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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ....................... to
.........................
Commission File No. 0-13551
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MONARCH BANCORP
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(Name of small business issuer in its charter)
CALIFORNIA 95-3863296
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
30000 TOWN CENTER DRIVE LAGUNA NIGUEL, CALIFORNIA 92677
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (714) 495 3300
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Securities registered under Section 12(b) of Exchange Act: NONE
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Securities registered under Section 12(g) of Exchange Act:
COMMON STOCK, NO PAR VALUE
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(Title of Class)
Check whether the issuer (1) filed all reports 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
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No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this from, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ X ]
The issuer's net revenues for its most recent fiscal year was $5,424,000.
The aggregate market value of the voting stock held by non-affiliates of
the issuer as of March 15, 1996 was $10,598,000
Number of registrant's shares of Common Stock outstanding as of March 15,
1995 was 8,228,436
Documents incorporated by reference: NONE
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PART I
ITEM I. BUSINESS
GENERAL
Monarch Bancorp (the "Company") was organized on May 20, 1983 as a
California Corporation for the purpose of becoming a bank holding company
and to acquire all the outstanding capital stock of Monarch Bank (the
"Bank"), a California state-chartered bank. The Company commenced operation
on June 18, 1984. It is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended, and is subject to the supervision
and regulation of the Board of Governors of the Federal Reserve System.
The Company's principal business is to serve as a holding company for its
banking subsidiary and other possible banking or banking-related
subsidiaries. Since inception, the Company has not been active except
through its subsidiaries which the Company or the Bank may form or acquire.
The Company has no salaried employees, and shares both executive management
and Board of Directors with its banking subsidiary, the Bank.
As of December 31, 1995, the Company had total consolidated assets of
approximately $70 million, total consolidated net loans of approximately
$32 million, total consolidated deposits of approximately $59 million, and
total consolidated capital of approximately $11 million.
The Company has no industry segments other than banking.
The Bank conducts a general banking business including the acceptance of
checking and savings deposits and the making of commercial, real estate,
installment, and other loans. The Bank is located at 30000 Town Center
Drive, Laguna Niguel, California 92677. The Bank was incorporated as a
California Corporation in October 1979, and commenced operation as a
California state-chartered bank on April 21, 1980. The Bank is insured
under the Federal Deposit Insurance Act up to applicable limits thereof,
but the Bank is not a member of the Federal Reserve System. In March 1996,
the Bank was examined by the Federal Reserve as part of the membership
process. A formal application for membership in the Federal Reserve is
expected to be submitted in the first week of April and membership is
expected to be granted during the second quarter of 1996.
The Bank's primary market area is South Orange County, California. The
principal business of the Bank is to accept time and demand deposits, and
to make commercial loans, consumer loans, real estate loans, and other
investments. The Bank offers a broad range of banking products and
services, including many types of business and personal savings and
checking accounts and other consumer banking services. The Bank originates
several types of loans, including secured and unsecured commercial and
consumer loans, commercial and residential real estate mortgage loans, and
commercial and residential construction loans. The Bank's loans are
primarily short-term and/or adjustable rate loans. The Bank provides for
the SBA lending market on a limited basis,
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and outside sources are used to assist in the documentation. Loans are
generally expected to be held in the Bank's portfolio rather than sold.
A service was introduced in 1993 to process electronic fund transfers for
certain Bank customers. This service has been expanded as part of the
billing process being done for several Bank customers including local
homeowners associations. During the first part of 1995, the Bank has
continued to expand its billing and electronic fund transfers services to
provide both fee income and an expanded service for deposit customers. The
Bank generally has limited this service to existing customers as an
additional component of relationship banking.
The Bank currently offers access to ATM networks. The Bank issues Master
Card credit cards through a correspondent bank. The Bank is a merchant
depository for cardholder drafts under Visa and Master Card credit cards
and, similar to other state-chartered banks of its size, can provide
investment and international banking services through its major
correspondent banks.
Since 1987, the Bank's Strategic Plan has emphasized serving the banking
needs of individuals, professionals, and small to medium-sized businesses
in Laguna Niguel, California and the contiguous communities. The Bank has
carved a local niche by being active in civic and community activities and
providing a high degree of individualized personal service. The Bank was
the first in the local area to be open for Saturday business and maintains
operating hours from 7:00 a.m. to 7:00 p.m. in an effort to serve its
largely commuter customer base as well as its small business customers. In
addition, it has a courier "branch" which operates throughout mid- and
southern-Orange County, serving professionals and small businesses, which
has greatly expanded its service area without the need for additional
physical facilities. Under present management since 1987, the Bank's major
lending emphasis has been directed at short term owner-occupied home
construction projects, commercial lending to professionals and individuals,
with the objective of building a balanced community loan and investment
portfolio mix (although real estate loans, and other loans secured by real
estate, have dominated the portfolio in the past). The Bank relies on a
foundation of locally generated deposits and Management believes it has a
relatively low cost of funds due to a high percentage of low cost and
noninterest bearing deposits. Due to consolidations, mergers, and a reduced
number of independent banks headquartered in South Orange County, the Bank
believes that, with sufficient capital resources, it is well positioned to
prudently expand and seek to build a larger, regional independent financial
institution in the affluent South Orange County market.
The Bank has not been involved in leasing in the past several years. The
Bank has not been involved in any direct equity investments in real estate
projects or in the sale of annuities, mutual funds, or other investment
products.
As part of its efforts to achieve long-term stable profitability and
respond to a changing economic environment in Southern California and South
Orange County, the Company and the Bank are investigating all possible
options to augment its traditional focus by broadening the credit and
customer services provided to individuals, professionals and small and
medium size businesses. The Company and the Bank believe that additional
capital will permit an acceleration of this effort, leading to greater
diversification of both the Bank's loan portfolio and deposit base and
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new sources of fee income. Areas of possible future diversification
include expanded days and hours of operation, mortgage, brokerage, annuity
and mutual funds products, as well as the acquisition of other financial
institutions or branches of other financial institutions.
On March 21, 1996, the Company in a press release announced a Definitive
Agreement to acquire Western Bank. Western Bank has offices in Westwood,
Beverly Hills, Century City, Santa Monica and Encino. As of December 31,
1995, total assets of Western Bank were $397 million, and net earnings for
the 1995 fiscal year were $4.2 million. The Definitive Agreement, which is
subject to several conditions, provides for Western Bank shareholders to
receive a per share purchase price in cash of $17.25 per share if the
merger occurs by September 30, 1996, and $17.50 per share if the merger
occurs after September 30, 1996 and by December 31, 1996. The Agreement is
subject to the Company raising sufficient capital in a private placement
offering scheduled to be completed in the third quarter of 1996, and
regulatory approvals. Western Bank is expected to survive as a wholly-owned
subsidiary of the Company and to be operated as a separate entity from
Monarch Bank. While the Company expects to move forward with its
acquisition plans, no assurances can be given that the acquisition will be
completed as planned nor that the acquisition, if completed, will produce
increased profitability, shareholder value or franchise value.
The Company believes (but cannot assure) that the franchise value of the
Bank, in part due to the shrinking number of independent banks in South
Orange County, can be enhanced by expansion into the affluent markets of
Laguna Beach, Laguna Hills, Leisure World (the largest retirement community
in the United States), Lake Forest, Mission Viejo, Dana Point, San Juan
Capistrano and San Clemente. These communities are among communities with
the highest per capital incomes in California, most of which do not
presently have a locally head quartered independent community bank. Very
few bank charters are presently being granted, and the capitalization
requirements for such charters are substantially higher than in the past;
therefore, it is Management's belief that a well run community bank which
concentrates its expansion in such an affluent coastal area of Southern
California can, over a five to ten year period, substantially improve its
franchise value, as well as its assets size and income levels. However, no
assurances can be given that the Bank will experience an improvement in its
franchise value or achieve any of the goals referred to herein. The Bank is
currently in the process of establishing a branch in Laguna Beach,
California. The proposed branch would require regulatory approvals and, if.
approved would be opened during the second or third quarter of 1996.
The severe problems associated with the savings and loan industry and the
problems experienced by other independent banks within Orange County, with
operations in South Orange County, have resulted in a number of branch
facilities being made available for sale. The Company believes that one or
more small institutions may be available at attractive prices and that
branches of other financial institutions may be available at substantially
below their investment cost. Although the Company has had preliminary
discussions with a number of financial institutions regarding possible
acquisitions, no agreements or understandings have been reached at this
time. The Company has been contacted by other financial institutions with
regard to their interest in selling various branches of their companies.
Except as otherwise stated, no negotiations are ongoing with respect to
such transactions, and the Company cannot predict whether assets or banks
can
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definitely be acquired on terms acceptable to the Company. Acquisitions of
this nature can take from 60 to 90 days or longer for the approval and
purchase of assets and branches, and 6 to 12 months or longer for the
negotiation, approval and purchase of an entire financial institution. No
assurance can be given that the Company can successfully negotiate the
acquisition of other institutions or branches at prices that would be
acceptable to it, or that any such acquisition would receive the requisite
regulatory and shareholder (if applicable) approvals.
ADMINISTRATIVE ACTIONS
Following the conclusion of the FDIC examination of the Bank in 1994, for
the purpose of cooperating with the FDIC and without admitting or denying
any allegations, the Bank entered into a Section 8(b) Order ("8(b) Order")
with the FDIC.
The 8(b) Order became effective on December 23, 1994, and it related to
several areas in the Bank including: (i) management; (ii) increased
participation by the Board in the affairs of the Bank; (iii) a Tier 1
leverage capital ratio of at least 7%: (iv) reduce classified assets; (v)
extensions of credit to borrowers whose assets were adversely classified;
(vi) the Bank's loan policy; (vii) to reduce the balances of certain loans
that exceeded the Bank's current lending limit; (viii) establish and
maintain an adequate reserve for loan losses; (ix) prepare and implement a
budget; (x) correct any violations of laws; (xi) internal routine and
control practices and internal audit policy; (xii) Consolidated Reports of
Condition; (xiii) cash dividends; and (xiv) written progress reports.
As a result of the 1994 examination by the California State Banking
Department, the Bank agreed to a final order under California Financial
Code Section 1913 (the "1913 Order") with the California State Banking
Department (the "Department") that became effective December 14, 1994. The
1913 Order related to several areas of the Bank, including: (i) management;
(ii) the business plan; (iii) tangible shareholders' equity which equals or
exceeds 7% of total tangible assets; (iv) reduction of assets adversely
classified; (v) allowance for loan loss; (vi) a budget for 1995; (vii)
written policies and procedures; (viii) distributions to shareholders; (ix)
correction of all violations of law; and (x) written progress reports.
RESPONSIVE MEASURES
The Bank took aggressive action to comply with each of the regulatory
Orders or requirements. The most critical need was to increase the Bank's
capital, and capital was increased to or above the target levels on March
31, 1995.
On March 31, 1995, the Company completed a private placement offering for
approximately $6,139,000 and issued 4,547,111 new shares of common stock.
Proceeds from the Offering were used to pay approximately $470,000 in
Offering expenses; $3,550,000 to increase the Company's investment in the
Bank; $53,500 to retire Company debt; and approximately $2,065,000 in cash
was being held by the Company for future operating needs or investments.
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As a result of the capital increase for the Bank, the Bank's Tier 1 capital
ratio increased to approximately 7.85%. The increase in the Bank's capital
meets or exceeds the Bank's regulatory commitments to the FDIC and
Superintendent to increase the Bank's ratio for Tier 1 capital to total
assets to equal or exceed 7.0%.
In addition to the completion of the private placement offering in the
first quarter of 1995, the Company completed in the third quarter of 1995 a
rights and public offering for the offer and sale of up to 3,177,296 shares
of its common stock pursuant to the terms of a Prospectus dated July 14,
1995. In connection with such offering, a total of 2,886,898 shares of
common stock of the Company were sold. The Company increased its capital by
an additional $3,464,000 in net proceeds in the rights and public offering,
and the Company increased its leverage capital ratio as of September 30,
1995 to approximately 15.4%.
The Bank since March 31, 1995 has been in full compliance with the
provisions of the Orders relating to capital and capital ratios. Management
of the Bank also has taken specific action to improve the Bank's credit
administration including the adoption of revised policies for lending and
loan administration, changes to staff to improve technical lending skills,
and reducing classified loans. The Board increased its participation in the
affairs of the Bank and the Bank charged off all assets classified loss on
the 1994 examinations and has been consistently in compliance with the
reduction schedule of classified assets contained in the 8(b) Order. The
Bank has not extended any credit to an individual whose extension of credit
has been charged off or classified loss, and the Loan Committee of the Bank
approved any further renewal or extension of credit to a borrower whose
loan was classified substandard. The Bank also amended its policies and
procedures. The Board of Directors has reviewed the Reserve for Loan Losses
not less than quarterly and additional provisions have been made in 1995 in
order to establish an adequate Reserve.
The FDIC commenced an examination of the Bank in the second quarter of
1995, and the FDIC determined that although the Bank was in compliance with
several terms of the 8(b) Order, the FDIC stated that the Bank was not in
sufficient compliance with all of the terms of the 8 (b) Order that would
warrant the FDIC to remove the 8(b) Order. The FDIC noted substantial
progress of the Bank in complying with the terms of the 8(b) Order,
however, the 1995 examination closely followed the completion of the
private placement offering, and the FDIC indicated that following the next
regulatory examination, if the Bank was considered to be satisfactory, the
FDIC would consider removing the 8(b) Order.
REMOVAL OF ORDERS, AND MOU
In the fourth quarter of 1995, the Superintendent commenced an examination
of the Bank, and upon the conclusion of such examination, the
Superintendent determined that the Bank was in compliance with the State's
1913 Order, and the State's 1913 Order was terminated on December 28,
1995.
While the FDIC did not complete an examination concurrent to the State's,
they did complete a visitation and an off-site review as of the end of
1995. As a result of this review, the FDIC agreed
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to terminate its Section 8(b) Order. The Bank has agreed to a Memorandum of
Understanding with the FDIC which became effective on March 6, 1996. The
Bank received official notification on March 11, 1996 that the Section 8(b)
Order had been terminated.
The terms of the Memorandum call for the Bank to: i) continue to retain
qualified management; ii) to notify the Regional Director of the FDIC at
least 30 days prior to any addition to the board or the employment of any
individual as a senior officer; (iii) to maintain a fully funded loan loss
reserve and a Tier 1 capital to total assets ratio of 7.0% or more during
the life of the Memorandum; (iv) to reduce classified assets from previous
State and FDIC examinations to not more than 40% of total capital and
reserves as of June 30,1996; (v) to formulate and adopt a three-year
business/strategic plan in addition to the plan and budget the Bank has
already completed for 1996; (vi) to not pay dividends except a) as allowed
by State and Federal laws; b) that after the payment the Tier 1 capital
ratio to total asset is more than 7.0%; c) that the declaration and payment
of the dividend be approved in advance by the board; and d) that the Bank
shall certify to the Regional Director that it is in conformance with the
dividend provisions of the Memorandum no less than 30 days prior to paying
the dividends; and (vii) the Bank will provide written quarterly reports
detailing its actions to secure compliance with the Memorandum.
Management is currently formulating an action plan to ensure the full
compliance with all of the terms of the Memorandum.
The Bank's regulatory agencies are required to examine the Bank within
certain statutory time frames, and management of the Company believes the
Bank is scheduled to be examined before the end of the second quarter of
1996 by the FDIC. In the event the FDIC determines that the Bank is not in
compliance with the terms of the Memorandum, or the FDIC otherwise
determines that the Bank is engaging in unsafe or unsound practices in
conducting its business or otherwise violating any law, rule or regulation,
the FDIC would have available to it various remedies, including taking one
or more of the enforcement actions discussed below. There can be no
assurance that the steps taken by the Bank will be sufficient to terminate
the Memorandum or that enforcement actions will never be commenced in the
future.
SUPERVISION AND REGULATION
MONARCH BANCORP
Upon the reorganization of the Bank as a wholly-owned subsidiary, the
Company became a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Act"), and is subject to the
supervision and regulation of the Board of Governors of the Federal Reserve
System (the "Board"). The Company functions primarily as the sole
stockholder of the Bank and its nonbank subsidiary, and the Company
establishes general policies and activities of the operating subsidiaries.
The capital stock of the Company is subject to the registration
requirements of the Securities Act of 1933. The common stock of the Bank is
exempt from such requirements. The Company is also
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subject to the periodic reporting requirements of the Securities Exchange
Act of 1934, which include, but are not limited to, the filing of annual,
quarterly and other reports with the Securities and Exchange Commission.
The Company, as a bank holding company, is subject to regulation under the
Bank Holding Company Act of 1956, as amended, and is registered with and
subject to the supervision of the Federal Reserve Board. The Company is
required to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially all of the assets of any bank, or
ownership or control of voting shares of any bank if, after giving effect
to such acquisition, the Company would own or control, directly or
indirectly more than 5% of such bank. The Bank Holding Company Act
prohibits the Company from acquiring any voting shares of, interest in, or
all or substantially all of the assets of a bank located outside the State
of California unless the laws of such state specifically authorize such
acquisition.
Under the Bank Holding Company Act, the Company may not engage in any
business other than managing or controlling banks or furnishing services to
its subsidiaries. The Company is also prohibited, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of
the voting shares of any company unless the company is engaged in such
activities. The Federal Reserve Board's approval must be obtained before
the shares of any such company can be acquired and, in certain cases,
before any approved company can open new offices. In making such
determinations the Federal Reserve Board considers whether the performance
of such activities by a bank holding company would offer advantages to the
public, such as greater convenience, increased competition, or gains in
efficiency, which outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices. Further, the Federal Reserve Board
is empowered to differentiate between activities commenced de novo and
activities commenced by acquisition, in whole or in part, of a going
concern.
Although the entire scope of permitted activities is uncertain and cannot
be predicted, the major non-banking activities that have been permitted to
bank holding companies with certain limitations are: making, acquiring or
servicing loans that would be made by a mortgage, finance, credit card or
factoring company; operating an industrial loan company; leasing real and
personal property; acting as an insurance agent, broker, or principal with
respect to insurance that is directly related to the extension of credit by
the bank holding company or any of its subsidiaries and limited to
repayment of the credit in the event of death, disability or involuntary
unemployment; issuing and selling money orders, savings bonds and travelers
checks; performing certain trust company services; performing appraisals of
real estate and personal property; providing investment and financial
advice; providing data processing services; providing courier services;
providing management consulting advice to nonaffiliated depository
institutions; arranging commercial real estate equity financing; providing
certain securities brokerage services; underwriting and dealing in
government obligations and money market instruments; providing foreign
exchange advisory and transactional services; acting as a futures
commission merchant; providing investment advice on financial futures and
options on futures; providing consumer financial counseling; providing tax
planning and preparation services; providing check guaranty services;
engaging in collection agency activities; and operating a credit bureau.
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The Company's primary sources of income are the receipt of dividends and
management fees from its subsidiaries, and interest income on its
investments. The Bank's ability to make such payments to the Company is
subject to certain statutory and regulatory restrictions.
The Company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or
lease of property or furnishing of services. For example, with certain
exceptions the Bank may not condition an extension of credit on a
customer's obtaining other services provided by it, the Company or any
other subsidiary or on a promise by the customer not to obtain other
services from a competitor.
As a bank holding company, the Company is required to file reports with the
Federal Reserve Board and to provide such additional information as the
Federal Reserve Board may require. The Federal Reserve Board also has the
authority to examine the Company and each of its subsidiaries with the cost
thereof to be borne by the Company.
