<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, 1996
[ ] 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
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(Address of principal executive officers)
(714) 495 3300
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(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 October 31, 1996: 34,374,821
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INDEX
PART I --FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Balance Sheets as of 3
September 30, 1996 (unaudited) and December 31, 1995
Consolidated Statements of Operations (unaudited) for the 4
three and nine months ended September 30, 1996 and September
30, 1995
Consolidated Statements of Cash Flows (unaudited) 5
for the nine months ended September 30, 1996 and September
30, 1995
Notes to consolidated financial statements 6-8
Item 2. Management's Discussion and Analysis of Operations 9-15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Change in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 17-18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
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PART 1 ITEM 1
FINANCIAL STATEMENTS
MONARCH BANCORP
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000's omitted, except share data)
ASSETS 30-SEP-96 31-DEC-95
- -------------------------------------------------------- --------- ---------
Cash and due from banks $ 30,947 $ 4,747
Federal funds sold 6,900 2,938
Interest bearing deposits and investment securities
Held to maturity (Fair value of $9,608 and
$6,693 at 9/30/96 and 12/31/95 respectively 9,624 6,660
Available for sale, at fair value 151,649 22,203
Loans and leases (net) 237,715 31,666
Premises and equipment 5,894 610
Other real estate owned 5,409 150
Goodwill 29,892
Other assets 12,264 1,127
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TOTAL ASSETS $490,294 $70,101
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LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------
Deposits $420,759 $58,742
Other borrowings 11,000 132
Accrued interest payable and other 4,969 230
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TOTAL LIABILITIES 436,728 59,104
Common stock, no par value,
authorized 100,000,000 shares and
34,374,821 and 8,228,436 outstanding
9/30/96 and 12/31/95 respectively 58,713 16,500
Accumulated deficit (5,149) (5,454)
Unrealized gain on investment
securities available for sale, net of taxes 2 83
Deferred charge related to KSOP -- (132)
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TOTAL SHAREHOLDERS' EQUITY 53,566 10,997
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $490,294 $70,101
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(See accompanying notes)
3
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MONARCH BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(000's omitted, except per share data)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
------------------------- --------------------------
30-SEP-96 30-SEP-95 30-SEP-96 30-SEP-96
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
INTEREST AND LOAN FEE INCOME:
Investment securities $ 1,359 $ 977 $ 455 $ 359
Federal funds sold 333 232 133 94
Loans and leases 2,521 2,019 937 671
------------ ----------- ------------- -----------
TOTAL INTEREST INCOME 4,213 3,228 1,525 1,124
INTEREST EXPENSE:
Deposits 1,297 961 559 357
Notes payable -- 1 --
------------ ----------- ------------- -----------
TOTAL INTEREST EXPENSE 1,297 962 559 357
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NET INTEREST INCOME 2,916 2,266 966 767
Less: provision for loan losses 165 135 60 10
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,751 2,131 906 757
NON-INTEREST INCOME
Service charges on deposits accounts 169 141 62 52
Temporary overdraft charges 204 214 71 74
Data processing income 63 56 17 12
Other service charge and fee income 56 49 27 21
Other income 14 274 14 42
------------ ----------- ------------- -----------
TOTAL NON-INTEREST INCOME 506 734 191 201
NON-INTEREST EXPENSE
Salaries and benefits 1,159 1,261 305 419
Office operations 746 863 365 290
Depreciation 136 122 47 41
Advertising and marketing 102 89 50 29
Other real estate owned 9 29 (5) 28
Professional services 406 186 75 49
Other 195 32 130 2
------------ ----------- ------------- -----------
TOTAL NON-INTEREST EXPENSE 2,753 2,582 967 858
------------ ----------- ------------- -----------
Net income before provision for taxes 504 283 130 100
Provision for taxes 199 (7) 60
------------ ----------- ------------- -----------
NET INCOME AFTER PROVISION FOR TAXES $ 305 $ 290 $ 70 $ 100
------------ ----------- ------------- -----------
------------ ----------- ------------- -----------
PER SHARE INFORMATION
Number of shares (weighted average) 8,228.4 4,366.0 8,228.4 5,373.5
Income per share (dollars) $ 0.04 $ 0.07 $ 0.01 $ 0.02
</TABLE>
