<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 JUNE 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
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(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 July 31, 1996: 8,228,436
<PAGE>
INDEX
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Balance Sheets as of
June 30, 1996 (unaudited) and December 31, 1995 3
Consolidated Statements of Operations (unaudited)
for the six months ended June 30, 1996 and June 30, 1995 4
Consolidated Statements of Cash Flows (unaudited)
for six months ended June 30, 1996 and June 30, 1995 5
Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Operations 7 - 17
Part II -- Other Information
Item 1. Legal Proceedings 17
Item 2. Change in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
PART 1 ITEM 1
FINANCIAL STATEMENTS
MONARCH BANCORP
CONDENSED, CONSOLIDATED BALANCE SHEET
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's omitted)
ASSETS 30-JUN-96 31-DEC-95
- ---------------------------------------------------------------- --------- ---------
<S> <C> <C>
Cash and due from banks $3,997 $4,747
Interest bearing deposits and
investment securities 25,385 28,863
Federal funds sold 12,894 2,938
Loans and leases (net) 33,839 31,666
Premises and equipment 560 610
Other real estate owned 337 150
Other assets 1,897 1,127
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TOTAL ASSETS $78,909 $70,101
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---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------
Deposits $67,490 $58,742
Other borrowings 121 132
Accrued interest payable and other liabilities 254 230
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TOTAL LIABILITIES 67,865 59,104
Common stock, no par value,
authorized 100,000,000 shares
8,228,436 shares outstanding at
6/30/96 and at 12/31/95, respectively 16,500 16,500
Accumulated deficit (5,219) (5,454)
Unrealized appreciation (depreciation) on investment securities (116) 83
available for sale
Deferred charge related to KSOP (121) (132)
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TOTAL SHAREHOLDERS' EQUITY 11,044 10,997
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $78,909 $70,101
---------- ----------
---------- ----------
</TABLE>
(see accompanying notes)
3
<PAGE>
MONARCH BANCORP
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
------------------------ --------------------------
(000's omitted) 30-JUN-96 30-JUN-95 30-JUN-96 30-JUN-95
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST AND LOAN FEE INCOME:
Investment securities $904 $618 $501 $359
Federal funds sold 200 138 129 90
Loans and leases 1,584 1,348 798 657
--------- --------- --------- ---------
TOTAL INTEREST INCOME 2,688 2,104 1,428 1,106
INTEREST EXPENSE:
Deposits 738 604 385 319
Notes payable 0 1 0 0
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 738 605 385 319
--------- --------- --------- ---------
NET INTEREST INCOME 1,950 1,499 1,043 787
Less increase in provision for loan losses 105 125 $55 125
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,845 1,374 988 662
OTHER OPERATING INCOME:
Service charges on deposit accounts 240 229 109 112
Other service charge and fee income 75 132 32 65
Gain on sale of assets 0 172 (8) 0
--------- --------- --------- ---------
TOTAL OTHER INCOME 315 533 133 177
OTHER OPERATING EXPENSES:
Salaries and benefits 854 843 435 413
Office operations 381 573 104 286
Depreciation 89 81 45 41
Advertising and marketing 52 60 20 29
Other real estate owned 14 1 8 (11)
Professional services 331 136 224 73
Other 65 30 50 0
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TOTAL OPERATING EXPENSES 1,786 1,724 886 831
Net income before provision for taxes 374 183 235 8
Provision for taxes (139) (7) (79) 0
--------- --------- --------- ---------
NET INCOME AFTER PROVISION FOR TAXES $235 $190 $156 $8
--------- --------- --------- ---------
--------- --------- --------- ---------
PER SHARE INFORMATION
Number of shares 8,228,436 3,093,141 8,228,436 5,341,434
Income per share $0.03 $0.06 $0.02 $0.00
</TABLE>
(see accompanying notes)
4
<PAGE>
MONARCH BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR SIX MONTH PERIOD ENDED
--------------------------
(000's omitted) 30-JUN-96 30-JUN-95
<S> <C> <C>
Cash flows from operating activities:
Net income $235 $190
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan loss 105 125
Depreciation, amortization (89) (81)
Increase in accrued interest
payable and other liabilities 24 71
(Increase) decrease in accrued interest
receivable and other assets (770) (493)
--------- ---------
Net cash (from) used by operating activities (495) (188)
Cash flows from investing activities:
Net (increase) decrease in principal reductions