In addition, banking subsidiaries of bank holding companies are subject to
certain restrictions imposed by federal law in dealings with their holding
companies and other affiliates. Subject to certain exceptions set forth in
the Federal Reserve Act, a bank can loan or extend credit to an affiliate,
purchase or invest in the securities of an affiliate, purchase assets from
an affiliate, accept securities of an affiliate as collateral security for
a loan or extension of credit to any person or company or issue a
guarantee, acceptance or letter of credit on behalf of an affiliate only if
the aggregate amount of the above transactions of the Bank and its
subsidiaries does not exceed 10% of the Bank's capital stock and surplus on
a per affiliate basis or 20% of the Bank's capital stock and surplus on an
aggregate affiliate basis. Such transaction must be on terms and conditions
that are consistent with safe and sound banking practices. A bank and its
subsidiaries generally may not purchase a low-quality asset, as that term
is defined in the Federal Reserve Act, from an affiliate. Such restrictions
also prevent a holding company and its other affiliates from borrowing from
a banking subsidiary of the holding company unless the loans are secured by
collateral.
The BHC Act also prohibits a bank holding company or any of its
subsidiaries from acquiring voting shares or substantially all the assets
of any bank located in a state other than the state in which the operations
of the bank holding company's banking subsidiaries are principally
conducted unless such acquisition is expressly authorized by statutes of
the state in which the bank to be acquired is located. Legislation recently
adopted in California permits out-of-state bank holding companies to
acquire California banks. See "Effect of Governmental Policies and Recent
Legislation" later in this section.
The BHC Act and regulations of the Federal Reserve Board also impose
certain constraints on the redemption or purchase by a bank holding company
of its own shares of stock.
The Federal Reserve Board has cease and desist powers to cover parent bank
holding companies and non-banking subsidiaries where action of a parent
bank holding company or its non-financial institutions represent an unsafe
or unsound practice or violation of law. The Federal Reserve Board has the
authority to regulate debt obligations (other than commercial paper) issued
by bank
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holding companies by imposing interest ceilings and reserve requirements on
such debt obligations.
The ability of the Company to pay dividends to its shareholders is subject
to the restrictions set forth in the California General Corporation Law
(the "Corporation Law"). The Corporation Law provides that a corporation
may make a distribution to its shareholders if the corporation's retained
earnings equal at least the amount of the proposed distribution. The
Corporation Law further provides that, in the event that sufficient
retained earnings are not available for the proposed distribution, a
corporation may nevertheless make a distribution to its shareholders if it
meets two conditions, which generally are as follows: (i) the corporation's
assets equal at least 1-1/4 times its liabilities; and (ii) the
corporation's current assets equal at least its current liabilities or, if
the average of the corporation's earnings before taxes on income and before
interest expense for the two preceding fiscal years was less than the
average of the corporation's interest expense for such fiscal years then
the corporation's current assets equal at least 1-1/4 times its current
liabilities.
MONARCH BANK
Banks are extensively regulated under both federal and state law. The Bank,
as a California state chartered bank, is subject to primary supervision,
periodic examination and regulation by the Superintendent and the FDIC.
The Bank is insured by the FDIC, which currently insures deposits of each
member bank to a maximum of $100,000 per depositor. For this protection,
the Bank, as is the case with all insured banks, pays a semiannual
statutory assessment and is subject to the rules and regulations of the
FDIC. Although the Bank is not a member of the Federal Reserve System, it
is nevertheless subject to certain regulations of the Federal Reserve
Board.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State
and federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings,
dividends and locations of branch offices. Further, the Bank is required to
maintain certain levels of capital.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to the stockholders by the Bank. California law restricts
the amount available for cash dividends by state-chartered banks to the
lesser of retained earnings or the bank's net income for its last three
fiscal years (less any distributions to stockholders made during such
period). In the event a bank has no retained earnings or net income for its
last three fiscal years, cash dividends may be paid in an amount not
exceeding the net income for such bank's last preceding fiscal year only
after obtaining the prior approval of the Superintendent.
The FDIC also has authority to prohibit the Bank from engaging in what, in
the FDIC's opinion, constitutes an unsafe or unsound practice in conducting
its business. It is possible, depending upon the financial condition of the
bank in question and other factors, that the FDIC could assert
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that the payment of dividends or other payments might, under some circumstances,
be such an unsafe or unsound practice.
Banks are subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of its affiliates, the purchase of or investments in stock or other
securities thereof, the taking of such securities as collateral for loans and
the purchase of assets of such affiliates. Such restrictions prevent affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank in any other affiliate is limited to 10% of the Bank's capital and
surplus (as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations). California law also imposes certain
restrictions with respect to transactions involving other controlling persons of
the Bank. Additional restrictions on transactions with affiliates may be imposed
on the Bank under the prompt corrective action provisions of the FDIC
Improvement Act.
POTENTIAL ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Bank, may be subject to potential
enforcement actions by the FDIC and the Superintendent for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease-and-desist order that can be
judicially enforced, the termination of insurance of deposits, the imposition of
civil money penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties and the imposition of
restrictions and sanctions under the prompt corrective action provisions of the
FDIC Improvement Act.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the Bank on loans extended to
its customers and securities held in the Bank's portfolio comprise the major
portion of the Bank's earnings. These rates are highly sensitive to many factors
that are beyond the control of the Bank. Accordingly the earnings and growth of
the Bank are subject to the influence of local, domestic and foreign economic
conditions, including recession, unemployment and inflation.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial intermediaries subject to its
reserve requirements and by
10
<PAGE>
varying the discount rates applicable to borrowings by depository institutions.
The actions of the Federal Reserve Board in these areas influence the growth of
bank loans, investments and deposits and also affect interest rates charged on
loans and paid on deposits. The nature and impact of any future changes in
monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
intermediaries. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
intermediaries are frequently made in Congress, in the California legislature
and before various bank regulatory and other professional agencies. For example,
legislation has been introduced in Congress that would repeal the current
statutory restrictions on affiliations between commercial banks and securities
firms. The likelihood of any major changes and the impact such changes might
have on the Bank are impossible to predict.
CAPITAL STANDARDS
The FDIC has adopted risk-based capital guidelines intended to provide a measure
of capital that reflects the degree of risk associated with a banking
organization's operations for both transactions reported on the balance sheet as
assets and transactions, such as letters of credit and recourse arrangements,
which are recorded as off balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off balance sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain US Treasury securities,
to 100% for assets with relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which includes off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock,
retained earnings, noncumulative perpetual preferred stock (cumulative perpetual
preferred stock for bank holding companies) and minority interests in certain
subsidiaries, less most intangible assets. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, cumulative
preferred stock, long-term preferred stock, eligible term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital is subject to certain other requirements and
limitations of the federal banking agencies. The federal banking agencies
require a minimum ratio of qualifying total capital to risk-adjusted assets of
8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%.
In addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform
11
<PAGE>
risk-based capital guidelines and leverage ratios that apply across the
industry, the regulators have the discretion to set individual minimum capital
requirements for specific institutions at rates significantly above the minimum
guidelines and ratios.
Effective January 17, 1995, the federal banking agencies issued a final rule
relating to capital standards and the risks arising from the concentration of
credit and nontraditional activities. Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory minimums. The federal
banking agencies have not imposed any quantitative assessment for determining
when these risks are significant, but have identified these issues as important
factors they will review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss reserves to classified assets.
The benchmark set forth by such policy statement is the sum of (a) assets
classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of
assets classified substandard; and (d) estimated credit losses on other assets
over the upcoming 12 months.
Federally supervised banks and savings associations are currently required to
report deferred tax assets in accordance with SFAS No. 109. The federal banking
agencies recently issued final rules governing banks and bank holding companies,
which became effective April 1, 1995, which limit the amount of deferred tax
assets that are allowable in computing an institution's regulatory capital. The
standard has been in effect on an interim basis since March 1993. Deferred tax
assets that can be realized for taxes paid in prior carry back years and from
future reversals of existing taxable temporary differences are generally not
limited. Deferred tax assets that can only be realized through future taxable
earnings are limited for regulatory capital purposes to the lesser of (i) the
amount that can be realized within one year of the quarter-end report date, or
(ii) 10% of Tier 1 capital. The amount of any deferred tax in excess of this
limit would be excluded from Tier 1 capital and total assets and regulatory
capital calculations.
Future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of the Bank to grow and could restrict the amount of profits, if
any, available for the payment of dividends. As of December 31, 1995, the Bank
had total risk-based capital ratio of 18.19%, Tier 1 risk-based capital ratio of
16.94%, and leverage capital ratio of 8.85%. Based upon these ratios, the Bank
was deemed well capitalized as of December 31, 1995 under the prompt corrective
action provisions of the FDIC Improvement Act and was in full compliance with
the FDIC's Order. It was also in full compliance with the continued 7.0% capital
ratio defined in the Memorandum.
SAFETY AND SOUNDNESS STANDARDS
On February 2, 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines
12
<PAGE>
rather than regulations, relate to internal controls, information systems,
internal audit systems, loan underwriting and documentation, compensation and
interest rate exposure. In general, the standards are designed to assist the
federal banking agencies in identifying and addressing problems at insured
depository institutions before capital becomes impaired. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan may
result in enforcement proceedings. Additional standards on earnings and
classified assets are expected to be issued in the near future.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan to value limits that do
not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be conducted by
either state certified or state licensed appraisers for transactions in excess
of certain amounts. State certified appraisers are required for all transactions
with a transaction value of $1,000,000 or more; for all nonresidential
transactions valued at $250,000 or more; and for "complex" 1-4 family
residential properties of $250,000 or more. A state licensed appraiser is
required for all other appraisals. However, appraisals performed in connection
with "federally related transactions" must now comply with the agencies'
appraisal standards. Federally related transactions include the sale, lease,
purchase, investment in, or exchange of, real property or interests in real
property as security for a loan or investment, including mortgage-backed
securities.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC.
The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The FDIC also has authority to impose special assessments
against insured deposits.
The FDIC has adopted final regulations implementing a risk-based premium system
required by federal law. Under the regulations which cover the assessment
periods commencing on and after January 1, 1994, insured depository institutions
are required to pay insurance premiums within a range of 23 cents per $100 of
deposits to 31 cents per $100 of deposits depending on their risk
classification. The FDIC, effective September 30, 1995, lowered assessments from
their rates of $.23 to $.31 per $100 of insured deposits to rates of $.04 to
$.31, depending on the health of the bank, as a result of the recapitalization
of the BIF. On November 15, 1995, the FDIC voted to
13
<PAGE>
drop its premiums for well capitalized banks to zero effective January 1, 1996.
Other banks will be charged risk-based premiums up to $.27 per $100 of deposits.
Congress is expected to act soon on provisions to strengthen the Savings
Association Insurance Fund (the "SAIF") and to repay outstanding bonds that were
issued to recapitalize the SAIF's successor as a result of payments made due to
the insolvency of savings and loan associations and other federally insured
savings institutions in the late 1980s and early 1990s. Costs for these measures
could be passed along, in part, to the banking industry.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Interstate Act") .Under the
Interstate Act, beginning one year after the date of enactment, a bank holding
company that is adequately capitalized and managed may obtain regulatory
approval to acquire an existing bank located in another state without regard to
state law. A bank holding company would not be permitted to make such an
acquisition if, upon consummation, it would control (a) more than 10% of the
total amount of deposits of insured depository institutions in the United States
or (b) 30% or more of the deposits in the state in which the bank is located. A
state may limit the percentage of total deposits that may be held in that state
by any one bank or bank holding company if application of such limitation does
not discriminate against out-of-state banks. An out-of-state bank holding
company may not acquire a state bank in existence for less than a minimum length
of time that may be prescribed by state law except that a state may not impose
more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirement and conditions as for a merger
transaction.
The Interstate Act is likely to increase competition in the Bank's market areas
especially from larger financial institutions and their holding companies. It is
difficult to assess the impact such likely increased competition will have on
the Bank's operations.
In 1986, California adopted an interstate banking law. The law allows California
banks and bank holding companies to be acquired by banking organizations in
other states on a "reciprocal" basis (i.e., provided the other state's laws
permit California banking organizations to acquire banking organizations in that
state on substantially the same terms and conditions applicable to banking
organizations solely within that state). The law took effect in two stages. The
first stage allowed acquisitions on a "reciprocal" basis within a region
consisting of 11 western states. The second stage, which became effective
January 1, 1991, allows interstate acquisitions on a national
14
<PAGE>
"reciprocal" basis. California has also adopted similar legislation applicable
to savings associations and their holding companies.
On September 28, 1995, Governor Pete Wilson signed Assembly Bill No. 1482, the
Caldera, Weggeland, and Killea California Interstate Banking and Branching Act
of 1995 (the "1995 Act"). The 1995 Act, which was filed with the Secretary of
State as Chapter 480 of the Statutes of 1995, became operative on October 2,
1995.
The 1995 Act opts in early for interstate branching, allowing out-of-state banks
to enter California by merging or purchasing a California bank or industrial
loan company which is at least five years old. Also, the 1995 Act repeals the
California Interstate (National) Banking Act of 1986, which regulated the
acquisition of California banks by out-of-state bank holding companies. In
addition, the 1995 Act permits California state banks, with the approval of the
Superintendent of Banks, to establish agency relationships with FDIC-insured
banks and savings associations. Finally, the 1995 Act provides for regulatory
relief, including (i) authorization for the Superintendent to exempt banks from
the requirement of obtaining approval before establishing or relocating a branch
office or place of business, (ii) repeal of the requirement of directors' oaths
(Financial Code Section 682), and (iii) repeal of the aggregate limit on real
estate loans (Financial Code Section 1230).
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of financial institutions in meeting the
credit needs of their local community, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In May 1995, the federal banking agencies issued final regulations which change
the manner in which they measure a bank's compliance with its CRA obligations.
The final regulations adopt a performance-based evaluation system which bases
CRA ratings on an institution's actual lending service and investment
performance rather than the extent to which the institution conducts needs
assessments, documents community outreach or complies with other procedural
requirements. In March 1994, the Federal Interagency Tax Force on Fair Lending
issued a policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
CHANGES IN ACCOUNTING PRINCIPLES
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," which is effective for fiscal years ending after
December 15, 1992 (December 15, 1995 in the case of entities with less than $150
million in total assets such as the Bank). SFAS No. 107 requires financial
intermediaries to disclose, either in the body of their financial statements or
15
<PAGE>
in the accompanying notes, the "fair value" of financial instruments for which
it is "practicable to estimate that value." SFAS No. 107 defines "fair value" as
the amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Quoted market prices, if available, are deemed the best evidence of the fair
value of such instruments. Most deposit and loan instruments issued by financial
intermediaries are subject to SFAS No. 107 and its effect will be to require
financial statement disclosure of the fair value of most of the assets and
liabilities of financial intermediaries such as the Bank. Management is unable
to predict what effect, if any, such disclosure requirements could have on the
market price of the common stock of the Bank or its ability to raise funds in
the financial markets.
In February 1992, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 109 "Accounting for Income Taxes," which supersedes SFAS No. 96 of the same
title. SFAS No. 109 is effective for fiscal years beginning after December 31,
1992, or earlier at the Bank's option. SFAS No. 109 employs an asset and
liability approach in accounting for income taxes payable or refundable at the
date of the financial statements as a result of all events that have been
recognized in the financial statements and as measured by the provisions of
enacted tax laws. SFAS No. 109 was adopted by the Company in 1995 and there is
no material impact on the Company's financial statements.
In May 1993, the FASB issued Statement of Financial Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114") .Under the
provisions of SFAS No. 114, a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. SFAS
No. 114 requires creditors to measure impairment of a loan based on the present
value of expected future cash flows discounted at the loan's effective interest
rate. If the measure of the impaired loan is less than the recorded investment
in the loan, a creditor shall recognize an impairment by creating a valuation
allowance with a corresponding charge to bad debt expense. This statement also
applies to restructured loans and changes the definition of in-substance
foreclosures to apply only to loans where the creditor has taken physical
possession of the borrower's assets. SFAS No. 118 amended SFAS No. 114, to allow
a creditor to use existing methods for recognizing interest income on an
impaired loan. To accomplish that it eliminated the provisions in SFAS No. 114
that described how a creditor should report income on an impaired loan. SFAS No.
118 did not change the provisions in SFAS No. 114 that require a creditor to
measure impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical expedient,
at the observable market price of the loan or the fair value of the collateral
if the loan is collateral dependent. SFAS No. 118 amends the disclosure
requirements in SFAS No. 114 to require information about the recorded
investments in certain impaired loans and about how a creditor recognizes
interest income related to those impaired loans. The Company implemented this
statement in 1995, and it did not have a material impact on its operation or the
Company's financial position.
In June 1993, the FASB issued SFAS No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" addressing the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. These
16
<PAGE>
investments would be classified in three categories and accounted for as
follows: (i) debt securities that the entity has the positive intent and ability
to hold to maturity would be classified as "held to maturity" and reported at
amortized cost; (ii) debt and equity securities that are held for current resale
would be classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings; and (iii) debt and equity
securities not classified as either securities held to maturity or trading
securities would be classified as securities available for sale, and reported at
fair value, with unrealized gains and losses excluded from earnings and reported
as a separate component of shareholders' equity. The rule is effective for
financial statements for calendar year 1994, but may be applied to an earlier
fiscal year for which annual financial statements have not been issued.
Effective for 1993, the Bank implemented SFAS No. 115 regarding its investment
securities.
The Bank has both investment securities classified as "held to maturity" and
investment securities classified as "available for sale." Securities classified
as available for sale are reported at their fair value at the end of each fiscal
quarter. Accordingly, the value of such securities fluctuates based on changes
in interest rates. Generally, an increase in interest rates will result in a
decline in the value of investment securities available for sale, while a
decline in interest rates will result in an increase in the value of such
securities. Therefore, the value of investment securities available for sale and
the Bank's shareholders' equity is subject to fluctuation based on changes in
interest rates. As a consequence, the Bank's capital levels for regulatory
purposes could change based solely on fluctuations in interest rates and
fluctuations in the value of investment securities held for sale.
HAZARDOUS WASTE CLEANUP COSTS
Management is aware of recent legislation and court actions concerning lender
liability relating to hazardous waste cleanup costs and continued liability.
Based on a general survey of the Bank's loan portfolio, conversations with local
authorities and appraisers, and the type of lending currently and historically
done by the Bank (the Bank as a rule has not made the types of loans generally
associated with hazardous waste contamination problems) management is not aware
of any potential liability for hazardous waste contamination.
OTHER REGULATIONS AND POLICIES
The federal regulatory agencies have adopted regulations that implement Section
304 of FDICIA which requires federal banking agencies to adopt uniform
regulations prescribing standards for real estate lending. Each insured
depository institution must adopt and maintain a comprehensive written real
estate lending policy, developed in conformance with prescribed guidelines, and
each agency has specified loan-to-value limits in guidelines concerning various
categories of real estate loans.
Various requirements and restrictions under the laws of the United States and
the State of California affect the operations of the Bank. Federal regulations
include requirements to maintain non-interest bearing reserves against deposits,
limitations on the nature and amount of loans which may be made, and
restrictions on payment of dividends. The California Superintendent of
17
<PAGE>
Banks approves the number and locations of the branch offices of a bank.
California law exempts banks from the usury laws.
MARKET AREA
Laguna Niguel, a typical Southern California "bedroom" community of over 50,000
residents, is the Bank's primary market area. The Bank also provides services to
similar neighboring communities including Mission Viejo, Dana Point, San Juan
Capistrano, Laguna Beach, San Clemente, Laguna Hills, and Aliso Viejo. These
communities combine to provide a market area that includes both retail banking
opportunities and commercial banking for small businesses, professionals and
some light industry. There is no one dominant business segment and a majority of
the residents work outside of the immediate area. The area in the past five
years has felt the full impact of the national recession that continued in
California through much or in some areas all of 1995. The recession has been
most felt through the progressive loss of jobs as defense contractors cut back
and restructure; in declines in construction activity; and in the closing of
more than the normal number of small businesses. The recession can best be
measured in the decrease in real estate values with some properties dropping by
20% to 30% depending on location and price range and the increases in
unemployment statistics. On a positive note, most recent economic reports
starting with the end of 1995 and into the first quarter of 1996 point to
decreases in unemployment and some increases in both sales volume and prices of
real estate.