(See accompanying notes)
4
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MONARCH BANCORP
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000's omitted)
FOR NINE MONTH PERIOD ENDED
---------------------------
30-SEP-96 30-SEP-95
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Cash flow from operating activities $ 305 $ 290
Net income
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 165 135
Depreciation and amortization 136 122
Net increase in accrued interest
payable and other liabilities 716 213
Termination of KSOP 121
Net increase in accrued interest
receivable and other assets (777) (124)
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CASH PROVIDED BY OPERATING ACTIVITIES 666 636
Cash flow from investing activities:
Principal payments received on
investment securities 7,861 996
Purchase of investment securities (4,889) (6,707)
(Increase) decrease in net loans (7,796) 1,410
(Increase) decrease in OREO (188) 617
Additions to premises and equipment (321) (327)
Termination of KSOP 121
Increase in assets and liabilities assumed
due to the acquisition of Western Bank
(Increase) in investments available for
sale (134,397)
(Increase) in investments held to maturity (985)
(Increase) in loans (198,418)
(Increase) in other assets (15,512)
(Increase) in premises and equipment (5,099)
Increase in deposits 353,030
Increase in other liabilities 3,913
Excess of price paid over net assets aquired (29,892)
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NET CASH PROVIDED BY INVESTING ACTIVITIES (32,572) (4,011)
Cash flow from financing activities:
Net increase (decrease) in deposits 8,987 (1,313)
Issuance of debt 11,000
Repayment of debt (132) (54)
Proceeds from issuance of common stock 42,213 9,132
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NET CASH PROVIDED BY FINANCING ACTIVITIES 62,068 7,765
--------- ---------
Net increase in cash and cash equivalents 30,162 4,390
Cash and cash equivalents at the beginning of
the period 7,685 10,653
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CASH AND CASH EQUIVALENTS AT THE END OF NINE
MONTH PERIOD $37,847 $15,043
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--------- ---------
Supplemental disclosure of cash flow information
Property acquired through foreclosure $ 188 $ 2,184
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Repayment of KSOP debt $ 11 $ 28
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Increase (decrease) of unrealized gain on
investment securities available for sale,
net of tax $ 81 $ (280)
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(See accompanying notes)
5
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MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. Monarch Bancorp (the "Company") is the holding company for Monarch Bank
("Monarch") and Western Bank ("Western"). The unaudited consolidated financial
statements of the Company and subsidiaries included herein reflect all
adjustments, consisting only of normal recurring adjustments, which are in the
opinion of management necessary to present a fair statement of the results for
the interim periods indicated. Certain reclassifications have been made to the
consolidated financial statements for 1995 to conform to the 1996 presentation.
Certain information and note disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. The results of operations for the
nine months ended September 30, 1996, are not necessarily indicative of the
results of operations to be expected for the remainder of the year.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1995.
2. Western Bank Acquisition: On September 30, 1996 the Company acquired all
of the issued and outstanding shares of Western Bank, a state chartered bank
located in West Los Angeles. Western has five offices, including its head
office in Westwood.
In connection with the acquisition of Western that occurred on September 30,
1996, Western will be operated as a wholly-owned subsidiary of the Company. The
company paid $17.25 per share for the 3,543,156 issued and outstanding shares of
Western, for total consideration of $61.1 million , and an additional $5.5
million representing the difference between $17.25 and the exercise price of the
425,724 outstanding stock options of Western. The net consideration for the
acquisition of Western was approximately $66.6 million.
In order to fund the purchase price, the Company sold approximately $43.2
million of common stock in an SEC Regulation D private placement offering
conducted in 11 states, and from the proceeds of a three year revolving loan
of $26.5 million from The Northern Trust Company of Chicago (the "Lender").
Of this $26.5 million note, a $15.5 million dividend was declared by Western
concurrently with the completion of the acquisition and paid to the Company,
which was used to reduce the $26.5 million note to $11 million.
