<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For transition period _________________ to _________________
Commission file number 0-13551
MONARCH BANCORP
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-38663296
(State of incorporation) (IRS Employer Identification No.)
30000 TOWN CENTER DRIVE, LAGUNA NIGUEL, CALIFORNIA 92677
(Address of principal executive officers)
(714) 495 3300
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 8,228,332
<PAGE>
INDEX
<TABLE>
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Statement of Condition
September 30, 1995 (unaudited) 2
Consolidated Statement of Operations
(unaudited) for the three and nine months ended
September 30, 1995 and September 30, 1994 3
Consolidated Statement of Cash Flows
(unaudited) for nine months ended
September 30, 1995 and September 30, 1994 4
Notes to consolidated financial statements 5
Item 2. Management's Discussion and Analysis of
Operations 6-8
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Change in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
</TABLE>
1
<PAGE>
PART 1 ITEM 1
FINANCIAL STATEMENTS
MONARCH BANCORP
CONDENSED, CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(000's OMITTED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
----
<S> <C>
Cash and due from banks__________________________________________ $ 4,162
Interest bearing deposits and investment securities______________ 23,618
Federal funds sold_______________________________________________ 10,881
Loans (net)______________________________________________________ 28,415
Premises and equipment___________________________________________ 611
Other real estate owned__________________________________________ 180
Other assets_____________________________________________________ 807
-------
TOTAL ASSETS___________________________________________________ $68,674
-------
-------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits_________________________________________________________ $57,330
Other borrowings_________________________________________________ 143
Accrued interest payable and other liabilities___________________ 615
-------
TOTAL LIABILITIES______________________________________________ 58,088
Common stock, no par value, authorized 25,000,000 shares
8,228,332 shares outstanding as of September 30, 1995__________ 16,500
Accumulated deficit______________________________________________ (5,847)
Unrealized appreciation on investment securities
available for sale_____________________________________________ 76
Deferred charge related to KSOP__________________________________ (143)
-------
Total Shareholders' Equity_____________________________________ 10,586
-------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY__________________ $68,674
-------
-------
</TABLE>
(see accompanying notes)
2
<PAGE>
MONARCH BANCORP
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(000's OMITTED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
------------------------- --------------------------
30-SEPT-95 30-SEPT-94 30-SEPT-95 30-SEPT-94
<S> <C> <C> <C> <C>
INTEREST AND LOAN FEE INCOME
Investment securities__________ $ 977 $ 669 $ 359 $ 231
Federal funds sold_____________ 232 87 94 34
Loans__________________________ 2,019 2,163 671 727
------- ------- ------- -------
TOTAL INTEREST INCOME________ 3,228 2,919 1,124 992
INTEREST EXPENSE
Deposits______________________ 961 818 357 276
Notes payable_________________ 1 2 0 1
------- ------- ------- ------
TOTAL INTEREST EXPENSE______ 962 820 357 277
------- ------- ------- ------
NET INTEREST INCOME______________ 2,266 2,099 767 715
Less increase in provision
for loan losses______________ 135 545 10 545
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES________ 2,131 1,554 757 170
OTHER OPERATING INCOME
Service charges on deposit
accounts______________________ 141 136 52 50
Temporary overdraft charges____ 214 158 74 49
Data processing income_________ 56 91 12 30
Other service charge and fee
income________________________ 49 45 21 19
Miscellaneous income___________ 274 73 42 25
------- ------- ------- -------
TOTAL OTHER INCOME__________ 734 503 201 173
OTHER OPERATING INCOME
Salaries and benefits__________ 1,261 1,248 419 417
Office operations______________ 863 872 290 344
Depreciation___________________ 122 144 41 47
Advertising and marketing______ 89 99 29 30
Other real estate owned________ 29 8 28 0
Professional services__________ 186 191 49 75
Other__________________________ 32 1 2 1
------- ------- ------- -------
TOTAL OPERATING EXPENSES____ 2,582 2,563 858 914
Net income before provision for
taxes___________________________ 283 (506) 100 (571)
Provision for taxes___________ (7) 0 0 0
------- ------- ------- -------
Net income after provision for
taxes___________________________ $ 290 $ (506) $ 100 $ (571)
------- ------- ------- -------
------- ------- ------- -------
PER SHARE INFORMATION
Number of shares________________ 4,365,972 794,324 5,373,511 794,324
Income per share________________ $0.07 ($0.64) $0.02 ($0.72)
</TABLE>
(see accompanying notes)
3
<PAGE>
MONARCH BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000's OMITTED)
<TABLE>
<CAPTION>
FOR NINE MONTH PERIOD ENDED
---------------------------
30-SEPT-95 30-SEPT-94
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income___________________________________________ $ 290 $ (506)
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan loss____________________________ 135 545
Write down of REO direct expense___________________ 0 542
Depreciation, amortization_________________________ (122) (144)
Increase in accrued interest
payable and other liabilities_____________________ 213 62
Increase in accrued interest receivable
and other assets__________________________________ (124) (275)
------- --------
NET CASH (FROM) USED BY OPERATING
ACTIVITIES_____________________________________ 392 224
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments received on
investment securities_______________________________ 996 9,490