Based on local newspaper reports, the recent recession was the most severe
experienced in Orange County as measured by decreases in employment and a
significant decline in real estate values. Nearly every area of the local
economy had declines, and virtually all community banks experienced significant
loan losses and declines in the relative size of their loan portfolios as a
direct result of the recession.
The economic recovery has been compounded by the bankruptcy filing by Orange
County. However, one local economic research organization has published data
that suggests that on a technical basis the local economic recovery began sooner
than previously suggested and is currently stronger than expected. Several
economists feel that the bankruptcy has caused more damage from short-term
uncertainty than it has from a realistic standpoint for the majority of the
County's residents and businesses. These economists are now reporting that the
local economy is moving faster into the recovery than expected, and this will be
more evident once the County's workout plan is completed. However, no assurances
can be given regarding the possible recovery in the local economy.
Since October 1993, Southern California sustained large economic losses from
both major fires and earthquakes. The Bank's customers have not been directly
affected by these disasters although there was some smoke damage to a few homes
from the Laguna Beach fire in October 1993. The destruction of over 300 homes in
Laguna Beach has provided a large demand for single family, owner occupied
construction loans with loan demand starting in late 1994 and expected to
continue into 1996.
BUSINESS CONCENTRATIONS
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As of December 31, 1995, the Bank had approximately $70 million in assets and
$59 million in deposits. No individual or single group of related accounts is
considered material in relation to the Bank's totals, or in relation to its
overall business. A review of the Bank's lending shows the following patterns:
Loan Portfolio Distribution
(percent of gross loans)
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ----
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Construction 6% 13% 14% 26% 25% 28% 24% 15%
Real Estate Mortgages 36% 39% 34% 30% 34% 32% 36% 49%
Commercial 51% 39% 40% 33% 31% 33% 30% 22%
Installment 7% 9% 12% 11% 10% 7% 10% 14%
</TABLE>
MONETARY POLICY
Banking is a business which depends on rate differentials. In general, the
difference between the interest paid by the Bank on its deposits and its other
borrowings and the interest rate received by the Bank on loans extended to its
customers and securities held in the Bank investment portfolios will comprise
the major portion of the Bank's earnings.
The earnings and growth of the Bank will be affected not only by general
economic conditions, both domestic and international, but also by the monetary
and fiscal policies of the United States and its agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession, by its
open market operations in US Government securities, limitations upon savings and
time deposit interest rates, and adjustments to the discount rates applicable to
borrowings by banks which are members of the Federal Reserve System. The actions
of the Federal Reserve Board influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on deposits.
The nature and impact that future changes in fiscal or monetary policies or
economic controls may have on the Bank's businesses and earnings cannot be
predicted.
Other legislation has been proposed or is pending before the United States
Congress which could affect the financial institutions industry. Such
legislation includes proposals to further alter the structure, regulation, and
competitive relationships of the nation's financial institutions, to reorganize
the federal regulatory structure of the financial institution industry, and to
change the range of financial services which banks and bank holding companies
can provide. It cannot be predicted whether the pending or proposed legislation
will be adopted or what effect such legislation will have on commercial banking
in general or the business of the Bank in particular.
COMPETITION
The banking business in California generally, and in the Bank's primary service
areas specifically, is highly competitive with respect to both loans and
deposits, and is dominated by a relatively
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<PAGE>
small number of major banks with many offices and operations over a wide
geographic area. Among the advantages such major banks have over the Bank are
their ability to finance wide-ranging advertising campaigns and to allocate
their investment assets to regions of higher yield and demand. Such banks offer
certain services such as trust services and international banking which are not
offered directly by the Bank (but which can be offered indirectly by the Bank
through correspondent institutions). In addition, by virtue of their greater
total capitalization, such banks have substantially higher lending limits than
the Bank. (Legal lending limits to an individual customer are based upon a
percentage of a bank's total capital accounts.) Other entities, both
governmental and in private industry, seeking to raise capital through the
issuance and sale of debt or equity securities also provide competition for the
Bank in the acquisition of deposits. Banks also compete with money market funds
and other money market instruments which are not subject to interest rate
ceilings.
In order to compete with other competitors in their primary service areas, the
Bank attempts to use to the fullest extent the flexibility which their
independent status permits. This includes an emphasis on specialized services,
local promotional activity, and personal contacts by their respective officers,
directors and employees. In particular, each of the banks offers highly
personalized banking services.
The Bank is carefully following the acquisition of First Interstate Bank by
Wells Fargo, and has started to obtain new business from former customers of
both of these institutions. As the actual completion date of the acquisition
gets closer, the Bank anticipates the closing and restructuring of the branches
of these banks to provide a material source of new business.
EMPLOYEES
As of January 31, 1996, the Bank had 35 full time equivalent employees.
M.B. MORTGAGE COMPANY, INC.
M.B. Mortgage Company, Inc. was incorporated under California laws on November
8, 1983, and is wholly-owned by the Bank. The company is inactive.
STATISTICAL DISCLOSURE
The following tables and data set forth statistical information relating to the
Company and its subsidiaries. This statistical data should be read in
conjunction with MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (ITEM 6) and the FINANCIAL STATEMENTS (ITEM 7). Average
balances are based on the annual averages for 1995 and 1994 and are
representative of operations.
20
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The following table sets forth the Company's condensed consolidated average
balances of each principal category of assets, liabilities and shareholders'
equity for each of the past two years. All amounts are (dollars in thousands)
for the years ended December 31.
<TABLE>
<CAPTION>
ASSETS:
1995 1994
---- ----
<S> <C> <C>
Cash and due from banks 3,725 3,993
Due from banks - time 1,016 2,712
Investment securities - held to maturity 6,538 5,508
Investment securities - available for sale 14,227 11,537
Federal funds sold 6,676 3,817
Loans (net) 28,808 32,397
Premises and equipment (net) 630 730
Other real estate owned 490 1,313
Other assets 970 1,302
------ ------
Total Asset 63,080 63,309
------ ------
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand Deposits 40,651 46,148
Savings Deposits 5,312 7,369
Time Deposits 9,655 6,872
Other Debt 9 54
Other Liabilities 564 383
------ ------
Total Liabilities 56,191 60,826
Common Stock 13,285 7,367
Retained Earnings (Deficit) (6,396) (4,884)
------ ------
Total Equity 6,889 2,483
------ ------
Total Liabilities and Equity 63,080 63,309
------ ------
------ ------
</TABLE>
INTEREST RATES AND DIFFERENTIALS
The Company's consolidated earnings depend primarily upon the difference between
the income the Bank receives from its loan portfolio and investment securities,
and its cost of funds -- principally, interest paid on savings and time
deposits. Interest rates charged on the Bank's loans are influenced principally
by the demand for such loans, the supply of money for lending purposes, and
competitive factors. These factors are, in turn, affected by general economic
conditions and other factors beyond the Bank's control, such as federal economic
and tax policies, the general supply of money in the economy, governmental
budgetary actions, and the actions of the Federal Reserve Board.
21
<PAGE>
Information concerning average interest-earning assets and interest-bearing
liabilities, along with the average interest rates earned and paid thereon, is
set forth in the following table. Loan income includes loan fees as accounted
for on a yield basis under SFAS No. 91.
<TABLE>
<CAPTION>
INTEREST RATES AND DIFFERENTIALS
(Dollars in Thousands)
YEAR ENDED 12/31/95 YEAR ENDED 12/31/94
---------------------------- -----------------------------
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE % BALANCE EXPENSE RATE %
------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing
deposits placed with banks 1,016 43 4.23% 2,712 111 4.09%
Investment Securities (HTM) 6,538 429 6.56% 5,508 258 4.68%
Investment Securities (AFS) 14,227 589 4.14% 11,537 536 4.64%
Federal Funds Sold 6,676 376 5.63% 3,817 155 4.06%
Loans and Leases (net) (1) 28,808 3,054 10.60% 32,397 2,878 8.88%
------ ----- ------ ------ ----- -----
Interest-earning Assets: 57,265 4,491 7.84% 55,971 3,938 7.04%
NON INTEREST-EARNING ASSETS:
Cash and Due from Banks 3,725 3,993
Premises and equipment (net) 630 730
Other Real Estate owned 490 1,313
Other Assets 970 1,302
------ ------
Total 63,080 63,309
------ ------
------ ------
INTEREST-BEARING LIABILITIES:
Interest-bearing Demand
Deposits 25,106 671 2.67% 32,590 724 2.22%
Savings Deposits 5,312 110 2.08% 7,369 153 2.08%
Other Time Deposits 9,655 504 5.22% 6,872 224 3.26%
Long Term Debt 9 1 11.11% 54 2 3.70%
------ ----- ------ ------ ----- -----
Total Interest-bearing
Liabilities: 40,082 1,286 3.21% 46,885 1,101 2.35%
----- -----
Non-Interest bearing Demand 15,545 13,558
Non-Interest bearing Liabilities 564 383
Shareholders' equity 6,889 2,483
------ ------
63,080 63,309
------ ------
------ ------
Net Interest Income 3,205 2,835
----- -----
----- -----
Net Yield on Interest-
bearing Assets 5.60% 5.07%
----- -----
----- -----
</TABLE>
(1) Non-performing loans are included in average loans, and interest income
for loans includes loan fees. The Bank has no tax-exempt investments.
22
<PAGE>
The following table sets forth changes in interest income and interest expense,
and the amount of change attributable to variances in volume and variances in
interest rates. The change in interest due to both volume and rate has been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each. Non-performing and non-accrual
loans are included in volume rate loan calculations and loan fees based on a
level yield basis. The Bank has no tax-exempt assets.
<TABLE>
<CAPTION>
INTEREST RATES AND DIFFERENTIALS
(Dollars in Thousands)
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 OVER 1994 1994 OVER 1993
-------------------------- --------------------------
TOTAL CHANGE DUE TO TOTAL CHANGE DUE TO
INCREASE -------------- INCREASE --------------
(DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
---------- ------ ---- ---------- ------ ----
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans 175 (340) 515 (660) (741) 81
Interest bearing deposits
with banks (68) (71) 3 18 8 10
Interest on investment
securities HTM 171 54 117 (247) (219) (28)
Interest on investment
securities AFS 54 116 (62) 535 535 0
Interest on federal
funds sold 221 145 76 (55) (143) 88
---- ---- ---- ---- ---- ----
Total Interest Income 553 (96) 649 (409) (560) 151
---- ---- ---- ---- ---- ----
INTEREST EXPENSE
Interest bearing
demand deposits (52) (183) 131 (32) (51) 19
Interest on savings
deposits (43) (43) 0 (59) (22) (37)
Interest on other
time deposits 280 113 167 (48) (43) (5)
Long Term Debt (1) (3) 2 (4) (2) (2)
---- ---- ---- ---- ---- ----
Total interest expense 184 (116) 300 (143) (118) (25)
---- ---- ---- ---- ---- ----
Net interest income 369 20 349 (266) (443) 176
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
</TABLE>
INVESTMENT SECURITIES
Investment securities as presented are held by the Bank and are stated at cost,
adjusted for amortization of premiums and accretion of discounts. In December
1993, the Bank implemented FASB 115, mark-to-market for its investment
securities. As of December 31, 1995 and 1994, respectively the portfolio
segregated as follows:
23
<PAGE>
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Securities Available for Sale (AFS - FMV) 22,004 11,885
Securities Held to Maturity (HTM - cost) 6,661 4,254
------ ------
28,665 16,139
------ ------
------ ------
</TABLE>
In making its determination for classifying each security as available for sale
or held to maturity, the Bank considers several factors including: (i) short-
and mid-term liquidity needs; (ii) the need to have securities available for
pledging purposes for public deposits; (iii) the average life and interest rate
characteristics of the securities (fixed or adjustable rate); and (iv) the
probability of future market interest rate changes. Securities Held to Maturity,
as a rule, are fixed rate investments with short-term maturities; securities
Available for Sale have either very short maturities or are tied to floating
rates that reprice annually or more frequently.
The following table summarizes the "book" value of investment securities
(cost basis for securities Held to Maturity and current market value for
Available for Sale investments). All dollar amounts are in thousands:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
------ ------
<S> <C> <C>
U. S. Gov.'s and Agencies 19,240 10,845
Investment Funds (U.S. Government Securities) 9,240 5,191
Other Securities 185 103
------ ------
28,665 16,139
------ ------
------ ------
</TABLE>
The following tables show the maturities, based on repricing dates, expected
call dates and Contract dates, of investment securities at December 31, 1995 and
the estimated weighted average yields of such securities. All dollar amounts are
in thousands:
Maturities based on earliest repricing date
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-----------------------
AMOUNT YIELD
------ -----
<S> <C> <C>
Maturing within one year 24,471 5.88%
Maturing after one year but within five years 4,194 6.70%
------
28,665 6.00%
------
------
</TABLE>
Maturities based on stated maturities only
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
------------------------
AMOUNT YIELD
------ -----
<S> <C> <C>
Maturing within one year 11,005 5.38%
Maturing after one year but within five years 8,754 6.29%
Maturing after five years but within ten years 2,717 6.94%
Maturing after ten years 6,189 6.29%
------
28,665 6.00%
------
------
</TABLE>
The Bank does not have a securities Trading Account and does not intend to trade
securities.
24
<PAGE>
Additional discussions concerning investments, including information relating to
derivatives and structured notes, are included in the MD&A section for
INVESTMENT ACTIVITIES and in the audited financial statements that are included
as a part of the December 31, 1995 Form 10-KSB.
LOAN PORTFOLIO
The following table sets forth the amount of loan financing outstanding at the
end of the following periods, according to type of loan. All dollar amounts are
in thousands:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
------ ------
<S> <C> <C>
Real estate construction 2,033 4,032
Real estate mortgage 11,675 12,226
Commercial 16,758 12,089
Installment 2,184 2,693
------ -------
32,650 31,040
Less: Deferred loan fees (130) (52)
Allowance for possible loan losses (854) (1,137)
------ ------
Total loans and leases 31,666 29,851
------ ------
------ ------
</TABLE>
With certain exceptions, the Bank is permitted under California law to make
loans to a single borrower in aggregate amounts up to 15% of the sum of the
Bank's shareholders' equity, allowance for loan losses, capital reserves, if
any, and debentures, if any, for unsecured loans (as defined for regulatory
purposes), and up to 25% of such sum for the aggregate of secured and unsecured
loans (as defined). As of December 31, 1995 these lending limits for the Bank
were approximately $990,000 for unsecured loans, and approximately $1,650,000
for secured loans. The Bank sells participations in loans where necessary to
stay within lending limits or to otherwise limit the Bank's exposure in
particular credits. Where deemed appropriate to better utilize available funds,
the Bank may purchase participations in loans.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table sets forth the maturity distribution and/or interest rate
sensitivity of the Bank's loan portfolio (excluding residential mortgages of 1-4
family residences and installment loans) as of December 31, 1995. All dollar
amounts are in thousands:
<TABLE>
<CAPTION>
ONE YEAR THROUGH OVER
OR LESS 5 YEARS 5 YEARS TOTAL
-------- ------- ------- ------
<S> <C> <C> <C> <C>
Real estate construction 2,033 0 0 2,033
Commercial and Financial 9,112 5,679 1,967 16,758
------ ----- ----- ------
11,145 5,679 1,967 18,791
------ ----- ----- ------
------ ----- ----- ------
Loans maturing after one year with:
Fixed interest rates 5,679 1,967
Variable interest rates 0 0
----- -----
5,679 1,967
----- -----
----- -----
</TABLE>
25
<PAGE>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table shows Bank nonaccrual, past due and restructured loans. All
dollar amounts are in thousands:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
----- -----
<S> <C> <C>
Non-accrual loans 344 431
Loans past due 90 days or more
and still accruing interest - 362
Interest income that would have
been recorded under original terms 17 26
Income recorded during period 24 42
</TABLE>
There were no commitments to lend additional funds to borrowers listed non-
accrual or past due 90 days or more.
The Bank's policy concerning non-performing loans is to cease accruing interest,
and to charge off all accrued and unpaid interest on loans which are past due as
to principal and/or interest for at least 90 days, or at such earlier time as
Management determines timely collection of the interest to be in doubt; except
that in certain circumstances accrued interest is not charged off on adequately
secured loans which are deemed by Management to be fully collectible.
Additionally, loans which are 90 days or more past due may continue accruing
interest if they are both well secured and in the process of being collected.
POTENTIAL PROBLEM LOANS
Except as noted above, as of March 15, 1996, Management is not aware of any
borrowers who are experiencing severe financial difficulties, or in the normal
course of business, represent any identified loss potential. The Bank monitors
all loans and completes a monthly internal watch list, which is inclusive of
both loans past due and/or borrowers that have been identified as having special
difficulties.
LOAN CONCENTRATIONS
The Bank's loan portfolio is diverse, and there are no specific concentrations
to any one borrower or group of borrowers that are engaged in similar activities
which would cause them to be similarly impacted by economic or other
considerations.
SUMMARY OF LOAN LOSS EXPERIENCE AND ALLOWANCE FOR LOAN LOSSES
The following table summarizes loan balances, loans charged off, the provision
for credit losses charged to expenses, the Allowance, and loan recoveries. All
dollar amounts are in thousands:
26
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1994
------ ------
<S> <C> <C>
ALLOWANCE FOR CREDIT LOSSES:
Balance - beginning of period 1,137 1,055
Loans charged-off:
Real estate 278 795
Construction - -
Commercial 401 167
Installment 38 29
----- -----
Total 717 991
RECOVERIES ON LOAN CHARGE-OFFS:
Real estate 5 40
Construction - -
Commercial 3 33
Installment 1 5
----- -----
Total 9 78
----- -----
Net loans and leases charged-off 708 913
Provision charged to operating expenses 425 995
----- -----
Balance - end of period 854 1,137
----- -----
----- -----
LOANS:
Average loans outstanding during period 28,808 32,397
Total loans at end of period 31,666 29,851
RATIOS:
Net loans charged-off to average loans 2.46% 2.82%
Reserve as a percent of end of period loans 2.70% 3.81%
</TABLE>
The Bank's local market was hit very severely by the recession in 1993 and 1994
and, in several instances borrowers who had never reported financial
difficulties or were past due simply declared bankruptcy. In 1994 the Bank
charged $542,000 to loan losses concurrent with the acquisition of OREO with the
properties subsequently being sold in 1995 at book value. The Bank acquired one
property in 1995 as OREO with a write down of $30,000. These real estate losses
were related to a severe drop in the actual and appraised value of real estate.
During 1995 the Bank made a complete change in its loan staff in order to
effectuate a material strengthening of the credit administration function by
increasing the overall experience and technical skill levels of its loan
officers. The primary charge for the loan staff in 1995 was to continue to
devote primary attention to completing loan workouts and decreasing classified
assets while maintaining high credit standards for all new loans. The local and
regional economy has also stabilized and most published economic reports are
showing some positive growth specifically in real estate values and employment.
A summary statistical report from the California State Banking Department which
includes data for all state chartered banks in California reflects the following
loan and problem loan trends and averages for Banks with total assets as of
December 31, 1995 of less than $100 million:
27
<PAGE>
MONARCH AVERAGE
------- -------
Total Past Due Loans/Total Loans 1.20% 4.26%
Loans Past Due 90+ days and
Nonaccrual Loans/Total Loans 1.06% 2.57%
Allowance for Loan Losses/Non-Performing Loans 248.26% 143.38%
Loan/Deposit Ratio 53.91% 67.05%
Based on preliminary reports for other banks for December 1995, other banks are
also seeing a decrease in the volume of problem loans and a settling of the
Allowance levels from recent very high levels.