The summary balance sheet acquired by the Company is shown below:
6
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ASSETS
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Cash and due from banks $25,787
Interest bearing deposits and investment
securities:
Held to maturity 985
Available for sale 134,397
Loans and leases (net) 198,418
Premises and equipment 5,099
Other real estate owned 5,071
Goodwill 29,892
Other assets 10,441
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TOTAL ASSETS $410,090
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $353,030
Accrued interest payable and other liabilities 3,913
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TOTAL LIABILITIES 356,943
SHAREHOLDER'S EQUITY 53,147
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TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $410,090
--------
--------
The acquisition of Western was accounted for under the purchase method of
accounting. As such, the results of operations for Western will be included
in the Company's results of operations beginning October 1, 1996. Consolidated
pro forma results for the nine months ended September 30, 1996 and 1995 would
have been as follows:
1996 1995
---- ----
Revenue $19,181 $20,071
Net income $2,182 $1,891
Earnings per share $0.06 $0.06
7
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3. Changes in Control of the Company: In connection with the acquisition
of control by the Company of Western, Castle Creek Capital Partners Fund-1,
L.P. ("Castle Creek"), San Diego, California, acquired 11,685,385 shares
directly from the Company in the Company's SEC Regulation D private placement
offering and 814,615 additional shares from existing shareholders, for total
shares acquired of 12,500,000, representing 36.36% of the issued and
outstanding shares of the Company. There are no arrangements or
understandings among members of the general or limited partners of Castle
Creek with respect to the election of directors or other matters of the
Company.
Castle Creek acquired control of the company pursuant to approvals issued by the
Federal Reserve Bank of San Francisco and the California State Banking
Department.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
GENERAL
During the third quarter of 1996, the Company and the Bank focused on
utilization of the increased capitalization of the Company through a variety of
activities and related actions. The acquisition of Western was completed on
September 30, 1996. The Bank achieved substantial growth in deposits and
continued to see increasing loan demand in its marketplace. In addition,
continued emphasis on cost controls and credit quality resulted in improved
earnings.
During the third quarter the Company employed a new chief financial officer,
reorganized the functions and administration of the data processing operations
center, began item processing for another financial institution in the Palm
Springs area, achieved better than budgeted performance from the new Laguna
Beach branch, and achieved operating earnings that showed steady improvement
from the first and second quarter of the year.
The Southern California economy continues to reflect moderate but positive
improvements in local economic conditions. Among other trends with noticeable
improvement are increased employment and corresponding lower unemployment in the
county. Recent state and county reports indicate that job losses from a large
reduction in aerospace and defense contracts, and real estate investment in the
area and the county during the recession of 1992 to early 1995 have been fully
regained and that residential real estate values have increased moderately.
The improvement in local economic conditions has extended to the Bank. These
improvements are reflected in the Bank's improved loan and deposit totals.
As of September 30, 1996, excluding the effect of the Western acquisition,
loans and leases grew to approximately $39 million versus $35 million and
slightly over $31 million at June 30, 1996 and December 31, 1995,
respectively. The growth in loans in the third quarter of 1996 included the
purchase of $4.7 million of real estate loans. In addition, excluding the
effect of the Western acquisition, deposits as of September 30, 1996, were
approximately $71 million, slightly down from $72 million at June 30, 1996
and up significantly from $59 million on December 31, 1995. Based on
existing loan commitments in the expanded market area added by the Western
acquisition, it is expected that loan activity will increase even more in the
fourth quarter of 1996 and that the improved local economy, as well as the
acquisition of two large statewide institutions by other major banks, will
continue to result in increases core deposit totals, although not at the pace
of the first half of the year.
9
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RESULTS OF OPERATIONS
The acquisition of Western occurred on September 30, 1996. As a result,
Western's operations are not part of the third quarter results. However, the
Company's consolidated balance sheet at September 30, 1996 does include Western
(For further information concerning the Western acquisition see note 2 of
Notes to Consolidated Financial Statements.)
As of September 30, 1996, the Company had consolidated total assets, total
deposits and shareholders' equity of approximately $490 million, $421
million, and $54 million, respectively versus $70 million, $59 million, and
$11 million at December 31, 1995, respectively. Of the $420 million increase
in assets from December 31, 1995, approximately $410 million was due to the
acquisition of Western. Of the $362 million increase in deposits, $353
million came with the Western acquisition. Almost all, $42.2 million, of the
increase in equity resulted from the issuance of the Company's common stock
concurrent with the Western acquisition. For the nine (9) months ended
September 30, 1996, the Company, on a consolidated basis, recorded net
earnings of approximately $305 thousand. Net income of the Company would
have been $426 thousand without the termination of the KSOP plan related to
the Western acquisition.
The Company defines nonperforming assets to include (i) loans on which it has
ceased to accrue interest ("Nonaccrual Loans"), (ii) foreclosed real estate
owned, and (iii) those loans whose terms have been modified such that the
interest rates charged to the borrowers have been reduced to levels below the
original contract rates and below market rates of interest at both the time of
modification and the reporting date ("Modified Loans").