and purchases of investment securities (1,170) (5,792)
Net (increase) decrease in net loans 2,173 3,186
Additions to premises and equipment (50) (73)
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Net cash used by investing activities 953 (2,679)
Cash flows from financing activities:
Net (decrease) increase in demand and savings deposits 8,748 (2,990)
Repayment of debt 0 (54)
Proceeds from issuance of commom stock 0 5,668
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Net cash provided (used) by financing activities 8,748 2,624
Net increase (decrease) in cash and cash equivalents 9,206 (243)
Cash and cash equivalents, Beginning of Period 7,685 10,653
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Cash and cash equivalents, End of Period $16,891 $10,410
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Non-cash Activities:
Property acquired through foreclosure $0 $272
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Repayment of KSOP debt $11 $20
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Equity adjustments for FASB 115 changes to AFS securities ($116) $368
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</TABLE>
(see accompanying notes)
5
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
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
June 30, 1996, and the consolidated results of operations for the six
months ended June 30, 1996 and June 30, 1995, and the cash flows for the
same six 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 six month period ended June 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
MANAGEMENT'S DISCUSSION
During the second quarter of 1996, Monarch Bancorp ("the Company") and Monarch
Bank ("the Bank") focused on utilization of the increased capitalization of the
Company through a variety of activities and related actions. Among other
activities, near the end of the quarter the Bank opened a de novo retail branch
in Laguna Beach and relocated its data processing facility there. The Company
continued its progress toward the acquisition of Western Bank in West Los
Angeles, achieved substantial growth in deposits at the Bank, and continued to
see increasing loan demand in its marketplace. In addition, continued emphasis
on cost controls and credit quality resulted in earnings which approximated
budgeted numbers and loan portfolio performance which continued previous
positive trends.
The Southern California economy, and particularly that of the Bank's primary
market, Orange County, 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,
stabilization and some increase in real estate values, and the reorganization
of, and the emergence from bankruptcy of, Orange County government. 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 financial institutions in
Orange County and to the Bank and are reflected in the Bank's improved loan and
deposit totals. As of June 30, 1996, loans and leases approximate $35 million,
as opposed to $32 million and the little over $31 million at March 31, 1996 and
December 31, 1995, respectively. In addition, deposits as of June 30, 1996,
were approximately $72 million as opposed to $62 million and $59 million on
March 31, 1996 and December 31, 1995, respectively. Based on existing loan
commitments, it is expected that loan activity will increase even more in the
third quarter of 1996 and that the improved local economy, as well as the
acquisition of two large statewide institutions by other major banks will
increase core deposit totals, although not at the pace of the second quarter.
RESULTS OF OPERATIONS
As of June 30, 1996, the Company had consolidated total assets, total deposits
and shareholders' equity of approximately $78.9 million, $67.5 million, and
$11.0 million, respectively as opposed to $63.2 million, $55.7 million, and
$6.95 million for the period ended June 30, 1995, respectively. The Company's
shareholders' equity includes depreciation in available-for-sale securities in
the amount of $115,800. For the six (6) months ended June 30, 1996, the Company
on a consolidated basis recorded net earnings of approximately $235,000.
7
<PAGE>
Other Assets increased by $770,000 from the period ending December 31, 1995.
The increase was due primarily to increases of $187,000 in OREO, $93,000 in
accrued interest receivable, $70,000 in prepaid insurance and
stationery/supplies, $30,000 in miscellaneous receivables, and $365,000 in work
in progress accounts for the construction and start-up of the new Laguna Beach
branch facility, equipment for a new on-line teller system, and equipment and
software for expanded capability to do item processing for another financial
institution. These items constitute 97% of the increase and will be cleared by
the end of the third quarter.
