<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MONARCH BANCORP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 6712 95-3863296
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
</TABLE>
------------------------
30000 TOWN CENTER DRIVE
LAGUNA NIGUEL, CALIFORNIA 92677
(714) 495-3300
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------------
HUGH S. SMITH, JR.
MONARCH BANCORP
1251 WESTWOOD BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(310) 477-2401
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
STANLEY F. FARRAR, ESQ. FRANCES E. LOSSING, ESQ.
SULLIVAN & CROMWELL O'MELVENY & MYERS LLP
444 SOUTH FLOWER STREET 400 SOUTH HOPE STREET
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90071
(213) 955-8000 (213) 669-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE REGISTRATION FEE
SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) OFFERING PRICE (2) (3)
<S> <C> <C> <C> <C>
Common Stock, no par value....................... 3,187,476 shares $24.25 $77,296,293 1,741.48
</TABLE>
(1) Represents the estimated maximum number of shares of Common Stock, no par
value, which are issuable upon consummation of the merger of California
Commercial Bankshares ("CCB") with and into Monarch Bancorp ("Monarch"),
including shares of Common Stock of Monarch which will become issuable upon
exercise of employee stock options of CCB.
(2) Pursuant to Rule 457 (f) (1) and 457(c), the registration fee is based on
the average of the bid and asked prices on May 9, 1997 of the CCB Common
Stock, no par value, on the National Daily Quotation "pink sheets" and
computed based on the estimated maximum number of shares thereof that may be
converted into the securities to be registered.
(3) A fee of $21,681.64 was previously paid upon filing of a Joint Proxy
Statement--Prospectus on Schedule 14A which constitutes a part of this
Registration Statement. The Schedule 14A fee was calculated by multiplying
(i) 3,188,476 shares (the then estimated number of shares to which the
transaction applies), by (ii) the per share price of $34.00 computed
pursuant to Securities Exchange Act Rule 0-11, and by (iii) one-50th of one
percent. The amount of the registration fee hereunder, $23,423.12, has been
reduced by the amount of such Schedule 14A fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES
May , 1997
To Our Shareholders:
You are cordially invited to attend the Annual Meeting (the "CCB Annual
Meeting") of Shareholders of California Commercial Bankshares ("CCB") which will
be held at 4100 Newport Place, Third Floor, Newport Beach, California 92660 at
10:00 a.m. on June 2, 1997.
At the CCB Annual Meeting, each shareholder of CCB ("CCB Shareholder") will
be asked to consider and approve the principal terms of the merger (the
"Merger") of CCB with and into Monarch Bancorp ("Monarch") pursuant to an
Amended and Restated Agreement and Plan of Merger, dated as of December 19,
1996, by and between Monarch and CCB. Upon the Merger becoming effective, each
share of common stock, no par value, of CCB ("CCB Common Stock") issued and
outstanding at such time (other than (a) shares which have not been voted in
favor of the approval of the principal terms of the Merger and with respect to
which dissenters' rights have been perfected in accordance with the California
General Corporation Law and (b) shares held directly or indirectly by Monarch,
other than shares held in a fiduciary capacity or in satisfaction of a debt
previously contracted) will be converted automatically into the right to receive
one share (the "Conversion Number") of common stock, no par value, of Monarch
("Monarch Common Stock"), after giving effect to the 1 for 8.5 reverse stock
split of Monarch Common Stock referred to in the accompanying Joint Proxy
Statement--Prospectus. Immediately following the consummation of the Merger,
Monarch Bank, a wholly-owned subsidiary of Monarch, will be merged with and into
National Bank of Southern California (the "Bank Merger"). In addition, in
connection with the Merger, Monarch's name will be changed to "Western Bancorp."
The Board of Directors of CCB (the "CCB Board") approved the Merger on
December 18, 1996, subject to satisfaction of certain conditions, including, but
not limited to, obtaining the requisite vote of the shareholders of both CCB and
Monarch, the designation for quotation of Monarch Common Stock on the NASDAQ
National Market and approval of the Merger and the Bank Merger by various
regulatory agencies. THE CCB BOARD HAS CONCLUDED THAT THE MERGER IS IN THE BEST
INTERESTS OF CCB AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT ITS
SHAREHOLDERS VOTE FOR THE APPROVAL OF THE PRINCIPAL TERMS OF THE MERGER. The
Findley Group, CCB's financial advisor, has delivered its opinion, dated the
date hereof, to the CCB Board that the Conversion Number is fair, from a
financial point of view, to the CCB Shareholders.
At the CCB Annual Meeting, each CCB Shareholder will also be asked to
consider and approve the election of seven directors to hold office until the
Merger is consummated or, if the Merger is not consummated, until the next
Annual Meeting and until their successors have been elected and duly qualified.
The accompanying Notice of Annual Meeting and Joint Proxy
Statement--Prospectus provide specific information regarding the Merger and the
CCB Annual Meeting. Please read these materials carefully.
It is important that your shares be represented and voted at the CCB Annual
Meeting regardless of the number of shares you own and whether or not you plan
to attend the CCB Annual Meeting. The affirmative vote of the holders of a
majority of the votes that may be cast by all holders of CCB Common Stock
entitled to vote at the CCB Annual Meeting is required for approval of the
principal terms of the Merger. Your failure to vote for approval of the
principal terms of the Merger has the same effect as a vote against the Merger.
Therefore, I urge each of you to sign, date and mail the enclosed proxy. If you
decide to attend the CCB Annual Meeting and wish to vote in person, you may
withdraw your proxy at that time. YOU SHOULD NOT SEND IN CERTIFICATES FOR YOUR
SHARES OF CCB COMMON STOCK AT THIS TIME.
Sincerely,
Robert L. McKay
Chairman of the Board
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES
4100 NEWPORT PLACE
NEWPORT BEACH, CALIFORNIA 92660
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AT 10:00 A.M., MONDAY, JUNE 2, 1997
TO THE SHAREHOLDERS OF
CALIFORNIA COMMERCIAL BANKSHARES:
The 1997 Annual Meeting (the "CCB Annual Meeting") of Shareholders of
California Commercial Bankshares ("CCB") will be held at 4100 Newport Place,
Third Floor, Newport Beach, California 92660 on Monday, June 2, 1997 at 10:00
a.m. for the following purposes:
(1) To consider and vote on a proposal to approve the principal terms of
the merger (the "Merger") of CCB with and into Monarch Bancorp, a California
corporation ("Monarch");
(2) To consider and approve the election of seven directors to hold
office until the Merger is consummated or, if the Merger is not consummated,
until the next annual meeting of CCB and until their successors have been
elected and duly qualified; and
(3) To transact such other business as may properly come before the CCB
Annual Meeting or any postponement or adjournment thereof.
The Amended and Restated Agreement and Plan of Merger, dated as of December
19, 1996, by and between CCB and Monarch (as the same may be amended, the
"Merger Agreement") provides, among other things, that the Board of Directors of
the surviving corporation immediately following the Merger will consist of ten
members, including each of the seven Directors of Monarch at the time of
consummation of the Merger and three of the current directors of CCB, Robert L.
McKay, William H. Jacoby and Mark H. Stuenkel. Under the terms of the Merger
Agreement, the directors of CCB will be required to submit their irrevocable
resignations as directors of CCB, effective upon consummation of the Merger. In
the event that the Merger is not consummated as contemplated, all directors of
CCB elected at the CCB Annual Meeting will continue to serve as directors of CCB
until the next annual meeting and until their successors have been elected and
duly qualified.
CCB's Board of Directors has fixed the close of business on April 11, 1997
as the record date for determination of the shareholders entitled to notice of
and to vote at the CCB Annual Meeting or any adjournment thereof.
CCB'S BOARD OF DIRECTORS HAS CONCLUDED THAT THE MERGER IS IN THE BEST
INTERESTS OF CCB AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR THE PRINCIPAL TERMS OF THE MERGER.
Shareholders of CCB are entitled to exercise dissenters' rights and to
receive cash in an amount equal to the fair market value of their shares of
common stock of CCB as of December 18, 1996 in lieu of receiving the common
stock of Monarch in the Merger by complying with certain procedures specified by
California law. See "THE MERGER--Dissenters' Rights" in the accompanying Joint
Proxy Statement-- Prospectus.
A copy of the Annual Report to Shareholders on Form 10-K as amended by Form
10-KA for the year ended December 31, 1996 is included as Appendix A to the
accompanying Joint Proxy Statement-- Prospectus.
By Order of the Board of Directors,
Abdul S. Memon, Assistant Secretary
Newport Beach, California
May , 1997
------------------------
YOUR VOTE IS IMPORTANT. THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND THE CCB
ANNUAL MEETING, YOU SHOULD DATE, SIGN AND RETURN THE ENCLOSED PROXY. IF YOU
ATTEND THE ANNUAL MEETING YOU WILL BE ENTITLED TO VOTE IN PERSON, IF YOU WISH.
YOU SHOULD NOT FORWARD SHARE CERTIFICATES AT THIS TIME.