Without the acquisition of Western, nonperforming loans and OREO, which
totaled $1.41 million on December 31, 1994, were reduced to $494 thousand on
December 31, 1995, $509 thousand at June 30, 1996, and presently total $870
thousand as of September 30, 1996. The increase in nonperforming loans from
June 30, 1996 to September 30, 1996 is a result of one single family loan
being placed on nonaccrual status during the period. The acquisition of
Western added $6.6 million of nonperforming loans and OREO, resulting in
total nonperforming loans and OREO of $7.5 million as of September 30, 1996.
Planned workout arrangements are currently in place for all nonperforming
assets, and, unless there are any unexpected changes in the financial
condition of the borrowers, management is not aware of any additional
significant loss potential that has not already been included in the
Allowance for Loan and Lease Losses ("ALLL").
10
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NONPERFORMING LOANS AND OREO
Without With
Western Western
12/31/95 3/31/96 6/30/96 9/30/96 9/30/96
-------- ------ ------ ------- -------
Nonperforming Loans $344 $177 $172 $532 $2,091
Other Real Estate Owned 150 335 337 338 5,409
-------- ------ ------ ------- -------
TOTAL NPA $494 $512 $509 $870 $7,500
-------- ------ ------ ------- -------
-------- ------ ------ ------- -------
Operating profits for the Company and the Bank are dependent on renewed loan
growth, and efforts continue to prevent any additional unexpected loan losses
which would require additions to the ALLL. Demand for quality loans has
increased in the Bank's primary area, as net loans at the Bank were $39.3
million as of September 30, 1996, an increase of $7.6 million from December 31,
1995. However, as a result of mergers and acquisitions of other financial
institutions in the Bank's service area and the Bank's business development
activities, total deposits have increased to $72 million as of September 30,
1996 from $59 million as of December 31, 1995. The Bank's loan-to-deposit
ratio, has increased slightly from 53.4% as of December 31, 1995 to 54.5% as of
September 30, 1996. The acquisition of Western added $198 million of net loans
and $353 million of deposits, resulting in a consolidated loan-to-deposit ratio
of 56.5%
During the nine months ended September 30, 1996, $46 thousand in loans were
charged to the ALLL, while $14 thousand of loans were recovered. Because of
the increased provision for loan losses, the Bank's ALLL increased from $855
thousand or 2.6% of gross loans as of December 31, 1995 to $1.1 million, or
2.7% of gross loans as of September 30, 1996. The increase in the allowance
is consistent with the increase in the loan portfolio. With the acquisition
of Western, the Company ALLL increased to $6.1 million, or 2.5% of loans.
Management has concluded that the ALLL is adequate based on all currently
available information.
NET INTEREST INCOME
The $650 thousand increase in net interest income for the comparative nine
months ended September 30, 1996 and 1995 is due primarily to increases in the
volume of earning assets and a small increase in average yields. For the first
nine months of 1996 average outstanding gross loans were $34.9 million compared
to $29.1 million at September 30, 1995, and investments were $25.0 million
compared to $21.5 million for the same periods yields on loans and investments
increased approximately 20 basis points over 1995 while the average rate paid on
deposits remained relatively flat.
Interest expense on deposits increased by $336 thousand for the period ended
September 30, 1996 compared to the prior period. The increase was
attributable primarily to an increase of 27% in average deposits. Overall,
the Bank's cost of funds remains low with a strong core deposit base.
For the three month periods ending September 30, 1996 and 1995, net interest
income increased by $199 thousand. This increase resulted from a 25.5%
increase in average earning assets and an approximate 10 basis points
increase in the yield on earning assets. This resulted in an increase in
interest income of $401 thousand. At the same time interest bearing deposits
increased by approximately 32.4% while the average rate paid decreased by
approximately 20 basis points. This resulted in an increase of $202 thousand
in interest expense.
PROVISION FOR LOAN LOSSES
Consistent with the increase in loans, the provision for loan losses for the
nine month periods ending September 30, 1996 and 1995 increased from $135
thousand to $165 thousand. Similarly, for the three month periods ending
September 30, 1996 and 1995, the provision for loan losses increased from $10
thousand to $60 thousand. The provision for loan losses for the three month
period ending September 30, 1995 was lower than normal due to a substantial
increase in the ALLL in 1994.