Nonperforming loans and OREO, which totaled $1.41 million on December 31, 1994,
were reduced to $494,000 on December 31, 1995, and presently total $510,600 as
of June 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").
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 $33.8
million as of June 30, 1996, an increase from $26.4 million as of June 30, 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 $67.5 million as of June 30, 1996 from $55.7 million
as of June 30, 1995. The Bank's loan-to-deposit ratio, however, has decreased
from 53.5% as of March 31, 1996 to 47.8% as of June 30, 1996 as a result of core
deposit growth exceeding net loan growth. Management does not anticipate this
result to continue over the long term.
During the six (6) months ended June 30, 1996, $36,939 in loans were charged to
the ALLL. Because of the increased provisions, the Bank's ALLL increased from
$875,000 or 2.63% of gross loans as of March 31, 1996 to $925,000, or 2.7% of
gross loans as of June 30, 1996. The increase in the allowance is consistent
with the increase in the loan portfolio. Management has completed its quarterly
review of the adequacy of the ALLL as of June 30,1996, and has concluded that it
is adequate based on all currently available information. Management's review
included a detailed loan-by-loan assessment of the portfolio; considered current
economic events; and the declining number of past due loans as the loans that
were classified as problem loans on June 30, 1996 progress through the workout
process and are either charged off or repaid.
On July 14, 1996 the Bank officially opened a branch office located at 401
Glenneyre, Laguna Beach, California. The branch also houses the Bank's data
processing system. Based on internal forecasts, the Bank believes the branch
will run a deficit of approximately
<PAGE>
$100,000 during the remainder of 1996, and will become profitable in the tenth
full month of operation.
REGULATORY CAPITAL RATIOS
As of June 30, 1996, the Bank had regulatory capital ratios as follows and was
considered to be Well Capitalized by definition:
<TABLE>
<CAPTION>
THE BANK
June 30, 1996 June 30, 1995
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Well Capitalized Well Capitalized
Requirement Actual Requirement Actual
----------- ------ ----------- ------
<S> <C> <C> <C> <C>
Leverage Capital Ratio 5.00% 7.57% 5.00% 8.42%
Tier I Risk Based Ratio 6.00% 15.53% 6.00% 15.84%
Total Risk Based Ratio 10.00% 16.78% 10.00% 17.49%
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
June 30, 1996 June 30, 1995
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Well Capitalized Well Capitalized
Requirement Actual Requirement Actual
----------- ------ ----------- ------
<S> <C> <C> <C> <C>
Leverage Capital Ratio 5.00% 14.30% 5.00% 10.90%
Tier I Risk Based Ratio 6.00% 29.29% 6.00% 20.67%
Total Risk Based Ratio 10.00% 30.54% 10.00% 21.92%
</TABLE>
INTEREST INCOME
The $451,000 increase in net interest income for the comparative six months
ended June 30, 1996 and 1995 is due primarily to increases in the volume of
earning assets. For the first half of 1996 outstanding gross loans were
$33,780,000 compared to $27,279,000 at June 30, 1995, and investments were
$38,279,000 compared to $30,340,000 for the same periods. Although interest
rates declined 75-100 basis points between the periods, yields on earning assets
increased because of marginally higher yields on investments, improved loan
pricing, and reductions in both nonaccrual loans and OREO.
INTEREST EXPENSE
Interest expense increased by $133,000 for the period ended June 30, 1996
compared to the prior comparative period. The increase was attributable
primarily to an increase of 21.2% in deposits, as well as a rise of 25-50 basis
points in the competitive pricing of interest-bearing deposits of all
9
<PAGE>
kinds during the second quarter of 1996. Overall, the Bank's cost of funds
remains low with a strong core deposit base.