------------------------
<PAGE>
[Monarch Letterhead]
May , 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting (the "Monarch Annual
Meeting") of Shareholders of Monarch Bancorp ("Monarch"), to be held on Monday,
June 2, 1997, at the South Coast Medical Center, 31872 Pacific Coast Highway,
Laguna Beach, California 92677 at 10:00 a.m., at which you will be asked to
consider and vote on a proposal to approve the principal terms of a proposed
merger (the "Merger") of California Commercial Bankshares ("CCB") with and into
Monarch pursuant to an Amended and Restated Agreement and Plan of Merger, dated
as of December 19, 1996 (as the same may be amended, the "Merger Agreement"), by
and between Monarch and CCB. Upon the Merger becoming effective, each share of
common stock, no par value, of CCB ("CCB Common Stock") issued and outstanding
at such time (other than (a) shares which have not been voted in favor of the
approval of the principal terms of the Merger and with respect to which
dissenters' rights have been perfected in accordance with the California General
Corporation Law and (b) shares held directly or indirectly by Monarch, other
than shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted) will be converted automatically into the right to receive one share
of common stock, no par value, of Monarch ("Monarch Common Stock") (after giving
effect to the reverse stock split referred to below). The Merger Agreement
provides for, among other things, (a) an increase in the number of directors of
Monarch to ten and the appointment of three current directors of CCB to
Monarch's Board of Directors upon consummation of the Merger, joining the seven
current Monarch Directors and (b) the merger of Monarch Bank, a wholly-owned
subsidiary of Monarch, with and into National Bank of Southern California, a
wholly-owned subsidiary of CCB, immediately following the consummation of the
Merger.
You will also be asked at the Monarch Annual Meeting to consider and vote on
amendments to Monarch's Amended Articles of Incorporation to (a) change the name
of Monarch to "Western Bancorp," and (b) effect a 1 for 8.5 reverse stock split
of Monarch Common Stock prior to the consummation of the Merger. In addition, at
the Monarch Annual Meeting, you will be asked to consider and approve the
election of seven directors.
The Board of Directors of Monarch has unanimously approved the Merger
Agreement and has determined that the Merger is fair to, and in the best
interests of, holders of Monarch Common Stock (the "Monarch Shareholders"). In
addition, RP Financial, LC., as financial advisor to Monarch, has delivered its
opinion, dated the date hereof, to the Board of Directors of Monarch that the
Conversion Number is fair from a financial point of view to the Monarch
Shareholders. Therefore, the Board of Directors of Monarch unanimously
recommends that Monarch Shareholders vote "FOR" the approval and adoption of the
principal terms of the Merger.
I urge you to consider carefully these important matters which are described
in the accompanying Joint Proxy Statement--Prospectus. In order to ensure that
your vote is represented at the Monarch Annual Meeting, please indicate your
choice on the proxy form, date and sign it and return it in the enclosed
envelope. A prompt response will be appreciated. If you are able to attend the
Monarch Annual Meeting you may revoke your proxy and vote in person if you wish.
Sincerely,
Hugh S. Smith, Jr.
Chairman of the Board and
Chief Executive Officer
1
<PAGE>
MONARCH BANCORP
30000 TOWN CENTER DRIVE
LAGUNA NIGUEL, CALIFORNIA 92677
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 2, 1997
NOTICE IS HEREBY GIVEN that an Annual Meeting (the "Monarch Annual Meeting")
of Shareholders of Monarch Bancorp, a California corporation ("Monarch"), has
been called by the Board of Directors of Monarch (the "Monarch Board") and will
be held at the South Coast Medical Center, 31872 Pacific Coast Highway, Laguna
Beach, California 92677 at 10:00 a.m. local time on Monday, June 2, 1997 for the
following purposes:
(1) To consider and vote upon a proposal to approve the principal terms
of a proposed merger (the "Merger") of California Commerical Bankshares
("CCB") with and into Monarch pursuant to an Amended and Restated Agreement
and Plan of Merger, dated as of December 19, 1996 (as the same may be
amended, the "Merger Agreement"), by and between Monarch and CCB. The Merger
Agreement provides, among other things, that each outstanding share of CCB's
common stock, no par value ("CCB Common Stock") (other than (i) shares which
have not been voted in favor of the approval of the principal terms of the
Merger and with respect to which dissenters' rights have been perfected in
accordance with the California General Corporation Law and (ii) shares held
directly or indirectly by Monarch, other than shares held in a fiduciary
capacity or in satisfaction of a debt previously contracted), will be
converted into the right to receive one share of Monarch's common stock, no
par value ("Monarch Common Stock"), after giving effect to the reverse stock
split referred to below all on, and subject to, the terms and conditions
contained in the Merger Agreement;
(2) To elect a board of seven directors to hold office until the next
Annual Meeting and until their successors have been elected and duly
qualified;
(3) To consider and vote on an amendment to Monarch's Amended Articles
of Incorporation to change the name of Monarch to "Western Bancorp";
(4) To consider and vote on an amendment to Monarch's Amended Articles
of Incorporation to effect a 1 for 8.5 reverse stock split of Monarch Common
Stock prior to the consummation of the Merger; and
(5) To consider and act upon such other business as may properly come
before the Monarch Annual Meeting or any adjournment or postponement
thereof.
The Joint Proxy Statement--Prospectus and the Appendices thereto (including
the Merger Agreement attached as Appendix C thereto and certain of the Annexes
to the Merger Agreement) form a part of this Notice.
Only holders of Monarch Common Stock of record at the close of business on
April 21, 1997, will be entitled to notice of, and to vote at, the Monarch
Annual Meeting or any adjournments or postponements thereof. Approval of the
matters to be voted upon in connection with the Merger require the affirmative
vote of a majority of the outstanding shares of Monarch Common Stock.
Shareholders of Monarch may be entitled to exercise dissenters' rights and
to receive cash in an amount equal to the fair market value of the Monarch
Common Stock as of December 18, 1996 by
1
<PAGE>
complying with certain procedures specified by California law. See "THE
MERGER--Dissenters' Rights" in the accompanying Joint Proxy
Statement--Prospectus.
<TABLE>
<S> <C>
By Order of the Board of Directors,
Hugh S. Smith, Jr.
Laguna Niguel, California Chairman of the Board and
May , 1997 Chief Executive Officer
</TABLE>
------------------------
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU
PLAN TO ATTEND THE MONARCH ANNUAL MEETING. YOUR PROXY WILL BE REVOCABLE, EITHER
IN WRITING OR BY VOTING IN PERSON AT THE MONARCH ANNUAL MEETING, AT ANY TIME
PRIOR TO ITS EXERCISE, BY FOLLOWING THE PROCEDURES DESCRIBED IN THE ACCOMPANYING
JOINT PROXY STATEMENT--PROSPECTUS. THE BOARD OF DIRECTORS OF MONARCH UNANIMOUSLY
RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE THE PRINCIPAL TERMS OF THE MERGER
AND THE OTHER MATTERS TO BE VOTED UPON AT THE MONARCH ANNUAL MEETING.
------------------------
2
<PAGE>
MONARCH BANCORP CALIFORNIA COMMERCIAL BANKSHARES
JOINT PROXY STATEMENT
--------------------------
MONARCH BANCORP
PROSPECTUS
------------------------
This Joint Proxy Statement--Prospectus is being furnished to the
shareholders of Monarch Bancorp, a California corporation ("Monarch"), in
connection with the solicitation of proxies by Monarch's Board of Directors (the
"Monarch Board") from holders of outstanding shares of Monarch's common stock,
no par value ("Monarch Common Stock"), for use at an Annual Meeting of
shareholders of Monarch ("Monarch Shareholders") to be held on June 2, 1997 and
at any adjournments and postponements thereof (the "Monarch Meeting"). This
Joint Proxy Statement--Prospectus is also being furnished to the shareholders of
California Commercial Bankshares, a California corporation ("CCB"), in
connection with the solicitation of proxies by CCB's Board of Directors (the
"CCB Board") from holders of outstanding shares of CCB's common stock, no par
value ("CCB Common Stock"), for use at an Annual Meeting of shareholders of CCB
("CCB Shareholders") to be held on June 2, 1997 and at any adjournments or
postponements thereof (the "CCB Meeting," and, together with the Monarch
Meeting, the "Annual Meetings").
At the Annual Meetings, Monarch Shareholders and CCB Shareholders will be
asked to consider and vote upon, among other things, a proposal to approve the
principal terms of a merger of CCB with and into Monarch (the "Merger"), with
Monarch being the corporation surviving the Merger (sometimes hereinafter
referred to as the "Surviving Corporation"), pursuant to an Amended and Restated
Agreement and Plan of Merger, dated as of December 19, 1996 (as it may be
amended, supplemented or otherwise modified from time to time, the "Merger
Agreement"), by and between Monarch and CCB, which is attached as Appendix C to
this Joint Proxy Statement--Prospectus and is incorporated herein by reference.