As of December 31, 1995 the Bank's Allowance for Loan Losses was based on a
combination of loan-by-loan analysis for all classified loans, factors for the
balance of the portfolio that are based on a migration analysis, and other
factors such as the improvements made to credit administration in 1995 and the
recent improvements in the economy and the declining trend in loan
delinquencies. As of December 31, 1995, the Allowance as a percentage of
Classified assets was 34%.
The Bank has not been active in areas that involve hazardous waste, and based
on portfolio reviews by the Bank and during credit reviews during regulatory
examinations, no loans have been identified that would appear to be of concern
because of hazardous material.
DEPOSITS AND LIABILITY MANAGEMENT
The Bank provides a range of deposit types to meet the needs of the local
community. Time deposits, which are normally sensitive to competitive rate
changes, are generally used to expand or contract the overall liability
position needed to meet the various management ratios established for
liquidity, capital, loans to deposits, and other funding measurements. As a
policy, the Bank does not accept or solicit brokered deposits.
The following tables show the average amount of interest bearing and non-
interest bearing deposits and rates as of December 31, 1995 and 1994,
respectively. All dollar amounts are in thousands:
<TABLE>
<CAPTION>
1995 1994
AVERAGE AVERAGE
------- -------
BALANCE RATE BALANCE RATE
------- ---- ------- ----
<S> <C> <C> <C> <C>
Non-interest bearing deposits 15,545 - 13,558 -
Interest bearing demand deposits 25,106 2.67% 32,590 2.22%
Savings deposits 5,312 2.08% 7,369 2.08%
Time deposits 9,655 5.22% 6,872 3.26%
------ ------ ------ ------
Total * 55,618 2.31% 60,389 1.82%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
* Includes non-interest bearing deposits for both amount and rates. Rates
represent weighted averages.
28
<PAGE>
The increase in time deposit and interest-bearing demand deposits is consistent
with the overall increase in interest rates and cost of funds in 1995. In 1995
the Bank paid and continues to pay market rates for all deposits and does not
offer any specific "high rate" deposit products, and it does not solicit or
accept brokered deposits.
The following table shows the maturity schedule of time certificates of deposit
of $100,000 or more as of December 31, 1995 All dollar amounts are in
thousands:
3 months or less 1,802
Over 3 months through 6 months 1,400
Over 6 months through 12 months 200
Over 1 year -
-----
Total 3,502
-----
-----
RETURN ON EQUITY AND ASSETS
The following table presents the key ratios for the Company based on average
assets, average equity, and net income for the years 1995 and 1994
1995 1994
---- ----
Return on assets 1.08% (2.93%)
Return on equity 9.91% (74.51%)
Equity to assets 10.92% 3.94%
ITEM 2. PROPERTIES
The Bank's office is located in a shopping/business center at 30000 Town Center
Drive, Laguna Niguel, California. The leased building is free standing, and has
approximately 8,500 square feet of space. The land and building were leased on
August 1, 1981 for a twenty (20) year term with three 10-year options. After
the first five (5) years of the lease, the lease was subject to annual cost of
living increases; the annual rent, as of December 1995, was approximately
$10,300 per month triple net. The facility is equipped with a vault and
safe-deposit boxes, eight (8) teller stations, two (2) automatic teller
machines, four (4) drive-up teller stations, a night depository, and includes
parking adjacent to the Bank.
An administrative office, located at 27751 La Paz Road in Laguna Niguel, is a
free standing building with approximately 7,750 square feet of space. The lease
on this facility was renewed in June 1991 for five years. The monthly rental as
of December 31, 1995 was approximately $5,000. This lease matures in June 1996,
and the Bank expects to relocate this facility to a location with less space
and a reduction in monthly rent of approximately $1,600.
The Company formerly occupied approximately 5,000 square feet of space at 30100
Town Center Drive, Laguna Niguel. This facility has a 13 year lease which
started in 1983 and ends in June 1996. The facility was subleased in 1987
through September 1993 with an option to extend the sublease until June 1996.
The original sublease was structured as a pass-through for income
29
<PAGE>
approximately equal to expense. In late 1993 the Bank's tenant agreed to
exercise its option but at current market rates for similar property. As a
result of this renewal, which included free rent and a reduced rate, the Bank
recorded a projected loss on this property of $61,000 in December 1993 and
$20,000 in 1994. The Bank's expense and income for this sublease are the same
after the accounting adjustment for the projected difference in income versus
expense.
Rental income from subleased properties totaled approximately $66,000 in 1995
and $77,000 in 1994.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Bank is subject to claims, counter
actions, and other litigation. No single action or similar group of claims
exceeds 10 percent of liquid assets (Cash and Federal Funds Sold).
Based on facts known to the Bank, the Board of Directors, management and the
Bank's representatives do not believe that to the best of their knowledge the
Bank has any material known legal liability or potential liability. However, no
assurance can be given that future litigation involving the Bank will not
result or that liability may not be incurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Trading in the Company's common stock has not been extensive, and such trades
cannot be characterized as amounting to an active trading market. The Company
is aware of one securities dealer who has consistently handled transactions in
its common stock. Brookstreet Securities Corporation, 2361 Campus Drive, Irvine,
California continues to be the only active broker who has made a market in the
Company's stock. Various other firms have handled single transactions but have
not actively been available to assist in trade activities.
The Company's common stock is traded over-the-counter, is not listed on
any exchange, and is not quoted by "NASDAQ". The number of holders as of
February 15, 1995 is approximately 740.
All share and per share information has been restated to reflect the 1-for-5
reverse stock split that was effective December 14, 1993 (See Description of
Securities).
30
<PAGE>
The following table summarizes those trades of Company Common Stock of which
Management is aware, setting forth the approximate high and low sales prices
for each quarterly period since December 1993:
QUARTER ENDED APPROXIMATE SALES PRICES
(last trading day)
HIGH LOW
---- ----
March 31, 1994 3.75 2.50
June 30, 1994 none none
September 30, 1994 2.44 1.90
December 31, 1994 0.80 0.80
March 31, 1995 1.50 1.20
June 30, 1995 none none
September 30, 1995 1.35 1.20
December 31, 1995 1.35 1.20
There have been insufficient trades in 1995 and 1994 to determine a realistic
market value. The Company completed a private placement of common stock on
March 30, 1995 and a shareholders' rights offering in September 1995 and during
1995 issued a total of 7,434,000 new shares at $1.35 per share.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 25,000,000 shares of
common stock, no par value, and 5,000,000 shares of serial preferred stock, no
par value as of December 31, 1995; during the first quarter of 1996 the
Company's Board and shareholders approved an amendment to the Company's
Articles of Incorporation increasing the number of authorized shares of common
stock from 25 million to 100 million.
Holders of shares of Common Stock are entitled to one vote for each share held
of record on all matters voted upon by shareholders; except that in connection
with the election of directors, the shares subject to notice may be voted
cumulatively. The holders of the Common Stock have preemptive rights, but
shares of the Common Stock are not subject to redemption, conversion, or
sinking fund provisions.
Holders of Company common stock are entitled to receive dividends declared by
the Company's Board of Directors out of funds legally available, therefore,
under the laws of the State of California. The Company has not paid dividends
since it was formed, and is currently ineligible to declare a dividend because
of retained earnings deficits.
The Bank, the principal source of income for the Company, may pay dividends to
its parent under the laws of California and subject to maintaining certain
capital levels that are judged acceptable to the FDIC. At the end of 1995, the
Bank was not eligible to pay dividends without the written approval of the
FDIC and Superintendent.
31
<PAGE>
Holders of Serial Preferred Stock, when and if issued, may become senior to
holders of Common Stock as to dividends, voting, liquidation, or other rights.
The Board of Directors has no present intention to issue Serial Preferred Stock.
Convertible subordinated notes totaling $376,500 were issued in September 1988
and February 1989 in a private placement offering. Since issuance, the majority
of the notes have either been converted or repaid. In August 1993, $25,500 of
the remaining notes were repaid and $53,500 renewed for an additional two years
at a floating interest rate of prime rate minus one percent payable
semi-annually. These notes were fully repaid on March 31, 1995.
On March 31, 1995, the Company closed a private placement offering of
approximately $6,139,000 and issued 4,547,111 new shares of common stock.
Proceeds from the offering were used to pay approximately $470,000 in offering
expenses; $3,550,000 to increase the Company's investment in Monarch Bank;
$53,500 to retire Company debt; and approximately $2,065,000 in cash was held
By the Company for future operating needs or investments. The Company made an
additional capital contribution in June 1995 of $250,000 to increase the
Bank's capital.
In addition to completion of the private placement offering in the first
Quarter of 1995, the Company completed in the third quarter of 1995 a rights
And public offering for the offer and sale of up to 3,177,296 shares of common
stock pursuant to the terms of a prospectus dated July 14, 1995. In connection
with such offering, a total of 2,886,898 shares of common stock were sold. The
Company increased its capital by an additional $3,464,000 in net proceeds in
The rights and public offering. No additional capital contributions have been
made to the Bank and as of December 31, 1995, the Company had over $5 million
In cash available for investments, possible expansion opportunities and as
additional financial support for the Bank.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
There were five material events or activities for the fiscal year 1995 that
allowed the Company to report a consolidated profit of $683,000 versus a
$1,850,000 loss for 1994. The events or activities were: 1) capital activities
that materially increased the shareholders equity of both the Company and Bank;
2) a general return to profitability that was supplemented by the
implementation of an extensive "earnings improvement program"; 3) certain
staffing changes that
32
<PAGE>
were made to strengthen credit administration; 4) recognition of deferred tax
benefits; and 5) a general stabilization of the local economy. A sixth item, a
low loan to deposit ratio, limited the Bank's ability to make additional gains
in building net income. The Bank was also subject to the provisions of the
regulatory Orders it signed with the State and FDIC during 1995.
CAPITAL ACTIVITIES
On March 31, 1995, the Company completed a private placement offering for
approximately $6,139,000 and issued 4,547,111 new shares of common stock.
Proceeds from the Offering were used to pay approximately $470,000 in Offering
expenses; $3,550,000 to increase the Company's investment in the Bank; $53,500
to retire Company debt; and approximately $2,065,000 in cash was retained by
the Company for future operating needs or investments. The capital increase for
the Bank was sufficient to fully comply with the terms of its regulatory Orders
to increase its leverage capital ratio to 7.0% or more. The Company made a
further $250,000 capital contribution to the Bank in June 1995, and the Bank
has consistently met and exceeded all capital requirements since March 30, 1995,
including the target ratios established in the Orders which are higher than the
normal statutory ratios required to be classified as "well capitalized".
In addition to the completion of the private placement offering in the first
quarter of 1995, the Company also completed in the third quarter of 1995 a
rights and public offering for the offer and sale of up to 3,177,296 shares of
its common stock pursuant to the terms of a Prospectus dated July 14, 1995. In
connection with such offering, a total of 2,886,898 shares of common stock of
the Company were sold. The Company increased its capital by an additional
$3,464,000 in net proceeds in the rights and public offering. As of December
31, 1995, the Company had over $5 million in cash liquidity for possible future
investments and, if needed, to provide additional financial support for the
Bank.
The increased capital allowed the Company and Bank to meet regulatory
commitments to increase capital, provided an additional source of funds that
could be used to fund earning assets, and to allow for possible future growth
opportunities.
EARNINGS IMPROVEMENT PROGRAM
In addition to income generated from the capital funds, the Bank, as a natural
extension of its activities to raise capital engaged the services of a
consultant to provide assistance in reviewing all aspects of the Bank's
operations. The goal of this review was to identify strengths and weaknesses of
the Bank's operations and to implement an earnings improvement program to
increase profitability. A majority of the recommendations from this review were
implemented during the third quarter of 1995 with measurable results first seen
in October 1995. Overall, the plan calls for a reduction of expenses or
increases in fee related income of approximately $500,000 per year. An initial,
preliminary measurement of the implementation of the new program suggests that
average monthly net income (adjusted for known nonrecurring items) for the
fourth quarter of 1995 increased by approximately $30,000 per month. It is
Management's belief and expectation that a majority of the earnings improvement
program has been implemented and that a majority, if not all, of the planned
expense savings or increases in income will be realized by the middle of
33
<PAGE>
1996. Major areas of expense reduction came from reductions in staff and
employee benefits costs, improved utilization of account analysis earnings
credits, decreases in insurance costs (based on new capital and improved
earnings and not reduced coverage), and reductions in other operating expense
areas. Increases in fee income are expected to come from account analysis on
business accounts and a general increase in the Bank's Schedule of Charges.
STAFF CHANGES
During 1995, the Bank effectuated a complete change of all of its lending
staff. While a complete change in lending staff was made, the appointment of
Mr. Louis F. Cumming as Executive Vice President and Senior Credit Officer was
the most significant change. Mr. Cumming has over 30 years of senior level bank
lending experience in both major banks and community banks, and his appointment
was made to materially improve the level of technical and administrative skills
for credit administration. A major focus for the new loan "team" was to reduce
classified assets from prior examinations and to meet or exceed the reduction
targets for classified assets defined in the Orders. The Bank met and
consistently exceeded the reduction dates contained in the Order and, as of
December 31, 1995, has reduced the level of classified assets to capital from
166% at the end of 1994 to 38% as of the end of 1995 and reduced the level of
classified loans from 136% to 34% for the comparative periods. Loan delinquency
trends as of December 31, 1995 have also consistently been reduced below the
averages for California banks.
DEFERRED TAX BENEFIT
The Company's tax position, including a large net operating loss carry forward,
was carefully examined at the end of 1995 due to the changes in the Company's
capital base and the significantly improved outlook for future earnings. The
private placement capital offering in March 1995 has been determined to be an
IRS Section 382 "change of control" that limits the utilization of NOL by
reducing the dollar amount that can be used in future years based on formulas
defined in Section 382. Based on an extensive review of Section 382 and FASB
109, it was determined that the Company should adjust the valuation allowance
for deferred tax assets and reflect a corresponding increase in income for 1995
of $496,000. The Company concurrently elected to increase the funding of the
Allowance for Loan Losses by an additional $250,000 to increase the Allowance
for unanticipated losses or a reversal of the economy.
LOCAL ECONOMY
After experiencing the worst recession in its history, including the much
publicized county bankruptcy, Orange County appears to have reached the bottom
of its economic slide and to have started a slow rebuilding process. Recent
newspaper reports now show that Orange County created nearly three times the
number of jobs in 1995 than was originally estimated, with nonfarm jobs
increasing by 21,900 compared to preliminary estimates of 8,400. Local payrolls
increased by 2% in 1995 which is well ahead of any expectations. As of February
1996, reported data suggests that the median price of all homes sold has
increased 1.6% from $188,000 in February 1994 to $189,000 in February 1995. This
positive increase is significant since the peak month in home values was June
1991 with the average home selling for $223,000.
34
<PAGE>
LOAN-TO-DEPOSIT RATIO
The Bank's and Company's primary focus in 1995 was on increasing capital,
restructuring the Bank to allow for positive future growth and reducing the
level of classified and problem loans. As of December 31, 1995, the Bank's
loan-to-deposit ratio was 54% and for most of 1995 averaged less than 50%. On
a comparative basis in December 1995, the average state chartered bank in
California had a loan-to-deposit ratio of 67%. Increasing the relative level of
income from loans as measured by a higher loan-to-deposit ratio has been
identified as a priority need for 1996 if the Bank is to continue to build its
level of profitability. At the same time, the Bank recognizes the need to
continue to maintain high loan underwriting standards and to confine its
lending activities to areas consistent with the technical skill level of its
loan staff.
REGULATORY ORDERS
Management and the Board of Directors made every possible effort in 1995 to
insure full compliance with its regulatory Orders. These efforts included
specific activities to increase capital, rewriting or drafting new policies and
procedure, a major emphasis on improving credit administration, and prompt
reporting of its progress in taking the corrective actions outlined in the
Orders. The State Banking Department, following a November 1995 examination of
the Bank, confirmed that the Bank was in substantial compliance with its
Section 1913 Order and removed the Order in December 1995. The FDIC also
completed an inspection and off-site review of the Bank in November 1995. Based
on their review process, the FDIC terminated their Section 8(b) Order in March
1996 while requesting the Bank agree to an informal Memorandum of Understanding
which the Board signed in March 1996. In signing the Memorandum, the Bank has
agreed to i) retain qualified management; ii) to notify the Regional Director
of the FDIC at least 30 days prior to any addition to the board or the
employment of any individual as a senior officer; (iii) to maintain a fully
funded loan loss reserve and a Tier 1 capital to total assets ratio of 7.0% or
more during the life of the memorandum; (iv) to reduce classified assets from
previous State and FDIC examinations to not more than 40% of total capital and
reserves as of June 30,1996; (v) to formulate and adopt a three-year
business/strategic plan in addition to the plan and budget the Bank has already
completed for 1996; (vi) to not pay dividends except a) as allowed by State and
Federal laws, b) that after the payment the Tier 1 capital ratio to total asset
is more than 7.0%, c) that the declaration and payment of the dividend be
approved in advance by the board, and d) that the Bank shall certify to the
Regional Director that it is in conformance with the other dividend provisions
in the Memorandum no less than 30 days prior to paying the dividends; and (vii)
the Bank will provide written quarterly reports detailing its actions to secure
compliance with the memorandum.
INVESTMENT ACTIVITY
While FASB 115 requires the AFS portfolio to be adjusted to market value
directly through the equity account, banking regulators, as a group, have
excluded this equity accounting adjustment from capital ratio calculations
because of the short-term volatility of the adjustments that may or may not
represent a real change in equity capital.
35
<PAGE>
The Bank's investment portfolio displays the following characteristics (dollars
in thousands):
HTM DEC. 1995 DEC. 1994
--------- ---------
Cost basis 6,661 4,254
Market value 6,693 4,020
Appreciation/(depreciation) 32 (234)
----- -----
----- -----
AFS
Cost basis 21,864 12,241
Market value 22,004 11,885
Appreciation/(depreciation) 140 (356)
----- -----
----- -----
The Bank, as part of its investment portfolio, holds derivative securities.
These securities include three Collateralized Mortgage Obligations (CMOs) which
are held in the HTM portfolio. As of December 31, 1995, these three securities
are carried at a cost of $1,675,000 and had a current market value of
$1,695,000. The weighted average rate of these investments was 6.67% and a
weighted average life of 1.56 years. All three CMO's have been tested no less
than annually using the FFIEC "High Risk Security Test", and each of the
securities have passed the tests. This stress test is used by bank regulators
to assess relative CMO investment risks. A security that passes is not
considered to be "high-risk"; a security that fails the test may be subject to
additional regulatory scrutiny and under the most severe case, the bank could
be asked to sell the security.
The Bank also holds a $2.5 million SLMA Multi Step-up security that is
scheduled to reprice to 6.25% in March 1996; this security is expected to be
called in March 1997 when it is scheduled to reprice to 7.25% until its
maturity.
The Bank's Investment Committee makes every effort to keep informed about both
the perceived and real risks of derivative securities, and has set general
limits on the types of derivatives the Bank can purchase at the most basic
levels which include step-up notes and CMO's.
The Bank has not been involved in any off balance sheet hedging type activities.
CREDIT RISK AND LOAN ISSUES
NET CHARGE-OFFS: The following table illustrates the net results of loan
charge-offs and recoveries in 1995, 1994, 1993 and 1992 (dollars in thousands):
1995 1994 1993 1992
---- ---- ---- ----
Real estate 273 755 52 90
Construction - - 75 70
Commercial 398 134 594 32
Installment 37 24 78 15
--- --- --- ---
708 913 799 207
The trend for net charge-offs in 1995, 1994, 1993 and 1992 is a direct
reflection of the impact of the recession. Net charge-offs on a historic basis
on a larger loan portfolio base in 1991 and 1990
36
<PAGE>
were $27,000 and $31,000, respectively, which in Management's opinion is more
indicative of the normal, expected loss profile for the Bank.