NON-INTEREST INCOME
Non-interest income declined during the comparative six-month periods of June
30, 1996 and June 30, 1995 in the amount of $218,000. The decrease was
primarily attributable to a non-recurring recovery of a non-loan item during
the period end for 1995. The remaining difference is attributable to
decreased item processing income due to the cancellation of a previous
contract and reduction of $27,000 in NSF and late fee income due to economic
improvements in the local economy. Service charge income grew marginally due
to changes in account analysis procedures.
OPERATING EXPENSE
Operating expense grew during the comparative periods by approximately 3.5%, or
$1.79 million for the period June 30, 1996 as compared to $1.72 million. This
was due primarily to a 143% increase in Other Professional Services. The
increase related primarily to consulting fees related to an earnings improvement
program which should result in a $500,000 reduction in Bank overhead on an
annual basis, and to legal fees relative to regulatory issues and a settled
lawsuit. Salary expense increased 1.3% during the first six months of 1996,
about one-third the rate of inflation, and other operating and marketing
expenses declined $200,000, or 32%, as a result of the implementation of the
earnings improvement program. Further overall benefits are expected in the
third and fourth quarters of 1996.
RESIGNATION OF CHIEF FINANCIAL OFFICER
On June 1, 1996, the Chief Financial Officer of the Company, Mr. William Demmin,
submitted his resignation effective June 30, 1996, to accept a similar position
in another financial institution. Mr. Demmin's resignation was voluntary and
was made for purposes of accepting other employment. There was no disagreement
as to either his performance or competence in maintaining the Company's
financial affairs, nor was there any disagreement between Mr. Demmin and the
Company relative to the conduct of its financial affairs and the accuracy of its
books.
On July 8, 1996, the Bank retained the services of Ms. Bobbe A. Sigler as
Controller and Cashier of the Bank, and Ms. Sigler will serve as the acting
Chief Financial Officer and Secretary of the Corporation. Ms. Sigler has many
years of experience in independent banks and bank holding companies, and is
fully capable of administering the duties of those positions. Ms. Sigler's
previous responsibilities include service as an Assistant Controller of Eldorado
Bank in Tustin, California from 1983 to 1985, a position as Chief Financial
Officer and Executive Vice President of Cerritos Valley Bank in Orange County
from 1985 to 1992, and in addition she also had substantial experience as a
consultant to other community
10
<PAGE>
banking organizations during 1995 and 1996, and as Director of Internal Audit
and Controller/Secretary-Treasurer of two non-banking corporations during the
last ten years. Ms. Sigler is a long time resident in the bank's trade area and
has considerable experience not only in administering the financial affairs of
independent banks, but also has experience in Federal Reserve Bank and SEC
financial reporting relative to their respective bank holding companies.
A decision will be made at a later time with regard to a permanent replacement
at the parent company for Mr. Demmin, after the presumed closing of the Western
Bank transaction and a reconstitution of the Company's Board of Directors.
WESTERN BANK ACQUISITION
On March 21, 1996 the Company entered into an Agreement and Plan of
Reorganization to acquire all of the issued and outstanding shares of Western
Bank ("Western"), a state chartered bank located in West Los Angeles. Western
has five offices, including its head office in Westwood. On June 30, 1996
Western had approximately $384 million in total assets. Under the terms of the
Agreement the cash purchase price will be $17.25 per share if the acquisition is
completed by September 30, 1996, or $17.50 if completed after September 30 and
before December 31, 1996. The projected purchase price, assuming all
outstanding stock options are exercised, will be approximately $68.5 million.
The proposed acquisition is subject to regulatory approvals and the Company's
ability to raise sufficient additional capital and financing for the
acquisition. As of July 31, 1996 all required regulatory applications have been
filed and have been determined to be complete, and the Company believes that the
transaction will close on or about September 30, 1996. While no assurance can
be given that the Company will be certain to raise the needed funds, as of June
30, 1996, written commitments for common stock purchases in a proposed private
placement offering pursuant to SEC Regulation D exceed $55 million and a loan
commitment from Northern Trust Company of Chicago, Illinois has been issued for
$26.5 million. Thus, the Company believes that it has reliable financial
commitments which exceed the amount required to close the transaction, and at
the present time expects to have the required funds from private placement
common stock purchasers in escrow by September 11, 1996. Pending necessary
regulatory approvals, management feels that the transaction will close on or
about September 30, 1996, but no later than December 31, 1996, and believes that
the acquisition is consistent with long term plans to increase shareholder value
by expanding the size and scope of the Company's operations.
