<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1996
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For transition period to
----------------- -----------------
Commission file number 0-13551
-------
MONARCH BANCORP
---------------
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-38663296
---------- -----------
(State of incorporation) (IRS Employer Identification No.)
30000 TOWN CENTER DRIVE, LAGUNA NIGUEL, CALIFORNIA 92677
---------------------------------------------------------
(Address of principal executive officers)
(714) 495 3300
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 8,228,436
---------
<PAGE>
INDEX
PART I -- FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements Page
----
Consolidated Balance Sheets as of
March 31, 1996 (unaudited) and December 31, 1995 3
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1996 and
March 31, 1995 4
Consolidated Statements of Cash Flows (unaudited)
for three months ended March 31, 1996 and March 31, 1995 5
Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Operations 7 - 12
Part II -- Other Information
Item 1. Legal Proceedings 12
Item 2. Change in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE>
PART 1 ITEM 1
FINANCIAL STATEMENTS
MONARCH BANCORP
CONDENSED, CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(000's omitted)
<TABLE>
<CAPTION>
ASSETS 31-MAR-96 31-DEC-95
--------- --------
<S> <C> <C>
Cash and due from banks $ 3,693 $ 4,747
Interest bearing deposits and
investment securities 24,403 28,863
Federal funds sold 11,100 2,938
Loans and leases (net) 32,328 31,666
Premises and equipment 588 610
Other real estate owned 336 150
Other assets 1,359 1,127
--------- ---------
Total assets $ 73,807 $ 70,101
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 62,294 $ 58,742
Other borrowings 121 132
Accrued interest payable and
other liabilities 310 230
------ ------
TOTAL LIABILITIES 62,725 59,104
Common stock, no par value,
authorized 100,000,000 shares and
8,228,436 shares outstanding at
3/31/96 and at 12/31/95 16,500 16,500
Accumulated deficit (5,374) (5,454)
Unrealized appreciation on
investment securities available for sale 77 83
Deferred charge related to KSOP (121) (132)
------ ------
TOTAL SHAREHOLDERS' EQUITY 11,082 10,997
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 73,807 $ 70,101
------- -------
------- -------
</TABLE>
(see accompanying notes)
3
<PAGE>
MONARCH BANCORP
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
--------------------------------
31-MAR-96 31-MAR-95
--------- ---------
<S> <C> <C>
(000's omitted)
INTEREST AND LOAN FEE INCOME:
Investment securities $ 403 $ 259
Federal funds sold 71 48
Loans and leases 786 691
----- ----
TOTAL INTEREST INCOME 1,260 998
INTEREST EXPENSE:
Deposits 353 285
Notes payable 0 1
---- ----
TOTAL INTEREST EXPENSE 353 286
---- ----
NET INTEREST INCOME 907 712
Less increase in provision for
loan losses 50 0
---- ----
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 857 712
OTHER OPERATING INCOME:
Service charges on deposit accounts 131 117
Other service charge and fee income 43 67
Other income 8 172
---- ----
TOTAL OTHER INCOME 182 356
OTHER OPERATING EXPENSES:
Salaries and benefits 419 430
Office operations 277 287
Depreciation 44 40
Advertising and marketing 32 31
Other real estate owned 6 12
Professional services 107 63
Other 15 30
---- ----
TOTAL OPERATING EXPENSES 900 893
Net income before provision for taxes 139 175
Provision for taxes 60 (7)
------ ------
NET INCOME AFTER PROVISION FOR TAXES $ 79 $ 182
------ ------
------ ------
PER SHARE INFORMATION
Number of shares (weighted average) 8,228,436 835,563
Income per share (dollars) $0.01 $0.22
</TABLE>
(see accompanying notes)
4
<PAGE>
MONARCH BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
--------------------------------
31-MAR-96 31-MAR-95
--------- ---------
<S> <C> <C>
(000's omitted)
Cash flows from operating activities:
Net income $ 79 $ 182
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan loss 50 0
Depreciation, amortization (44) (40)
Increase in accrued interest
payable and other liabilities 80 10
Increase in accrued interest
receivable and other assets (158) (188)
-------- -------
NET CASH (FROM) USED BY OPERATING
ACTIVITIES 7 (37)
Cash flows from investing activities:
Principal payments received on investment
securities 5,209 169
Purchases of investment securities (784) (250)
(Increase) decrease in net loans (854) 623
Proceeds from sale of OREO 0 0
Additions to premises and equipment (22) (22)
-------- -------