11
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NON-INTEREST INCOME
Non-interest income declined during the comparative nine-month periods of
September 30, 1996 and September 30, 1995 in the amount of $228 thousand. The
decrease was primarily attributable to a non-recurring bond claim settlement
during the first quarter of 1995. Non-interest income for the three months
ended September 30, 1996 was comparable with the same period in 1995.
NON-INTEREST EXPENSE
Operating expense grew during the comparative periods by approximately 6.6%,
or $171 thousand, for the nine month period ended September 30, 1996. This
increase was due primarily to a $220 thousand increase in Other Professional
Services. The increase related primarily to consulting fees related to an
earnings improvement program which is expected to result in a significant
reduction in Bank overhead on an annual basis, and to legal fees relative to
regulatory issues and a settled lawsuit. Salary expense decreased by 8.1%
during the first nine months of 1996. The decline was due to the
capitalization of internal costs associated with the private placement of
common stock and the acquisition of Western. Without this capitalization,
salaries and benefits would have increased by approximately 3.7%, slightly
higher than the rate of inflation. Part of the increase in expense results
from opening the Laguna Beach branch during the third quarter of 1996. Office
operations declined $117 thousand or 13.6% as a result of the implementation
of the earnings improvement program mentioned above. Further overall
benefits are expected in the fourth quarter of 1996 continuing into 1997.
The increase in other operating expense was due largely to the $121 thousand
charge for the termination of the Company's KSOP plan in September of this
year.
For the three month period ended September 30, 1996, non-interest expense
increased $109 thousand from the same period in 1995. Salaries and benefits
decreased by $114 thousand, a decrease of $149 thousand due to the
capitalization discussed above and a $35 thousand increase due mostly to the
opening of the new branch in Laguna Beach. Other expense increased due to the
$121 thousand charge for the termination of the Company's KSOP in September
of 1996.
CREDIT QUALITY AND ANALYSIS
In the third quarter of 1996, while witnessing increased loan demand and
activity, the Bank continued its focus on credit quality. As of September 30,
1996 the all OREO properties, including those acquired with the Western
acquisition, have been written down to the fair value or expected fair
value less selling costs.
The Bank's Allowance for Loan and Lease Losses (ALLL) was $1.1 million as of
September 30, 1996, or 2.7% of gross loans outstanding as of the end of the
quarter. With the acquisition of Western, the consolidated ALLL increased to
$6.1 million, or 2.5% of loans. Management does not foresee any significant or
unanticipated losses in the fourth quarter of the year.
12
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Key credit statistics are shown in the following table:
Monarch Western Consolidated
------- ------- ------------
Past due 30 through 89 days and still accruing $95 $7,225 $7,320
Past due 90 days or more and still accruing 0 767 767
Nonaccrual loans 532 1,559 2,091
Impaired loans 1,574 4,283 5,857
Specific reserves on impaired loans 0 1,161 1,161
Nonperforming assets 870 6,630 7,500
Allowance for loan and lease losses (ALLL) 1,096 5,041 6,137
Loans 40,393 203,459 242,691
ALLL to loans 2.71% 2.48% 2.53%
ALLL to Nonaccrual loans 206% 323% 293%
Nonperforming assets to loans 2.15% 3.28% 3.09%
A loan is impaired when, based on current information and events, a creditor
will be unable to collect all amounts contractually due under a loan agreement.
If a loan is determined to be impaired, an allowance is established based upon
the difference between the Company's investment in the loan and the fair value
of the loan's underlying collateral. Subsequent to classification as impaired,
the fair values of the impaired loans are periodically reviewed. If there is a
change in the fair value of a loan the allowance is adjusted accordingly. All
such provisions and related recoveries are recorded as adjustments to the
valuation ALLL.
The Bank has established a monitoring system for its loans in order to
identify impaired loans, potential problem loans and to permit periodic
evaluation of impairment and the adequacy of the allowance for loan losses in
a timely manner. The monitoring system and ALLL methodology have evolved over
a period of years and, such classifications have been incorporated into the
determination of the ALLL. This monitoring system and allowance methodology
include a loan-by-loan analysis for all Classified Loans as well as loss
factors for the balance of the portfolio that are based on migration analysis
relative to the unclassified portfolio. This analysis includes such factors
as historical loss experience, current portfolio delinquency and trends and
other inherent risk factors such as economic conditions, risk levels of
particular loan categories, internal loan review and oversight,
concentrations in the portfolio and changes in the quality of the lending
staff of the Bank.