As of June 30, 1996, Western Bank had assets of $384 million, total deposits of
$343.3 million, and shareholders' equity of $38.9 million, a decrease of $13
million, $14 million, and an increase of $1.4 million, respectively from the
period ended December 31, 1995. The bank's equity includes depreciation in the
available-for-sale securities in the amount of $1,046,000, as opposed to $54,000
at December 31, 1995.
During 1993, Western sold its interest in the single family Mortgage Banking
Division. On August 30, 1993, Western and Lawrence Koppleman and Company
("LK&C") entered into an agreement whereby Western purchased LK&C's 50% interest
in the Mortgage Division with the intention of selling the 100% interest to
Victoria Mortgage Corporation of San Antonio, Texas.
11
<PAGE>
Subsequently, Western and LK&C entered into a purchase and sale agreement
effective August 31, 1993 whereby Western sold all but a minor portion of the
servicing rights and the assets of its Mortgage Banking Division to Victoria
Mortgage. The sale provided Western with a net-after-tax gain on the sale of
$6.6 million, or $1.95 per share in 1993. Victoria assumed the lease of the
Mortgage Division; however, the Bank was not released from its obligations under
the lease.
Victoria ceased operations in July 1996 and is being liquidated. Approximately
30% of the space has been sublet. There is a pending sublease for the balance
of the remaining lease. The consummation of the pending sublease would
substantially reduce the lease exposure. Should the sublease not be finalized,
the total, pre-tax exposure will be approximately $1.5 million, one half of
which would be borne by Koppelman.
In addition to the lease exposure the Bank has a receivable due from Victoria of
$276,000. The receivable and the lease liability are shared equally with
Lawrence Koppelman & Company.
LAGUNA BEACH BRANCH AND DATA PROCESSING CENTER OF THE BANK
On April 20, 1996 the Bank moved its Data Processing and Administrative Center
from leased facilities in Laguna Niguel to new leased branch facilities in
Laguna Beach. The Bank is occupying approximately 5,100 sq. ft of premises in
downtown Laguna Beach, formerly occupied by another financial institution, and
which at one time also served as the headquarters of an independent bank. The
facility was remodeled into two approximately equal sections, one occupied by
the Data Processing Center and one by the de novo retail branch facility. The
lease cost of the new branch facility in Laguna Beach is significantly lower
than that of a normal branch operation as a result of the approximately $60,000
per year in savings realized by relocating the Data Processing Center to the new
facility.
The Bank already has a substantial customer base in the Laguna Beach market and
the branch facility is expected to build on that base. Pro forma profit and
loss statements for the branch indicate a break even status within ten months if
moderate loan and deposit projections are achieved. The unbudgeted effect on
1996 earnings is expected to be approximately $90,000 - $100,000. The improved
Data Processing Center operation is expected to provide additional revenue by
expanding its billing services for independent homeowners associations, and from
providing item processing services to another Southern California independent
bank beginning early in the third quarter.
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.
12
<PAGE>
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.
CREDIT QUALITY AND ALLL ANALYSIS
In the second quarter of 1996, the Bank realized further improvement in the
quality and administration of its loan portfolio, and while witnessing increased
loan demand and activity, continued its focus on credit quality. A Small
Business Administration lending specialist was added to the loan staff, further
augmenting improvements already made over the prior twelve months and increasing
the Bank's ability to lend to the lower end of the retail market. The Bank had
total loan classifications of $1,696,000 or 25% of total capital and reserves at
June 30, 1996.
As of June 30, 1996 the Bank still retained two OREO properties that have been
written down to the appraised value or expected market value less selling costs.