NET CASH USED BY INVESTING ACTIVITIES 3,549 520
Cash flows from financing activities:
Net increase (decrease) in demand and savings
deposits 3,552 (2,665)
Repayment of debt 0 (54)
Proceeds from issuance of common stock 0 5,668
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,552 2,949
Net increase in cash and cash equivalents 7,108 3,432
Cash and cash equivalents at beginning of
three month period 7,685 10,653
-------- -------
CASH AND CASH EQUIVALENTS AT THE END OF
THREE MONTH PERIOD $ 14,793 $ 14,085
-------- -------
-------- -------
NON-CASH ACTIVITIES:
Property acquired through foreclosure $ 186 $ 0
Repayment of KSOP debt $ 11 $ 10
Equity adjustments for FASB 115 changes
to AFS securities $ (19) $ 206
</TABLE>
(see accompanying notes)
5
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
1. In the opinion of management of Monarch Bancorp (the "Company"), the
following accompanying unaudited consolidated financial statements contain
all adjustments (consisting only of normal, recurring accruals) necessary
to present fairly the consolidated financial position of the Company at
March 31, 1996, and the consolidated results of operations for the three
months ended March 31, 1996 and March 31, 1995, and the cash flows for the
same three month periods. These consolidated financial statements do not
include all disclosures associated with the Company's annual financial
statements and, accordingly, should be read in conjunction with such
statements.
2. The results of operations for the three month period ended March 31, 1996
are not necessarily indicative of the results to be expected for the full
year.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS.
MANAGEMENT'S DISCUSSION
During the first quarter of 1996, Monarch Bancorp (the Company) and Monarch Bank
(the Bank) continued restructuring and rebuilding following the initial
recapitalization of the Company and Bank in March 1995 and following the
additional capital raised by the Company in September 1995 from a rights and
public offering. On a combined basis, the Company increased its equity capital
by approximately $10 from its capital activities in 1995. Emphasis during the
quarter focused on expanding the size and geographic scope of the Company
through a proposed acquisition of another bank; continuing to improve the Bank's
credit quality; pre-opening activities for a new Bank branch in Laguna Beach;
and the final implementation of the earnings improvement program that started in
late 1995.
On March 21, 1996, the Company entered into an Agreement and Plan of
Reorganization to acquire all of the issued and outstanding shares of Western
Bank (Western), a state chartered bank located in West Los Angeles. Western has
five banking offices including its head office in Westwood and branches in
Beverly Hills, Century City, Santa Monica and Encino. On December 31, 1995,
Western had approximately $400 million in total assets. Under the terms of the
Agreement, the cash purchase price will be $17.25 per share if the acquisition
is completed by September 30, 1996 or $17.50 if completed after September 30,
1996 and before December 31, 1996. The projected purchase price assuming all
outstanding stock options are exercised will be approximately $68.5 million. The
proposed acquisition is subject to regulatory approvals and to the Company's
ability to raise sufficient additional capital and financing for the
acquisition. While no assurance can be made that the Company will be able to
raise the needed funds to complete the acquisition or that it will receive the
necessary regulatory approvals, Management feels that the acquisition is
consistent with long-term plans to increase shareholder value by expanding the
size and scope of the Company's operation.
Improvements in credit quality and credit administration that began in April
1995 when the Bank hired a new, very experienced Senior Credit Officer, have
continued into 1996. As of March 31, 1995, nonperforming assets included past
due loans of $178,000 and $336,000 in OREO. On March 31, 1995, nonperforming
loans totaled $841,000 and OREO totaled $617,000. The decrease in nonperforming
loans has also been reflected in a decrease in the level of classified assets
which represented less than 33% of the Bank's capital and reserves as of March
31, 1996. If a loan payoff that was received in the first part of April 1996 is
included, the ratio would have been reduced to 25%. On March 31, 1995,
classified assets represented 47% of capital and reserves with approximately $3
million less in loan outstandings.