On September 30, 1996, the Bank had $1.574 million of loans which were
considered to be impaired under the provisions of FASB114. This is a
significant decrease from $1.696 million at June 30, 1996 and $2.397 million
at December 31, 1995. There were no specific reserves on these loans at
September 30, 1996. Of these loans, $532 thousand are on nonaccrual status.
With the acquisition of Western, impaired loans at September 30, 1996
increased by $4.283 million to $5.857 million and specific reserves increased
to $1.161 million. Of the $4.283 million increase in impaired loans, $1.559
million are on nonaccrual status.
13
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LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and interest bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers who may need assurance that
sufficient funds will be available to meet their credit needs. Interest rate
sensitivity management seeks to avoid fluctuating interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates.
Historically, the overall liquidity of the Company has been enhanced by a
significant aggregate amount of core deposits. The Company has not relied on
large denomination time deposits.
To meet short-term liquidity needs, the Company has maintained adequate
balances in federal funds sold, certificates of deposits with other financial
institutions and investment securities having maturities of five years or
less. Liquid assets (cash, federal funds sold and investment securities
available for sale) as a percent of total deposits are 45.0% and 50.9% as of
September 30, 1996 and December 31, 1995, respectively.
REGULATORY MATTERS
As previously noted, on March 11, 1996 the FDIC terminated the 8(b) Order which
the Bank had executed in December of 1994, and the Superintendent of Banks had
previously terminated the 1913 Order on December 28, 1995. At the time of the
termination of the FDIC's 8(b) Order the Bank had agreed to a Memorandum of
Understanding which was effective March 11, 1996.
On April 24, 1996 the Bank completed the application process and became a member
in the Federal Reserve Bank of San Francisco. As a member bank, the Bank's
primary federal regulator is now the Federal Reserve Bank rather than the FDIC,
although the Bank's deposits continue to be insured by the FDIC. On July
3, 1996, as a result of both Federal Reserve Bank membership and significant
improvement in the financial condition and operations of the Bank, the
Memorandum of Understanding was terminated by the FDIC. There are no remaining
regulatory restrictions on the Company or the Bank.
The Company and the subsidiary banks met the definition of being well
capitalized as of September 30, 1996. Under regulatory guidelines, minimum
capital ratios for being well capitalized are a Leverage Capital Ratio of 5%,
a Tier I Risk Based ratio of 6%, and a Total Risk Based Ratio of 10%.
14
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QUASI-REORGANIZATION OF THE COMPANY AND MONARCH BANK
A quasi-reorganization of the Company and the Bank, which was approved by the
shareholders at the Annual Meeting on August 20, is being undertaken to enhance
the ability of the Company to pay dividends in the future. As a result of
losses suffered during the 1993 and 1994 recession, as well as other losses
suffered early in the Company's history, at the present time the Company is not
able to pay dividends under state law. The same conditions in general apply to
the Bank under the State Financial Code.
The quasi-reorganization was not a condition precedent to the acquisition of
Western Bank. The Western Bank acquisition, however, is considered to be a
significant event in the affairs of the Company with an increase of over 500% in
the capitalization of the Company, and the quasi-reorganization is considered to
be a critical matter in the future successful operation of the Company.
On September 12, 1996, the California State Banking Department approved the
Bank's application to readjust its accounts in a quasi-reorganization pursuant
to California Financial Code Section 663. The Company approved the proposed
quasi-reorganization of the Bank on September 19, 1996 as the sole shareholder
of the Bank. The Company and the Bank anticipate that the quasi-reorganization
of the Company will take place by December 31, 1996, at the discretion of the
Board of Directors of the Bank.
15
<PAGE>
Part II -- Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
16
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1996 Annual Meeting of Shareholders on August 20, 1996.
There were 8,228,436 issued and outstanding shares of Common Stock of the
Company on July 1, 1996, the Record Date for the Annual Meeting.