The properties are for sale and the Bank expects that at least one of those
properties will be sold at a small gain during the third quarter of the year,
after the expiration of the IRS redemption period relative to an existing tax
lien which is junior to the Bank's position.
At the end of the second quarter the Bank had no loans which were 90 days or
more past due and still accruing interest, and had five loans totaling $173,000
on nonaccrual and therefore, nonperforming loans comprised one-half of one
percent of gross loans as of the end of the quarter. Delinquency at the end of
the second quarter was 1.2%, approximately 75% below the average of all
independent banks in Southern California.
The Bank's Allowance for Loan and Lease Losses (ALLL) was $925,000 as of June
30, 1996, or 2.7% of gross loans outstanding as of the end of the quarter. The
Allowance increased, therefore, by $50,000 from the end of the first quarter,
with provisions to the Allowance of $55,000 during the quarter and net
charge-offs of $5,000. Management does not foresee any significant or
unanticipated losses in the third quarter of the year.
Management has completed its quarterly review of the adequacy of the ALLL as of
June 30, 1996 and has concluded that it is adequate based on all currently
available information. Management's review included a detailed loan-by-loan
assessment of the portfolio, considered current economic events, and the
declining number of past due loans that were classified as problem loans on June
30, 1996, and believes that collective information supports its determination of
adequacy as of the end of the quarter. Trends in performance of the loan
portfolio can be seen in the following table:
13
<PAGE>
CREDIT QUALITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FOR THE 6 MONTH PERIODS ENDING :
-----------------------------------------------------------------------------
JUNE 1996 DEC 1995 JUNE 1995 DEC 1994 JUNE 1994
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Charge offs 36,939 717,052 592,260 991,298 838,669
- -------------------------------------------------------------------------------------------------------------------
Recoveries 2,499 9,399 7,149 78,317 58,950
- -------------------------------------------------------------------------------------------------------------------
OREO 334,935 150,000 889,123 617,275 1,638,835
- -------------------------------------------------------------------------------------------------------------------
Non-accrual Loans 173,616 344,667 206,772 431,571 299,533
- -------------------------------------------------------------------------------------------------------------------
Accruing loans past due 90+ 0 0 649,791 362,149 450,078
- -------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses 925,018 854,458 677,000 1,136,971 275,000
- -------------------------------------------------------------------------------------------------------------------
Period-end Gross Loans 33,328,151 32,651,701 27,279,238 31,038,431 33,618,417
- -------------------------------------------------------------------------------------------------------------------
Impaired Loans 1,186,314 1,195,741 --- --- ---
- -------------------------------------------------------------------------------------------------------------------
Classified Loans 1,695,844 2,397,040 2,827,952 3,250,949 1,077,616
- -------------------------------------------------------------------------------------------------------------------
Allowance To Total Loans 2.7% 2.6% 2.5% 3.6% .8%
- -------------------------------------------------------------------------------------------------------------------
Allowance To Classified
Assets 54.6% 35.6% 23.9% 35.0% 25.5%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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, while management has disagreed on occasion with certain regulatory
examination classifications, such classifications have been incorporated into
the determination of the ALLL. The same basic monitoring system and allowance
methodology have been in place for the past three years. 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 June 30, 1996, the Bank had two loans which were considered to be impaired
under the provisions of FASB114. The two loans total $1,186,000, and both loans
have total specific reserves of $300,561 included in the adequacy analysis of
the ALLL. Both loans are current as to payment and no loss is foreseen in the
third quarter of 1996, although conditions relative to the two credits and their
underlying collateral values present risk characteristics should they
deteriorate at a future time.