Upon the Merger becoming effective, each share of CCB Common Stock issued and
outstanding at the Effective Time (as defined herein) (other than (a) shares
which have not been voted in favor of the approval of the principal terms of the
Merger and with respect to which Dissenters' Rights (as defined herein) shall
have been perfected in accordance with the California General Corporation Law
(the "CGCL") and (b) shares held directly or indirectly by Monarch, other than
shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted) will be converted automatically into the right to receive one share
(the "Conversion Number") of Monarch Common Stock (after giving effect to the
Reverse Stock Split (as defined herein)). Pursuant to the Merger Agreement, the
Conversion Number was determined by dividing (a) 1.6 times CCB's Per Share Book
Value (as defined) by (b) Monarch's Per Share Book Value (as defined) after
giving effect to the Reverse Stock Split. Based upon (a) the 3,043,226 shares of
CCB Common Stock outstanding on April 11, 1997 and (b) the 144,250 shares of CCB
Common Stock reserved for issuance upon exercise of employee stock options to
acquire CCB Common Stock outstanding on April 11, 1997, and assuming no
Dissenters' Rights are perfected by CCB Shareholders and no cash is paid in lieu
of fractional shares, (i) if no shares of CCB Common Stock reserved for issuance
on April 11, 1997 were issued and outstanding on the Effective Date, 3,043,226
shares of Monarch Common Stock would be issued in the Merger, and (ii) if all
shares of CCB Common Stock reserved for issuance on April 11, 1997 were issued
and outstanding on the Effective Date, 3,187,476 shares of Monarch Common Stock
would be issued in the Merger. Based upon the 4,043,885 shares of Monarch Common
Stock outstanding on April 21, 1997 and the 287,458 shares of Monarch Common
Stock reserved for issuance upon exercise of employee stock options and warrants
to acquire Monarch Common Stock outstanding on April 21, 1997 (in each case
after giving effect to the Reverse Stock Split), and assuming no Dissenters'
Rights are perfected by any Monarch Shareholders or CCB Shareholders and no cash
is paid in lieu of fractional shares, shares held by Monarch Shareholders and
CCB Shareholders after consummation of the Merger would represent (i) 57.1
percent and 42.9 percent, respectively, of the Surviving Corporation, if none of
the shares of CCB Common Stock or Monarch Common Stock which were reserved for
issuance on April 11, 1997 and April 21, 1997, respectively, were outstanding on
the Effective Date, and (ii) 57.6 percent and 42.4 percent, respectively, if all
shares of CCB Common Stock and Monarch Common Stock which were reserved for
issuance on April 11, 1997 and April 21, 1997, respectively, were issued by the
Effective Date. Such relative share ownership information will be materially
impacted by the issuance of additional shares of Monarch Common Stock if the SCB
Merger (as defined herein) is consummated. See "PROPOSED SC BANCORP
ACQUISITION."
IN ORDER FOR ANY CCB SHAREHOLDER TO EXERCISE DISSENTERS' RIGHTS, A NOTICE
MUST BE RECEIVED BY CCB (OR BY THE SURVIVING CORPORATION AFTER THE EFFECTIVE
DATE) WITHIN 30 DAYS AFTER THE DATE ON WHICH NOTICE IS MAILED BY CCB TO ITS
SHAREHOLDERS OF THE APPROVAL BY THE CCB SHAREHOLDERS OF THE MERGER, AND ANY SUCH
SHAREHOLDER MUST NOT VOTE IN FAVOR OF THE PRINCIPAL TERMS OF THE MERGER, BY
PROXY OR OTHERWISE. IN ORDER FOR ANY MONARCH SHAREHOLDER TO EXERCISE DISSENTERS'
RIGHTS, A NOTICE MUST BE RECIEVED BY MONARCH ON OR BEFORE JUNE 2, 1997, AND ANY
SUCH SHAREHOLDER MUST VOTE AGAINST THE APPROVAL OF THE PRINCIPAL TERMS OF THE
MERGER. SEE "SUMMARY--DISSENTERS' RIGHTS" AND "THE MERGER--DISSENTERS' RIGHTS."
Immediately following the Merger, Monarch Bank, a California banking
corporation and wholly-owned subsidiary of Monarch, will merge with and into
National Bank of Southern California, a national banking association organized
under the laws of the United States and a wholly-owned subsidiary of CCB
("NBSC"), pursuant to an Agreement and Plan of Merger dated as of March 15, 1997
(the "Bank Merger") between Monarch Bank and NBSC. CCB Shareholders and Monarch
Shareholders each will also be asked to elect seven directors to their
respective Boards, to hold office until the next Annual Meeting and until their
successors have been elected and duly qualified or, in the case of CCB, until
the Merger is consummated (if at all). In addition, the Monarch Shareholders
will be asked to approve amendments to Monarch's Amended Articles of
Incorporation to (a) change the name of Monarch to "Western Bancorp," and (b)
effect a 1 for 8.5 reverse stock split of Monarch Common Stock prior to the
consummation of the Merger.
There is currently only a limited trading market for Monarch Common Stock
and CCB Common Stock. Application will be made to have the Monarch Common Stock
designated for quotation on the NASDAQ National Market under the symbol "WEBC."
SEE "RISK FACTORS" ON PAGE 32 FOR A DISCUSSION OF CERTAIN CONSIDERATIONS
THAT MONARCH SHAREHOLDERS AND CCB SHAREHOLDERS SHOULD CONSIDER WITH RESPECT TO
THE MERGER.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT--PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
--------------------------
THE DATE OF THIS JOINT PROXY STATEMENT--PROSPECTUS IS MAY 14, 1997.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT--PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT
PROXY STATEMENT--PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS JOINT PROXY
STATEMENT-- PROSPECTUS, OR THE SOLICITATION OF A PROXY, BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER, OR SOLICITATION OF
AN OFFER, OR PROXY SOLICITATION. NEITHER DELIVERY OF THIS JOINT PROXY
STATEMENT--PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES BEING OFFERED
PURSUANT TO THIS JOINT PROXY STATEMENT--PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR THEREIN SINCE THE DATE OF THIS JOINT PROXY
STATEMENT--PROSPECTUS.
AVAILABLE INFORMATION
Each of Monarch and CCB is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, each files reports, proxy statements and other information
with the Securities and Exchange Commission (the "SEC"). The reports, proxy
statements and other information filed by Monarch and CCB with the SEC may be
inspected and copied at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices
at 7 World Trade Center, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661, at prescribed rates. Such material may
also be accessed electronically by means of the SEC's home page on the Internet
at http//www.sec.gov.
Monarch has filed with the SEC a Registration Statement on Form S-4
(including exhibits thereto, the "Registration Statement") pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), covering the shares
of Monarch Common Stock issuable in the Merger. This Joint Proxy Statement--
Prospectus does not contain all the information set forth in the Registration
Statement. Such additional information may be obtained from the SEC's principal
office in Washington D.C. Statements contained in this Joint Proxy
Statement--Prospectus as to the contents of any contract or other document
referred to herein are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference.
This Joint Proxy Statement--Prospectus constitutes both the proxy statement
of Monarch and CCB relating to the solicitation of proxies for their use at
their respective Annual Meetings and the Prospectus filed as part of the
Registration Statement. This Joint Proxy Statement--Prospectus and the related
proxies and other materials are first being provided to the shareholders of
Monarch and CCB on or about May 16, 1997.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Joint Proxy Statement--Prospectus incorporates by reference documents
not included herein. Documents relating to Monarch, excluding exhibits unless
specifically incorporated herein, are available without charge upon request to
Arnold C. Hahn, Secretary, Monarch Bancorp, 30000 Town Center Drive, Laguna
Niguel, California 92677. Telephone requests may be directed to Arnold C. Hahn,
Secretary at (714) 485-3300. Documents relating to CCB, excluding exhibits
unless specifically incorporated herein, are available without charge upon
request to Abdul S. Memon, Assistant Secretary, 4100 Newport Place, Suite 900,
Newport Beach, California 92660. Telephone requests may be directed to Abdul
Memon at (714) 863-2300. In order to ensure timely delivery of documents, any
requests should be made by May 23, 1997.
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The following documents filed with the SEC by Monarch (file number 0-13551)
and CCB (file number 2-78788) are incorporated herein by reference:
(a) Monarch's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996 (the "Form 10-KSB");
(b) Monarch's Annual Report, as amended, on Form 10-KSBA for the fiscal
year ended December 31, 1996 (which amends and restates the Form 10-KSB)
(c) Monarch's Current Report on Form 8-K, dated February 28, 1997;
(d) Monarch's Current Report on Form 8-K, dated April 14, 1997;
(e) Monarch's Current Report on Form 8-K, dated May 2, 1997;
(f) CCB's Annual Report on Form 10-K for the fiscal year ended December
31, 1996;
(g) The amendment on Form 10-KA to CCB's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996; and
(h) CCB's Current Report on Form 8-K, dated January 6, 1997.
