ("Monarch") has engaged Belle
Plaine Partners, Inc. ("Belle Plaine") as the exclusive financial advisor to
Monarch, its subsidiaries, and any entities it may form or invest in
(collectively, the "Company") in connection with the Company's efforts to (a)
acquire other financial institutions excepting therefrom the opening or
acquiring of individual bank branches in the ordinary course of business; or (b)
effect a sale of the Company or a material amount of its assets or liabilities;
(collectively, the "Transaction").
1. In connection with a proposed Transaction, at the request of the Company,
Belle Plaine will provide such services as the Company shall reasonably
request including: (i) assisting the Company in the structuring of the
financial aspects of a Transaction; (ii) identifying alternative potential
parties and contacting such parties as the Company may designate; and (iii)
negotiating the terms of a Transaction with such parties.
2. In connection with a proposed Transaction, you will furnish Belle Plaine
with such material regarding the business and financial condition of the
Company as we request, all of which will be accurate and complete in all
material respects at the time furnished. The Company will also use its
best efforts to assure that its personnel, consultants, experts and
accountants are made available to Belle Plaine upon Belle Plaine's
reasonable request in connection with services provided or to be provided
by Belle Plaine. During the term of this agreement, the Company shall
promptly notify Belle Plaine of any material events or developments
relating to the financial condition or business operations or prospects of
the Company and promptly make available for Belle Plaine's review copies of
all filings made by the Company with any regulatory agency and copies of
all press releases issued by the Company. We are relying, without
independent verification, on the accuracy and completeness of all
information furnished to us by the Company or any other party or potential
party to any transaction contemplated by this agreement. Belle Plaine
agrees to keep any such non-public information 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 Belle Plaine will not
make any use thereof, except in connection with our services hereunder for
the Company. Any advice rendered by Belle Plaine pursuant to this letter
shall not be disclosed in any manner without Belle Plaine's prior written
approval and will be treated by the Company and Belle Plaine as
confidential.
<PAGE>
Monarch Bancorp
May 17, 1995
Page 2
3. In consideration of the services to be provided hereunder, the Company
agrees to pay to Belle Plaine the following cash fees:
(A) $9,000 upon the signing of this letter agreement and $9,000 at the
beginning of each fiscal quarter beginning April 1, 1995; plus
(B) in the event that a sale of the Company is completed, an amount equal
to two percent (2%) of the aggregate consideration paid or payable
(including the value of any future specified and/or contingent
payments) in the Transaction; or
(C) in the event that an acquisition of another financial institution is
completed by the Company, an amount based upon the following schedule
will be owed to Belle Plaine upon the consummation of the acquisition
based upon the total deal value of the Transaction:
<TABLE>
<CAPTION>
Deal Value
($ in millions) Fees
--------------- ----
<S> <C>
(1) If $ 0 less than $20 then 3%
(2) If $20 less than or equal to $50 then 3(C)(1), plus 2% of amount in
excess of $20 million, but
less than $50 million
(3) If $50 greater than then 3(C)(2), plus 1% of amount in
excess of $50 million
</TABLE>
(D) Fees payable pursuant to 3(B) and 3(C) shall be paid upon the closing
of the transaction.
4. Regardless of whether a Transaction is completed, the Company will
reimburse Belle Plaine, upon its demand and upon approval by the Board of
Directors of Monarch based upon budgets established for each Transaction by
Monarch and Belle Plaine, for all reasonable out-of-pocket expenses
(including fees and disbursements of counsel retained by Belle Plaine in
connection with this engagement). In addition to professional fees, our
billing statements include reimbursable expenses normally incurred in the
conduct of the work. The reimbursable expenses will include a flat ten
percent of Belle Plaine's monthly costs for telephone, fax, postage and
general office expenses which will be categorized on our statement as
indirect expenses.
<PAGE>
Monarch Bancorp
May 17, 1995
Page 3
5. The Company and Belle Plaine have entered into the indemnification
agreement (attached hereto as Appendix A) providing for the indemnification
by the Company of Belle Plaine and certain related entitles and persons and
providing for indemnification of the Company by Belle Plaine. Nothing in
this letter agreement shall limit or affect the Company's indemnification
or modification hereof, or completion of Belle Plaine's engagement
hereunder, shall limit or affect such indemnification agreement.
6. Belle Plaine's services hereunder may be terminated by the Company or Belle
Plaine at any time upon 30 days written notice, provided that Belle Plaine
shall be entitled to any fees payable pursuant to Section 3 and Section 8
hereof in the event that the Company completes a Transaction (i) on which
Belle Plaine provided advice or participated in discussions with any of the
investors in such Transaction or (ii) with any of the parties as to which
Belle Plaine advised the Company or with whom the Company engaged in
discussion regarding a possible Transaction prior to the termination of
this letter agreement, providing that such Transaction is completed within
two years following the termination of this letter agreement. In addition,
Belle Plaine shall remain entitled to the reimbursement of fees and
expenses under the terms and conditions 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 order to coordinate our efforts with respect to any Transaction, during
the period of our engagement hereunder neither the Company nor any
representative thereof (other than Belle Plaine) will initiate discussions
regarding a Transaction except through Belle Plaine. If the Company or its
management receives an inquiry regarding a Transaction, they will promptly
advise Belle Plaine of such inquiry in order that we can evaluate such
prospective party and its interest and assist the Company in any resulting
negotiations.
8. It is understood and agreed that if the Company decides to pursue a
financing or recapitalization Transaction for which Belle Plaine is to
provide any of the financial advisory services described above in Section 1
hereof, the Company and Belle Plaine shall negotiate in good faith
acceptable compensation for Belle Plaine in consideration of such services,
which compensation will take into account, among other things, the results
obtained and the custom and practice among investment bankers acting in
similar situations. The compensation owed to Belle Plaine in accordance
with the fee structure agreed upon by the Company and Belle Plaine in
respect of a financing or recapitalization Transaction shall be paid to
Belle Plaine in cash upon the consummation of any such Transaction.
<PAGE>
Monarch Bancorp
May 17, 1995
Page 4
9. Except as previously provided herein, no fee paid or payable to Belle
Plaine or any of its affiliates shall be used as an offset or credit
against any other fee paid or payable to Belle Plaine or any of its
affiliates.
10. This letter agreement, together with the related indemnification agreement,
embodies the sole terms of the agreement between the Company and Belle
Plaine with respect to the subject matter hereof and supersedes all
previous agreements, whether oral or written, between the Company and Belle
Plaine with respect to the subject matters 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 related to or
arising out of this engagement or any transaction or conduct in connection
herewith, 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 or of the United States of
America Central District, Santa Ana Branch, located in Orange County,
California, and, by execution and delivery of this letter agreement, the
Company hereby accepts for itself and in respect of its 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 continue one and the same
instrument.
12. The obligations of the Company hereunder shall be the joint and several
obligations of the entities comprising the term Company.
13. The Company expressly acknowledges that Belle Plaine has been retained
solely as an advisor to the Company, and not as an advisor to or agent of
any other person, and that the Company's engagement of Belle Plain is not
intended to confer rights upon any persons not a party hereto (including
shareholders, employees or creditors of the Company) as against Belle
Plaine, Belle Plaine's affiliates or their respective directors, officers,
agents and employees.
14. The parties acknowledge that Belle Plaine is not considered an affiliate of
Monarch under the definitions of affiliate contained in Section 23A(b) of
the Federal Reserve Act nor is Monarch and Belle Plaine hereunder required
to comply with Sections 23A or 23B of the Federal Reserve Act, the rules
and regulations promulgated thereunder, nor the Federal Reserve Bank
Supervision Manual sections regarding insider transactions regarding this
agreement, although Belle Plaine acted as one of the Financial Advisors in
Monarch's Private Placement Offering under Regulation D that was concluded
on March 31, 1995, and Belle Plaine is acting as one of the Financial
Advisors in Monarch's Rights and Public Offering, which the Registration
Statement was filed with the Securities and
<PAGE>
Monarch Bancorp
May 17, 1995
Page 5
Exchange Commission on May 12, 1995. The parties also acknowledge that Mr.