Purchase of investment securities____________________ (6,707) (4,955)
Net (increase) decrease in net loans_________________ 1,410 167
Proceeds from the sale of OREO_______________________ 617 2,075
Additions to premises and equipment__________________ (83) (22)
------- --------
NET CASH FROM (USED) BY
INVESTING ACTIVITIES____________________________ (3,767) 6,755
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand and savings deposits__________ (1,313) (4,886)
Repayment of debt____________________________________ (54) 0
Proceeds from issuance of common stock_______________ 9,132 0
------- --------
NET CASH PROVIDE (USED) BY
FINANCING ACTIVITIES____________________________ 7,765 (4,886)
Net increase (decrease) in cash and
cash equivalents____________________________________ 4,390 2,093
Cash and cash equivalents at
beginning of nine month period______________________ 10,653 8,346
------- --------
CASH AND CASH EQUIVALENTS AT THE
END OF NINE MONTH PERIOD____________________________ $15,043 $ 10,439
------- --------
------- --------
NON-CASH ACTIVITIES
Property acquired through foreclosure________________ $ 180 $ 2,184
------- --------
------- --------
Repayment of KSOP debt_______________________________ $ 30 $ 28
------- --------
------- --------
Equity adjustment for FASB 115
changes to AFS Securities___________________________ $ 432 $ (280)
------- --------
------- --------
</TABLE>
(see accompanying notes)
4
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30,
1995, and the consolidated results of operations for the three
and nine months ended September 30, 1995 and September 30,
1994, and the cash flows for the same nine 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 and nine months
period ended September 30, 1995 are not necessarily indicative
of the results to be expected for the full year.
3. 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 collateral of 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 at the loan's effective rate of
interest in the original loan agreement. Finally, the impart of
initially applying the statement is reported as part of bad-debt
expense. The Company adopted FASB 114 and 118 as of January 1, 1995.
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.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS.
OVERVIEW
During September 1995, the Company completed the second phase of
a capital restoration plan formulated in late 1994 to increase
the capital of the Bank and Company to a level needed to meet
certain commitments with the Bank's regulators and to allow for
future growth. The capital plan, as completed, included a $6.1
million private placement which closed in March 1995 and a $3.9
million shareholder rights and public offering which was
completed in September 1995. Net proceeds after expenses for
the combined offerings were approximately $9.1 million of which
approximately $3.8 million was used to increase the Bank's
equity capital to achieve a capital ratio to meet and exceed the
7.0% Tier 1 leverage ratio defined in agreements between the
Bank and its regulators. Additional funds were used to retire
all outstanding Company debt on March 31, 1995 ($53,500), and to
provide approximately $5 million in cash for investment and
possible future growth by the Company. As of September 30,
1995, the Bank's Tier 1 leverage capital ratio was 7.8% and the
Company's over 15.4%, and the Bank and Company met and exceeded
all of its capital requirements.
REGULATORY ORDERS
The Bank has made and continues to make every effort to meet,
and where possible to exceed, the terms of the regulatory Orders
with the FDIC and California Superintendent of Banks which were
signed in December 1994. In management's opinion, the Bank as
of September 30, 1995 was in compliance with the Orders, but
does not expect they will be removed or changed until the
beginning of 1996 at the earliest. The Bank has provided and
will continue to provide its regulators with detailed, written
quarterly status reports on each of the provisions of the
Orders.
ECONOMIC CONDITIONS
The Bankruptcy of Orange County has not had a measurable impact
on Monarch Bank and its customers. Based on newspaper reports,
it appears that a bankruptcy workout plan has been or soon will
be approved which will allow the county and related entities to
resume its normal operations without a constant fear of the
unknown. Economic reports and forecasts currently reflect
favorable economic information including a recent report that
shows unemployment as of September 1995 at 5.1 percent with
positive job growth -- a year ago the unemployment rate was 6.0
percent with a high of 7.5 percent in late 1992. California's
jobless rate in September 1995 was 7.1 percent while the
National rate was 5.4 percent. An economist at Cal State
University, Fullerton recently reported that the County is
"continuing a moderate recover."
RESULTS OF OPERATIONS
The Company had a $100,000 operating profit for the three months
ended September 30, 1995 and is finalizing work on
restructuring lending and operations to position the Bank for
rebuilding a consistent and acceptable income stream.
6
<PAGE>
Since the start of 1995, the Bank has made several change in its
lending staff to significantly enhance the overall level of
experience and lending skills to both meet the day-to-day
administrative needs of the loan portfolio, and to allow for
controlled but significant increases in overall lending activity
as the economy improves and as the Bank regains momentum
following the completion of its capital raising activities.
The Bank is also in the final implementation stage of a major
reorganization which has targeted both expense reductions and
earnings improvements. This earnings improvement program is
being done with the assistance of an outside consultant and is
expected to produce measurable results starting in the fourth
quarter of 1995 and with significant gains in net income
expected 1996 when all of the recommendations are implemented.