On April 25, 1996, the Bank filed for regulatory approval to open a new branch
in the neighboring city of Laguna Beach. On April 20, 1996, the Bank moved its
data/administrative center from leased facilities in Laguna Niguel to leased
facilities in Laguna Beach. The new
7
<PAGE>
facility will be divided into separate sections for the data/administrative
center and from the branch. The Bank currently has a reasonable volume of
business for Laguna Beach, and this business is expected to materially increase
with a physical presencets in Laguna Beach. The branch is scheduled to be
opened on or about June 3, 1996, and will allow the Bank to expand its base of
operations in the coastal area of South Orange County.
A majority of the impact of an earnings improvement program that was implemented
during the last quarter of 1995 has been completed and accounts for most of the
reductions in operating expense classifications discussed in the Results of
Operations section.
REGULATORY MATTERS
On March 11, 1996, the FDIC terminated the 8(b) Order which the Bank had signed
in December 1994; the Superintendent of Banks had previously terminated its 1913
Order on December 28, 1995. These Orders had included requirements designed to
address the Bank's capital ratio, problem loans and nonperforming assets, and
other areas primarily related to credit administration. The Bank also agreed to
a Memorandum of Understanding with the FDIC that became effective March 11,
1996. The terms of the MOU discuss the continued maintenance of adequate capital
and reserves, further reductions in classified assets (which have already been
exceeded), and general management issues.
On April 24, 1996, the Bank completed the application process and purchased
stock in the Federal Reserve Bank of San Francisco and became a "state-member
bank" of the Federal Reserve. As a member bank, the Bank's primary federal
regulator is now the Federal Reserve rather than the FDIC; however, the Bank's
deposits continue to be insured by the FDIC. The Federal Reserve is also the
primary federal regulator for the Company, and membership is expected to reduce
some of the overlapping regulatory duplication the Company and Bank had
previously experienced.
In addition, on April 24, 1996, the Federal Reserve Bank terminated its
Supervisory Letter restrictions and also terminated the Board of Directors
Resolutions in effect since October 1993. As a result there are no remaining
regulatory restrictions on the Company.
ECONOMIC CONDITIONS
Consistent with national conditions, local news reports continue to reflect slow
but positive growth in the Southern California economy. Most noticeable have
been the reports of job increases, lower unemployment, stabilization in real
estate values, and a lack of negative economic fallout from the Orange County
bankruptcy. The improvements in the economy have extended to financial
institutions in Orange County, and most community banks are reporting 1996 gains
in profits compared to the first quarter of 1995 and significant reductions in
problem and classified loans.
8
<PAGE>
RESULTS OF OPERATIONS
A review of the first quarters' operating results for 1996 versus 1995 requires
a comparison of the Company and Bank before and after the March 30, 1995
recapitalization which restored the Company and Bank to the "well capitalized"
category. The approximately $6 million in cash from the March 1995 private
placement by the Company of which $3.6 million was used to recapitalize the Bank
and the additional approximately $4 million in additional net proceeds from the
September 1995 offerings have provided additional cash that has been moved into
earning assets for the Company and Bank. The increased capital also has resulted
in improved business development results since the Company and Bank are now
designated as "well capitalized".
The $79,000 net-after-tax consolidated profit for the first quarter of 1996
represents normal operating income after a $50,000 provision for loan losses and
a provision for income taxes. The $182,000 net profit for the first quarter of
1995 included a nonrecurring settlement of a $171,000 bond claim and maximum
utilization of the Company's NOL. The Company's ability to utilize its remaining
NOL has been limited under IRS Section 382 which significantly limits the
utilization of NOL following a (defined) change of control. There were no
material nonrecurring income or expense items for the first quarter of 1996.
INTEREST INCOME
The $262,000 increase in Interest Income for the comparative quarters of 1996
and 1995 is primarily due to increases in the volume of earning assets. For the
first quarter of 1996 average loans totaled $32.3 million and average
investments totaled $24.1 million versus average loans of $30.7 million and
average investments of $17.5 million for the first quarter of 1995. During the
comparative quarters, interests rates as measured by prime rate were
approximately 8.25% in 1996 versus approximately 9% in 1995. While increases in
the volume of earning assets have been important, the yields on both loans and
investments have marginally increased due to higher yields on investments and
improvements in loan pricing.