All documents filed by either Monarch or CCB pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior
to the Annual Meetings shall be deemed to be incorporated herein by reference
and to be a part hereof from the date of such filing and any statement contained
herein or in a document incorporated or deemed to be incorporated herein by
reference shall be deemed to be modified or superseded for purposes hereof to
the extent that a statement contained herein or in any other subsequently filed
document which also is, or is deemed to be, incorporated herein by reference,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed to constitute a part hereof, except as so
modified or superseded.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION...................................................................................... 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................................................... 2
SUMMARY.................................................................................................... 8
The Companies.......................................................................................... 8
Proposed SC Bancorp Acquisition........................................................................ 9
The Merger............................................................................................. 9
Amendments to Monarch's Amended Articles of Incorporation.............................................. 10
The Annual Meetings.................................................................................... 10
Votes Required......................................................................................... 11
Recommendations of the Boards of Directors............................................................. 11
Opinions of Financial Advisors......................................................................... 12
Effective Time......................................................................................... 12
Conditions to the Merger............................................................................... 12
Waiver and Amendment................................................................................... 14
Termination............................................................................................ 14
The Bank Merger........................................................................................ 14
Stock Option Agreement................................................................................. 15
Regulatory Approvals................................................................................... 15
Operations and Management After the Merger............................................................. 15
Interests of Certain Persons in the Merger............................................................. 16
Description of Monarch Capital Stock and Dividend Policy............................................... 17
Certain Tax Consequences............................................................................... 17
Accounting Treatment................................................................................... 17
Dissenters' Rights..................................................................................... 18
Certain Effects of the Merger on the Rights of CCB Shareholders........................................ 18
Risk Factors........................................................................................... 19
Markets and Market Prices.............................................................................. 19
Summary Historical Financial Information............................................................... 21
Summary Unaudited Pro Forma Combined Financial Information............................................. 23
Selected Historical and Pro Forma Per Share Data....................................................... 26
Summary Historical Financial Information (SCB)......................................................... 27
Summary Unaudited Pro Forma Combined Financial Information (SCB)....................................... 28
Selected Historical and Pro Forma Per Share Data (SCB)................................................. 30
RISK FACTORS............................................................................................... 32
Competition............................................................................................ 32
Ability to Integrate the Operations of Monarch and CCB................................................. 32
General Business Risk.................................................................................. 32
Concentration of Operations; Recessionary Environments; Decline in Real Estate Values.................. 33
Accounting Treatment................................................................................... 33
Interest Rate Risk..................................................................................... 33
Shares Eligible for Future Sale; Dilution.............................................................. 34
Regulation............................................................................................. 34
Limited Market for Monarch Common Stock................................................................ 35
INFORMATION REGARDING CCB.................................................................................. 35
Business of CCB........................................................................................ 35
Incorporation of Certain Information By Reference...................................................... 36
INFORMATION REGARDING MONARCH.............................................................................. 36
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Business of Monarch.................................................................................... 36
Incorporation of Certain Information By Reference...................................................... 36
RECENT DEVELOPMENTS........................................................................................ 37
PROPOSED SC BANCORP ACQUISITION............................................................................ 38
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION............................................... 40
Pooling-of-Interests Accounting........................................................................ 41
Purchase Accounting.................................................................................... 46
SC Bancorp............................................................................................. 51
THE ANNUAL MEETING OF MONARCH SHAREHOLDERS................................................................. 60
General................................................................................................ 60
Matters to be Considered at the Monarch Meeting........................................................ 60
The Monarch Record Date................................................................................ 60
Votes Required and Voting of Proxies................................................................... 60
Revocability of Proxies................................................................................ 61
Solicitation of Proxies................................................................................ 62
Security Ownership of Certain Beneficial Owners and Monarch Management................................. 62
Dissenters' Rights..................................................................................... 64
Election of Monarch Directors.......................................................................... 64
Directors and Nominees................................................................................. 64
Committees of the Board of Directors................................................................... 65
Section 16(a) Beneficial Ownership Reporting Compliance................................................ 66
Executive Officers..................................................................................... 66
Executive Compensation................................................................................. 67
Certain Relationships and Related Transactions......................................................... 69
Submission of Shareholder Proposals For Monarch's 1998 Annual Meeting.................................. 69
THE ANNUAL MEETING OF CCB SHAREHOLDERS..................................................................... 70
General................................................................................................ 70
Matters To Be Considered at the CCB Meeting............................................................ 70
The CCB Record Date.................................................................................... 71
Votes Required and Voting of Proxies................................................................... 71
Revocability........................................................................................... 72
Solicitation of Proxies................................................................................ 72
Security Ownership of Principal CCB Shareholders and Management........................................ 72
Dissenters' Rights..................................................................................... 74
Election of CCB Directors.............................................................................. 74
Committees of the CCB Board............................................................................ 75
Compensation of Executives of CCB...................................................................... 76
CCB Performance Graph.................................................................................. 81
Submission of Shareholder Proposals For CCB's 1998 Annual Meeting...................................... 81
FIP LITIGATION............................................................................................. 81
THE MERGER................................................................................................. 82
Background of the Merger............................................................................... 82
Reasons for the Merger; Recommendations of the Board of Directors...................................... 84
Opinions of Financial Advisors......................................................................... 86
Certain Federal Income Tax Consequences................................................................ 95
Regulatory Approvals................................................................................... 97
Resale of Monarch Common Stock......................................................................... 98
Certain Effects of the Merger.......................................................................... 98
Interests of Certain Persons in the Merger............................................................. 99
Proposed Amendments to Monarch's Amended Articles of Incorporation..................................... 101
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Dissenters' Rights..................................................................................... 101
Accounting Treatment................................................................................... 105
Markets and Market Prices.............................................................................. 105
THE MERGER AGREEMENT....................................................................................... 107
The Merger............................................................................................. 107
Effective Time and Effective Date...................................................................... 108
Exchange of Stock Certificates......................................................................... 108
No Fractional Shares................................................................................... 109
Conduct of the Business of CCB and Monarch Prior to the Merger......................................... 109
Representations and Warranties......................................................................... 110
Certain Covenants...................................................................................... 110
Conditions............................................................................................. 113
Waiver and Amendment................................................................................... 114
Termination............................................................................................ 114
Termination Payment.................................................................................... 115
Expenses............................................................................................... 115
The Bank Merger........................................................................................ 115
THE STOCK OPTION AGREEMENT................................................................................. 116
General................................................................................................ 116
The Stock Option....................................................................................... 116
Termination............................................................................................ 116
THE SHAREHOLDER AGREEMENTS................................................................................. 117
DESCRIPTION OF MONARCH CAPITAL STOCK AND COMPARISON OF SHAREHOLDER RIGHTS.................................. 118
Description of Monarch Capital Stock................................................................... 118
Comparison of Corporate Structure...................................................................... 118
Voting Rights.......................................................................................... 119
Dividends and Dividend Policy.......................................................................... 119
Number of Directors.................................................................................... 119
Indemnification of Directors and Officers.............................................................. 119
VALIDITY OF MONARCH COMMON STOCK........................................................................... 120
EXPERTS.................................................................................................... 120
TABLE OF DEFINED TERMS..................................................................................... 121
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LIST OF APPENDICES
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Appendix A -- CCB's Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1996 (without exhibits), as amended by amendment on Form 10-KA.
Appendix B -- Monarch's Annual Report on Form 10-KSBA for the Fiscal Year Ended December
31, 1996 (without exhibits).
Appendix C -- Amended and Restated Agreement and Plan of Merger, dated as of December
19, 1996, between Monarch and CCB.
Appendix D -- Fairness Opinion of RP Financial, LC.
Appendix E -- Fairness Opinion of The Findley Group.
Appendix F -- Chapter 13 of the CGCL.
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SUMMARY
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ALL
RESPECTS BY THE MORE DETAILED INFORMATION INCLUDED IN THIS JOINT PROXY
STATEMENT--PROSPECTUS, THE APPENDICES HERETO AND THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE. SHAREHOLDERS OF CCB AND MONARCH ARE URGED TO READ CAREFULLY
THIS JOINT PROXY STATEMENT--PROSPECTUS, INCLUDING THE APPENDICES HERETO AND THE
DOCUMENTS INCORPORATED HEREIN BY REFERENCE, IN ITS ENTIRETY.
ALL INFORMATION CONCERNING MONARCH, MONARCH BANK AND WESTERN BANK INCLUDED
IN THIS JOINT PROXY STATEMENT--PROSPECTUS, THE APPENDICES HERETO AND THE
DOCUMENTS INCORPORATED HEREIN BY REFERENCE HAS BEEN FURNISHED BY MONARCH, AND
ALL INFORMATION CONCERNING CCB AND NBSC INCLUDED IN THIS JOINT PROXY
STATEMENT--PROSPECTUS, THE APPENDICES HERETO AND THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE HAS BEEN FURNISHED BY CCB. UNLESS THE CONTEXT OTHERWISE
REQUIRES, REFERENCES TO "MONARCH" HEREIN SHALL BE TO MONARCH AND ITS
SUBSIDIARIES, MONARCH BANK AND WESTERN BANK, AND REFERENCES TO "CCB" HEREIN
SHALL BE TO CCB AND ITS SUBSIDIARIES, INCLUDING NBSC.