John Rose of McAllen Capital Partners, also one of the Financial Advisors,
but not affiliated with Belle Plaine, is proposed to become a director of
Monarch. Nevertheless, Belle Plaine represents that it has the necessary
expertise to provide the services contemplated by this Agreement and that
the compensation provided for herein is fair and reasonable and comparable
to the compensation which would be charged by an independent provider of
such services with the same type, level and quality of expertise. Monarch
acknowledges that the services contemplated herein will meet legitimate
needs of Monarch and it is in the best interest of Monarch to obtain such
services. Belle Plaine further agrees that no portion of any indirect
expenses for which it shall request reimbursement under Section 4 hereof
shall involve any debt service requirements of Belle Plaine.
Please confirm that the foregoing is in accordance with your understanding by
signing and returning to us the duplicates of this agreement an the related
indemnification agreement which shall thereupon constitute binding agreements.
Very truly yours,
Belle Plaine Partners, Inc.
/s/ William J. Ruh
--------------------------
Vice President
Accepted and agreed:
Monarch Bancorp
on its behalf and on behalf of the
Company, as defined above.
By: /s/ E. Lynn Caswell
--------------------------
Name: E. Lynn Caswell
Title: President
Date: May 22, 1995
<PAGE>
APPENDIX A
May 17, 1995
Belle Plaine Partners, Inc.
125 South Wacker Drive, Suite 300
Chicago, Illinois 60606
In connection with your engagement to serve as financial advisor to us, as more
particularly set forth in the certain letter agreement by and between you and us
of event date (the "Engagement Letter"), including modifications or future
additions to such engagement and transactions or conduct in connection
therewith, we agree that we will indemnify and hold harmless you and your
affiliates, any director, officer, agent or employee of you or any of your
affiliates and each other person, if any, controlling you or any of your
affiliates (hereinafter collectively referred to as "you" and "your"), to the
full extent lawful, from and against, and that you shall have not liability to
us or our owners, parents, affiliates, creditors or security holders for any
losses, damages, liabilities, expenses, claims or proceedings, including
shareholder actions (hereinafter collectively referred to as "losses") related
to or arising our of your activities in connection with the above-referenced
engagement or transactions or conduct in connection therewith; provided,
however, that the foregoing indemnity shall not apply with respect to any losses
that are finally determined by a court of competent jurisdiction to have
resulted primarily from your willful misconduct or gross negligence. We will
also promptly reimburse you for all expenses (including legal fees and
disbursements of counsel) as they are incurred by you in connection with
investigation, preparing or defending, or providing evidence in, any pending or
threatened claim or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not you are a party to such
claim or proceeding) or in enforcing this agreement.
If any losses are incurred that are finally determined by a court of competent
jurisdiction to have resulted primarily from your willful misconduct or gross
negligence, you agree that you will indemnify and hold harmless us and our
affiliates, any of our directors, officers, agents or employees, or any of our
affiliates and each other person, if any, controlling us or any of our
affiliates (hereinafter collectively referred to as "we", "us" and "our"), to
the full extent lawful, rom and against, and we shall have no liability for any
losses, related to or arising out of your activities in connection with the
above-described engagement. In such case, you will also promptly reimburse us
for all expenses as they are incurred by us in connection with investigation,
preparing, or defending, or providing evidence in, any pending or threatened
claim or proceeding in respect of which indemnification or contribution may be
sought hereunder (whether or not we are a party to such claim or proceeding) or
in enforcing this agreement.
We agree that we will not, without the prior written consent of Belle Plaine
Partners, settle any pending or threatened claim or proceeding related to or
arising out of such engagement or transaction or conduct in connection therewith
(whether or not you are a party to such claim or
<PAGE>
proceeding) unless such settlement includes a provision unconditionally
releasing you from and holding you harmless against all liability in respect of
claims by any releasing party related to or arising out of such engagement or
any transaction or conduct in connection therewith.
The foregoing agreement shall be in addition to any rights that the parties may
have at common law or otherwise, including, but not limited to, any right to
indemnification and/or contribution. Solely, for the purpose of enforcing this
agreement, the parties hereby consent to personal jurisdiction, service and
venue in any court in which any claim or proceeding which is subject to this
agreement is brought. Any right to trial by jury with respect to any claim or
proceeding related to or arising out of such engagement, any transaction or
conduct in connection therewith or this agreement is waived. This agreement
shall remain in full force and effect following the completion or termination of
the Engagement Letter.
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.
Very truly yours,
MONARCH BANCORP
on behalf and on behalf of the Company
(as such term is defined in the Engagement Letter)
By: /s/ E. Lynn Caswell
---------------------
Name: E. Lynn Caswell
Title: President
Accepted and agreed:
BELLE PLAINE PARTNERS, INC.
By: /s/ William J. Ruh
---------------------
Name: William J. Ruh
Title: Vice President
<PAGE>
WARRANT AGREEMENT
THIS WARRANT AGREEMENT, dated as of _________, 1995, is made between
Monarch Bancorp, a California corporation (the "Bancorp"), and Belle Plaine
Partners, Inc. (the "Holder").
R E C I T A L S
A. The Holder has assisted the Bancorp in a Private Placement Offering,
(the "Private Placement Offering"), and a Rights and Public Offering pursuant to
a Registration Statement on Form SB-2 of the Bancorp (the "Offering").
B. The Bancorp proposes to issue warrants as hereinafter described (the
"Warrants") to the Holder to purchase up to _______ shares of its Common Stock,
no par value per share (the "Common Stock"), in connection with the Private
Placement Offering and the Offering by the Bancorp.
C. In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Warrants and the respective rights and obligations
thereunder of the Bancorp and the Holder, the Bancorp and the Holder hereby
agree as follows:
SECTION 1. GRANT OF WARRANTS. The Bancorp hereby grants to the Holder
Warrants to purchase all or any part of an aggregate of _______ shares of the
Bancorp's Common Stock, which to all warrant holders in the aggregate will not
exceed five percent (5%) of the Bancorp's issued and outstanding shares of the
Bancorp's Common Stock, subject to the terms, conditions and adjustment
provisions as provided in this Agreement.
SECTION 2. TERM OF WARRANTS; EXERCISE OF WARRANTS.
2.1 TERM OF EXERCISE OF WARRANTS. The Warrants are for a maximum
term of five (5) years (the "Term") and are exercisable for the last four (4)
years of the Term. Subject to the terms of this Agreement, the Holder shall
have the right, which may be exercised at any time commencing one year after the
effective date of the Registration Statement (the "Exercise Date") until a
period of four years have elapsed (the "Expiration Date") to purchase from the
Bancorp that number of shares of Common Stock of the Bancorp specified in
Section 1. Upon such purchase, the shares of Common Stock of the Bancorp will
be fully paid and nonassessable shares of Common Stock to which the Holder may
at the time be entitled to purchase upon exercise of such Warrants.
2.2 EXERCISE OF WARRANTS. Subject to Paragraphs 2.1 and 3.2, a
Warrant may be exercised upon surrender to the Bancorp at its principal office
of the certificate or certificates evidencing the Warrants to be exercised,
together with the form of election to purchase on the reverse thereof duly
filled in and signed, (and upon payment to the Bancorp for the account of the
Bancorp in accordance with the provisions of Sections 9 and 10 hereof), for the
number of shares of Common Stock in respect of which such Warrants are then
exercised. Payment of the aggregate Warrant Price shall be made by check,
cashier's check, money order, or any combination thereof.
Subject to Sections 2.1 and 6 hereof, upon such surrender of Warrants
and payment of the Warrant Price as aforesaid, the Bancorp shall issue and cause
to be delivered with all reasonable
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dispatch to or upon the written order of the Holder and in such name or names as
the Holder may designate, a certificate or certificates for the number of full
shares of Common Stock so purchased upon the exercise of such Warrants, together
with cash, as provided in Section 11 hereof, in respect of any fractional shares
of Common Stock otherwise issuable upon such surrender. Such certificate or
certificates shall be deemed to have been issued and any person so designated to
be named therein shall be deemed to have become a holder of record of such
Common Stock as of the date of the surrender of such Warrants and payment of the
Warrant Price, the transfer books for the Common Stock or other class of stock
purchasable upon the exercise of such Warrants shall be closed, the certificates
for the Common Stock in respect of which such Warrants are then exercised shall
be issuable as of the date on which such books shall next be opened (whether
before or after the Expiration Date) and until such date the Bancorp shall be
under no duty to deliver any certificate for such Common Stock; provided
further, however, that the transfer books of record, unless otherwise required
by law, shall not be closed at any one time for a period longer than twenty
days. The rights of purchase represented by the Warrants shall be exercisable,
at the election of the Holders thereof, either in full or from time to time in
part and, in the event that a certificate evidencing Warrants is exercised in
respect of less than all of the Common Stock purchasable on such exercise at any
time prior to the date of expiration of the Warrants, a new certificate
evidencing the remaining Warrant or Warrants will be issued.