Loan charge-offs in 1995 represent 12 borrowers with an average charge-off of
$60,000 and a high of $196,000 for a real estate loan and a low of $1,000 on an
installment loan. There was no specific pattern for the charges-offs other than
individuals who in one way or another were financially hurt by the recession.
A review of past due and nonaccrual loans as of December 31, 1995, 1994 and
1993 shows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
# $'000 # $'000 # $'000
-- ----- -- ----- -- -----
<S> <C> <C> <C> <C> <C> <C>
Past due 60 - 89 days 2 91 2 3 4 106
Past due 90 + and accruing 0 0 3 362 3 505
Non-accruing & TDR's 6 344 6 431 4 2,420
-- ----- -- ----- -- -----
8 435 11 796 11 3,031
</TABLE>
Of the non-accruing loans on December 31, 1995, two loans totaling $328,000 are
well secured by real estate. One is expected to become OREO in February 1996
with no loss, and the other, which is a troubled debt restructuring, is in the
final stage of a workout and is expected to be paid off in 1996. As of March
13, 1996 four of the remaining nonaccrual loans were charged off. As of
December 31, 1995, the Bank had established Reserves for these loans as
impaired loans in the total amount $61,000. These impaired loans have been
recorded and recognized in accordance with SFAS No. 114. The average recorded
investment in such impaired loans during 1995 was $341,000. Interest income
recorded on impaired loans totaled $24,000 in 1995, and this interest was
recognized on a cash basis.
There are no loans classified for regulatory purposes as loss, doubtful, or
substandard that have not been disclosed which represent or result from trends
or uncertainties which Management reasonably expects will materially impact
future operating results, liquidity, or capital resources, nor are there
material credits about which management is currently aware of any information
which causes Management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
The Bank held one OREO property as of December 31, 1995. This property was
written down through the Allowance at acquisition by $98,000 with an additional
write down during 1995 of $30,000 to reflect a book value consistent with the
current appraised value less expected selling and closing costs. This property
is currently being marketed for sale. This OREO is vacant land and the carrying
costs are not material.
LIQUIDITY AND INTEREST RATE RISK
During 1995, the Bank consistently maintained very high cash liquidity (Cash,
Investments -- AFS only, and Federal Funds Sold divided by Total Deposits) of
approximately 40% or greater. The high liquidity was a product of low demand
for loans and very high underwriting standards during
37
<PAGE>
the latter part of a major recession. The Bank was also hesitant to commit
liquid funds to mid- to long-term investments during a period when the yield
curve was reasonably flat, and in anticipation of increased funding needs as the
loan portfolio grows.
On August 2, 1995, the banking agencies published a proposed policy statement
concerning a supervisory framework for measuring and assessing banks' interest
rate risk exposure. The proposal would require nonexempt banks to report data in
several new schedules that would be added to the Call Report effective March 31,
1996. However, the agencies recently have decided that any new Call Report
interest rate risk schedules will not be implemented as of the March 31, 1996,
report date. The plans for the implementation of guidelines for interest rate
risk are expected to include requirements to increase capital levels if a bank
appears to be exposed to higher than average interest rate risk. The Bank feels
that its current position will qualify for "exempt" status and has consistently
limited the levels of longer-term interest rate risk through the use of floating
rates and/or shorter-term loans and investments.
The following table for the Bank breaks down rate sensitivity for earning assets
(RSA) and rate sensitive liabilities (RSL) based on the earliest possible
repricing dates for variable rate instruments, or for fixed rate assets and
liabilities, on scheduled maturities. The table includes experience-based
prepayment assumptions for mortgage loans. The table uses data from FDIC Call
Reports and is similar to the reporting assumptions used during bank
examinations. In the past few years, various models and rate sensitive studies
have focused on the interest rate risk characteristics of interest-bearing
transactional accounts. Based on historic reviews and documentation, it appears
that these accounts do not have the same degree of short-term interest rate
sensitivity associated with loans that are tied to any immediate change in prime
rate or to short-term investments like Federal Funds Sold. The following table
makes certain assumptions as to the interest rate sensitivity of savings
accounts that have had limited rate fluctuation during the past three years, as
to money market accounts which are based on a tier rate structure depending on
the account deposit level, and as to now accounts that have had very little
price fluctuation in the past three years:
38
<PAGE>
<TABLE>
<CAPTION>
1 2-90 91-365 1-5 5+
DAY DAYS DAYS YEARS YEARS TOTAL
--- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
CD's at other banks - 99 99 - - 198
Investments
Fixed rate - 2,500 2,807 6,680 24 12,011
Floating 4,276 3,842 3,389 - - 11,507
Loans
Fixed - 642 1,609 8,333 1,670 12,254
Floating 7,785 1,946 7,726 868 1,729 20,054
Nonaccrual - - 343 - - 343
Federal Funds Sold 2,938 - - - - 2,938
------ ------ ------ ------ ------ ------
Total RSA 14,999 9,029 15,973 15,881 3,423 59,305
Savings - 2,317 2,316 - - 4,633
MMDA 6,505 4,336 - - - 10,841
Now Accounts 6,613 4,409 - - - 11,022
CD's over $100,000 - 1,803 1,699 - - 3,502
Other CD's - 3,044 4,383 722 - 8,149
------ ------ ------ ------ ------ ------
Total RSL 13,118 15,909 8,398 722 - 38,147
------ ------ ------ ------ ------ ------
Net RSA-RSL 1,881 (6,880) 7,574 15,159 3,423
Cumulative RSA-RSL (4,999) 2,576 17,735 21,157
Cumulative GAP as % 114% 83% 107% 146% 155%
As % of Total Assets 3% 8% 4% 27% 33%
</TABLE>
As a rule, the Bank works to keep the cumulative difference between RSA and RSL
as balanced as possible over a one year cycle. In 1995, banks as a group needed
to progressively increase deposit rates which had been held low in 1994 due to
the lack of competition for deposits at a time when banks were still operating
with low or lower than normal loan demand. Starting in mid-1995 and continuing
into March 1996, banks as a group have become much more aggressive in pricing
time deposits, but have yet to make a major jump in interest-bearing
transactional accounts. These pricing decisions appear to be consistent with
recent patterns whereby transactional and savings accounts do not mirror the
repricing patterns on the asset side.
CASH FLOW -- PARENT COMPANY ONLY
The Company as of December 31, 1995 had over $5 million in cash liquidity.
The Bank's liquidity as of December 31, 1995 included over $7 million in cash,
its bank accounts and federal funds sold, and over $21 million in available for
sale securities.
ECONOMY AND INFLATION
The majority of the published economic forecasts for 1996 suggest that the
opposing forces affecting interest rates and the economy will moderately favor
lower interest rates
39
<PAGE>
with the greatest drop coming in the short end of the yield curve. Inflation
currently appears to be well within the target ranges used by the Federal
Reserve. Unless conditions significantly change after the elections in November,
it appears that the economy will continue to show modest growth for 1996.
OPERATIONS RESULTS
INTEREST INCOME increased for the year 1995 versus 1994 by $553,000 with average
earning assets increasing by approximately $1.3 million. The majority of the
increase was based on increasing interest rates on loans and investments. Prime
rate as of December 1994 was at 8.5% and increased to 9.0% during 1995. As of
March 1996, prime rate has been reduced to 8.25% following a total of a 50 basis
point decrease since December 1995. The average yield on the Bank's loan
portfolio for the month of December 1994 was 9.0%. Improvements in loan quality,
better attention to loan pricing, and the periodic repricing of variable rate
loans all contributed to an increased income on loans, and the average yield on
the portfolio in December 1995 was 9.3%.
The investment portfolio also benefited from progressive repricing on floating
rate investments and from generally higher yields as new securities were
purchased to replace repayments and maturities. The average yield on the
investment portfolio in December 1994 was 5.6% versus the average for the month
of December 1995 of 6.7%.
INTEREST EXPENSE increased by $184,000 while the average total for all interest-
bearing deposits actually decreased by $6.8 million. The increase trend in
deposit rates, and specifically for time deposits, was consistent for all of
1995. There has been little or no decrease in deposit rates during the first
quarter of 1996 although the corresponding short-term rates for earning assets
have decreased by approximately 50 basis points. As of March 1996, bank time
deposit rates for 60 day to one-year time deposit were generally 20 to 50 basis
points over the Federal Funds Sold rates. While loan and investment rates have
seen an up-and-down cycle since December 1994, the upward trend for deposit
rates has been driven by increased competition for deposits as banks increased
their lending in 1995 and from strong rate competition from nonbank investment
opportunities including a strong stock market. The most significant deposit rate
increase was in time deposit rates with some, but less, change for interest-
bearing demand deposits. There was no change in the savings interest rate from
1994 to 1995 and the average balances in savings accounts which had been
inflated in prior years when all deposit rates were very low have returned to a
more historic "core" level.
NON-INTEREST INCOME increased in 1995 compared to 1994 by $284,000 or 44%;
however, a majority of the increase is related to the settlement of a $171,000
claim against the Bank's blanket bond for a loss sustained in 1994 and
approximately $50,000 from legal and other recoveries from losses sustained in
1994. The Bank did increase income on overdraft service charges by $63,000. The
majority of this increase came from increased attention to the fee collection,
and part is a result of the poor economy with an increased volume of checks
drawn against insufficient funds. The Bank has had no material losses from
overdrafts and closely monitors its NSF activity. Deposit service charges
increased starting in the last quarter of 1995 as part of an increase focus on
fee income that was developed as part of the 1995 earnings improvement program.
On
40
<PAGE>
average, income from these service charges increased by $7,000 per month
starting in October 1995, and this improvement is expected to continue in 1996.
The $52,000 decrease in data processing income reflects the mid-1994 termination
of an item processing contract with another community bank. As of March 1996,
the Bank does not do any data or item processing for any other bank; however, it
continues to do ACH origination and payment processing for local homeowners
associations and other organizations.
OPERATING EXPENSES decreased in 1995 compared to 1994 by $813,000 or 19%.
Material changes in operating expenses included Salary and Benefits which
decreased by $131,000 or 7%; Office Operations which increased by $124,000 or
18%; Other Real Estate Owned Expenses which declined by $181,000 or 74%; and
Legal settlements and other which decreased by $257,000.
Salary and Benefits decreases are directly related to staff reduction which were
planned in 1994 and completed in September 1995. The Bank in September 1995
reduced staff by 6 full-time equivalents. Concurrent with the staff reductions,
the Bank implemented the recommendations from a consultant to improve its
overall operating efficiencies and to incrementally improve customer service.
Throughout the entire review process, specific attention was focused on
maintaining and, where needed, strengthening operating efficiency within the
confines of prudent internal controls and segregation of duties. Stress was also
placed on a continued high level customer service quality.
The recorded increase in Office Operations is related to a $53,000 nonrecurring
insurance credit adjustment in 1994 which understated the actual insurance
expense in 1994. This 1994 correction was followed by an increase in insurance
costs in 1995 as the cost for the Bank's blanket bond and a new directors and
officers liability insurance increased by approximately $43,000. This increase
in cost was reflective of the deterioration of condition in the Bank's financial
position and the Bank's regulatory Orders. A majority of the Bank's insurance
policies were renewed in late 1995 with a combined reduction in cost of
approximately $27,000. The renewal policies generally reflect the improvements
in the Bank's financial condition, in the reduced level of problem and
classified assets, and in the removal of the regulatory Orders by the State and
FDIC.
The sale of $617,000 in OREO property, held as of the end of 1994, in early 1995
was completed with no additional write downs and a minimum amount of direct
carrying expenses. Expenses relating to the OREO acquired in 1995 have been
limited and are not expected to be material in 1996 or until the property is
sold. The Bank is actively marketing the remaining OREO for sale.
The expenses relating to legal settlements that were incurred in 1994 for the
most part were offset by recoveries of legal expenses and settlements in 1995.
DEFERRED TAX BENEFITS were booked at the end of 1995 after a very detailed
review of the Company's current and projected future earnings to accurately
reflect the utilization of the deferred tax assets for its net operating
carryforwards. These calculations carefully considered the impact of the March
1995 private placement which was determined under IRS Section 382 to be a
"change of control". Under Section 382 if a change of control has taken place,
future use of an NOL is dependent on certain ratio limitations. After booking
the $496,000 in deferred tax assets
41
<PAGE>
and income benefit in 1995, the Company anticipates that its future NOL will be
limited to approximately $27,000 per year.
PROVISION FOR LOAN LOSSES
As previously disclosed, in the past year the Bank has made several changes in
its credit administration process; has consistently reduced the level of
classified loans and loan delinquency; and has not lowered its credit standards.
In Management's opinion, the Allowance as of December 31, 1995 is adequate to
meet any known credit losses; however, no assurance can be given that there will
not be future events or credit problems from circumstances of which Management
has no current knowledge that could result in unexpected losses or require
future increases in the Allowance. An additional provision of $250,000 was made
in December 1995 to provide an additional funding for any possible unknowns or
losses that could result from any fallout from the recession or other unexpected
source.
INTERNAL CONTROLS
The Company's and Bank's Board Audit Committee has been increasingly involved in
reviewing and monitoring internal controls. In addition to the normal controls,
internal audits, and the external audit as part of the annual audit process, the
Company and Bank were also reviewed at multiple levels including loan review and
internal controls by outside firms as part of the due diligence process for the
capital offerings in 1995. The Bank also had separate FDIC and State
examinations which were done approximately five months apart during 1995.
Beginning in 1996, the Board Audit Committee has restructured the Bank's
internal audit process and appointed an internal auditor rather than rely on an
outside firm to do internal auditing for the Bank. Under the newly implemented
Internal Audit Policy, more frequent auditing will be done and directly reported
to the Audit Committee. While the Bank nor Company have had any material
internal audit comments from the Company's independent auditors, the new system
is expected to increase the frequency and scope of internal auditing.
The Committee has also reviewed recent federal banking guidelines concerning
risk assessments of banks including the internal auditing function. During 1996,
the Committee expects to work with Management to more fully implement a risk
assessment system to mirror the standards that will be used during federal bank
examinations.
At the completion of a Community Reinvestment Act examination in June 1995, the
Bank was rated "Outstanding" for CRA.
FORWARD LOOKING
The primary goal for the Bank is to progressively increase profitability based
on the foundation that started with the capital increase in March 1995, the
earnings improvement program that was completed in 1995, and the improvements
made in credit administration and loan quality that began in 1995 and the start
of 1996.
42
<PAGE>
The Bank is currently in the final review stage in preparation for the
submission of an application to open a new branch in a neighboring community.
The plan is consistent with the goal of the Bank to expand its market area into
contiguous communities. It is also expected that the Bank and proposed branch
will have some direct benefits in attracting new customers because of the
acquisition of First Interstate Bank by Wells Fargo.
As part of its efforts to achieve long-term stable profitability and respond to
a changing economic environment in Southern California and South Orange County,
the Company and the Bank are investigating all possible options to augment its
traditional focus by broadening its customer services. The Company and the Bank
believe that additional capital will permit an acceleration of this effort,
leading to greater diversification of both the Bank's loan portfolio and deposit
base and new sources of fee income. Areas of possible future diversification
include expanded days and hours of operation, mortgage, brokerage, annuity and
mutual funds products, as well as the acquisition of other financial
institutions or branches of other financial institutions, in cities and areas
adjoining its Laguna Niguel headquarters.
The Company believes (but cannot assure) that the franchise value of the Bank
will increase, in part due to the shrinking number of independent banks. Very
few bank charters are presently being granted, and the capitalization
requirements for such charters are substantially higher than in the past;
therefore, it is Management's belief that a well run community bank which
concentrates its expansion in such an affluent coastal area of Southern
California can, over a five to ten year period, substantially improve its
franchise value, as well as its assets size and income levels. However, no
assurances can be given that the Company will experience an improvement in its
franchise value or achieve any of the goals referred to herein.
The severe problems associated with the savings and loan industry and the
problems experienced by other independent banks within Orange County, with
operations in South Orange County, have resulted in a number of branch
facilities being made available for sale. The Company believes that one or more
small institutions may be available at attractive prices and that branches of
other financial institutions may be available at substantially below their
investment cost. Although the Company has had preliminary discussions with a
number of financial institutions regarding possible acquisitions, no agreements
or understandings have been reached at this time. The Company has been contacted
by other financial institutions with regard to their interest in selling various
branches of their companies. Acquisitions of this nature can take from 60 to 90
days or longer for the approval and purchase of assets and branches, and 6 to 12
months or longer for the negotiation, approval and purchase of an entire
financial institution.
Concurrent with the final preparation of the Form 10-KSB, Monarch Bancorp
prepared the following press release:
E. Lynn Caswell, President and Chief Executive Officer of Monarch Bancorp, the
bank holding company for Monarch Bank, Laguna Niguel, California, and Hugh S.
Smith, Jr., Chief Executive Officer of Western Bank, Los Angeles, California,
announced today that the two companies have
43
<PAGE>
signed a Definitive Agreement providing for the acquisition of Western Bank by
Monarch Bancorp, with Western Bank surviving as a wholly-owned subsidiary of
Monarch Bancorp.
"Western Bank is an extremely well run organization and has consistently been
one of the most profitable banks in California," observed Mr. Caswell. "We
believe that Western Bank will provide the foundation for our goal of building a
large community banking organization in Southern California."
Mr. Smith said, "We at Western Bank believe that the merger with Monarch Bancorp
is a very positive development, one that will benefit our shareholders,
customers and employees. The merger will allow our shareholders to receive cash
for their shares as well as allow the Bank additional avenues that would enhance
the services we currently offer to our customers."
The Definitive Agreement provides for Western Bank shareholders to receive a per
share purchase price in cash of $17.25 per share if the merger occurs by
September 30, 1996, and $17.50 per share if the merger occurs after September
30, 1996 and by December 31, 1996. The consummation of the Definitive Agreement
is subject to several conditions, including approval of the shareholders of
Western Bank, Monarch Bancorp raising sufficient capital in a private placement
offering scheduled to be completed in the third quarter of 1996, and regulatory
approvals.
Monarch Bancorp is a bank holding company for Monarch Bank, with its
headquarters office located in Laguna Niguel, California. As of December 31,
1995, total assets of Monarch Bancorp were approximately $70.1 million, and net
earnings for the 1995 fiscal year were approximately $683,000.
Monarch Bancorp raised $10.2 million of new common stock through a combined
private placement and rights offering in 1995. Participating in that offering
were such well known bank investors as Keefe Managers, Mutual Series Fund and
Basswood Partners. At December 31, 1995, the leverage capital of Monarch Bancorp
stood at 15.7%.
Western Bank has 5 offices serving the communities of Westwood, Beverly Hills,
Century City, Santa Monica and Encino. As of December 31, 1995, total assets of
Western Bank were $397 million, and net earnings for the 1995 fiscal year were
$4.2 million.
Following consummation of the merger, Hugh S. Smith, Jr. will be elected as
Chairman of the Board and Chief Executive Officer of Monarch Bancorp. Lynn
Caswell will continue to serve as President and Chief Executive Officer of
Monarch Bank and Joseph Digange will continue as President of Western Bank. Each
of them will serve on the Board of Monarch Bancorp.
While the Company expects to move forward with its plans to acquire Western
Bank, no assurances can be made that this acquisition will be completed as
planned nor that the acquisition, if completed, will produce increased
profitability, shareholder value or franchise value.