IN CONNECTION WITH THE MERGER DESCRIBED HEREIN, THE MONARCH SHAREHOLDERS
WILL VOTE UPON A PROPOSAL TO EFFECT A 1 FOR 8.5 REVERSE STOCK SPLIT (THE
"REVERSE STOCK SPLIT") OF MONARCH COMMON STOCK IMMEDIATELY PRIOR TO THE
EFFECTIVE TIME (AS DEFINED HEREIN). SEE "THE ANNUAL MEETING OF MONARCH
SHAREHOLDERS--MATTERS TO BE CONSIDERED AT THE MONARCH MEETING." UNLESS OTHERWISE
NOTED, SHARE INFORMATION RELATING TO MONARCH COMMON STOCK HEREIN, INCLUDING
WITHOUT LIMITATION THE CONVERSION NUMBER, GIVES EFFECT TO THE REVERSE STOCK
SPLIT.
THE COMPANIES
MONARCH
Monarch is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended (the "BHCA"), and its principal business is to serve as
a holding company for its banking subsidiaries, Monarch Bank and Western Bank.
Monarch was organized on May 20, 1983 as a California corporation and commenced
operation as a bank holding company on June 18, 1984. Western Bank was acquired
by Monarch on September 30, 1996. Monarch's principal executive offices are
located at 30000 Town Center Drive, Laguna Niguel, California 92677, and its
telephone number is (714) 495-3300. Monarch Bank provides banking and other
financial services primarily in southern Orange County and northern San Diego
County. Western Bank provides banking and other financial services primarily in
the west side of Los Angeles County. At March 31, 1997, Monarch had consolidated
total assets, total deposits and shareholders' equity of $494,042,000,
$427,837,000, and $54,632,000, respectively.
CCB
CCB is a bank holding company registered under the BHCA, and its principal
business is to serve as a bank holding company for NBSC. CCB was organized on
June 16, 1982 as a California corporation and commenced operation as a bank
holding company on January 10, 1983. CCB's principal executive offices are
located at 4100 Newport Place, Suite 900, Newport Beach, California 92660, and
its telephone number is (714) 863-2300. NBSC provides banking and other
financial services primarily in Orange County. At March 31, 1997, CCB had
consolidated assets, total deposits and shareholders' equity of $356,100,000,
$324,845,000 and $26,029,000, respectively.
ADDITIONAL INFORMATION AND RECENT DEVELOPMENTS
For additional information regarding the business of Monarch and CCB, see
"AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE,"
"UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION," "INFORMATION
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REGARDING CCB," "INFORMATION REGARDING MONARCH," "RECENT DEVELOPMENTS,"
"PROPOSED SC BANCORP ACQUISITION," "FIP LITIGATION," CCB's Annual Report on Form
10-K, as amended by an amendment on Form 10-KA, for the Fiscal Year Ended
December 31, 1996 ("CCB's Annual Report") attached hereto as Appendix A and
Monarch's Annual Report on Form 10-KSB, as amended by and restated on Form
10-KSBA, for the Year Ended December 31, 1996 ("Monarch's Annual Report")
attached hereto as Appendix B.
PROPOSED SC BANCORP ACQUISITION
On April 29, 1997, Monarch executed an Agreement and Plan of Reorganization
(the "SCB Merger Agreement") with SC Bancorp ("SCB") pursuant to which SCB will
merge with and into Monarch (the "SCB Merger"). The Merger Agreement provides
for the shareholders of SCB to receive shares of Monarch based on a purchase
price of $14.25 per share of common stock, no par value, of SCB (the "SCB Common
Stock") using a floating exchange ratio for Monarch Common Stock within a price
range of $23.38 to $31.88 per share (after giving effect to the Reverse Stock
Split). The SCB Merger Agreement is subject to several conditions, including
approval of the shareholders of each of Monarch and SCB, which is intended to be
sought at a special shareholder meeting held by each of Monarch and SCB in the
third quarter of 1997, and certain regulatory approvals. In addition, the
closing of the SCB Merger is contingent upon the consummation of the Merger with
CCB in accordance with the terms of the Merger Agreement. It is expected that
the SCB Merger will be accounted for as a pooling-of-interests. See "UNAUDITED
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION--SC Bancorp" and "PROPOSED SC
BANCORP ACQUISITION." Approval of the principal terms of the merger solicited
hereby is independent of and does not constitute approval of the SCB Merger.
Monarch has agreed to set the record date for holders of Monarch Common Stock
entitled to vote on the SCB Merger after the date on which the Merger is
consummated. As a result, if the Merger is consumated, CCB Shareholders (other
than those perfecting Dissenters' Rights) will be entitled to vote on the SCB
Merger as Monarch Shareholders. Another shareholders meeting will be held to
consider and vote upon the SCB Merger, and more detailed information will be
provided to Monarch Shareholders (including CCB Shareholders who become Monarch
Shareholders) prior to that meeting.
THE MERGER
On December 18, 1996, the Monarch Board and the CCB Board (with one CCB
director absent) each approved the Merger Agreement, which was executed and
delivered on December 19, 1996 by Monarch and CCB. The Merger Agreement provides
for the Merger of CCB with and into Monarch, with Monarch being the Surviving
Corporation. In connection with the Merger, each share of CCB Common Stock
issued and outstanding at the Effective Time (other than (a) shares which have
not been voted in favor of approval of the principal terms of the Merger and
with respect to which Dissenters' Rights have been perfected in accordance with
the CGCL and (b) shares held directly or indirectly by Monarch, other than
shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted) will be converted into one share of Monarch Common Stock. With the
exception of shares for which Dissenters' Rights have been perfected, each share
of Monarch Common Stock outstanding immediately prior to the Effective Time will
remain outstanding after the Merger as one share of common stock of the
Surviving Corporation (the "Surviving Corporation Common Stock"). See "THE
MERGER AGREEMENT--The Merger."
As a result of the Merger, holders of CCB Common Stock immediately prior to
the Merger will own approximately 42.9 percent of the issued and outstanding
shares of Surviving Corporation Common Stock assuming no exercise of currently
outstanding options and warrants to acquire either Monarch Common Stock or CCB
Common Stock and approximately 42.4 percent of Surviving Corporation Common
Stock assuming the exercise of all such options and warrants. The exact number
of shares of Monarch Common Stock to be issued in the Merger will be dependent
on the number of shares of CCB Common Stock outstanding at the Effective Time,
the number of shares, if any, for which Dissenters' Rights have been
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perfected and the number of shares of CCB Common Stock held by Monarch. Under
the terms of the Merger Agreement, CCB may not issue any additional shares of
CCB Common Stock other than pursuant to stock options, warrants and other rights
outstanding on the date of execution of the Merger Agreement. See "PROPOSED SC
BANCORP ACQUISITION" for information concerning the pro forma effect of the SCB
Merger on the relative percentage of shares of Monarch Common Stock to be held
by holders who are currently Monarch or CCB Shareholders. The Merger Agreement
provides that, to the extent permitted by applicable law, preemptive rights with
respect to the purchase of CCB Common Stock, if any, shall terminate and cease
to exist at the Effective Time.
As a condition to consummation of the Merger, each of William H. Jacoby,
Robert L. McKay and Mark H. Stuenkel, each currently a CCB director, will be
appointed to the Monarch Board effective upon consummation of the Merger. The
Monarch Board will consist of the seven directors elected at the Monarch Annual
Meeting until the Effective Time, at which time the Monarch board will adopt
resolutions fixing the exact number of directors at ten and appointing Messrs.
Jacoby, McKay and Stuenkel to fill the vacancies created thereby. In addition,
Monarch and CCB have agreed to take all actions necessary to consummate the Bank
Merger, pursuant to which the existing directors of NBSC will continue as
directors of the Surviving Association (as defined herein) following the Bank
Merger. It is also a condition to the Merger that the Monarch Common Stock be
designated for quotation on the NASDAQ National Market. See "THE MERGER
AGREEMENT--Conditions."
AMENDMENTS TO MONARCH'S AMENDED ARTICLES OF INCORPORATION
Monarch proposes to amend its Amended Articles of Incorporation (the
"Amendments") (i) to change its name from "Monarch Bancorp" to "Western Bancorp"
and (ii) to effect a 1 for 8.5 reverse stock split with respect to the Monarch
Common Stock immediately prior to the Effective Time. See "THE ANNUAL MEETING OF
MONARCH SHAREHOLDERS--Matters to be Considered at the Monarch Meeting."
THE ANNUAL MEETINGS
MONARCH
The Monarch Meeting to consider and vote on, among other things, approval of
the principal terms of the Merger will be held on Monday, June 2, 1997 at 10:00
a.m. local time, at the South Coast Medical Center, 31872 Pacific Coast Highway,
Laguna Beach, California 92677. Only holders of record of Monarch Common Stock
at the close of business on April 21, 1997 will be entitled to vote at the
Monarch Meeting. At such date, there were outstanding and entitled to vote
34,373,021 shares of Monarch Common Stock (4,043,885 shares after giving effect
to the Reverse Stock Split). Each share of Monarch Common Stock is entitled to
one vote.
CCB
The CCB Meeting to consider and vote on, among other things, approval of the
principal terms of the Merger will be held on Monday, June 2, 1997 at 10:00 a.m.
local time, at 4100 Newport Place, Third Floor, Newport Beach, California 92660.