NET INTEREST INCOME
The Bank's loan totals both in dollars and as measured by the
loan-to-deposit ratio are very low. Average loans and the
loan-to-deposit ratio were 57% and $33 million, 54% and $32
million, and 49% and $29.6 million as for September 1994,
December 1994, and September 1995, respectively. Increase in
interest income in 1995 for the third quarter and for the nine
months ended September 30, 1995 have come from increased yield
and income on investments. A small increase in loan yields has
been offset by a small decrease in loan volumes. Increasing
the size of the loan portfolio within prudent underwriting
standards is being given a highest priority by the Bank's
management. The Bank now has the staff, lending expertise, and
liquidity to increase loan activity at a time when the economy
is showing real signs of recovery.
INTEREST EXPENSE
The cost of deposits has increased in 1995 from both higher
deposit competition and from increasing interest rates
specifically for certificates of deposit and money market
accounts. The repricing cycle for certificates of deposit plus
a shift in funds to CD's accounted for a majority of the
increased cost of deposits. The Bank's yield analysis shows
CD rates averaged 3.6% in September 1994, were under 4.0% in
December 1994, but moved to approximately 5.6% in September
1995. The pattern of increased costs appears to have reached
the limit of the repricing cycle for CD's as of September 1995
and should remain within a narrow range until there is a
measurable change in overall interest rates or deposit demand.
PROVISION FOR LOAN LOSSES
The Bank made significant increases in its Reserve in late 1994
and has added $135,000 to the Reserve in 1995. Based on
management's and the Board of Director's review of the Reserve
as of September 1995, the Reserve of $584,000 or 2.01% of gross
loans is adequate to meet all known or expected losses. In
completing the Reserve analysis, consideration was given to: a)
specific estimate reserves for all loans classified as
substandard or doubtful; b) an increase in the Reserve for the
unclassified portion of the Reserve as determined by a weighted
migration analysis of past loan losses; c) the inclusion of a
reserve factor for the committed but undisbursed part of the
loan portfolio; d) improvements in credit administration as
measured by the decreases in past due loans and internally
classified loans; and e) the reported improvements in the local
economy.
7
<PAGE>
FASB 114 AND FASB 118
The Bank adopted FASB 114 as amended by FASB 118 as of January
1, 1995. Implementation of this accounting standard is based
on the identification of impaired loans which is consistent with
the banking industry's traditional nonaccrual classification.
As of September 30, 1995, the Bank had four impaired loans
totaling $358,000. Cash interest income on these accounts
totaled approximately $22,000 for the year. The loans are on a
zero interest or nonaccrual status. The total amount of
Reserves associated with these impaired loans is approximately
$75,000.
OTHER OPERATING INCOME
For the three months ended September 30, 1995, noninterest
income increased by approximately $28,000 with positive gains
from Temporary Overdraft Charges, a decrease in Data Processing
Income, and some gains in Miscellaneous Income. The Bank
continues to provide daily telephone calls to customers on the
overdraft list but has never had any measurable losses from
overdrafts. Data processing income on a comparative basis
decreased because of the termination of an item processing
contract with another bank at the start of 1995.
OTHER OPERATING EXPENSES
Operating expense decreased in the comparative third quarters
primarily because of a one-time rent accounting adjustment for a
subleased facility in 1994 versus a recovery of an over payment
of utilities in the 1995. The Bank has focused on expense
controls and, with the exception of OREO expense, has maintained
operating expense at or below prior year levels.
CREDIT ADMINISTRATION
Past due and nonaccrual loans as a percent of total loans were
7.3% in January 1995, 10.5% in March 1995, 6.7% in June 1995 and
2.8% in September 1995. The recent reductions reflect both
aggressive collection efforts and positive results in developing
meaningful loan workout programs with improved collateral and
realistic cash flows. It also reflects some improvements in the
local economy and renewed optimism about the local economy.
On a relative basis, second quarter data for banks in Orange
County in the $50 million to $125 million asset range show
average Loan Loss Reserve to Total Loans of 2.53% versus 2.50%
for Monarch, Loan to Deposit ratio of 72% versus 47% for
Monarch, and Loan Loss Reserve to Non-Performing Loans of 71% to
79% for Monarch.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
9
<PAGE>
---------------------------
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MONARCH BANCORP
---------------
(Registrant)
----------------------------------------
E. Lynn Caswell
Chairman of the Board,
President and C.E.O.
----------------------------------------
William C. Demmin
Executive Vice President and
Chief Financial Officer
----------------------------------------
November 13, 1995
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 4,162
<INT-BEARING-DEPOSITS> 23,618
<FED-FUNDS-SOLD> 10,881
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 28,415
<ALLOWANCE> 0
<TOTAL-ASSETS> 68,674
<DEPOSITS> 57,330
<SHORT-TERM> 143
<LIABILITIES-OTHER> 615
<LONG-TERM> 0
<COMMON> 16,500
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 68,674
<INTEREST-LOAN> 3,228
<INTEREST-INVEST> 977
<INTEREST-OTHER> 2,241
<INTEREST-TOTAL> 3,228
<INTEREST-DEPOSIT> 961
<INTEREST-EXPENSE> 961
<INTEREST-INCOME-NET> 2,266
<LOAN-LOSSES> 135
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 32
<INCOME-PRETAX> 283
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