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
Monarch Bancorp
We have audited the accompanying consolidated balance sheets of Monarch Bancorp
and Subsidiaries as of December 31, 1995 and December 31, 1994, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects. the financial position of Monarch Bancorp and
Subsidiaries as of December 31, 1995 and December 31, 1994, and the results of
its operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Dayton & Associates
February 29, 1996
Laguna Hills, California
45
<PAGE>
MONARCH BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1995 1994
- ------ ------------- -------------
<S> <C> <C>
Cash and due from banks (Notes 1 and 2 ) $ 4,747,000 $ 4,762,000
Federal funds sold 2,938,000 5,891,000
---------- ----------
Total cash and cash equivalents 7,685,000 10,653,000
Interest bearing deposits with other banks 198,000 1,382,000
Investment securities - held to maturity, at cost (Notes 1 and 3) 6,661,000 4,254,000
Investment securities - available for sale, at fair value (Notes 1 and 3) 22,004,000 11,885,000
Loans: (Notes 1, 4, 5, and 11)
Real estate mortgage 11,675,000 12,226,000
Real estate construction 2,033,000 4,032,000
Commercial 16,758,000 12,089,000
Installment 2,184,000 2,693,000
---------- ----------
Gross loans 32,650,000 31,040,000
Less: Deferred loan fees (130,000) (52,000)
Allowance for loan losses (854,000) (1,137,000)
----------- -----------
Net loans 31,666,000 29,851,000
Premises and equipment, net (Notes 1 and 6) 610,000 650,000
Other real estate owned 150,000 617,000
Deferred tax assets (net) (Note 9) 440,000 -
Accrued interest receivable and other assets 687,000 682,000
---------- ----------
Total Assets $ 70,101,000 $ 59,974,000
---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 19,931,000 $ 14,790,000
Interest bearing demand 22,527,000 30,775,000
Savings 4,633,000 6,236,000
Time certificates of deposits of $100 or more 3,502,000 2,260,000
Other time deposits 8,149,000 4,582,000
---------- ----------
Total deposits 58,742,000 58,643,000
Notes payable - 53,000
Other borrowings (Note 12) 132,000 173,000
Accrued interest payable and other liabilities 230,000 403,000
---------- ----------
Total Liabilities 59,104,000 59,272,000
Shareholders' equity: (Notes 1, 8, 9 and 17)
Preferred stock, no par value, 5 million shares authorized,
none issued - -
Common stock, no par value, 25 million shares authorized,
issued and outstanding, 8,228,000 in 1995 and 794,000 in 1994 16,500,000 7,368,000
Accumulated deficit (5,454,000) (6,137,000)
Unrealized appreciation (depreciation) on investment
securities net of taxes of $57,000 in 1995 83,000 (356,000)
Deferred charge relating to KSOP (132,000) (173,000)
----------- -----------
Total shareholders' equity 10,997,000 702,000
---------- ----------
Total shareholders' equity and liabilities $ 70,101,000 $ 59,974,000
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
46
<PAGE>
MONARCH BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 3,054,000 $ 2,878,000
Interest on interest bearing deposits in other banks 43,000 111,000
Interest on investment securities 1,018,000 794,000
Interest on federal funds sold 376,000 155,000
----------- -----------
Total interest income 4,491,000 3,938,000
Interest expense:
Interest expense on deposits 1,285,000 1,101,000
Interest expense on notes payable 1,000 2,000
--------- ---------
Total interest expense 1,286,000 1,103,000
--------- ---------
Net interest income 3,205,000 2,835,000
Provision for loan losses 425,000 995,000
--------- ---------
Net interest income after provisions for loan losses 2,780,000 1,840,000
Other income:
Overdraft service charges 293,000 230,000
Deposit service charges 213,000 171,000
Rental income 66,000 71,000
Data processing income 70,000 122,000
Late charges on loans 19,000 20,000
Service charges, commissions, and other fees 20,000 82,000
Loss on investments - (47,000)
Legal settlements and other 252,000 -
--------- ---------
Total other income 933,000 649,000
Other operating expenses:
Salary and employee benefits 1,657,000 1,788,000
Office operations 800,000 676,000
Occupancy expense 623,000 615,000
Professional services 260,000 276,000
Public offering expenses - 366,000
Other real estate owned 62,000 243,000
Advertising and business development 116,000 110,000
Legal settlements and other 7,000 264,000
--------- ---------
Total other operating expenses 3,525,000 4,338,000
Gain (loss) before income taxes 188,000 (1,849,000)
Deferred tax benefit (provision for income taxes) (Note 9) 496,000 (1,000)
--------- ----------
Net income (loss) $ 683,000 $ (1,850,000)
--------- -----------
--------- -----------
Weighted average number of shares outstanding (Note 1) 5,071,000 794,000
--------- ----------
--------- ----------
Net income (loss) per share of common stock (in dollars) $ 0.13 $ (2.33)
--------- -----------
--------- -----------
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
47
<PAGE>
MONARCH BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
(IN THOUSANDS)
Net unrealized
appreciation
(depreciation)
on securities
Common stock Accumulated Deferred charge available Shareholders'
-------------- ---------------------------- ------------ -------------
Shares Amount Deficit related to KSOP for sale Equity
------ ------ ------- --------------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance December 1993 794 $ 7,368 $(4,287) $ (211) $ 53 $ 2,923
Repayment on KSOP debt - - - 38 - 38
(NOTE 12)
Net change in unrealized
depreciation on investment
securities available for sale - - - - (409) (409)
Net loss - - (1,850) - - (1,850)
----- ----- ------- ----- ----- -------
Balance December 1994 794 7,368 (6,137) (173) (356) 702
Repayment on KSOP debt - - - 41 - 41
(Note 12)
Net change in unrealized
appreciation on investment
securities available for sale - - - - 439 439
Issuance of common stock 7,434 9,132 - - - 9,132
(Note 8)
Net income - - 683 - - 683
----- ----- ------ ----- ----- -------
Balance December 1995 8,228 $ 16,500 $ (5,454) $ (132) $ 83 $ 10,997
----- ------- ------- ----- --- -------
----- ------- ------- ----- --- -------
</TABLE>
See accompanying notes to consolidated financial statements
48
<PAGE>
MONARCH BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 683,000 $ (1,850,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on investment securities - 47,000
Provision for loan losses 425,000 995,000
Prevision for losses on other real estate owned 30,000 200,000
Depreciation 165,000 187,000
Amortization of bond discounts (53,000) (45,000)
Deferred loan fees (80,000) (175,000)
(Increase) decrease in accrued interest receivable and other assets (14,000) 43,000
(Decrease) increase in accrued interest payable and other liabilities (172,000) 186,000
----------- --------
Net cash provided by (used in) operating activities 984,000 (412,000)
Cash flows from investing activities:
Net decrease in interest-bearing deposits in other banks 1,184,000 2,173,000
Securities held to maturity:
Proceeds from maturities 3,394,000 4,140,000
Purchases (5,704,000) (5,201,000)
Securities available for sale
Proceeds from maturities 1,351,000 3,303,000
Purchases (11,999,000) (997,000)
Net (increase) decrease in loans (1,848,000) 2,338,000
Purchases of equipment (125,000) (31,000)
Proceeds from sale of real estate owned 617,000 2,066,000
----------- ----------
Net cash provided (used) in investing activities (13,130,000) 7,791,000
Cash flows from financing activities:
Net increase noninterest bearing demand deposits 5,141,000 1,792,000
Net decrease in interest-bearing demand, savings, and other deposits (6,284,000) (6,382,000)
Net increase (decrease) in time deposits of $100,000 or more 1,242,000 (482,000)
Payments on maturing debt (53,000) -
Proceeds from the issuance of common stock 9,132,000 -
----------- -----------
Net cash provided (used) by financing activities 9,178,000 (5,072,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,968,000) 2,307,000
Cash and cash equivalents at beginning of year 10,653,000 8,346,000
----------- ---------
Cash and cash equivalents at end of year $ 7,685,000 $ 10,653,000
----------- ----------
----------- ----------
Non-cash activities:
Property acquired through foreclosure $ 150,000 $ 2,181,000
-------- ---------
-------- ---------
Net adjustments to securities available for sale $ 439,000 $ (409,000)
------- ----------
------- ----------
Repayment of KSOP debt $ 41,000 $ 38,000
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
49
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
The accounting and reporting policies of Monarch Bancorp (the Company) and its
subsidiary Monarch Bank (the Bank) are in accordance with generally accepted
accounting principles and conform to general practices within the banking
industry. The more significant of the principles used in preparing the financial
statements are briefly described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and the Bank, and M.
B. Mortgage Company an inactive subsidiary of the Bank. All significant
intercompany balances and transactions have been eliminated.
NATURE OF OPERATION
The Company only conducts business through its bank subsidiary. The Bank, a
full service bank with one banking office, is a state-chartered bank subject to
the laws of the State of California and the regulations of the Federal Deposit
Insurance Corporation. The area served by the Bank is the southern area of
Orange County.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting Cash Flows, cash and cash equivalents include the
balance sheet captions "Cash and due from banks" and "Federal funds sold".
INVESTMENT SECURITIES
As of December 31, 1993, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This statement addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values, and
all investments in debt securities. Under this statement, securities are
classified into three categories as follows:
50
<PAGE>
Held-to-Maturity Securities (HTM) - Securities that the Company has
the positive intent and ability to hold to maturity. These securities
are to be reported at amortized cost.
Trading Securities - Securities that are bought and held principally
for the purpose of selling them in the near term. These securities
are to be reported at fair value with unrealized gains and losses
included in earnings.
Available-for-Sale Securities (AFS) - Securities not classified as
either held-to-maturity or trading securities. These securities are
to be reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of
stockholders' equity (net of tax effects).
As of December 31, 1995 all securities classified as AFS were reported at the
lower of amortized cost or market and all securities classified as HTM were
reported at amortized cost. Gains and losses on sale of securities are
recognized when realized on a specific identified basis. Premiums and discounts
are amortized into income using a level yield method.
LOANS
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest income is ordinarily discontinued
when a loan becomes 90 days past due as to principal or interest; however,
management may elect to continue the accrual when the estimated net realizable
value of collateral is sufficient to cover the principal balance and the accrued
interest. When the loan is determined to be uncollectible, interest accrued in
prior years and the principal are charged to the allowance for loan losses.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct loan origination costs are capitalized
and recognized as an adjustment of the yield on the related loan.
ALLOWANCE FOR LOAN LOSSES
The adequacy of the allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan portfolio.
Management's determination of the adequacy is based on a number of factors,
including loan loss experience, review of problem loans, quality of the
portfolio, and current economic conditions. Losses are charged and recoveries
are credited to the allowance for loan losses at the time of the loss or
recovery.
OTHER REAL ESTATE OWNED
Other real estate owned, acquired through partial or total satisfaction of a
loan, is carried at the lower of cost or fair value less estimated selling
costs. At the date of acquisition, losses are charged to the allowance for loan
losses, and subsequent write-downs are charged to expense in the period they are
incurred.
51
<PAGE>
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization which are charged to expense on a straight-line basis over the
estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged to operations, and the
expenditures for major replacements and betterments are added to the property
and equipment accounts. The cost and accumulated depreciation of the property
and equipment retired or sold are eliminated from the property accounts at the
time of retirement or sale and the resulting gain or loss is reflected in
current operations.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for the
current year (after exclusion of nontaxable income such as interest on state and
municipal securities) and deferred taxes on temporary differences between the
amount of taxable and pretax financial income and between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax asset and liabilities are expected to be realized or settled as
prescribed in FASB Statement No. 109, "Accounting for Income Taxes." As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision of income taxes.
The Company and its subsidiary file a consolidated Federal income tax return.
NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Company and Bank enter into off balance
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
EFFECT OF NEW ACCOUNTING STANDARDS
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
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
52
<PAGE>
ending after December 15, 1995 for all other institutions. SFAS No. 107 requires
disclosure of the fair value of financial instruments, both assets and
liabilities recognized and not recognized in the statements of financial
position, for which it is practical to estimate fair value.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan". SFAS No. 114, as amended by SFAS No. 119, is effective for the Bank for
the year beginning January 1, 1995 and requires that impaired loans that are
within the scope of the Statement be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent.
The Company adopted SFAS Nos. 107 and 114 for the year ended December 31, 1995.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March of 1995, the FASB issued SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The statement does not apply to financial instruments, long-term
customer relationships of a financial institution (core deposits), mortgage and
other servicing rights, and deferred tax assets. SFAS No. 121 requires the
review of long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances include, for example, a significant
decrease in market value of an asset, a significant change in use of an asset,
or an adverse change in a legal factor that could affect the value of an asset.
If such an event occurs and it is determined that the carrying value of the
asset may not be recoverable, an impairment loss should be recognized as
measured by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Fair value can be determined by a current transaction,
quoted market prices, or present value of estimated expected future cash flows
discounted at the appropriate rate. The statement is effective for fiscal years
beginning after December 15, 1995. The Company does not anticipate that AFAS No.
121 will have any material effect on its financial results.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October of 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, establishing financial accounting and reporting standards for
stock-based employee compensation plans. This statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that
53
<PAGE>
elect to remain with the existing accounting are required to disclose in a
footnote to the financial statements pro forma net income and, if presented,
earnings per share, as if this statement had been adopted. The accounting
requirements of this statement are effective for transactions entered into in
fiscal years that begin after December 15, 1995; however, companies are required
to disclose information for awards granted in their first fiscal year beginning
after December 15, 1995. Management of the Company has not completed an analysis
of the potential effects of this statement on its financial condition or results
of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 financial statements to
conform to the 1995 presentation. Such reclassifications had no effect on net
income or stockholders' equity as previously reported.
NOTE 2 -- RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank has elected to maintain average reserve balances with the Federal
Reserve Bank. The average amount of those reserve balances for the year ended
December 31, 1995 was approximately $450,000.
NOTE 3 -- INVESTMENT SECURITIES
Investment securities shown in the consolidated balance sheets of the
Company at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
SECURITIES HELD TO MATURITY:
US Government Securities $ 485 $ 16 $ - $ 501
US Agency Securities 4,500 5 (4) 4,501
Mortgage-backed Securities 1,676 25 (10) 1,691
------ ------ ------ ------
$ 6,661 $ 46 $ (14) $ 6,693
------ ------ ------ ------
------ ------ ------ ------
SECURITIES AVAILABLE FOR SALE:
US Government Securities 4,868 5 (2) 4,871
US Agency Securities 5,536 45 (3) 5,578
Mortgage-backed Securities 2,116 20 (5) 2,131
US Government Fund 9,240 - - 9,240
Other securities 104 80 - 184
------ ------ ------ ------
$ 21,864 $ 150 $ (10) $ 22,004
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- --------- -------- --------
DECEMBER 31, 1994
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
US Government Securities $ 246 $ - $ (3) $ 243
US Agency Securities 2,500 - (151) 2,349
Mortgage-backed Securities 1,508 - (80) 1,428
------ ----- ------ -------
$ 4,254 $ - $ (234) $ 4,020
------ ----- ------ -------
------ ----- ------ -------
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed Securities $ 6,946 $ - $ (356) $ 6,590
US Government fund 5,191 - - 5,191
Other securities 104 - - 104
------ ----- ------ -------
$12,241 $ - $ (356) $ 11,885
------ ----- ------ -------
------ ----- ------ -------
</TABLE>
The amortized cost and estimated fair value of HTM securities and AFS securities
at December 31, 1995, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
HELD TO MATURITY COST MARKET VALUE
- ---------------- ---------- ------------
<S> <C> <C>
Due in one year or less $ 196 $ 194
Due after one year through five years 6,465 6,499
Due after five years through ten years - -
Due after ten years - -
------- ------
$ 6,661 $ 6,693
------- ------
------- ------
AVAILABLE FOR SALE
Due in one year or less 11,654 11,735
Due after one year through five years 5,099 5,137
Due after five years through ten years 3,231 3,233
Due after ten years 1,880 1,900
------- ------
$ 21,864 $ 22,004
------- ------
------- ------
</TABLE>
There were no sales of securities in 1995 or 1994.
At December 31, 1995 investment securities with a carrying amount of
approximately $1,008,000 were pledged as collateral to secure public deposits.
NOTE 4 -- LOANS
Most of the loans made by the Bank are to customers located in the Orange
County, California area. Mortgage and construction loans are collateralized by
real estate trust deeds. The Bank
55
<PAGE>
generally requires security in the form of assets, including real estate, on
commercial and installment loans. The ability of the Bank's customers to honor
their loan agreements is dependent upon the general economy of the Bank's market
area.
NOTE 5 -- ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for credit losses for the two years ended December 31
were as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Balance at beginning of year $ 1,137,000 $ 1,055,000
Provision for loan losses 425,000 995,000
Recoveries 9 78,000
Loans charged off (717,000) (991,000)
----------- ----------
Balance at end of year $ 854,000 $ 1,137,000
----------- ----------
----------- ----------
</TABLE>
A summary of loans past due 90 days or more and still accruing interest and
those loans on which the accrual of interest has been discontinued as of
December 31 follows:
<TABLE>
<CAPTION>
1995 1994
---------- -------
<S> <C> <C>
Loans Past Due 90 Days or More $ - $ 362,000
---------- -------
---------- -------
and Still Accruing Interest
Loans on Nonaccrual $ 344,000 $ 431,000
---------- -------
---------- -------
</TABLE>
If interest on nonaccrual loans had been recognized at the original interest
rates, interest income would have increased approximately $17,000 and $26,000
for the years ended December 31, 1995 and 1994 respectively.
Impairment of loans having recorded investments of $344,000 as of December 31,
1995 has been recognized in conformity with SFAS No. 114. The total allowance
for loan losses related to these loans was $57,000 at December 31, 1995. The
average recorded investment in such impaired loans during 1995 was $341,000.
Interest income on impaired loans totaling $24,000 was recognized in 1995 for
cash payments.
NOTE 6 -- PROPERTY AND EQUIPMENT
The Components of premises and equipment for the two years ended December 31
were as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Furniture, fixtures and equipment $ 1,111,000 $ 990,000
Leasehold improvements 17,000 14,000
---------- ---------
1,128,000 1,004,000
---------- ---------
Less accumulated depreciation and
amortization 518,000 353,000
---------- ---------
$ 610,000 $ 650,000
---------- ---------
---------- ---------
</TABLE>
56
<PAGE>
NOTE 7 -- NOTES PAYABLE
Convertible subordinated debentures totaling $53,000 were redeemed at par in
March 1995.
NOTE 8 -- SHAREHOLDERS' EQUITY
During 1995, shareholders' equity was increased from a private placement, which
closed in March 1995, and a shareholders rights and public offering, which
closed in September 1995. These changes were as follows:
Private placement
Price $1.35
Shares issued 4,547,000
Net proceeds $5,668,000
Shareholders' rights and public offering
Price $1.35
Shares issued 2,887,000
Net proceeds $3,464,000
NOTE 9 -- INCOME TAXES
The provision (benefit) for income taxes consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Current:
Federal $ - $ -
State 1,000 1,000
Deferred (497,000) -
--------- ---------
$ 496,000 $ 1,000
--------- ---------
--------- ---------
</TABLE>
The provision for income taxes differs from that which would result from
applying the U.S. statutory rate as follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Expected (benefit) provision at 34%
statutory rate $ 64,000 $(630,000)
Provision for state income taxes, 11,000 1,000
net of Federal Benefit
Adjustment to Valuation Allowance (591,000) 630,000
Other Items 20,000 -
--------- --------
Provision (benefit) for income taxes $ (496,000) $ 1,000
--------- --------
--------- --------
</TABLE>
57
<PAGE>
As of December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $3,262,000. Expiration dates of the
loss carryforwards are as follows:
<TABLE>
<CAPTION>
Expiration Date Amount
--------------- ----------
<S> <C> <C>
2000 $ 35,000
2001 87,000
2002 255,000
2004 1,000
2005 16,000
2006 11,000
2007 57,000
2008 1,010,000
2009 1,207,000
2010 583,000
----------
$ 3,262,000
----------
----------
</TABLE>
The Company has a California net operating loss carryforward of approximately
$1,434,000 at December 31, 1995 which will expire in the year ending December
31, 1999.