Only holders of record of CCB Common Stock at the close of business on April 11,
1997 will be entitled to vote at the CCB Meeting. At such date, there were
outstanding and entitled to vote 3,043,226 shares of CCB Common Stock. Each
share of CCB Common Stock is entitled to one vote.
For additional information relating to the Annual Meetings, see "THE ANNUAL
MEETING OF MONARCH SHAREHOLDERS" and "THE ANNUAL MEETING OF CCB SHAREHOLDERS."
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VOTES REQUIRED
MONARCH
Approval of the matters to be voted upon in connection with the Merger by
the Monarch Shareholders requires the affirmative vote of the holders of a
majority of the outstanding shares of Monarch Common Stock entitled to vote. As
a result, the failure to vote by person or proxy on any such proposal at the
Monarch Meeting or abstaining on any proposal has the same effect as voting
against the applicable proposal. In the election of directors at the Monarch
Meeting, the candidates receiving the highest number of affirmative votes of the
shares entitled to vote for them up to the number of directors to be elected by
such shares will be elected, assuming a quorum is present. In addition, Monarch
Shareholders will have cumulative voting rights with respect to the election of
directors if certain conditions are met. See "THE ANNUAL MEETING OF MONARCH
SHAREHOLDERS--Votes Required and Voting of Proxies."
As of April 21, 1997, Monarch's directors and officers and their affiliates
held, in the aggregate, the ability to direct the voting with respect to
approximately 39.44 percent of the outstanding Monarch Common Stock entitled to
vote at the Monarch Meeting. Each of the officers and directors of Monarch is
expected to vote in favor of the principal terms of the Merger and in favor of
the Amendments.
CCB
Approval of the matters to be voted upon in connection with the Merger by
the CCB Shareholders requires the affirmative vote of the holders of a majority
of the outstanding shares of CCB Common Stock entitled to vote. As a result, the
failure to vote by person or proxy on any proposal at the CCB Meeting or
abstaining on any such proposal has the same effect as voting against the
Merger. In the election of directors at the CCB Meeting, the candidates
receiving the highest number of affirmative votes of the shares entitled to vote
for them up to the number of directors to be elected by such shares will be
elected, assuming a quorum is present. In addition, CCB Shareholders will have
cumulative voting rights with respect to the election of directors if certain
conditions are met. See "THE ANNUAL MEETING OF CCB SHAREHOLDERS--Votes Required
and Voting of Proxies."
As of April 11, 1997, CCB's directors and officers and their affiliates held
in the aggregate approximately 44.59 percent of the outstanding CCB Common Stock
entitled to vote at the CCB Meeting. Each of the directors of CCB is expected to
vote in favor of the principal terms of the Merger. Monarch has entered into
Shareholder Agreements (as defined herein) with certain of CCB Shareholders,
each of whom are also directors of CCB, pursuant to which such shareholders have
agreed to vote their shares (a) in favor of the adoption and approval of the
Merger Agreement and the Merger and (b) against any other Acquisition Proposal
(as defined herein). In the aggregate, CCB Shareholders bound by the Shareholder
Agreements hold approximately 43.79 percent of the outstanding CCB Common Stock
entitled to vote at the CCB Meeting.
Monarch has agreed that neither it nor any of its affiliates will acquire
more than five percent of the outstanding shares of CCB Common Stock prior to
the Effective Time. As of April 11, 1997, Monarch owned no shares of CCB Common
Stock.
See "THE ANNUAL MEETING OF MONARCH SHAREHOLDERS--Votes Required and Voting
of Proxies," "THE ANNUAL MEETING OF CCB SHAREHOLDERS--Votes Required and Voting
of Proxies," "THE SHAREHOLDER AGREEMENTS" and "THE MERGER AGREEMENT--
Conditions."
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Monarch Board and the CCB Board have each approved the Merger Agreement
and the transactions contemplated thereby. The members of each Board unanimously
believe that the Merger and the transactions contemplated by the Merger
Agreement are fair to, and in the best interests of, the
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shareholders of their respective companies and unanimously recommend a vote
"FOR" the matters to be voted upon by such shareholders in connection with the
Merger. The conclusions of the Monarch and CCB Boards with respect to the Merger
are based upon a number of factors. See "THE MERGER-- Background of the Merger,"
"--Reasons for the Merger; Recommendations of the Boards of Directors" and
"--Opinions of Financial Advisors."
The Monarch Board recommends a vote "FOR" the seven persons nominated for
election to serve as directors of Monarch until the next Monarch annual meeting
and until their successors have been elected and duly qualified. See "THE ANNUAL
MEETING OF MONARCH SHAREHOLDERS--Election of Monarch Directors." The Monarch
Board also recommends a vote "FOR" the Amendments. See "THE ANNUAL MEETING OF
MONARCH SHAREHOLDERS--Matters to be Considered at the Monarch Meeting."
The CCB Board recommends a vote "FOR" the seven persons nominated for
election to serve as directors of CCB, until the Merger is consummated or, if
the Merger is not consummated, until the next CCB annual meeting and until their
successors have been elected and duly qualified. See "THE ANNUAL MEETING OF CCB
SHAREHOLDERS--Election of CCB Directors."
OPINIONS OF FINANCIAL ADVISORS
MONARCH
RP Financial, LC. ("RP Financial"), Monarch's financial advisor, has
rendered its written opinions, dated March 19, 1997 and as of the date hereof,
to the Monarch Board to the effect that, as of each of such dates, the
Conversion Number is fair to the Monarch Shareholders from a financial point of
view. The written opinion of RP Financial, dated as of the date hereof, is
attached to this Joint Proxy Statement-- Prospectus as Appendix D and should be
read in its entirety. See "THE MERGER--Opinions of Financial Advisors."
CCB
The Findley Group ("Findley") delivered to the CCB Board its opinions, dated
December 19, 1996 and as of the date hereof, to the effect that, as of each of
such dates, the Conversion Number is fair, from a financial point of view, to
the holders of CCB Common Stock. The written opinion of Findley, dated as of the
date hereof, is attached to this Joint Proxy Statement--Prospectus as Appendix E
and should be read in its entirety. See "THE MERGER--Opinions of Financial
Advisors."
EFFECTIVE TIME
The Merger will become effective on the date and at the time that an
agreement of merger and related documents are filed with the California
Secretary of State or such later date as may be specified in such agreement of
merger. Subject to conditions specified in the Merger Agreement, the parties
expect the Merger to become effective on or about June 2, 1997 although there
can be no assurance as to whether or when the Merger will occur. See "THE MERGER
AGREEMENT--Effective Time and Effective Date" and "--Conditions."
CONDITIONS TO THE MERGER
The respective obligations of Monarch and CCB to consummate the Merger are
subject to certain conditions, including (a) the approval by the Monarch
Shareholders and the CCB Shareholders of the principal terms of the Merger; (b)
receipt of approvals and consents required by law in connection with the Merger
and Bank Merger and the other transactions contemplated by the Merger Agreement,
including approval by the Board of Governors of the Federal Reserve System and
the Office of the Comptroller of the Currency ("OCC"); (c) the absence of any
statute, rule, regulation, order, injunction or decree being in
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effect and prohibiting or restricting the consummation of the Merger, the Bank
Merger or any other transaction contemplated by the Merger Agreement; (d) the
Registration Statement having become effective and there having been issued no
stop order suspending such effectiveness and no proceedings for that purpose
initiated or threatened by the SEC; and (e) receipt of an opinion of counsel by
each of Monarch and CCB to the effect that the Merger will be a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code") and that Monarch and CCB will each be a "party
to a reorganization" within the meaning of Section 368(b) of the Code (the
"Tax-Free Reorganization Condition"). The Tax-Free Reorganization Condition is a
principal term of the Merger, and as such may not be waived under California law
by either Monarch or CCB after their shareholders have approved the principal
terms of the Merger. See "THE MERGER AGREEMENT-- WAIVER AND AMENDMENT."
The obligation of Monarch to consummate the Merger is also subject to the
fulfillment or waiver by Monarch prior to the Effective Time of certain
conditions, including the following: (a) the representations and warranties of
CCB being true and correct unless the failure so to be true and correct is not
likely to have a material adverse effect on CCB; (b) the performance in all
material respects by CCB of all covenants and agreements contained in the Merger
Agreement required to be performed by CCB before the Effective Time; (c) receipt
by Monarch of a customary "cold comfort" letter from Deloitte & Touche LLP,
CCB's independent certified public accountants ("D&T"), with respect to certain
financial statements and data of CCB; (d) receipt by Monarch of a letter from
KPMG Peat Marwick LLP, Monarch's independent certified public accountants
("KPMG"), confirming that the Merger is entitled to "pooling-of-interests"
treatment for accounting purposes (the "Monarch Pooling Condition"); (e) receipt
by Monarch of an opinion of O'Melveny & Myers LLP, special counsel to CCB, dated
the Effective Date; (f) receipt by Monarch of written resignations, effective as
of the Effective Time, of each CCB Director and certain officers as specified by
Monarch; (g) receipt by Monarch, prior to the solicitation of shareholder
approval, of an opinion of RP Financial confirming the fairness of the terms of
the Merger from a financial point of view; and (h) Dissenters' Rights having
been exercised by no more than five percent of the outstanding shares of either
the CCB Common Stock or the Monarch Common Stock (the "Dissenters' Rights
Condition"). The Merger Agreement expressly provides that either the Monarch
Pooling Condition or the Dissenters' Rights Condition or both may be waived by
Monarch in its sole discretion either prior to or subsequent to the approval by
the Monarch Shareholders and the CCB Shareholders of the principal terms of the
Merger. See "THE MERGER AGREEMENT--Conditions." Monarch currently anticipates
waiving these conditions only if CCB agrees to waive the CCB Pooling Condition
(as defined herein) and the parties agree to account for the Merger as a
purchase. See "THE MERGER--Accounting Treatment."