SECTION 3. REGISTRATION, TRANSFERABILITY, ISSUANCE AND FORM OF WARRANT.
3.1 REGISTRATION. The Warrants shall be numbered and shall be
registered in a Warrant Register as they are issued. The Bancorp shall be
entitled to treat the Holder of any Warrant as the owner in fact thereof for all
purposes and shall not be bound to recognize any equitable or other claim to or
interest in such Warrant on the part of any other person, and shall not be
liable for any registration of transfer of Warrants which are registered or to
be registered in the name of a fiduciary or the nominee of a fiduciary unless
made with the actual knowledge that a fiduciary or nominee is committing a
breach of trust in requesting such registration of transfer, or with such
knowledge of such facts that its participation therein amounts to bad faith.
3.2 TRANSFER. The Warrants will be nontransferable for a period of
12 months following the date of issuance, except under the laws of descent and
distribution and except for the directors, officers, or stockholders of the
Holder and by operation of law; and thereafter, the Warrants shall be
transferable, except that if Warrants are transferred, the Warrants must then be
exercised immediately. The Holder understands that the securities exercisable
hereunder are intended to be registered upon request of the Holder pursuant to
the terms of a registration statement, but Bancorp shall not be liable for its
failure to register the Warrants or the securities hereunder, and in such case,
(i) the securities shall be offered and sold without registration under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance, in part,
upon the exemptions provided in Section 4(2) of the Securities Act and upon
Regulation D of the General Rules and Regulations promulgated thereunder; and
(ii) without qualification under the California Corporate Securities Law of
1968, as amended ("California Securities Law"), in reliance, in part, upon the
exemptions provided in Section 25102(f) of the California Securities Law.
If the Bancorp has not been able to effect the registration of the
Warrants and underlying securities, all certificates for Shares of the Common
Stock of the Bancorp and any certificate issued in exchange therefore shall bear
a Legend in substantially the followed form:
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"These shares have not been registered under the Securities
Act of 1933 in reliance upon exemptions from registration
provided by Section 4(2) thereof and by Regulation D
promulgated thereunder. Accordingly, these shares may be
sold, assigned, transferred, pledged, hypothecated or
otherwise disposed of only if such securities are
subsequently registered or the corporation has received an
opinion of counsel, satisfactory to it, to the effect such
transfer will not violate the Securities Act of 1933 or any
applicable state securities law and that registration is not
required."
If the Company's not able to effect the registration of the Warrants
and underlying shares in the Registration Statement, the Company agrees that,
upon written request of the then holder(s) of fifty percent (50%) of the
Holder's Shares which were originally issued to the Holder or to its designees,
made at any time within the period commencing one (1) year and ending five (5)
years after the effective date of the Company's Registration Statement and at
such a time that does not cause the Company to effect an audit of its interim
financial statements, the Company will file a Registration Statement under the
1933 Act registering or qualifying the Holder's Shares. The Company agrees to
use its best effort to cause the Registration Statement to become effective.
The Company's obligation to file a registration statement or post-effective
amendment to its Registration Statement under this paragraph shall not be
satisfied until the Registration Statement is declared effective by the SEC.
Notwithstanding anything to the contrary, the registration rights of the holders
of the Holder's Shares shall not be affected in the event the Registration
Statement does not become effective or is withdrawn for any reason.
The Company understands and agrees that, if at any time within the
period commencing one (1) year and ending five (5) years from the effective date
of the Registration Statement, it should file a registration statement or post-
effective amendment to its Registration Statement with the SEC pursuant to the
1933 Act, regardless of whether some of the holders of the Holder's Shares shall
have previously availed themselves of the demand rights above provided the
Company, at its own expense, will offer to said Holders the opportunity to
include the aforesaid Holders Shares in such registration statement or post-
effective amendment. This piggy-back registration provision is not applicable
to registration statements filed by the Company with the SEC on Forms S-8, S-4,
or any other successor or inappropriate form.
In addition to the rights above provided, the Company will cooperate
with the then holders of the Holder's Shares in preparing and signing any
registration statement in addition to the registration statements discussed
above, required in order to sell or transfer the Holder's Shares and will supply
all information required thereof, but such additional registration statement
shall be at the then holder's costs and expense, unless the Company elects to
register or qualify additional shares of the Company's Common stock, in which
case the costs and expense of the Registration Statement will be prorated
between the Company and the holders of the Holder's Shares according to the
aggregate share price of the securities being issued.
The Warrants shall be transferable on the books of the Bancorp
maintained at the principal office of the Bancorp upon delivery thereof duly
endorsed by the Holder or by his duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment or authority to
transfer, with signatures properly guaranteed. In all cases of transfer by an
attorney, the original power of attorney, duly approved, or an official copy
thereof, duly certified, shall be deposited
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and remain with the Bancorp. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority shall be produced, and may be required to be deposited and remain with
the Bancorp in its discretion. Upon any registration of transfer, the Bancorp
shall execute and deliver a new Warrant or Warrants to the persons entitled
thereto. The Warrants may be exchanged at the option of the Holder thereof,
when surrendered at the principal office of the Bancorp for another Warrant, or
other Warrants of different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of Warrant Shares. The Bancorp
shall not be required to effect any registration of transfer or exchange which
will result in the issuance of a Warrant Certificate for a fraction of a
Warrant.
3.3 ISSUANCE. Warrant certificates shall be issued and delivered by
the Bancorp as evidence of the Warrants sold by the Bancorp as a part of the
Offering (the "Warrant Certificates"). Each Warrant Certificate shall evidence
the right, subject to the provisions of this Agreement and of the Warrant
Certificate itself, for the registered holder thereof or his assigns to purchase
the number of shares of Common Stock of the Bancorp equal to the number of
shares received upon conversion of the Notes into Bancorp Common Stock.
3.4 FORM OF WARRANT. The text of the Warrant and the form of
Election to Purchase shares of Common Stock shall be substantially as set forth
in EXHIBIT "A" attached hereto. The price per share of Common Stock and the
number of shares of Common Stock issuable upon the exercise of Warrants are
subject to adjustment upon the occurrence of certain events, all as hereinafter
provided. The Warrants shall be executed on behalf of the Bancorp by its
Chairman of the Boar or President or one of its Vice Presidents, under its
corporate seal reproduced thereon attested by its Secretary or an Assistant
Secretary. The signature of any of such officers on the Warrants may be manual
or facsimile.
Warrants bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Bancorp shall bind the Bancorp,
notwithstanding that such individuals or any one of them shall have ceased to
hold such offices prior to the delivery of such Warrants or did not hold such
offices on the date of this Agreement.
Warrants shall be dated as of the date of signature thereof by the
Bancorp either upon initial issuance or upon division, exchange, substitution or
transfer.
SECTION 4. SIGNATURE OF WARRANTS. The Warrants shall be signed by the
Bancorp (or any successor to the Bancorp) and shall not be valid for any purpose
unless so signed. Warrants may be signed, however, by the Bancorp and may be
delivered by the Bancorp, notwithstanding that the persons whose manual or
facsimile signatures appear thereon as proper officers of the Bancorp shall have
ceased to be such officers at the time of such signature, issuance or delivery.
SECTION 5. EXCHANGE OF WARRANT CERTIFICATES. Each Warrant Certificate may
be exchanged for another certificate or certificates entitling the Holder
thereof to purchase a like aggregate number of shares of Common Stock as the
certificate or certificates to be so exchanged. Thereupon, the Bancorp shall
execute and deliver to the person entitled thereto a new Warrant Certificate or
Certificates, as the case may be, as so requested.