At December 31, 1995, the Company also has investment tax credit carryovers of
approximately $333,000 to offset against future federal tax liabilities.
Carryforward amounts expire at various dates beginning in 2000.
The components of the Company's deferred tax assets and liabilities at December
31, are:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Allowance for Loan Losses
$ 202,000 $ 360,000
Net Operating Loss Carryforward 1,216,000 997,000
Other Assets/Liabilities 97,000 210,000
Federal Income Tax Credit Carryforward 333,000 333,000
---------- ----------
Total Deferred Asset 1,848,000 1,900,000
Valuation Allowance (1,309,000) (1,900,000)
Total Deferred Liability (99,000) -
---------- ----------
Net Deferred Taxes $ 440,000 $ -
---------- ----------
---------- ----------
</TABLE>
During 1995 the Company underwent a change in its majority ownership that,
pursuant to the Tax Reform Act of 1986, may limit the utilization of its net
operating losses and income tax credits generated in the periods prior to the
ownership change. Management of the Company believes that the majority of these
items will be utilized; however, since ultimate realization is dependent upon
acceptance of the Company's position by the Internal Revenue Service, the
valuation allowance has been adjusted to reflect potential disallowance of these
items.
58
<PAGE>
NOTE 10 -- LEASE AND RENTAL PAYMENTS
The Company and Bank conducts operations from leased facilities under operating
leases which expire on various dates through 2001. The Company has three ten
year options to renew the lease on its branch facility.
The following is the schedule of future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
----------------------- -------
<S> <C> <C>
1996 179,000
1997 114,000
1998 114,000
1999 114,000
2000 114,000
Thereafter 114,000
</TABLE>
Rental expense was $267,000 in 1995 and $297,000 in 1994.
Sublease rental income for the years ended December 31, 1995 and 1994 totaled
approximately $66,000 and $71,000, respectively. The lease and sublease mature
in June 1996. Approximately $20,000 was expensed in 1994 to recognize the
estimated difference (loss) in rental income to be collected under the sublease
agreement versus the rent required under the master lease.
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Bank had loans outstanding to principal officers and directors and their
affiliated companies of approximately $248,000 and $141,000 at December 31, 1995
and 1994, respectively. Such loans were made substantially on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other borrowers and do not involve more than the
normal risks of collectibility.
An analysis of the activity with respect to such loans to related parties is as
follows:
<TABLE>
<CAPTION>
. 1995 1994
-------- ---------
<S> <C> <C>
Balance, January 1 $ 141,000 $ 286,000
New loans during the year 176,000 74,000
Repayments during the year (69,000) (219,000)
-------- ---------
Balance, December 31 $ 248,000 $ 141,000
-------- ---------
-------- ---------
</TABLE>
59
<PAGE>
NOTE 12 BENEFITS PLANS
The Company's stock option plan was approved in 1993. The plan allows for
the issuance of nonqualified and incentive stock options as defined under
the Internal Revenue Code. The plan was amended by shareholder action in
1995 to increase the number of shares available under the plan to 10% of
the issued and outstanding shares of the Company. All options that had
been previously issued under the 1983 and the 1993 plans were canceled in
October 1995.
On February 6, 1996, the Company issued 553,434 new stock options under the
terms of the plan. The options are all fully vested as issued, and they are
exercisable to 120% of the issued price of $1.35 or at $1.62 per share.
On May 16, 1995, the Board of Directors approved the 1995 Directors
Deferred Compensation Plan which was approved by shareholders on July 17,
1995. The plan is effective for fees earned on and after July 1, 1995. No
compensation has been awarded under the plan.
During 1992 the Company adopted an employee stock and ownership and salary
deferral plan ("KSOP"). In 1992, the KSOP obtained a $250,000 loan from
another financial institution, which is guaranteed by the Company, and
between 1992 and 1993 acquired approximately 50,000 shares of the Company's
common stock. Repayments on the loan are made by employee salary deductions
and from possible matching contributions by the Bank. The loan has a term
of five years and an interest rate of 8%. The Bank's contributions to the
KSOP totaled approximately $20,000 and $46,000 in 1995 and 1994,
respectively.
NOTE 13 -- COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is party to litigation and claims arising in the normal course of
business. Management, after consultation with legal counsel, believes that
the liability, if any, arising from such litigation and claims will not be
material to the consolidated financial positions.
The Company and Bank have an employment agreement with an executive officer
that provides for a base salary and other benefits. This agreement was
extended by Board action in 1995 until July 1996. The agreement provides
for not less than six months base salary and benefits nor more than one
year's base salary in the event of termination without cause or as a result
of merger or corporate dissolution.
NOTE 14 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
its normal course of business in meeting the financial needs of its
customers. These financial instruments consist primarily of commitments to
extend credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets. The contract or notional amounts of those instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
60
<PAGE>
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
-------- --------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Loan commitments $ 6,557,000 $ 4,055,000
Standby letters of credit 10,000 10,000
--------- -----------
$ 6,567,000 $ 4,065,000
--------- ---------
--------- ---------
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract; they
generally have fixed expiration dates or other termination clauses and may
require a fee. The total commitment amount generally represents future cash
requirements.
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset
or obligation could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Fair value estimates
are made at a specific point in time based on relevant market information
and information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at
one time the entire holdings of a particular financial instrument. Because
no market value exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics
of various financial instruments, and other factors. These estimates are
subjective in nature, involve uncertainties and matters of judgment and,
therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated
future business, and the value of assets and liabilities that are not
considered financial instruments. Additionally, tax consequences related to
the realization of the unrealized gains and losses can have a potential
effect on fair value estimates and have not been considered in many of the
estimates.
The following methods and assumptions were used to estimate the fair value
of significant financial instruments:
FINANCIAL ASSETS
The carrying amounts of cash, short-term investments, due from customer
acceptances, and Bank acceptances outstanding are considered to approximate
fair value. Short-term investments include
61
<PAGE>
federal funds sold, securities purchased under agreements to resell, and
interest-bearing deposits with Banks. The fair value of investment
securities, including available for sale, are generally based on quoted
market prices. The fair value of loans are estimated using a combination of
techniques, including discounting estimated future cash flows and quoted
market prices of similar instruments where available.
FINANCIAL LIABILITIES
The carrying amounts of deposit liabilities payable on demand, commercial
paper, and other borrowed funds are considered to approximate fair value.
For fixed maturity deposits, fair value is estimated by discounting
estimated future cash flows using currently offered rates for deposits of
similar remaining maturities. The fair value of long-term debt is based on
rates currently available to the Bank for debt with similar terms and
remaining maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit and standby letters of
credit is estimated using the fees currently charged to enter into similar
agreements. The fair value of these financial instruments is not material.
The estimated fair value of financial instruments at December 31, 1995 is
summarized as follows:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
<S> <C> <C>
Financial Assets:
Cash and due from banks $ 4,747,000 $ 4,747,000
Federal Funds Sold 2,938,000 2,938,000
Investment Securities 28,665,000 28,697,000
Loans 31,666,000 31,531,000
Financial Liabilities:
Deposits 58,742,000 58,740,000
</TABLE>
NOTE 16 -- REGULATORY MATTERS
Following the conclusion of a joint, second quarter 1994 FDIC and
California State Banking Department (Superintendent) examination of the
Bank, Monarch Bank stipulated to the issuance of a Section 8(b) Order and a
California Financial Code Section 1913 Order (the "Orders") which became
effective on December 23, 1994 and December 14, 1994, respectively. The
Orders were similar in content and require the Bank to perform several
actions within certain time frames and include the following: (i) to have
and retain management who are acceptable to the Superintendent and the
FDIC and who are qualified to restore the Bank to a safe and sound
condition; (ii) the Board of Directors to increase its participation in
the affairs of the Bank; (iii) by no later than April 30, 1995, the Bank
shall have Tier 1 capital in an amount as to equal or exceed 7% of the
Bank's total assets and to adopt a capital plan to meet the minimum risk-
based capital requirements as described in FDIC rules and regulations; (iv)
to eliminate from its books
62
<PAGE>
all assets classified loss in the 1994 examination and to reduce assets
classified substandard according to defined schedules; (v) prohibits and
restricts further extensions of credit to borrowers whose assets were
adversely classified in the 1994 examination; (vi) requires the Bank to
revise and amend its loan policy and improve credit administration
procedures; (vii) to reduce loan concentrations; (viii) to establish and
maintain an adequate reserve for loan losses and revise the Bank's policy
for determining the adequacy of the loan loss reserve; (ix) to prepare and
implement a written plan and budget for review and comment by the FDIC and
for the Board's review versus actual performance on a quarterly basis; (x)
to correct, to the extent possible, certain violations of law contained in
the examination report; (xi) to adopt and implement a policy to provide
for adequate internal controls and an internal audit program; (xii) to file
amended Call Reports where needed; (xiii) to not pay cash dividends without
the prior consent of the FDIC and Superintendent; and (xiv) to file written
progress reports with the FDIC and Superintendent.
The California State Banking Department recently completed an examination
of the Bank and informed the Bank that is has now been rated satisfactory
and the State has removed its 1913 Order on December 29, 1995.
The FDIC removed their Order on March 6, 1996 when the Bank signed a
Memorandum of Understanding. The Memorandum requires the Bank to: 1) to
have qualified management; 2) no changes in management or the board without
prior notification; 3) to maintain adequate capital including a Tier 1
capital to total asset ratio of 7.0% or more; 4) to further reduce
classified assets; 5) to develop a 3-year business and strategic plan
within 60 days; 6) places certain restrictions on the payment of dividends
including prior notification to the FDIC; and 7) requires quarterly written
status reports relating to actions taken concerning the Memorandum.
NOTE 17 -- RESTRICTIONS ON PAYMENT OF DIVIDENDS
As of December 31, 1995, the Company was not eligible to pay dividends
because of the accumulated deficit in shareholders' equity.
The Bank is subject to certain restrictions under regulations governing
state banks which limit its ability to transfer funds to the Company
through intercompany loans, advances, or cash dividends. As of December
31, 1995, the Board may not pay dividends without the prior approval of the
FDIC and State Superintendent of Banks.
63
<PAGE>
<TABLE>
<CAPTION>
18. CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS DECEMBER 31,
------------
1995 1994
------------ ----------
<S> <C> <C>
Assets:
Cash $ 194,000 $ 22,000
Investment in bank subsidiary 5,806,000 907,000
Investments in available for sale 5,186,000 -
----------- -----------
$ 11,186,000 $ 929,000
----------- -----------
----------- -----------
Liabilities:
Notes payable $ - $ 54,000
Other borrowing 132,000 173,000
Other liabilities - 1,000
---------- ----------
132,000 228,000
Shareholders' equity 11,054,000 702,000
---------- --------
$ 11,186,000 $ 929,000
----------- -----------
----------- -----------
CONDENSED STATEMENTS OF OPERATIONS
Total Interest income $ 107,000 $ 1,000
Interest expense 1,000 2,000
Other 69,000 2,000
------------ -----------
Total Expenses 70,000 4,000
Income (loss) before equity in undistributed
earnings of bank subsidiary 37,000 (3,000)
Equity in undistributed income (losses)
of bank subsidiary 682,000 (1,771,000)
-------- -----------
Net income (loss) $ 719,000 $ (1,774,000)
-------- -----------
-------- -----------
CONDENSED STATEMENTS OF CASH FLOWS
1995 1994
--------- ----------
Net income (loss) $ 719,000 (1,774,000)
Net adjustments to income (loss) (682,000) 1,771,000
--------- ----------
Cash flows from operating activities 37,000 (3,000)
Cash flows from investing activities (8,944,000) -
Cash flows from financing activities 9,079,000 -
---------- ----------
Net increase (decrease) in cash 172,000 (3,000)
Cash beginning of year 22,000 25,000
------------ -----------
Cash end of year $ 194,000 $ 22,000
------------ ------------
------------ ------------
</TABLE>
64
<PAGE>
19. RELATED PARTY TRANSACTIONS
The Bank's health and life insurance programs have been contracted based
on competitive bids through Rice Brown Financial. Mr. Brown is an
insurance broker and a director of the Company and the Bank.
On January 1, 1996 the Company engaged Mr. Rose as a financial advisor for
consulting services including but not limited to: financial advice,
investment advice, certain advice on merger and acquisition opportunities,
review of investments and possibly loans, due diligence reviews and
examinations, and other items requested by the Company. The engagement
agreement provides for a monthly fee of $3,000 plus expenses beginning
January 1, 1996. The agreement maybe terminated by either the Company or
Mr. Rose upon 30 days written notice.
20. RISK-BASED CAPITAL STANDARDS
The Bank is required to maintain certain regulatory capital ratios. These
ratios at December 31, 1995 were as follows:
MINIMUM MONARCH
RATIO BANK
------- -------
Tier 1 leverage capital ratio 4.0% 8.85%
Tier 1 risk-based capital ratio 4.0% 16.94%
Total risk-based capital 8.0% 18.19%
65
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS
The following table sets forth, as of February 29, 1996, as to each of the
Directors of the Company, such person's age, such person's principal occupation
during the past five years, and the period during which such person has served
as a director of the Company and also the Bank.
DIRECTOR DIRECTOR OF
PRINCIPAL OCCUPATION OF COMPANY BANK
NAME AND OFFICE HELD AGE FOR PAST FIVE YEARS SINCE SINCE
- ----------------------- ---- --------------------- ---------- -----------
Rice E. Brown, 58 Owner & President of 1988 1988
Director Rice Brown Financial
Services
E. Lynn Caswell, 50 Commercial Banking and 1987 1987
Director, President, and Bank Holding Company
Chief Executive Officer Management
Raymond B. Cox, 87 President, Cox Marketing 1983 1979
Director Associates, marketing
consultants for real estate
investments
William C. Demmin, 50 Commercial Banking and 1993 1993
Director, EVP and Bank Holding Company
Chief Financial Officer Management
Alfred H. Jannard, 55 Pharmacist/Investor 1993 1993
Director
Cheryl Moore, 49 Owner/Operator of a retail 1993 1993
Director women's apparel store
Margaret A. Redmond, 55 Vice President & Office 1986 1986
Director Manager of Professional
Orthodontia Practice Firm
66
<PAGE>
DIRECTOR DIRECTOR OF
PRINCIPAL OCCUPATION OF COMPANY BANK
NAME AND OFFICE HELD AGE FOR PAST FIVE YEARS SINCE SINCE
- ----------------------- ---- --------------------- ---------- -----------
John W. Rose, Chairman,(1) 46 EVP, FNB Corporation 1995 1995
of the Board
Henry E. Schielein, (2) 61 President and COO 1995 1995
Director The Balboa Bay Club
David C. Wooten, (3) 57 President of International 1995 1995
Director Bay Clubs, Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
During 1995, the Board of Directors of the Company held eight (8) meetings. The
Bank, during 1995, held twelve (12) regular meetings, three (3) special
meetings. All Directors attended at least 70% of the Board meetings of the
Company and the Bank.
The Bank Loan Committee, which is responsible for reviewing and approving loans,
held twenty-four (24) meetings during 1995. Members of the Bank Loan Committee
also function as the Bank's Investment Committee.
The Board of Directors' Audit Committee had four (4) official meetings in 1995
to meet with outside auditors to review the auditing findings, financial
reports, and other matters, and also to meet with outside auditors who were
engaged to perform internal audits. The members of the Audit Committee are:
Rice E. Brown, Raymond B. Cox, Alfred H. Jannard, Cheryl Moore, and Margaret A.
Redmond.
The Company and Bank do not have separate standing Compensation or Nominating
committees and handle matters that might otherwise be delegated to these
committees in executive session or an as needed basis.
EXECUTIVE OFFICERS
The following table sets forth as to each of the persons who currently serves as
an Executive Officer of the Company and the Bank, such person's age, such
person's principal occupation during the past five years, such person's current
position with the Bank, and the period during which the person has served in
such position:
- --------------------------------------------------------------------------------
(1) Mr. Rose has been an Executive Vice President in charge of community banks
for FNB Corporation for approximately one year. He formerly worked as President
of McAllan Capital Partners, an investor in and advisor to community banks.
(2) Mr. Schielein, since the start of 1995 has served as President and COO of
the Balboa Bay Club in Newport Beach. From 1993 until 1995 he was President of
the Grand Wailea Resort Hotel in Hawaii and previously served as Vice President
and General Manager of The Ritz Carlton at Laguna Niguel. Mr. Schielein
previously served as a Director on the boards of both the Company and Bank from
1988 until June 1993.
(3) Mr. Wooten has been the President of International Bay Clubs, Inc. in
Newport Beach since March 1993; previously he was President of Integrated
Protein Technology.
67
<PAGE>
PRINCIPAL
POSITION WITH OCCUPATION FOR YEAR APPOINTED TO
NAME AGE COMPANY AND BANK PAST FIVE YEARS COMPANY BANK
- ---- --- ---------------- --------------- ------- ----
E. Lynn Caswell (1) 50 President and Commercial Banking 1987 1987
and Chief and Bank Holding
Executive Officer Company Management
William C. Demmin (2)50 Executive Vice Bank and Bank 1987 1987
President and Chief Holding Company
Management
Louis F. Cumming(3) 56 Executive Senior Commercial Banking 1995 -
Vice President and
Credit Administrator
ITEM 10. EXECUTIVE COMPENSATION
The Company's executive officers are John W. Rose, Chairman of the Board, E.
Lynn Caswell, President and Chief Executive Officer; William C. Demmin,
Executive Vice President and Chief Financial Officer. The Company paid no
salaries in 1995; however, on January 1, 1996 the Company engaged Mr. Rose as a
financial advisor for consulting services including but not limited to:
financial advice, investment advice, certain advice on merger and acquisition
opportunities, review of investments and possibly loans, due diligence reviews
and examinations, and other items requested by the Company. The engagement
agreement provides for a monthly fee of $3,000 plus expenses beginning January
1, 1996. The agreement may be terminated by either the Company or Mr. Rose upon
30 days written notice.
The following table reflects all compensation paid to Mr. E. Lynn Caswell, the
Company's and Bank's Chief Executive Officer. No other executive officer(s)
received a total annual salary and bonus of $100,000 or more.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
PROFIT OTHER ANNUAL OPTION/
NAME AND POSITION YEAR SALARY SHARING COMPENSATION SAR'S #
- ----------------- ---- ------ ------- ------------ -------
<S> <C> <C> <C> <C> <C>
E. Lynn Caswell 1995 $128,182 $ - $11,530 63,621
1994 $128,182 $ - $10,555 -
1993 $128,182 $ - $21,324 55,620
</TABLE>
- --------------------------------------------------------------------------------
(1) Mr. Caswell was formerly the President and Chief Executive Officer of the
Bank of San Diego, and Chief Operating Officer of BSD Bancorp, its parent
Company, from 1984 to 1987, and he has over 28 years of banking experience.
(2) From 1986 to 1987, Mr. Demmin served as Cashier of Commercial Center Bank
of Santa Ana, California, and he had previously served as Senior Vice President,
Chief Financial Officer, and Cashier of First American Bank & Trust in Laguna
Beach from 1983 to 1986. Mr. Demmin had previously served Bank of America for
eleven (11) years, and has over 28 years of banking experience.