In addition, the obligation of CCB to consummate the Merger is also subject
to the fulfillment or waiver by CCB prior to the Effective Time of certain
conditions, including the following: (a) the representations and warranties of
Monarch being true and correct unless the failure so to be true and correct is
not likely to have a material adverse effect on Monarch; (b) the performance in
all material respects by Monarch of all covenants and agreements contained in
the Merger Agreement required to be performed by Monarch before the Effective
Time; (c) receipt by CCB of a customary "cold comfort" letter from KPMG with
respect to certain financial statements and data of Monarch; (d) receipt by CCB
of a letter from D&T confirming that the Merger is entitled to
"pooling-of-interests" treatment for accounting purposes (the "CCB Pooling
Condition"); (e) receipt by CCB of an opinion of Sullivan & Cromwell, special
counsel to Monarch, dated the Effective Date; (f) William H. Jacoby, Robert L.
McKay and Mark H. Stuenkel having been appointed to the Board of Directors of
Monarch; (g) receipt by CCB, prior to the solicitation of shareholder approval,
of an opinion of Findley confirming the fairness of the terms of the Merger to
its shareholders from a financial point of view; and (h) as of the Effective
Time, the Monarch Common Stock being designated for quotation on the NASDAQ
National Market. The Merger Agreement expressly provides that the CCB Pooling
Condition may be waived by CCB in its sole discretion either prior to or
subsequent to the approval by the Monarch Shareholders and the CCB Shareholders
of
13
<PAGE>
the principal terms of the Merger. See "THE MERGER AGREEMENT--Conditions." CCB
currently anticipates waiving the CCB Pooling Condition only if Monarch agrees
to waive the Monarch Pooling Condition and the Dissenters' Rights Condition and
the parties agree to account for the Merger as a purchase. See "The
MERGER--Accounting Treatment."
WAIVER AND AMENDMENT
Prior to the Effective Time, each party may waive, in whole or in part, the
conditions to its obligation to consummate the Merger to the extent permitted by
applicable law. In addition, Monarch and CCB may amend the Merger Agreement at
any time prior to the Effective Time by written agreement, approved by their
respective Boards, so long as the principal terms of the Merger are not changed
after approvals by the CCB Shareholders and the Monarch Shareholders. See "THE
MERGER AGREEMENT--Waiver and Amendment." The Merger Agreement expressly provides
that Monarch may waive the Monarch Pooling Condition and the Dissenters' Rights
Condition and that CCB may waive the CCB Pooling Condition, in either case
whether prior to or subsequent to the approval by the Monarch Shareholders and
the CCB Shareholders of the principal terms of the Merger. Accordingly, Monarch
and CCB may by mutual agreement determine at any time, whether prior to or
subsequent to the Annual Meetings, to proceed with the Merger notwithstanding
the failure of such conditions to be satisfied (due to the exercise of
Dissenters' Rights by more than five percent of the shareholders of either
Monarch or CCB, or otherwise), although neither is obligated to do so.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Merger, either prior to or subsequent to its approval by the
shareholders of CCB and Monarch, (a) by mutual consent of Monarch and CCB, if so
determined by their respective Boards; (b) by either Monarch or CCB, if so
determined by its Board, if (i) the shareholders of Monarch or CCB fail to
approve the principal terms of the Merger, (ii) a material breach by the other
party of any representation, warranty, covenant or agreement contained in the
Merger Agreement is not cured or curable within a specified grace period, or
(iii) the Merger is not consummated by September 30, 1997, unless such failure
is due to a breach of any representation, warranty or covenant contained in the
Merger Agreement by the party seeking to terminate; (c) by either Monarch or
CCB, if either the approval of a governmental authority required for
consummation of the Merger is not obtained or any governmental authority
prohibits consummation of the Merger; (d) by Monarch if CCB solicits an
Acquisition Proposal (as defined); or (e) by CCB if the CCB Board receives an
Acquisition Proposal and determines, based upon the written advice of counsel,
to accept the proposal and that proceeding with the Merger would violate
fiduciary duties of the CCB Board to the CCB Shareholders. The Shareholder
Agreements executed by certain CCB Shareholders will terminate upon termination
of the Merger Agreement. If the Merger Agreement is terminated under certain
specified conditions, certain termination fees and expense reimbursement
provisions will become applicable. In addition, Monarch will be entitled to
exercise the option granted pursuant to the Stock Option Agreement (as defined
herein) under certain circumstances associated with events resulting in such
termination. See "THE MERGER AGREEMENT--Conditions," "--Termination" and "THE
STOCK OPTION AGREEMENT."
THE BANK MERGER
Immediately after consummation of the Merger, Monarch Bank will merge with
and into NBSC, with NBSC being the surviving association (the "Surviving
Association"). Pursuant to the Agreement and Plan of Merger, dated March 15,
1997 (the "Bank Merger Agreement"), between NBSC and Monarch Bank, the directors
of NBSC immediately prior to the effective time of the Bank Merger will continue
to be the directors of the Surviving Association after consummation of the Bank
Merger.
14
<PAGE>
The respective obligations of Monarch Bank and NBSC to effect the Bank
Merger are subject to the condition, among others, that the Merger shall have
been consummated. For a more detailed discussion of the Bank Merger, see "THE
MERGER AGREEMENT--The Bank Merger."
STOCK OPTION AGREEMENT
As an inducement and condition to Monarch's willingness to enter into the
Merger Agreement, CCB (as Issuer) entered into a Stock Option Agreement with
Monarch (as Grantee), dated as of December 19, 1996 (the "Stock Option
Agreement"). Pursuant to the Stock Option Agreement, CCB granted to Monarch an
irrevocable option (the "Option"), exercisable only under certain limited and
specifically defined circumstances, none of which, to the best of CCB's and
Monarch's knowledge, has occurred as of the date hereof, to purchase up to a
number of authorized but theretofore unissued shares of CCB Common Stock equal
to 19.9 percent of the shares of CCB Common Stock outstanding at the time of
exercise, for a purchase price of $9.50 per share, subject to adjustment in
certain circumstances. The purchase of CCB Common Stock pursuant to the Stock
Option Agreement is subject to compliance with applicable law, including receipt
of any necessary approvals under the BHCA.
The Stock Option Agreement and the Option are intended to increase the
likelihood that the Merger will be consummated on the terms set forth in the
Merger Agreement, and may be expected to discourage offers by third parties to
acquire CCB prior to the Merger.
In the event that either the CCB Shareholders or the Monarch Shareholders
fail to approve the Merger Agreement, either CCB or Monarch may terminate the
Merger Agreement. See "THE MERGER AGREEMENT--Termination." If such termination
occurs, or if termination occurs for any other reason other than (a) as a result
of a material breach by CCB of the Merger Agreement or (b) due to the
circumstances described in clauses (d) and (e) under "Termination" above, in
either case prior to the occurrence of a Purchase Event (as defined herein) or a
Preliminary Purchase Event (as defined herein) under the Stock Option Agreement,
the Stock Option Agreement will automatically terminate at such time. If a
Purchase Event or a Preliminary Purchase Event occurs under the Stock Option
Agreement prior to termination of such Stock Option Agreement, however, Monarch
will be entitled to exercise the related Option in accordance with its terms,
notwithstanding the subsequent termination of the Merger Agreement. See "THE
STOCK OPTION AGREEMENT."
REGULATORY APPROVALS
The Merger is subject to the prior approval by the Federal Reserve Board,
and the Bank Merger is subject to the prior approval by the OCC. Monarch and CCB
submitted initial applications seeking approval of the Merger and related
matters to the Federal Reserve Board on March 17, 1997, and the Federal Reserve
Board accepted final applications for processing on April 17, 1997. Monarch and
CCB each expect to obtain approvals of such applications by May 19, 1997. On
March 28, 1997, Monarch Bank and NBSC also submitted an application to the OCC
seeking approval of the Bank Merger, and Monarch Bank and NBSC each expects to
obtain approval of such application by May 15 , 1997. See "THE
MERGER--Regulatory Approvals."
Monarch and CCB have agreed in the Merger Agreement to use reasonable best
efforts promptly to take all actions necessary, proper or advisable to
consummate the transactions contemplated by the Merger Agreement, including
using efforts to obtain all necessary approvals from all applicable governmental
entities, making all necessary registrations, applications and filings and
obtaining any contractual consents and regulatory approvals. See "THE
MERGER--Regulatory Approvals."