14
<PAGE>
Management believes the above discussion assists in understanding management's
handling of, and fluctuations in, the ALLL from time to time. The Bank's
monitoring system and allowance methodology have remained relatively consistent
throughout the periods discussed and management believes the methodology has
been improved consistent with requirements of the regulatory orders and
suggestions. In addition, subsequent regulatory examination results have been
consistent with this belief. Management also believes this discussion
demonstrates a consistent and good-faith effort by management to identify and
recognize loan losses on a timely basis in accordance with generally accepted
accounting principles. In the past, a difficult economic environment
contributed to the difficulty in identifying all borrowers whose financial
condition had deteriorated until the loans themselves exhibited defined
weaknesses. While the situation appears to have stabilized, management also
believes the monitoring mechanisms are in place and that credit administration
has been improved such that emerging loan problems are identified on a timely
basis. The chart shown in Exhibit "A" attached tracks key criteria used in the
analysis of the adequacy of the ALLL.
DEFERRED INCOME TAX VALUATION ANALYSIS
At December 31, 1995, based on an analysis on realizability, management reversed
a portion of the previously existing valuation allowance. The $591,000
reduction in the valuation allowance was the result of $440,000 in anticipated
future benefits and a $151,000 reduction in deferred tax assets from 1994 to
1995. Of the recognized deferred tax assets approximately $96,000 pertained to
state tax benefits (see below), thus to support the $344,000 in federal deferred
tax assets approximately $1 million in federal taxable income, the actual
budgeted 1996 pre-tax income of Monarch, would be needed. A significant
portion of the budgeted figure is to be realized in the latter half of 1996 as
the benefits of loan and deposit growth begin to accumulate.
Pursuant to the recapitalization plan initiated in March of 1995, a significant
portion of the federal net operating losses and all existing federal tax
credits were limited as a result of the ownership shift provisions of section
382 of the internal revenue code. The computed limitation is equivalent to
$64,412 of annual recognized benefit. Utilization of tax credits is deferred
until all net operating losses have been either utilized or expired.
Although the 1995 tax return has not yet been finalized, the anticipated tax
loss of calendar year 1995 is $602,000 of which $473,000 will be exempt from any
limitation. This exempt loss coupled with a nine month proration of the $64,412
annual limit for 1995 and the full $64,412 annual limit for 1996 will provide a
total of loss benefit of $714,721. The full $243,000 after-tax benefit is
expected to be fully realized based upon forecasted pre-tax book income over a
12 to 18 month period.
In addition to the federal tax attributes, in excess of $800,000 of California
net operating losses are available. Based upon the anticipated pre-tax income
figures, the entire net operating loss would be utilized in 1996 at a rate of
approximately 11.5% for $96,000 in benefits.
15
<PAGE>
Approximately $3,262,000 in federal net operating loss carryovers are currently
available. As noted above approximately $714,000 of these loss carryovers will
be utilized in 1996 while all other carryovers would be subject to an annual
limitation of $64,412. Based upon the statutory lives of the $2,548,000 in
loss carryovers only $900,000 would ever be utilized. Thus $1,648,000 or
$560,000 in after tax dollars would expire prior to providing any economic
benefit. As previously noted, the alternative minimum tax credits, which
currently have no statutory life restriction, may not be utilized until after
the net operating loss carryovers the last of which expires in the year 2010. In
light of these restrictions, a valuation allowance equal to the net operating
loss carryovers that would be left unutilized as of December 31, 1996, as well
as all alternative minimum tax credits was established. All other deferred tax
assets are expected to be realized and sufficient tax history to support their
future realization is forecasted to exist within a 12 to 18 month period.
At June 30, 1996, management continues to believe the recorded deferred tax
asset is fully realizable.
QUASI-REORGANIZATION OF THE COMPANY AND BANK
The quasi-reorganization of the Company and the Bank, which will be submitted to
the shareholders at the Annual Meeting on August 20, 1996, and which was
included in the proxy materials furnished to all shareholders 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 is 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. The
Company anticipates, after shareholder approval, that the quasi-reorganization
of the Company will take place by December 31, 1996, at the discretion of the
Monarch Bancorp Board of Directors.
LOOKING FORWARD
The Company is actively working on all required regulatory approvals and towards
completing financing for the acquisition of Western Bank, which is expected on
or about September 30, 1996, but no later than December 31, 1996.