SECTION 6. PAYMENT OF TAXES. The Bancorp will pay all documentary stamp
taxes, if any, attributable to the initial issuance of shares of Common Stock
upon the exercise of Warrants; provided,
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however, that the Bancorp shall not be required to pay any tax or taxes which
may be payable in respect of any transfer involved in the issuance or delivery
of any Warrants or certificate for shares of Common Stock in a name other than
that of the registered Holder of Warrants in respect of which such shares of
Common Stock are issued, and in such case the Bancorp shall not be required to
issue or delivery any certificate for shares of Common Stock or any Warrant
until the person requesting the same has paid to the Bancorp the amount of such
tax or has established to the Bank's satisfaction that such tax has been paid.
SECTION 7. MUTILATED OR MISSING WARRANTS. In case of any of the
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Bancorp may, in its discretion, execute, issue and deliver in
exchange and substitution for any upon cancellation of the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like tenor and representing an
equivalent right or interest; but only upon receipt of evidence satisfactory to
the Bank of such loss, theft or destruction of such Warrant and indemnity, if
requested, also satisfactory to them. An applicant for such substitute Warrant
Certificate shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Bancorp may prescribe.
SECTION 8. RESERVATION OF SHARES; PURCHASE OF WARRANTS.
8.1 RESERVATION OF WARRANT SHARES. There will be reserved, and
thereafter the Bancorp shall at all times keep reserved, out of its authorized
Common Stock, a number of shares of Common Stock sufficient to provide for the
exercise of the rights of purchase represented by the outstanding Warrants. The
Transfer Agent for the Common Stock and every subsequent transfer agent for any
shares of the Bancorp's capital stock issuable upon the exercise of any rights
of purchase aforesaid will be irrevocably authorized and directed at all times
to reserve such number of authorized shares as shall be requisite for such
purposes. The Bancorp will keep a copy of this Agreement on file with the
Transfer Agent for the Common Stock and with every subsequent Transfer Agent for
any shares of the Bancorp's capital stock issuable upon the exercise of the
rights of purchase represented by the Warrants. The Bancorp will supply such
Transfer Agent with duly executed stock certificates for such purposes and will
provide or otherwise make available any cash which may be payable as provided in
Section 11 hereof. All Warrants surrendered in the exercise of the rights
thereby shall be canceled by the Bancorp.
8.2 PURCHASE OF WARRANTS BY THE BANCORP. The Bancorp shall have the
rights, except as limited by law, other agreement or herein, to purchase or
otherwise acquire Warrants at such times, in such manner and for such
consideration as it may deem appropriate.
8.3 CANCELLATION OF WARRANTS. In the event the Bancorp shall
purchase or otherwise acquire Warrants, the same shall thereupon be canceled by
the Bancorp and retired. The Bancorp shall cancel any Warrant surrendered for
exchange, substitution, transfer or exercise in whole or in part.
SECTION 9. WARRANT PRICE. The price per share at which shares of Common
stock shall be purchasable upon exercise of Warrants (the "Warrant Price") shall
be $1.62 subject to the adjustment pursuant to Section 10 hereof.
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SECTION 10. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number
and kind of securities purchasable upon the exercise of each Warrant and the
Warrant Price shall be subject to adjustment form time to time upon the
happening of certain events, as hereinafter defined.
10.1 MECHANICAL ADJUSTMENTS. The number of Warrant Shares
purchasable upon the exercise of each Warrant and the Warrant Price shall be
subject to adjustment as follows:
(a) In case the Bancorp shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock into a greater number of shares, (iii)
combine its outstanding shares of Common Stock into a smaller number of shares
of Common stock or (iv) issue a reclassification of its shares of Common Stock
or capital reorganization other securities of the Bancorp, the number of Warrant
Shares purchasable upon exercise of each Warrant immediately prior thereto shall
be adjusted so that the Holder of each Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Bancorp which he
would have owned or have been entitled to receive after the happening of any of
the events described above, had such Warrant been exercised immediately prior to
the happening of such event or any record date with respect thereto. An
adjustment made pursuant to this paragraph (a) shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(b) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Warrant Price
payable upon exercise of each Warrant shall be adjusted by multiplying such
Warrant Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of Warrant Shares purchasable upon the exercise of
each Warrant immediately prior to such adjustment, and of which the denominator
shall be the number of Warrant Shares so purchasable immediately thereafter.
(c) For the purpose of this subsection 10.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the Common Stock
of the Bancorp at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such shares consisting
solely of changes in par value, or from par value to no par value, or form no
par value to par value. In the event that at any tim, as a result of an
adjustment made pursuant to paragraph (a) above, the Holders shall be come
entitled to purchase any shares of the Bancorp other than shares so purchasable
upon exercise of each Warrant and the Warrant Price of such shares shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the shares of Common
Stock contained in paragraphs (a) and (b), inclusive, above, and the provisions
of Section 5 and subsections 10.2 through 10.4, inclusive, with respect to the
shares of Common Stock shall apply on like terms to any such other shares.
10.2 NOTICE OF ADJUSTMENT. Whenever the number of shares of Common
Stock purchasable upon the exercise of each Warrant or the Warrant Price of such
shares of Common Stock is adjusted, as herein provided, the Bancorp, within
thirty (30) days thereafter, shall cause to be mailed promptly by first class
mail, postage prepaid, to each Holder notice of such adjustment or adjustments
and the Warrant Price of such shares of Common Stock after such adjustment,
setting forth a brief statement of the facts requiring such adjustment and
setting forth the computation by which such adjustment was made. A firm of
independent public accountants selected by the Board of Directors of
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the Bancorp (who may be the regular accountants employed by the Bancorp) may
make any computation required under this Section 10.2.
10.3 NO ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS. Except as
provided in subsection 10.1, no adjustment in respect of any dividends or
distributions shall be made during the term of a Warrant or upon the exercise of
a Warrant.
10.4 PRESERVATION OF PURCHASE RIGHTS UPON CONSOLIDATION, MERGER,
ETC.. In case of any consolidation of the Bancorp with, or merger of the
Bancorp into, another corporation, or in case of any sale or conveyance to
another corporation of the property of the Bancorp as an entirety or
substantially as an entirety, the Bancorp or such successor or purchasing
corporation, as the case may be, shall execute an agreement that each Holder
shall have the right thereafter upon payment of the Warrant price in effect
immediately prior to such action to purchase upon exercise of each Warrant the
kind and amount of shares and other securities and property (including cash)
which he would have owned or have been entitled to receive after the happening
of such consolidation, merger, sale or conveyance had such Warrant been
exercised immediately prior to such action. The Bancorp shall mail by first
class mail, postage prepaid, to each Holder, notice of the execution of any such
agreement. Such agreement shall provide for adjustments, which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Section 10. The provisions of this subsection 10.4 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
10.5 STATEMENTS OR WARRANTS. Irrespective of any adjustments in the
Warrant Price or the number or ding of shares purchasable upon the exercise of
the Warrants, Warrants thereto or thereafter issued may continue to express the
same price and number and kind of shares as are stated in the Warrants initially
issuable pursuant to this Agreement.
SECTION 11. FRACTIONAL INTERESTS.
11.1 WHOLE WARRANT SHARES. The Bancorp shall not be required to
issue fractional shares of Common Stock on the exercise of Warrants. If more
than one Warrant shall be presented for exercise of shares of Common Stock in
full at the same time by the same Holder, the number of full shares of Common
Stock which shall be issuable upon the exercise thereof shall be computed on the
basis of the aggregate number of shares of Common Stock purchasable upon
exercise of the Warrants so presented. If any fraction of a share of Common
Stock would, except for the provisions of this Section 11, be issuable on the
exercise of any Warrant (or specified portion thereof), the Bancorp shall pay an
amount in cash equal to the then current book value price per share of Common
Stock multiplied by such fraction.