INTEREST EXPENSE
Average deposits also increased for the comparative quarters by approximately
$6.9 million. While the cost of time deposits has increased over the prior year,
the changes in the cost of transactional demand and savings accounts have not
been material. On a comparative basis, the Bank's cost of funds for the
comparative quarters is approximately 20 basis points lower in 1996 than for the
first quarter of 1995.
PROVISION FOR LOAN LOSSES
The Bank has seen material improvements in credit quality as measured by problem
loans and classified assets over the past full year. As of March 31, 1996, the
Bank has expensed $50,000 to continue to build the loan loss reserve (Reserve)
while having net charge-offs of approximately $30,000. The Reserve on March 31,
1996 represented 2.6% of period-end
9
<PAGE>
loans while nonperforming loans, and OREO to period-end loans and OREO had been
reduced to 0.53%. As of March 31, 1995 these same ratios were 3.2% and 2.0%,
respectively.
NON-INTEREST INCOME
The $14,000 increase in Service Charges on Deposit Accounts represents gains
from changes in account analysis charges and procedures that were implemented
as part to the earnings improvement program in late 1995. While the Bank has
increased some fees and been more proactive in collecting fees, it has not
experienced any material loss of deposits or deposit relationships as it
continues to play "catch-up" with the pricing structures of the major banks.
Other Service Charges and Fee Income reflects a comparative decrease of $24,000;
however, this is distorted due to the $27,000 in item processing income earned
in the first quarter of 1995. The item processing contract ended on March 31,
1995, and while the Bank was not able to replace all of this lost income, it has
reduced expenses associated with the contract. It also continues to build its
payment processing for homeowners associations and other organizations by
approximately $1,000 per month (as compared to 1995 HOA income) as part of a
longer-term plan to continue to build fee income by utilizing excess capacity
and expanding its processing for others.
The most material difference for the comparative quarters is from Other Income
and the nonrecurring $171,000 bond claim settlement in 1995 which represented
virtually all of the net income for the first quarter of 1995.
OPERATING EXPENSES
Salary and Benefits decreased for the comparative quarters of 1996 versus 1995
due to reductions in the total number of staff as part of the 1995 earnings
improvement program. The Bank ended its salary freeze in December 1995 and
granted some merit and promotional salary increase at the end of 1995. The
salary freeze had been in effect for approximately two years when it was lifted.
The comparative $10,000 decrease in Office Operations expenses is also related
to the earnings improvement program which targeted reduced costs from all areas
of the Bank's operations. Professional Services expenses increased by $44,000
for the comparative quarters because of costs relating to regulatory issues
concerning the Bank's regulatory orders, for legal expenses relating to a
settled lawsuit and for consulting expenses.
CREDIT ADMINISTRATION
In 1995, the Bank took aggressive action to materially improve credit
administration and its focus on credit quality. These actions included specific
staffing changes to improve technical lending skills; increased emphasis in
anticipatory analysis of the adequacy of the Allowance for Loan Losses; a
commitment to reduce the level of nonperforming and classified loans; and in
revising and updating written policies and procedures for lending.
10
<PAGE>
Improvements in credit administration can be seen in the following table:
<TABLE>
<CAPTION>
('000 omitted) MARCH MARCH DEC. MARCH DEC.
1996 1995 1994 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Charge offs 31 163 992 498 815
Recoveries 1 6 78 15 16
OREO 335 617 617 810 1,293
Nonaccrual Loans 178 454 431 1,415 2,420
Accruing loans past due 90 + 0 487 362 334 505
Allowance for Loan Losses 875 980 1,137 471 1,055
Period-end Gross Loans 33,205 30,413 31,040 34,498 35,369
</TABLE>
Ratio comparison to Period-end Gross Loans and OREO to:
<TABLE>
<S> <C> <C> <C> <C> <C>
Charge offs 0.1% 0.5% 3.1% 1.4% 2.2%
Recoveries 0.0% 0.0% 0.2% 0.0% 0.0%
OREO 1.0% 2.0% 1.9% 2.3% 3.5%
Nonaccrual Loans 0.5% 1.5% 1.4% 4.0% 6.6%
Accruing loans past due 90 + 0.0% 1.6% 1.1% 1.0% 1.4%
Allowance for Loan Losses 2.6% 3.2% 3.6% 1.3% 2.9%
</TABLE>
On March 31, 1996, the Bank had two OREO properties that have been written down
to 90% of the lower of the appraised value or expected market value. The
properties are for sale and the Bank is making every effort to sell them at
appraised value.