(3) Mr. Cumming is an executive officer of the Bank but not the Company. Since
1985, he has served as a senior credit officer in the Bank of San Diego,
Commercial Center Bank, First National Bank, and from 1992 to 1995 as the Senior
Credit Officer of Cuyamaca Bank. He has over 30 years of banking
experience.
68
<PAGE>
Mr. E. Lynn Caswell executed an Employment Agreement dated July 23, 1987, and
amended effective July 23, 1989, and July 23, 1991 with the Company and the
Bank. The agreement was effective for a three (3) year period with automatic,
subsequent three (3) year renewals, unless notice is given thirty (30) days
prior to the end of any given period. The Agreement was extended for one
additional year in 1994 until June, 1995. Renewal or review of the Agreement was
then postponed in 1995 until after the Company and Bank completed its capital
activities. In December 1995, the Board appointed a special committee to review
Mr. Caswell's Agreement and to recommend a new Agreement. The new Agreement has
not as yet been approved or signed.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
--------------------------------------
INDIVIDUAL GRANTS
PERCENT OF TOTAL
OPTIONS/SARS OPTIONS/SARS GRANTED TO EXERCISE OR BASE EXPIRATION
NAME GRANTED (#) EMPLOYEES IN FISCAL YEAR PRICE ($/SH) DATE
---- ------------ ------------------------ ---------------- ----------
NONE IN 1995
All stock options previously issued under the Company's Stock Option Plan, which
were all at exercise prices significantly above the $1.35 price for the shares
sold in 1995, were canceled in November 1995. In January 1996, the Board issued
a total of 553,439 options to a total of sixteen (16) individuals at a grant
price of $1.62 per share. These options are fully vested and can be exercised
during the next ten years.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
-----------------------------------------------------------------------------
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END(#) FY-END ($)
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- --------------- ------------------ --------------- ---------------
NONE
There were no options exercised during the fiscal year 1995, and all options,
which were significantly out-of-the-money, were canceled in November 1995.
On May 16, 1995, the Board of Directors approved the 1995 Directors Deferred
Compensation Plan which was approved by shareholders on July 17, 1995. The plan
is effective for fees earned on and after July 1, 1995. No compensation has
been awarded under the plan.
During 1992 the Company adopted an employee stock and ownership and salary
deferral plan ("KSOP"). In 1992, the KSOP obtained a $250,000 loan from another
financial institution, which is guaranteed by the company, and between 1992 and
1993 acquired approximately 50,000 shares of the company's common stock.
Repayments on the loan are made by employee salary
69
<PAGE>
deductions and from possible matching contributions by the Bank. The loan has a
term of five years and an interest rate of 8%. The Bank's contributions to the
KSOP totaled approximately $20,000 and $46,000 in 1995 and 1994, respectively.
Mr. Caswell is a participant of the KSOP, however, the KSOP has not as yet
vested any shares for 1995.
SECTION 16 REPORTING
To the best of Management's knowledge all Section 16 reports were correctly and
timely filed in 1995.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The following table lists any known shareholders with a beneficial ownership of
five percent of the Company's common stock as of March 15, 1996. All shares
are common stock, the only class of security outstanding.
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF PERCENT OF CLASS
BENEFICIAL OWNERSHIP
Basswood Partners (1) 530,000 6.44%
Paramus, NJ 07652
Launch & Co. Mutual Discovery Fund 800,000 9.72%
Short Hills, NJ 07078
Peter Huizenga Testamentary Trust (2) 800,000 9.72%
Huizenga Capital Management
Oak Brook, IL 60521
NB Bank Partners II 592,000 7.20%
Chicago, IL
Rainbow Partners Keefe Managers, Inc. 800,000 9.72%
New York, NY
Robert A. Schoellhorn Trust 750,000 9.11%
Northbrook, IL 60062
All ten (10) directors as a group (3) 582,290 6.89%
(1) Company shares owned by Basswood Partners are held in affiliated entities
as follows: 462,147 shares beneficially owned by Basswood Financial Partners,
LP. and 67,853 shares beneficially owned by Basswood International Fund, Inc.
(2) Company shares of Peter Huizenga are held in affiliated entities as
follows: 400,000 shares beneficially owned by Peter H. Huizenga Huizenga Capital
Management, and 400,000 shares beneficially owned by the Peter Huizenga
Testamentary Trust.
(3) Beneficial ownership for the Directors includes their beneficial ownership
in stock options which are exercisable within 60 days.
70
<PAGE>
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE MANAGEMENT
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF CLASS
NAME AND ADDRESS OF BENEFICAL OF BENEFICIAL OWNERSHIP (1)
OWNER
<S> <C> <C>
Rice E. Brown, 12,89 10.15%
Laguna Niguel, CA
E. Lynn Caswell,(2) 145,311 1.72%
Laguna Niguel, CA
Raymond B. Cox, 30,000 0.35%
Monarch Beach, CA
Louis F. Cumming,(3) 38,500 0.46%
La Jolla, CA ------ -----
William C. Demmin, 29,663 0.35%
Laguna Niguel, CA
Alfred H. Jannard, 27,842 0.33%
Laguna Niguel, CA
Cheryl Moore, 12,708 0.15%
Laguna Niguel, CA
Margaret A. Redmond, 28,996 0.34%
San Clemente, CA
John W. Rose, 276,644 3.27%
Hermitage, PA
Henry E. Schielein, 9,000 0.11%
Newport Beach, CA
David C. Wooten, 9,235 0.11%
Newport Beach, CA ----- -----
Directors and Executive Offices as a 620,790 7.34%
group
</TABLE>
(1) Beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship, or
otherwise has or shares: (a) voting power, which includes the power to vote, or
to direct the voting power, of such security; and/or (b) investment power, which
includes the power to dispose, or to direct the disposition of, such security.
Beneficial owner also includes any person who has the right to acquire
beneficial ownership of such security as defined above within 60 days of Record
Date. Ownership includes vested stock options.
(2) Mr. Caswell is a Director and Executive Officer.
(3) Mr. Cumming is an Executive Officer but not a Director.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and executive officers of the Company and its
subsidiaries, and the companies with which they are associated, are customers
of, and have had banking transactions with, Monarch Bank in the ordinary course
of the Bank's business, and the Bank expects to have banking transactions with
such persons in the future.
71
<PAGE>
In Management's opinion, all loans, and commitments to lend included in such
transactions, were made in compliance with applicable laws on substantially the
same terms, including interest rates and collateral, as those prevailing for
comparable transactions with other persons of similar creditworthiness, and did
not involve more than a normal risk of collectibility or present other
unfavorable features. the amount of all such loans and credit extensions, to
all executive officers, directors, and principal shareholders of the Company,
together with their associates, was $248,000 on December 31, 1995, constituting
approximately 2% of the Company's equity capital accounts on that date.
The Bank's health and life insurance programs have been contracted, based on a
competitive bid, through Rice Brown Financial; Mr. Brown is an insurance broker
and a director of the Company.
On January 1, 1996 the Company engaged Mr. Rose as a financial advisor for
consulting services including but not limited to: financial advice, investment
advice, certain advice on merger and acquisition opportunities, review of
investments and possibly loans, due diligence reviews and examinations, and
other items requested by the Company. The engagement agreement provides for a
monthly fee of $3,000 plus expenses beginning january 1, 1996. The agreement may
be terminated by either the Company or Mr. Rose upon 30 days written notice.
72
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS PAGE
- -------- ----
2.0 Plan of Reorganization and Merger Agreement. *
(Exhibit A of Reorganization Statement No. 2-84426
incorporated by reference)
3.1 Articles of Incorporation of the Holding Company *
(Exhibit 3.11 of Registration Statement No. 2-84426
incorporated by reference)
3.2 Bylaws of the Holding Company *
(Exhibit 3.2 of Registration Statement No. 2-84426
incorporated by reference)
3.3 Amended Articles of Incorporation approved in *
the July 1988 Shareholders Meeting.
(Exhibit 3.3 of 12/31/89 Annual Report on Form 10-K
incorporated by reference)
3.4 Amended Bylaws approved on October 19, 1988 *
(Exhibit 3.4 of 12/31/89 Annual Report on Form 10-K
incorporated by reference).
3.5 Amended Bylaws approved on February 29, 1996
(Exhibit 3.5 of 12/31/95 Annual Report of Form 10KSB
incorporated by reference 76
4.0 Form of Indenture *
(Exhibit 4.1 of Registration Statement No. 2-85442
incorporated by reference)
4.1 Warrant Agreement for warrants issued in June 1988 *
at the close of the California Offering.
(Exhibit 4.1 of 12/31/89 Annual Report on Form 10-K
incorporated by reference)
4.2 Convertible subordinated note issued in September 1988. *
(Exhibit 4.2 of 12/31/89 Annual Report on Form 10-K
incorporated by reference)
10.0 Monarch Bancorp 1983 Stock Option Plan; Form Incentive *
Stock Option Agreement and Form Nonstatutory Stock
Option Agreement
73
<PAGE>
(Exhibit 10.2 of Registration Statement No. 2-85442
incorporated by reference)
10.1 Headquarters Office Lease *
(Exhibit 10.3 of Registration Statement No. 2-85442
incorporated by reference)
10.2 27751 La Paz Lease (Exhibit 3.5 of 12/31/84 Annual *
Report on Form 10-K incorporated by reference)
10.3 30100 Town Center Drive Lease *
(Exhibit 3.6 of 12\31\84 Annual Report on Form 10-K
incorporated by reference)
10.4 Lease agreement for Bank assets sold and leased *
back from Parker North American in 1988.
(Exhibit 10.4 of 12/31/89 Annual Report on Form 10-K
incorporated by reference)
10.5 Amended Stock Option Plan as approved in the July 1988 *
Shareholders' Meeting.
(Exhibit 10.5 of 12/31/89 Annual Report on Form 10-K
incorporated by reference)
10.6 Stock Option Plan as approved in June 1993 Shareholders' *
Meeting(Exhibit 10.6 of original filing of 12.31/93 Annual
Report on Form 10-KSBincorporated by reference)
11.0 Computation of Per Earnings Common Stock
and Common Share Equivalents
(See Consolidated Statements of Income contained in ITEM 7
of this Annual Report on Form 10-KSB incorporated by reference)
13.0 Annual Report to Security Holders *
(to be sent under separate cover)
22.0 Subsidiaries of Monarch Bancorp *
28.0 Proxy Statement *
(to be sent under separate cover)
28.1 February 15, 1988 California Offering Circular *
(Exhibit 28.1 of 12/31/87 Form 10-K
incorporated by reference)
74
<PAGE>
28.2 Written Consent Statement for Proposed Amendment *
to the Articles of Incorporation to Increase the Number
of Authorized Shares (Original filing 1/12/96)
28.3 Prospectus for rights and public offering of up to 3,177,296 *
share of common stock
(Orignial filing 7/19/95
(b) REPORTS ON FORM 8-K
On March 22, 1996, the Company filed a Form 8-K discussing the
proposed acquisition of Western Bank.
75
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MONARCH BANCORP
BY:
-----------------------
E. Lynn Caswell
President and CEO
DATE:
------------------
In accordance with the Securities Exchange Act, this amended report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ William C. Demmin 3/26/96
- --------------------- Executive Vice President -------
William C. Demmin and Chief Financial Officer
and Director
DIRECTORS
- ----------
/s/ Rice E. Brown
- --------------------- -------------------------
Rice E. Brown Margaret A. Redmond
/s/ Raymond B. Cox
- --------------------- -------------------------
Raymond B. Cox John W. Rose
- --------------------- -------------------------
Alfred H. Jannard Henry E. Schielein
/s/ Cheryl Moore
- --------------------- -------------------------
Cheryl Moore David C. Wooten
- ---------------------
Margaret A. Redmond
- ---------------------
John W. Rose
<PAGE>
Exhbit 3.5
Form 10-KSB
December 31, 1995
ARTICLES OF INCORPORATION INCLUDING AMENDMENTS
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
MONARCH BANCORP
E. Lynn Caswell and William C. Demmin certify that:
1. They are the President and Secretary, respectively, of
MONARCH BANCORP, a California corporation.
2. Paragraph (a) of Article FOUR of the Articles of
Incorporation of this corporation is amended to read as follows:
"FOUR. (a) The corporation is authorized to issue
two classes of shares designated "Preferred Stock"
and "Common Stock", respectively. The number of shares
of Preferred Stock authorized to be issued is Five Million
(5,000,000) and the number of shares of Common Stock
to be issued is One Hundred Million (100,000,000)."
3. The foregoing amendment to the Articles of Incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment to the Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The corporation has only one class of
shares outstanding and the total number of outstanding shares of the corporation
is 8,228,436. The number of shares voting in favor of the amendment herein set
forth equaled or exceeded the vote required. The percentage vote required for
the approval of the amendment was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: February 29, 1996
---------------------------------------
E. Lynn Caswell, President
---------------------------------------
William C. Demmin, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
MONARCH BANCORP
E. Lynn Caswell and William C. Demmin certify that:
1. They are the President and Secretary, respectively, of
MONARCH BANCORP, a California corporation.
2. Paragraph (a) of Article FOUR of the Articles of
Incorporation of this corporation is amended to read as follows:
"FOUR. (a) The corporation is authorized to issue
two classes of shares designated "Preferred Stock"
and "Common Stock", respectively. The number of shares
of Preferred Stock authorized to be issued is Five Million
(5,000,000) and the number of shares of Common Stock
to be issued is Twenty-Five Million (25,000,000)."
3. The foregoing amendment to the Articles of Incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment to the Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The corporation has only one class of
shares outstanding and the total number of outstanding shares of the corporation
is 794,324. The number of shares voting in favor of the amendment herein set
forth equaled or exceeded the vote required. The percentage vote required for
the approval of the amendment was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: April 6, 1994
---------------------------------------
E. Lynn Caswell, President
---------------------------------------
William C. Demmin, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
MONARCH BANCORP
E. Lynn Caswell and William C. Demmin certify that:
1. They are the President and Secretary, respectively, of
MONARCH BANCORP, a California corporation.
2. Paragraph (a) of Article FOUR of the Articles of
Incorporation of this corporation is amended to read as follows:
"FOUR. (a) The corporation is authorized to issue
two classes of shares designated "Preferred Stock"
and "Common Stock", respectively. The number of shares
of Preferred Stock authorized to be issued is Five Million
(5,000,000) and the number of shares of Common Stock
to be issued is Two Million (2,000,000). Upon the
amendment to this paragraph (a) of Article FOUR, each
outstanding share of Common Stock is converted into
1/5 share."
3. The foregoing amendment to the Articles of Incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment to the Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The corporation has only one class of
shares outstanding and the total number of outstanding shares of the corporation
is 3,970,618. The number of shares voting in favor of the amendment herein set
forth equaled or exceeded the vote required. The percentage vote required for
the approval of the amendment was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: December 7, 1993
---------------------------------------
E. Lynn Caswell, President
---------------------------------------
William C. Demmin, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
MONARCH BANCORP
E. Lynn Caswell and William C. Demmin certify that:
1. They are the President and Secretary, respectively, of
MONARCH BANCORP, a California corporation.
2. Paragraph (a) of Article FOUR of the Articles of
Incorporation of this corporation is amended to read as follows:
"FOUR. (a) The corporation is authorized to issue
two classes of shares designated "Preferred Stock"
and "Common Stock", respectively. The number of shares
of Preferred Stock authorized to be issued is Five Million
(5,000,000) and the number of shares of Common Stock
to be issued is Ten Million (10,000,000).
(b) The Preferred Stock may be divided into such
number of series as the Board of Directors may determine.
The Board of Directors is authorized to determine and
alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of
Preferred Stock, and to fix the number of shares of any
series of Preferred Stock and the designation of any such
series of Preferred Stock. The Board of Directors, within
the limits and restrictions stated in any resolution or
resolutions of the Board of Directors originally fixing
the number of shares constituting any series, may increase or
decrease (but not below the number of shares of such
series than outstanding) the number of shares of any
series subsequent to the issue of shares of that series."
3. Article FIVE is added to the Articles of Incorporation of
this corporation, to read as follows:
"FIVE. DIRECTOR LIABILITY
The liability of the directors of the corporation
for monetary damages shall be eliminated to the
fullest extent permissible under California law."
4. Article SIX is added to the Articles of Incorporation of
this corporation to read as follows:
<PAGE>
"SIX. INDEMNIFICATION
The corporation is authorized to provide indemnification
of agents (as defined in Section 317 of the Corporations
Code) for breach of duty to the corporation and its
stockholders through bylaw provisions or through
agreements with agents, or both, in excess of the
indemnification otherwise permitted by Section 317 of the
Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the
Corporations Code."
5. The foregoing amendment to the Articles of Incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment to the Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The corporation has only one class of
shares outstanding and the total number of outstanding shares of the corporation
is 2,971,480. The number of shares voting in favor of the amendment herein set
forth equaled or exceeded the vote required. The percentage vote required for
the approval of the amendment was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: July 12, 1988
---------------------------------------
E. Lynn Caswell, President and
Chief Executive Officer
---------------------------------------
William C. Demmin, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
MONARCH BANCORP
Messrs. Terry Metrovich and Edward Loescher certify that:
1. They are the President and Secretary, respectively, of
MONARCH BANCORP, a California corporation.
2. Article FOUR of the Articles of Incorporation of this
corporation is amended to read as follows:
"FOUR. (a) The corporation is authorized to issue
two classes of shares designated "Preferred Stock"
and "Common Stock", respectively. The number of shares
of Preferred Stock authorized to be issued is Five Million
(5,000,000) and the number of shares of Common Stock
to be issued is Five Million (5,000,000).
(b) The Preferred Stock may be divided into such
number of series as the Board of Directors may determine.
The Board of Directors is authorized to determine and
alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series
of Preferred Stock, and to fix the number of shares of
any series of Preferred Stock and the designation of any
such series of Preferred Stock. The Board of Directors,
within the limits and restrictions stated in any resolution
or resolutions of the Board of Directors originally
fixing the number of shares constituting any series, may
increase or decrease (but not below the number of shares
of such series than outstanding) the number of shares of
any series subsequent to the issue of shares of that series."
3. The foregoing amendment of Articles of Incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment of Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The total number of outstanding shares of
the corporation is 768,692. The number of shares voting in favor of the
amendment equaled or exceeded the vote required. The percentage vote required
was more than 50%.
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: June 8, 1987
---------------------------------------
Terry Metrovich
President and
Chief Executive Officer
---------------------------------------
Edward Loescher, Secretary
<PAGE>
ARTICLES OF INCORPORATION
OF
MONARCH BANCORP
The undersigned Incorporator hereby executes, acknowledges and files
the following Articles of Incorporation for the purpose of forming a corporation
under the General Corporation Law of the State of California:
ARTICLE ONE:
The name of the Corporation shall be:
MONARCH BANCORP
ARTICLE TWO:
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE THREE:
The name and address in this state of the Corporation's initial
agent for service of process in accordance with Subdivision (b) of Section 1502
of the General Corportion Law is:
Richard E. Knecht, Esquire
Knecht & Donahue
1301 Dove Street, Suite 900
Newport Beach, California 92660
ARTICLE FOUR:
This corporation is authorized to issue only one (1) class of
shares, and the total number of shares which this corporation is authorized to
issue is Five Million (5,000,000).
IN WITNESS WHEREOF, the undersigned Incorporator has executed the
foregoing Articles of Incorporation on May 20, 1983.
---------------------------------------
RICHARD E. KNECHT, Incorporator
The undersigned declares that he is the person who executed the
foregoing Articles of Incorporation and that such instrument is the act and deed
of the undersigned.
---------------------------------------
RICHARD E. KNECHT
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4747
<INT-BEARING-DEPOSITS> 198
<FED-FUNDS-SOLD> 2938
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22004
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<ALLOWANCE> 854
<TOTAL-ASSETS> 70101
<DEPOSITS> 58742
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0
0
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