SECTION 12. NO RIGHTS AS STOCKHOLDERS; NOTICES TO HOLDERS. Nothing
contained in this Agreement or in any of the Warrants shall be construed as
conferring upon the Holders or their transferees the right to vote or to receive
dividends or to consent or to receive notice as stockholders in respect of any
meeting of stockholders for the election of directors of the Bancorp or any
other matter, or any rights whatsoever as stockholders of the Bancorp. If,
however, at any time after 60 days before the Exercise Date, and prior to the
expiration of the Warrants and prior to their exercise, any of the following
events shall occur:
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(a) The Bancorp shall declare any dividend or distribution payable in
any securities upon its shares of Common Stock to the Holders of its shares of
Common Stock; or
(b) The Bancorp shall offer to the holders of its shares of Common
Stock any additional shares of Common Stock or securities convertible into
shares of Common Stock or any right to subscribe thereto; or
(c) A dissolution, liquidation or winding up of the Bancorp (other
than in connection with a consolidation, merger, or sale of all or substantially
all of its property, assets, and business as an entirety) shall be proposed;
then in any one or more of said events, the Bancorp shall give notice in writing
of such event to the Holders as provided in Section 13 hereof, such giving of
notice to be completed at least 20 days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, or subscription rights, or
for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of any action taken in connection with such dividend,
distribution or subscription rights, or proposed dissolution, liquidation or
winding up.
SECTION 13. NOTICES. Any notice pursuant to this Agreement by the Holder
to the Bancorp shall be in writing and shall be mailed first class, postage
prepaid, or delivered (a) to the Bancorp, at its office at 30000 Town Center
Drive, Laguna Niguel, California 92677, with copies to Knecht & Hansen, 1301
Dove Street, Suite 900, Newport Beach, California 92660. Each party hereto may
from time to time change the address to which notices to it are to be delivered
or mailed hereunder by notice in writing to the other party.
Any notice mailed pursuant to this Agreement by the Bancorp to the Holders
shall be in writing and shall be mailed first class, postage prepaid, or
delivered to such Holders at their respective addresses on the books of the
Bancorp.
SECTION 14. SUPPLEMENTS AND AMENDMENTS. The Bancorp may not supplement or
amend this Agreement without the approval of any Holder, in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Bancorp and the Holder may deem necessary or desirable and which shall not be
inconsistent with the provisions of the Warrants.
SECTION 15. SUCCESSORS. All covenants and provisions of this Agreement by
or for the benefit of the Bancorp or the Holder shall bind and inure to the
benefit of their respective successors and assigns hereunder.
SECTION 16. APPLICABLE LAW. This Agreement and Warrant issued hereunder
shall be governed by and construed in accordance with the laws of the State of
California, without giving effect to principles of conflict of laws.
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SECTION 17. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Bancorp and the
Holders any legal or equitable right, remedy or claim under this Agreement; but
this Agreement shall be for the sold and exclusive benefit of the Bancorp and
the Holders of the Warrants.
SECTION 18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
SECTION 19. CAPTIONS. The captions of the Sections and subsections of
this Agreement have been inserted for convenience only and shall have no
substantive effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first written.
MONARCH BANCORP
By
----------------------------------------
E. Lynn Caswell, Chairman of the Board,
President and Chief Executive Officer
By
----------------------------------------
William C. Demmin, Senior Vice President
and Secretary
HOLDER
----------------------------------------
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MONARCH BANCORP
DIRECTORS DEFERRED COMPENSATION TRUST
(a) This Agreement made effective as of July 1, 1995 by and between
Monarch Bancorp and any subsidiary thereof whose directors are eligible for a
Plan listed in the Appendix (Monarch Bancorp and the subsidiaries are
individually each referred to as "Company") and the Trustee whose name appears
on the signature page hereto (the "Trustee");
(b) WHEREAS, the Company has adopted the nonqualified deferred
compensation plan listed in the Appendix (the "Plan");
(c) WHEREAS, the Company has incurred or expects to incur liability
under the terms of such Plan with respect to the individuals participating in
such Plan;
(d) WHEREAS, the Company wishes to establish a trust (hereinafter
called "Trust") and to contribute to the Trust assets that shall be held
therein, subject to the claims of the Company's creditors in the event of the
Company's Insolvency, as herein defined, until paid to Plan participants and
their beneficiaries in such manner and at such times as specified in the Plan;
(e) WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan maintained for the purpose of providing deferred
compensation for directors;
(f) WHEREAS, it is the intention of the Company to make contributions
to the Trust to provide itself with a source of funds to assist it in the
meeting of its liabilities under the Plan;
NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows:
SECTION 1. ESTABLISHMENT OF TRUST
(a) The Company hereby deposits with Trustee in trust cash or shares
of common stock of Monarch Bancorp ("Company Stock") which shall become the
principal of the Trust to be held, administered and disposed of by Trustee as
provided in this Trust Agreement.
(b) The Trust shall become irrevocable upon approval by the Board of
Directors of the Company.
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(c) The trust is intended to be a grantor trust, of which the Company
is the grantor, within the meaning of subpart E, part I, subchapter J, chapter
1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be
held separate and apart from other funds of the Company and shall be used
exclusively for the uses and purposes of Plan participants and general creditors
as herein set forth. Plan participants and their beneficiaries shall have no
preferred claim on, or any beneficial ownership interest in, any assets of the
Trust. Any rights created under the Plan and this Trust Agreement shall be mere
unsecured contractual rights of Plan participants and their beneficiaries
against the Company. Any assets held by the Trust will be subject to the claims
of the Company's general creditors under federal and state law in the event of
Insolvency, as defined in Section 3(a) herein.
(e) The Company, in its sole discretion, may at any time, or from
time to time, make additional deposits of cash or other property in trust with
Trustee to augment the principal to be held, administered and disposed of by
Trustee as provided in this Trust Agreement. Neither Trustee nor any Plan
participant or beneficiary shall have any right to compel such additional
deposits.
SECTION 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES
(a) The Company shall deliver to Trustee a schedule (the "Payment
Schedule") that indicates the amounts payable in respect of each Plan
participant (and his or her beneficiaries), that provides a formula or other
instructions acceptable to Trustee for determining the amounts so payable, the
form in which such amount is to be paid (as provided for or available under the
Plan, and the time of commencement for payment of such amounts. Except as
otherwise provided herein, Trustee shall make payments to the Plan participants
and their beneficiaries in accordance with such Payment Schedule. The Trustee
shall make provision for the reporting and withholding of any federal, state or
local taxes that may be required to be withheld with respect to the payment of
benefits pursuant to the terms of the Plan and shall pay amounts withheld to the
appropriate taxing authorities or determine that such amounts have been
reported, withheld and paid by the Company.
(b) The entitlement of a Plan participant or his or her beneficiaries
to benefits under the Plan shall be determined by the Company or such party as
it shall designate under the Plan, and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plan.
(c) The Company may make payment of benefits directly to Plan
participants or their beneficiaries as they become due under the terms of the
Plan. The Company shall notify Trustee of its decision to make payment of
benefits directly prior to the time amounts are payable to participants or their
beneficiaries. In addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in accordance with the
terms
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of the Plan, the Company shall make the balance of each such payment as it falls
due. Trustee shall notify the Company where principal and earnings are not
sufficient.
SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST
BENEFICIARY WHEN THE COMPANY IS INSOLVENT.
(a) Trustee shall cease payment of benefits to Plan participants and
their beneficiaries if the Company is Insolvent. The Company shall be
considered "Insolvent" for purposes of this Trust Agreement if (i) the Company
is unable to pay its debts as they become due, or (ii) the Company is subject to
a pending proceeding as a debtor under the United States Bankruptcy Code, or
(iii) the Company is determined to be insolvent by the California State Banking
Department or the Federal Deposit Insurance Corporation.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of the Company under federal and state law as set
forth below.
(1) The Board of Directors and the Chief Executive Officer of
the Company shall have the duty to inform Trustee in writing of the Company's
Insolvency. If a person claiming to be a creditor of the Company alleges in
writing to Trustee that the Company has become Insolvent, Trustee shall
determine whether the Company is Insolvent and, pending such determination,
Trustee shall discontinue payment of benefits to Plan participants or their
beneficiaries.
(2) Unless Trustee has actual knowledge of the Company's
Insolvency, or has received notice from the Company or a person claiming to be a
creditor alleging that the Company is Insolvent, Trustee shall have no duty to
inquire whether the Company is Insolvent. Trustee may in all events rely on
such evidence concerning the Company's solvency as may be furnished to Trustee
and that provides Trustee with a reasonable basis for making a determination
concerning the Company's solvency.