The Bank expects to begin item processing for a Palm Springs area independent
bank in late July 1996, and upon successful completion of this activity, plans
to begin item processing for Western Bank soon after completion of the
acquisition.
16
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
FASB115 adjustment
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. OTHER SIGNIFICANT INFORMATION
None
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
None
17
<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: August 12, 1996 /s/ E. Lynn Caswell
-----------------------------------
E. Lynn Caswell
President and CEO
Date: August 12, 1996 /s/ Bobbe A. Sigler
-----------------------------------
Bobbe A. Sigler
Acting Chief Financial Officer and Secretary
18
<PAGE>
Exhibit A
MONARCH BANCORP
ALLOWANCE FOR LOAN LOSS ANALYSIS
<TABLE>
<CAPTION>
Allowance For Provision Net
Total Loan Losses Classified Nonaccrual For Loan Charge-
Loans* At Period End Loans* Loans Losses Offs
----------- ------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993 $35,369,000 $1,055,000 $3,573,000
March 31, 1994 $34,584,000 $558,000 $3,128,000 $1,414,000 $0 $497,000
June 30, 1994 $33,618,000 $275,000 $1,078,000 $300,000 $0 $283,000
September 30, 1994 $32,000,000 $720,000 $3,004,000 $455,000 $545,000 $100,000
December 31, 1994 $31,695,000 $1,137,000 $3,251,000 $431,000 $450,000 $33,000
March 31, 1995 $30,675,000 $980,000 $2,934,000 $454,000 $0 $157,000
June 30, 1995 $27,279,000 $677,000 $2,828,000 $206,000 $125,000 $428,000
September 30, 1995 $29,101,000 $585,000 $2,448,000 $358,000 $10,000 $102,000
December 31, 1995 $32,652,000 $854,000 $2,397,000 $344,000 $290,000 $21,000
March 31, 1996 $33,328,000 $875,000 $2,193,000 $182,000 $50,000 $29,000
June 30, 1996 $33,738,000 $925,000 $1,696,000 $174,000 $55,000 $4,800
</TABLE>
<TABLE>
<CAPTION>
Allowance Allowance Allowance
To Classified To Nonaccrual To Total
Assets Loans Loans
------------- ------------- ---------
<S> <C> <C> <C>
December 31, 1993 29.5% 3.0%
March 31, 1994 17.8% 39.5% 1.6%
June 30, 1994 25.5% 91.7% 0.8%
September 30, 1994 24.0% 158.2% 2.3%
December 31, 1994 35.0% 263.8% 3.6%
March 31, 1995 33.4% 215.9% 3.2%
June 30, 1995 23.9% 328.6% 2.5%
September 30, 1995 23.9% 163.4% 2.0%
December 31, 1995 35.6% 248.3% 2.6%
March 31, 1996 39.9% 480.8% 2.6%
June 30, 1996 54.6% 531.6% 2.7%
</TABLE>
**As of one-month prior to quarter end.
Page 1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000721670
<NAME> MONARCH BANCORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,997
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,894
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,102
<INVESTMENTS-CARRYING> 8,283
<INVESTMENTS-MARKET> 0
<LOANS> 34,764
<ALLOWANCE> 925
<TOTAL-ASSETS> 78,909
<DEPOSITS> 67,490
<SHORT-TERM> 121
<LIABILITIES-OTHER> 254
<LONG-TERM> 0
0
0
<COMMON> 16,500
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 78,909
<INTEREST-LOAN> 2,688
<INTEREST-INVEST> 904
<INTEREST-OTHER> 1,784
<INTEREST-TOTAL> 2,688
<INTEREST-DEPOSIT> 738
<INTEREST-EXPENSE> 738
<INTEREST-INCOME-NET> 1,950
<LOAN-LOSSES> 105
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,786
<INCOME-PRETAX> 374
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 235
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 173
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 854
<CHARGE-OFFS> 37
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 925
<ALLOWANCE-DOMESTIC> 925
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