At the Annual Meeting, the following directors were elected. The following
chart indicates the number of shares cast for each elected director:
Rice E. Brown 6,878,319
E. Lynn Caswell 6,875,960
Raymond B. Cox 6,741,236
Alfred H. Jannard 6,880,584
Cheryl Moore 6,876,061
Margaret A. Redmond 6,743,797
John W. Rose 6,867,006
Henry E. Schielein 6,880,584
David C. Wooten 6,880,584
In its Proxy Statement dated July 29, 1996, the Company disclosed the proposed
changes to the Company's Board of Directors as provided in "Changes in
Directors and Officers" herein, which became effective on September 30, 1996,
the closing date of the acquisition of Western.
The Company also requested approval for a corporate readjustment of the accounts
of the company that would eliminate the Company's accumulated deficit from past
unprofitable operations using accounting standards that allow for a quasi-
reorganization to be effective as determined by the Company's Board of Directors
in its absolute sole discretion and by December 31, 1996. In general, the
principal effect of the quasi-reorganization is to eliminate the Company's
accumulated deficit. In addition, the recorded values of certain assets will be
adjusted to reflect fair market value. Increases in recorded values, however,
are limited to recorded decreases in the fair market value of other assets. The
affirmative approval by the holders of a majority of the Company's outstanding
shares of the Company's Common Stock is required. the quasi-reorganization was
not a requirement of or understanding precedent to the consummation of the
acquisition of Western. the quasi-reorganization is designed to enhance the
Company's ability to pay dividends.
At the Annual Meeting, the proposed quasi-reorganization was approved by the
following vote:
FOR 6,788,515 AGAINST 5,896
ABSTAIN 3,056 NONVOTES 1,430,969
The Company also requested the approval of its shareholders for proposed
amendments to the Company's 1993 Stock Option Plan (the "Plan") that would (i)
increase the number of shares subject to the 1993 Plan to 10% of the issued and
outstanding shares of the Company following the Company's acquisition of Western
and issuance of additional shares of Common Stock, (ii) allow the exercise of
options by surrendering a portion of the option being exercised and applying the
appreciated value of the shares being surrendered to payment of the exercise
price , and (iii) remove certain termination provisions relating to options
granted to consultants, business
17
<PAGE>
associates and others with important business relationships with the Company,
subject to any necessary amendments required by an regulatory agency.
At the 1996 Annual Meeting, the proposed amendments to the 1993 Plan were
approved by the following vote:
FOR 6,656,373 AGAINST 38,206
ABSTAIN 102,888 NONVOTES 1,430,969
18
<PAGE>
Item 5. Other Information
CHANGES IN DIRECTORS AND OFFICERS
As of October 1, 1996, Hugh S. Smith, Jr. assumed the role of Chairman of the
Board and Chief Executive Officer of the Company. Mr. John Rose resigned as
Chairman of the Board but remained a director of the Company. Mr. E. Lynn
Caswell, who served as President and Chief Executive Officer of the company
became Vice Chairman of the Company, and retained his position as chairman,
President and Chief Executive Officer of Monarch Bank. Joseph Digange,
President of Western, became Chairman of Western, and Matthew P. Wagner
became President and Chief Executive Officer of Western. Messrs. Smith,
Rose, Caswell, Digange and Wagner also were all appointed as members of the
Board of Directors of the Company.
Directors Raymond Cox, David Wooten, Henry Schielein, Margaret Redmond,
Cheryl Moore and Alfred Jannard resigned as directors of the Company. Mr.
Rice E. Brown continues as a director of the Company, and will be joined on
the Company board by Mr. Dale Walter, of La Quinta, California.
The resigning directors of the Company will continue as directors of Monarch
Bank.
The management of the company does not know of any disagreement with the Company
or an director on any matter relating to the Company's operations, policies or
practices, and the company has not received any letter from such resigning
director describing such a disagreement.
Item 6. Exhibits and Reports on Form 8-K
On October 4, 1996, the Company filed a Current Report on Form 8-K. Although
not technically filed in the third quarter, the Current Report disclosed events
that occurred in the third quarter. Such events included the completion of the
Company's acquisition of Western on September 30, 1996, the Change of Control of
the Company, the change of the Company's certified public accountants, and
changes in the Company's Board of Directors and officers that became effective
on September 30, 1996. The Company will be filing the financial statements
required by the requirements of the Form 8-K in the near future.
19
<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
Date: November ____, 1996 ___________________________________
Hugh S. Smith, Jr.
Chairman and Chief Executive Officer
Date: November ____, 1996 ___________________________________
Arnold C. Hahn
Chief Financial Officer
20
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