(3) If at any time Trustee has determined that the Company is
Insolvent, Trustee shall discontinue payments to Plan participants or their
beneficiaries and shall hold the assets of the Trust for the benefit of the
Company's general creditors. Nothing in this Trust Agreement shall in any way
diminish any rights as of Plan participants or their beneficiaries as general
creditors of the Company with respect to benefits due under the Plan or
otherwise.
(4) Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section 2 of this Trust
Agreement only after Trustee has determined that the Company is not Insolvent
(or is no longer Insolvent).
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(c) Provided that there are sufficient assets, if Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan for the period
of such discontinuance, less the aggregate amount of any payments made to Plan
participants or their beneficiaries by the Company in lieu of the payments
provided for hereunder during any such period of discontinuance.
SECTION 4. PAYMENTS TO THE COMPANY.
Except as provided in Section 3 hereof, after the Trust has become
irrevocable, the Company shall have no right or power to direct Trustee to
return to the Company or to divert to others any of the Trust assets before all
payment of benefits have been made to Plan participants and their beneficiaries
pursuant to the terms of the Plan.
SECTION 5. INVESTMENT AUTHORITY.
(a) Trustee may invest in securities (including stock or rights to
acquire stock) or obligations issued by the Company. All rights associated with
assets of the Trust shall be exercised by Trustee or the person designated by
Trustee, and shall in no event be exercisable by or rest with Plan participants
except that voting rights with respect to Trust assets will be exercised by the
management of the Company. The Company shall have the right at any time, and
from time to time in its sole discretion, to substitute assets of equal fair
market value for any asset held by the Trust. This right is exercisable by the
Company in a nonfiduciary capacity without the approval or consent of any person
in a fiduciary capacity.
SECTION 6. DISPOSITION OF INCOME.
(a) During the term of this Trust, all income received by the Trust,
net of expenses and taxes, shall be accumulated and reinvested.
SECTION 7. ACCOUNTING BY TRUSTEE.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between the
Company and Trustee. Within 90 days following the close of each calendar year
and within 30 days after the removal or resignation of Trustee, Trustee shall
deliver to the Company a written account of its administration of the Trust
during such year or during the period from the close of the last preceding year
to the date of such removal or resignation, setting forth all investments,
receipts, disbursements, and other transactions effected by it, including a
description of all securities and investments purchased and sold with the cost
or net proceeds of such purchases or sales (accrued interest paid or receivable
being shown separately), and showing all cash, securities and other property
held in
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the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be.
SECTION 8. RESPONSIBILITY OF TRUSTEE.
(a) Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that
Trustee shall incur no liability to any person for any action taken pursuant to
a direction, request or approval given by the Company which is contemplated by,
and in request or approval given by the Company which is contemplated by, and in
conformity, the terms of the Plan or this Trust and is given in writing by the
Company. In the event of a dispute between the Company and a party, Trustee may
apply to a court of competent jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in
connection with this Trust, the Company agrees to indemnify Trustee against
Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If the Company does not pay such costs, expenses and liabilities
in a reasonably timely manner, Trustee may obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel
for the Company generally) with respect to any of its duties or obligations
hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the Trust,
Trustee shall have no power to name a beneficiary of the policy other than the
Trust, to assign the policy (as distinct from conversion of the policy to a
different form) other than to a successor Trustee, or to loan to any person the
proceeds of any borrowing against such policy.
(f) Notwithstanding any powers granted to Trustee pursuant to this
Trust Agreement or to applicable law, Trustee shall not have any power that
could give this Trustee the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
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SECTION 9. COMPENSATION AND EXPENSES OF TRUSTEE.
Company shall pay all administrative and Trustee's fees and expenses.
If not so paid, the fees and expenses shall be paid from the Trust.
SECTION 10. RESIGNATION AND REMOVAL OF TRUSTEE.
(a) Trustee may resign at any time by written notice to the Company,
which shall be effective 30 days after receipt of such notice unless the Company
and Trustee agree otherwise.
(b) Trustee may be removed by the Company on 30 days notice or upon
shorter notice accepted by Trustee, except as provided below.
(c) Upon a Change of Control, as defined herein, Trustee may not be
removed by the Company for three years.
(d) If Trustee resigns or is removed within three years of a Change
of Control, as defined herein, Trustee shall select a successor Trustee in
accordance with the provisions of Section 11(b) hereof prior to the effective
date of Trustee's resignation or removal.
(e) Upon resignation or removal of Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the successor
Trustee. The transfer shall be completed within 30 days after receipt of notice
of resignation, removal or transfer, unless the Company extends the time limit.
(f) If Trustee resigns or is removed, a successor shall be appointed,
in accordance with section 11 hereof, by the effective date of resignation or
removal under paragraph (a) or (b) of this section. If no such appointment has
been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
SECTION 11. APPOINTMENT OF SUCCESSOR.
(a) If Trustee resigns or is removed in accordance with Section 10(a)
or (b) hereof, the Company may appoint any third party, such as a bank trust
department or other party that may be granted corporate trustee powers under
state law, as a successor to replace Trustee upon resignation or removal. The
appointment shall be effective when accepted in writing by the new Trustee, who
shall have all of the rights and powers of the former Trustee, including
ownership rights in the Trust assets. The former Trustee shall execute any
instrument necessary or reasonably requested by the Company or the successor
Trustee to evidence the transfer.
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(b) If Trustee resigns or is removed pursuant to the provisions of
Section 10(d) hereof and selects a successor Trustee, Trustee may appoint any
third party such as a bank trust department or other party that may be granted
corporate trustee powers under state law. The appointment of a successor
Trustee shall be effective when accepted in writing by the new Trustee. The new
Trustee shall have all the rights and powers of the former Trustee, including
ownership rights in Trust assets. The former Trustee shall execute any
instrument necessary or reasonably requested by the successor Trustee to
evidence the transfer.
(c) The successor Trustee need not examine the records and acts of
any prior Trustee and may retain or dispose of existing Trust assets, subject to
Section 7 and 8 hereof. The successor Trustee shall not be responsible for and
the Company shall indemnify and defend the successor Trustee from any claim or
liability resulting from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it becomes successor
Trustee.
SECTION 12. AMENDMENT OR TERMINATION.
(a) This Trust Agreement may be amended by a written instrument
executed by Trustee and the Company. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Plan or shall make the Trust
revocable after it has become irrevocable in accordance with Section 1(b)
hereof.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plan. Upon termination of the Trust, any assets remaining
in the Trust shall be returned to the Company.
(c) Upon written approval of participants or beneficiaries entitled
to payment of benefits pursuant to the terms of the plan(s), the Company may
terminate this Trust prior to the time all benefit payments under the Plan have
been made. All assets in the Trust at termination shall be returned to the
Company.
(d) Sections 1(b), 5, 10, 11, 12 and 13 of this Trust Agreement may
not be amended by the Company for three years following a Change of Control, as
defined herein.
SECTION 13. MISCELLANEOUS.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries
under the Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
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(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(d) For purposes of this Trust, Change of Control shall mean each of
the events specified in the following clauses (i) through (iii), (i) any third
person, including a "group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, shall become the beneficial owner of the
shares of the Company with respect to which 25% or more of the total number of
votes for the election of the Board of Directors of the Company may be cast,
(ii) as a result of, or in connection with, any cash tender offer, exchange
offer, merger, or other business combination, sale of assets, or contested
election, or combination of the foregoing, the persons who were directors of the
Company shall cease to constitute a majority of the Board of Directors of the
Company, or (iii) the shareholders of the Company shall approve an agreement
providing either for a transaction in which the Company will cease to be an
independent publicly owned corporation or for a sale or other disposition of all
or substantially all of the assets of the Company; provided, however, that the
occurrence of any such events shall not be deemed a "change of control" if,
prior to such occurrence, a resolution specifically approving such occurrence
shall have been adopted by at least a majority of the Board of Directors of the
Company.
SECTION 14. EFFECTIVE DATE.
The effective date of this Trust Agreement shall be July 1, 1995.