Nonaccrual or impaired loans totaled $178,000 on March 31, 1996. Reserves
associated with these loans totaled $57,000 or 32%. The Reserves for impaired
loans are established based on the present value of expected future cash flows
discounted at the loan's effective interest rate or at the loan's observable
market price or the fair value of the collateral for collateral dependent loans.
Income on nonaccrual loans is collected on a cash basis. Income collected on a
cash basis in 1996 on impaired loans was less than $5,000.
Other than loans internally classified by the Bank under standard regulatory
guidelines as substandard, doubtful or loss and under the Bank's classification
as special mention, the Bank is not aware of any loan or borrowing relationship
that represents more than normal credit exposure.
In addition to directed attention to nonperforming loans, the Bank also has
maintained high underwriting standards and is being very selective in approving
new loans. This insistence on loan quality has slowed the Bank's efforts to
build loan totals, and as of March 31, 1996, the Bank's loan-to-deposit ratio
was 53% which is well below the targeted level of plus or minus 70%. The Bank
does not expect to sacrifice credit quality just to build loan volume.
FORWARD LOOKING
The Company is actively working on the required regulatory approvals and
financing for the acquisition of Western which is expected to be completed by
the end of the third quarter or
11
<PAGE>
by December 31, 1996. Specific plans relating to the operations of this new
subsidiary are currently being reviewed and developed.
The Bank will open its new branch in Laguna Beach on or about Monday, June 3,
1996 and is currently in the final preparation stage for this opening. A major
business development program is underway for this new branch to correspond with
the closing of the First Interstate Bank branch in Laguna Beach as part of the
Wells Fargo acquisition of First Interstate Bank.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the first quarter of 1996, the Company received an
approval from shareholders to increase the number of authorized
shares of common stock from 25 million to 100 million as a result
of a request for written consent on this proposal. A total of 73%
of all shareholders returned the written consent with over 72.8%
voting in favor of the proposal.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A Form 8-K discussing the proposed acquisition of Western Bank
was filed on March 22, 1996.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Monarch Bancorp
Date: May 3, 1996 /s/E. Lynn Caswell
-----------------------------------
E. Lynn Caswell,
President and CEO
Date: May 3, 1996 /s/William C. Demmin
-----------------------------------
William C. Demmin
Executive Vice President and CFO
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000721670
<NAME> MONARCH BANCORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,693
<INT-BEARING-DEPOSITS> 99
<FED-FUNDS-SOLD> 11,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 17,348
<INVESTMENTS-MARKET> 6,660
<LOANS> 33,203
<ALLOWANCE> 875
<TOTAL-ASSETS> 73,807
<DEPOSITS> 62,294
<SHORT-TERM> 0
<LIABILITIES-OTHER> 431
<LONG-TERM> 0
0
0
<COMMON> 16,500
<OTHER-SE> (5,418)
<TOTAL-LIABILITIES-AND-EQUITY> 73,807
<INTEREST-LOAN> 786
<INTEREST-INVEST> 403
<INTEREST-OTHER> 71
<INTEREST-TOTAL> 1,260
<INTEREST-DEPOSIT> 353
<INTEREST-EXPENSE> 353
<INTEREST-INCOME-NET> 907
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 900
<INCOME-PRETAX> 139
<INCOME-PRE-EXTRAORDINARY> 139
<EXTRAORDINARY> (60)
<CHANGES> 0
<NET-INCOME> 79
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<YIELD-ACTUAL> 0
<LOANS-NON> 178
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 854
<CHARGE-OFFS> 31
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 875
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