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MONARCH BANCORP
DIRECTORS DEFERRED COMPENSATION PLAN
This Monarch Bancorp Directors Deferred Compensation Plan (the "Plan")
is effective for compensation earned on and after July 1, 1995 by directors of
Monarch Bancorp, Laguna Niguel, California (the "Company") and Monarch Bank (the
"Bank"), subject to approval of the Plan by a majority of the outstanding shares
of the Bank at the 1995 Annual Meeting of Shareholders of the Company.
1. DEFERRAL OF STOCK OR FEES.
a. From time to time eligible directors ("Directors") of the
Company and the Bank (each such corporation being referred to hereinafter as the
"Company") may, by written notice, elect to have payment of all or a portion of
their director's fees for the next succeeding calendar year, and/or all or a
portion of any grant of shares of common stock of the Company ("Company Stock")
to the Directors made on or after such election, deferred as herein provided.
Each such deferral of fees shall be (and is hereinafter referred to as) a
"Deferred Amount." Notwithstanding the foregoing, however, a Director may not
elect to defer any portion of fees unless such Director's deferrals with respect
to such year are in round percentage increments of 10%.
b. Any elections with respect to Deferred Amounts of fees shall
be exercised in writing by the Director prior to the latest to occur of the
following: (i) the beginning of the calendar year for which the fees are to be
earned; (ii) such Director's first day of board service in that year; (iii) the
first day of the calendar month next following the date the Director first
becomes eligible to participate in the Plan; PROVIDED THAT, an election made
after the first day of a calendar year shall only apply to fees earned after the
date of the election. Notwithstanding the foregoing, in the case of any
Directors who may be required to file reports of their Company Stock ownership
on Form 4 with the Securities and Exchange Commission, the election shall be no
later than the date specified in the preceding sentence or, if earlier, six
months prior to the date on which any fees deferred by the Director are invested
in Company Stock; and in the case of deferral of grants of Company Stock, the
election shall be made no later than the date specified in the preceding
sentence or, if earlier, the effective date of the grant of the Company Stock.
An election of Deferred Amounts, once made, is irrevocable, except as provided
in paragraph 6 hereof. An election of Deferred Amounts, once made, shall
continue to be effective for succeeding calendar years until revoked by the
Director by written request to the Secretary of the Company prior to the
beginning of a calendar year for which fees would otherwise be deferred.
c. Deferred Amounts shall be subject to the rules set forth in
this document, and each Director shall have the right to receive cash payments
on account of
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previously Deferred Amounts only in the amounts and under the circumstances
hereinafter set forth.
d. All Directors of the Company and the Bank, including
employee Directors, shall be eligible to participate in this Plan. Eligibility
shall be determined annually as of the latest practicable date prior to the
commencement of each new calendar year. In the event a Director ceases to be
eligible for this Plan during the course of a calendar year, the Director's
eligibility shall nevertheless continue through the end of that calendar year
with respect to fees earned prior to cessation of service.
2. ADMINISTRATIVE COMMITTEE. Full power and authority to construe,
interpret, and administer this document, shall be vested in an Administrative
Committee (the "Committee") to be comprised of all non-director executive
officers of the Company and the Bank. The Committee shall have full power and
authority to make each determination provided for in this document, and in this
connection, to promulgate such rules and regulations as the Committee considers
necessary or appropriate for the implementation and management of this Plan.
All determinations made by the Committee shall be conclusive upon the Company,
each Director and former Director and their designees, heirs and assigns.
3. DEFERRED COMPENSATION ACCOUNTS. The Company shall establish on
its books a separate account ("Account") for each of its Directors who becomes a
participant in this Plan, and each such Account shall be maintained as follows:
a. Each Account shall be credited with the Deferred Amounts
elected by the Director for whom such Account is established as of the date on
which such Deferred Amount would otherwise have been paid to the Director.
b. The value of a Director's Account is to be measured by the
value of and income from Company Stock, in which all Deferred Amount shall be
deemed to be invested, however such value is merely a measuring device to
determine the payments to be made to each Director hereunder. Each Director,
and each other recipient of a Director's Deferred Amounts pursuant to paragraph
7, shall be and remain an unsecured general creditor of the Company or whose
board the Director serves with respect to any payments due and owing to such
Director hereunder. If the Company should from time to time, in its discretion,
actually purchase the investments deemed to have been made for a Director's
Account, through the trust described in paragraph 4, such investments shall be
solely for such trust's own account, and the Directors shall have no right,
title or interest therein.
c. At the time a Director makes his or her first election
described in paragraph 1.b., the Director may also consent to have Deferred
Amounts contributed to the trust described in paragraph 4, and to have the
Director's Account adjusted as provided in paragraph 4 from the date as of which
it is established. Any such consent, if granted, shall be irrevocable as to the
Director, and shall apply to all of the Director's Deferred Amounts. Any
consent given pursuant to this paragraph 3.c. shall in no way obligate the
Company or the Bank to make
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contributions to the trust described in paragraph 4, such contributions being in
the Company's discretion as provided in paragraph 4.
4. TRUST.
The Company may establish a trust (of the type commonly known as
a "rabbi trust") to aid in the accumulation of assets for payment of Deferred
Amounts. In the event that such a trust is established ("Trust"), the amounts
credited to the Directors' Accounts shall be adjusted as follows:
a. The Company and the Bank may, in their discretion,
contribute to the Trust an amount equal to the balance credited to the Account
of each Director (other than Directors who have not made the election described
in paragraph 3.c.) serving on the board of the Company and the Bank on the date
of such contribution. Thereafter, the Company and the Bank may, in its
discretion, contribute to the Trust an amount equal to the Deferred Amounts of
the Directors within five business days after the Deferred Amount would
otherwise be paid to the Director. The assets of the Trust shall be invested in
Company Stock, subject to the Company's right to substitute assets of equal
value as provided in the Trust. The terms of the Trust shall be consistent with
the terms of this Plan. The Trustee shall be a corporate trustee independent of
the Company and shall conform to the provisions of the "model trust," as
described in Rev. Proc. 92-64. Nothing herein shall be construed as requiring
the Company to make any contributions to the Trust. To the extent such
contributions are actually made, the Trust's assets shall remain subject to the
claims of the Company's general creditors in the event of its insolvency.
b. The Trust shall provide for separate accounts in the name of
each Director who has elected a Deferred Amount and shall be deemed to be a
separate trust for each Company contributing to the Plan. Except as provided in
paragraph 4.d., from and after the date as of which such accounts are
established, the balances in the Accounts established for Directors pursuant to
this Plan shall be equal to the balances credited to such separate accounts.
Each such separate account shall then be adjusted as follows:
(i) Contributions made by the Company to the trust on
behalf of such Director, and all dividends or other distributions made with
respect to property allocated to such separate account, shall be credited to
such separate account and invested in Company Stock.
(ii) Each Director's separate account shall be increased
by the amount of any increase in the fair market value, as determined by the
Trustee, of any assets allocated to such separate account, and shall be
decreased by any decrease in the fair market value of such assets, as determined
by the Trustee.
(iii) Each Director's separate account shall be reduced
by any distributions made to the Director from the Trust which are chargeable to
such separate account.
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c. A Director's separate account shall continue during any
period of distribution subsequent to the Director's termination of service on
the board to be invested in Company Stock.
d. The adjustments described in this paragraph 4 shall only be
made to a Director's Account to the extent that the Company has made
contributions to the Trust pursuant to this paragraph 4. If for any reason such
contributions have not been made then, and only to that extent, the Director's
Account shall be adjusted as provided in paragraph 3.b.
5. PAYMENT OF DEFERRED AMOUNTS.
a. At the next regularly scheduled meeting of the Committee
following a Director's termination of service on the board (as defined herein),
the Committee shall direct the Trustee to commence distribution of the amounts
credited to such Director's Account. Commencing within the 30 day period
following the Committee's direction, the balance credited to the Director's
Account shall be paid in one lump sum or in annual installments over the period
directed by the Director in an election made upon the Director's commencement of
participation in the Plan.
b. The first payment under paragraph 5.a. shall be paid on a
date selected by the Committee which is no later than 30 days after the date on
which the Committee's direction as to the form and timing of distributions is
made. Succeeding installments (if any) shall be paid on January 31 of each
calendar year following the calendar year in which the first payment was made.
c. Each payment shall be made in cash or in kind as the
Committee, in its discretion, shall determine, and each annual installment
payment shall have a value equal to the amount credited to Director's Account as
of the first day of the calendar month in which the installment is paid
multiplied by a fraction, the numerator of which is one and the denominator of
which is the number of installments remaining to be paid, including the current
installment.
d. For purposes of this section, a Director's service on the
board is considered to terminate as of the date which is the later of (i)
Director's last date of service for the Company as a director, or (ii) the
Director's last date of service on the board of directors of any Company.
e. In the event installment payments commence and any
installments are unpaid at the time of Director's death, the payments shall be
made at the times and in such amounts as if Director were living to the persons
specified in paragraph 7.a.
f. Notwithstanding any other provision of this Section 5 or any
payment schedule directed by a Director pursuant to this Section 5 and
regardless of whether payments have commenced under this Section 5, in the event
that the Internal Revenue Service
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should finally determine that part or all of the value of a Director's Deferred
Amounts or Plan Account which have not actually been distributed to the
Director, or that part or all of a related Trust Account which has not actually
been distributed to the Director, is nevertheless required to be included in the
Director's gross income for federal and/or state income tax purposes, then the
Deferred Amounts or the Account or the part thereof that was determined to be
includible in gross income shall be distributed to the Director in a lump sum as
soon as practicable after such determination without any action or approval by
the Committee. A "final determination" of the Internal Revenue Service for
purposes of this paragraph 5.f is a determination in writing by said Service
ordering the payment of additional tax, reporting of additional gross income or
otherwise requiring Plan amounts to be included in gross income, which is not
appealable or which the Director does not appeal within the time prescribed for
appeals.
6. EMERGENCY PAYMENTS.
In the event of an "unforeseeable emergency" as determined
hereafter, the Committee may determine the amounts payable under paragraph 5
hereof and pay all or a part of such amounts without regard to the payment dates
provided in paragraph 5 to the extent the Committee determines that such action
is necessary in light of immediate and heavy needs of the Director (or his
beneficiary) occasioned by severe financial hardship. For the purposes of this
paragraph 6, an "unforeseeable emergency" is a severe financial hardship to the
Director resulting from a sudden and unexpected illness or accident of the
Director or beneficiary, or of a dependent (as defined in Section 152(a) of the
Internal Revenue Code of 1986, as amended) of the Director or beneficiary, loss
of the Director's or beneficiary's property due to casualty, or other similar
extraordinary and unforeseeable circumstances arising as a result of events
beyond the control of the Director or beneficiary. Payments shall not be made
pursuant to this paragraph 6 to the extent that such hardship is or may be
relieved: (a) through reimbursement or compensation by insurance or otherwise,
(b) by liquidation of the Director's or beneficiary's assets, to the extent the
liquidation of such assets would not itself cause severe financial hardship, or
(c) by cessation of the Director's deferrals under the Plan. Such action shall
be taken only if the Director (or Director's legal representatives or
successors) signs an application describing fully the circumstances which are
deemed to justify the payment, together with an estimate of the amounts
necessary to prevent such hardship, which application shall be approved by the
Committee after making such inquiries as the Committee deems necessary or
appropriate.
7. METHOD OF PAYMENTS.
a. In the event of a Director's death, payments shall be made
to the persons (including a trustee or trustees) named in the last written
instrument signed by the Director and received by the Committee prior to the
Director's death, or if the Director fails to so name any person, the amounts
shall be paid to the Director's estate or the appropriate distributee thereof.
The Committee, the Company, and the Trustee shall be fully protected in making
any payments due hereunder in accordance with what the Committee believes to be
such last written instrument received by it.
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b. Payments due to a legally incompetent person may be made in
such of the following ways as the Committee shall determine:
(i) directly to such incompetent person,
(ii) to the legal representative of such incompetent
person, or
(iii) to some near relative of the incompetent person to be
used for the latter's benefit.
c. Except as otherwise provided in paragraphs 7.a. and b., all
payments to persons entitled to benefits hereunder shall be made to such persons
in person or upon their personal receipt or endorsement, and shall not be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment or garnishment by creditors of the participant
or the participant's beneficiary.
d. All payments to persons entitled to benefits hereunder shall
be made out of the general assets, and shall be the sole obligations, of the
Companies, except to the extent that such payments are made out of the trust
described in paragraph 4. The Plan is a mere promise to pay benefits in the
future and it is the intention of the parties that it be "unfunded" for tax
purposes (and for the purposes of Title I of the Employee Retirement Income
Security Act of 1974 ("ERISA")).
8. CLAIMS PROCEDURES.
a. If a claim for benefits made by any person (the "Applicant")
is denied, the Committee shall furnish to the Applicant within 90 days after its
receipt of such claim (or within 180 days after such receipt if special
circumstances require an extension of time) a written notice which: (i)
specifies the reasons for the denial, (ii) refers to the pertinent provisions of
the Plan on which the denial is based, (iii) describes any additional material
or information necessary for the perfection of the claim and explains why such
material or information is necessary, and (iv) explains the claim review
procedures.
b. Upon the written request of the Applicant submitted within
60 days after his receipt of such written notice, the Committee shall afford the
Applicant a full and fair review of the decision denying the claim and, if so
requested: (i) permit the Applicant to review any documents which are pertinent
to the claim, (ii) permit the Applicant to submit to the Committee issues and
comments in writing, and (iii) afford the Applicant an opportunity to meet with
a quorum of the Committee as a part of the review procedure.
c. Within 60 days after its receipt of a request for review (or
within 120 days after such receipt if special circumstances, such as the need to
hold a hearing, require an extension of time) the Committee shall notify the
Applicant in writing of its decision and the
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reasons for its decision and shall refer the Applicant to the provisions of the
Plan which form the basis for its decision.
9. MISCELLANEOUS.
a. Except as limited by paragraph 7.c. and except that a
Director shall have a continuing power to designate a new recipient in the event
of Director's death at any time prior to such death without the consent or
approval of any person theretofore named as Director's recipient by an
instrument meeting the requirements of paragraph 7.a., this document shall be
binding upon and inure to the benefit of the Company, Director, their legal
representatives, successors and assigns, and all persons entitled to benefits
hereunder.
b. Any notice given in connection with this document shall be
in writing and shall be delivered in person or by registered mail, return
receipt requested. Any notice given by registered mail shall be deemed to have
been given upon the date of delivery indicated on the registered mail return
receipt, if correctly addressed.
c. Nothing in this document shall interfere with the rights of
any Director to participate or share in any profit sharing or pension plan which
is now in force or which may at some future time become a recognized plan of the
Company.
d. Nothing in this document shall be construed as an employment
agreement nor as in any way impairing the right of the Company, its board,
committees or shareholders, to remove the Director from service as a director,
to refuse to renominate or reelect such person as a director, or to enforce the
duly adopted retirement policies of the board of directors of such Company.
10. RULE 16B-3; STOCKHOLDER APPROVAL.
This Plan is intended to qualify for the exemption from short
swing profits liability under Section 16(b) of the Securities Exchange Act of
1934 provided by Rule 16b-3 of the Securities and Exchange Commission. If
required by such rule, the adoption of this Plan shall be contingent upon the
approval of the Plan and any material amendments thereto by the stockholders of
the Company on or before the date of the Annual Stockholders meeting for 1995.
11. REGISTRATION; NYSE LISTING.
The Company may, in its discretion, register the shares of
Company Stock subject to this Plan and any other applicable provisions of State
or Federal law, and may enter into a listing agreement for such shares with the
New York Stock Exchange, if such actions are deemed necessary or advisable by
the Company in order to provide directors with freely marketable shares.
However, nothing herein shall be deemed to require any such registration or
listing.
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<PAGE>
12. TERMINATION OR AMENDMENT. The Board of Directors of the Company
may, in its discretion, terminate or amend this document form time to time,
provided, however, that no such termination or amendment shall (without the
Director's consent) alter any Director's right to payments of amounts previously
credited to such Director's Account or delay the time or times at which a
Director is entitled to receive payments with respect to his Deferred Amounts.
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