OPERATIONS AND MANAGEMENT AFTER THE MERGER
The Merger Agreement provides that the Board of Directors of the Surviving
Corporation will include William H. Jacoby, Robert L. McKay and Mark H.
Stuenkel, each currently directors of CCB, in addition to the seven current
members. Accordingly, at the Effective Time, the Monarch Board will adopt
15
<PAGE>
resolutions fixing the number of directors at ten and appointing Messrs. Jacoby,
McKay and Stuenkel to fill the vacancies created thereby. The Merger Agreement
further provides that resignations of all members of the CCB Board will be
effective as of the Effective Time and that certain officers of CCB as specified
by Monarch will resign as of the Effective Time. The Merger Agreement also
provides that after consummation of the Bank Merger, the existing directors of
NBSC will continue as the directors of NBSC. See "THE MERGER--Certain Effects of
the Merger."
Messrs. Jacoby, Stuenkel and Memon are each parties to certain Salary
Continuation Agreements (as defined herein) which, in the event of a Change In
Control (as defined herein), become employment agreements with three-year terms
for Messrs. Jacoby and Stuenkel and an employment agreement with an
eighteen-month term for Mr. Memon. The Salary Continuation Agreements provide
that, during such periods of employment, Messrs. Jacoby, Stuenkel and Memon are
entitled to receive $570,000, $495,000 and $135,000, respectively, or $1,200,000
in the aggregate, as annual base salary, as well as regular bonuses and other
benefits. In addition, assuming full vesting, Messrs. Jacoby, Stuenkel and Memon
are entitled to receive $80,000, $62,500 and $23,000, respectively, annually for
a period of fifteen years after retirement. See "THE ANNUAL MEETING OF CCB
SHAREHOLDERS--Compensation of Executives of CCB-- Executive Salary Continuation
Agreements." The Salary Continuation Agreements also provide for the
compensation of Messrs. Jacoby, Stuenkel and Memon to increase annually during
such terms. Messrs. Jacoby, Stuenkel and Memon are also entitled to all non-cash
compensation and benefits which they received prior to a Change In Control for
such term. The consummation of the Merger will constitute a Change In Control.
Monarch and Messrs. Jacoby and Stuenkel are currently discussing the
possibility of entering into employment agreements upon consummation of the
Merger. If either or both of Messrs. Jacoby and Stuenkel enter into such
employment agreements, the Salary Continuation Agreement for such party or
parties will be terminated. See "THE ANNUAL MEETING OF CCB
SHAREHOLDERS--Compensation of Executives of CCB--Executive Salary Continuation
Agreements."
As described above under "--Amendments to Monarch's Amended Articles of
Incorporation," Monarch proposes to change its name to "Western Bancorp." After
the Merger, the Surviving Corporation will be headquartered at 30000 Town Center
Drive, Laguna Niguel, California 92677. The telephone number at such offices
will be (714) 495-3300. For a discussion of certain matters relating to the
operations and business of Monarch, see "THE MERGER--Certain Effects of the
Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
GENERAL
In considering the recommendations of the Monarch Board and the CCB Board,
the Monarch Shareholders and the CCB Shareholders should be aware that certain
members of management of each of Monarch and CCB have certain interests in the
transactions contemplated by the Merger Agreement that are in addition to the
interests of shareholders generally and which may create potential conflicts of
interest. These interests include, among others, provisions in the Merger
Agreement relating to the indemnification of CCB and NBSC officers and
directors; directors' and officers' liability insurance; the appointment of
three members of the CCB Board to the Monarch Board immediately following the
Effective Time; certain employee benefits and employment agreements; and the
beneficial ownership by John M. Eggemeyer, a Monarch Director, of 80 percent of
Belle Plaine Partners, Inc. ("BPI") which provided financial advisory and
consulting services to Monarch and will receive fees of $1,350,000 from Monarch
for such services in connection with the Merger. See "THE MERGER--Interests of
Certain Persons in the Merger," and "THE MERGER AGREEMENT--Certain
Covenants--Indemnification; Directors' and Officers' Insurance," and "--Employee
Benefits," "THE ANNUAL MEETING OF CCB SHAREHOLDERS--Compensation of Executives
of CCB--Executive Salary Continuation Agreements,"
16
<PAGE>
and "THE ANNUAL MEETING OF MONARCH SHAREHOLDERS--Executive Compensation" and
"--Certain Relationships and Related Transactions."
DESCRIPTION OF MONARCH CAPITAL STOCK AND DIVIDEND POLICY
The authorized capital stock of Monarch as of the Monarch Record Date (as
defined herein) consists of 100,000,000 shares of common stock, no par value,
and 5,000,000 shares of serial preferred stock, no par value. The Reverse Stock
Split will not result in any change in the authorized capital stock of Monarch.
Holders of shares of Monarch Common Stock are entitled to one vote for each
share held of record on all matters to be voted upon by Monarch Shareholders;
except that in connection with the election of directors, the shares subject to
notice may be voted cumulatively. Shares of Monarch Common Stock are not subject
to redemption, conversion or sinking fund provisions.
Holders of Monarch Common Stock are entitled to receive dividends declared
by the Monarch Board out of funds legally available therefor under the laws of
the State of California. Monarch has not paid any dividends since its formation,
and it is currently ineligible to declare a dividend because of retained
earnings deficits. Although the Surviving Corporation will not have retained
earnings deficits after consummation of the Merger, the Monarch Board currently
does not intend to consider the payment of any cash dividends on the Monarch
Common Stock in the foreseeable future. The declaration of any cash dividends in
the future will depend upon, among other things, Monarch's ability to improve
its financial condition and results of operations, limitations imposed on such
dividends by Monarch's debt instruments and by applicable laws and regulations
limiting Monarch's and its subsidiaries' ability to pay dividends and Monarch's
anticipated future cash requirements.
See "DESCRIPTION OF MONARCH CAPITAL STOCK AND COMPARISON OF SHAREHOLDERS
RIGHTS."
CERTAIN TAX CONSEQUENCES
Monarch has received from Sullivan & Cromwell, and CCB has received from
O'Melveny & Myers LLP, an opinion of counsel regarding the material tax
consequences of the Merger. Sullivan & Cromwell, special counsel to Monarch, and
O'Melveny & Myers LLP, special counsel to CCB, have each advised that (a) the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code and that Monarch and CCB will each be a "party to a reorganization"
within the meaning of Section 368(b) of the Code; (b) no gain or loss will be
recognized by CCB Shareholders upon their receipt of Monarch Common Stock on
conversion of their CCB Common Stock, except for those holders of CCB Common
Stock who exercise their Dissenters' Rights; (c) the tax basis of the shares of
Monarch Common Stock received by CCB Shareholders will be the same as the tax
basis of their converted CCB Common Stock; and (d) the holding period of the
Monarch Common Stock in the hands of the CCB Shareholders will generally include
the holding period of their converted CCB Common Stock. See "THE MERGER--Certain
Federal Income Tax Consequences."
Because of the complexity of the tax laws and the individual nature of the
tax consequences of the Merger to each CCB Shareholder, each CCB Shareholder
should consult a tax advisor concerning certain other federal and all state,
local and foreign tax consequences of the Merger that may be applicable.
ACCOUNTING TREATMENT
Monarch expects to account for the Merger as a "pooling-of-interests" in
accordance with generally accepted accounting principles. Consummation of the
Merger is conditioned upon the receipt of letters from Monarch's and CCB's
respective independent auditors to the effect that the Merger may be accounted
for in such manner. Such conditions may, however, be waived under certain
circumstances by the parties whether before or after the approval by the
shareholders of CCB and Monarch of the principal
17
<PAGE>
terms of the Merger. See "The MERGER--Accounting Treatment," "MERGER AGREEMENT--
Conditions" and "--Waiver and Amendment." Accordingly, in the event the
"pooling-of-interests" method is determined to be unavailable with respect to
the Merger, the parties may nonetheless proceed with the consummation of the
Merger, in which case the Merger will be accounted for as a "purchase." See
"RISK FACTORS--Accounting Treatment," "UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION" and "THE MERGER--Accounting Treatment."
DISSENTERS' RIGHTS
Holders of shares of CCB Common Stock will have Dissenters' Rights if (a)
the shares held by such CCB Shareholder are not voted in favor of the Merger;
(b) a demand to purchase the shares of such CCB Shareholder for cash at fair
market value as of December 18, 1996 is submitted to CCB and is received by CCB
(or the Surviving Corporation if the Merger has been consummated) within 30 days
after the date on which a notice of approval of the Merger is mailed to such CCB
Shareholder; and (c) such CCB Shareholder complies with all other requirements
of Chapter 13 of the CGCL. See "THE MERGER-- Dissenters' Rights" and Chapter 13
of CGCL attached hereto as Appendix F.
The Merger is conditioned on the designation for quotation of the Monarch
Common Stock on the NASDAQ National Market prior to or upon consummation of the
Merger. Assuming that such condition is satisfied, Monarch Shareholders will
have the right to require Monarch to purchase for cash, at the fair market value
as of December 18, 1996, their shares of Monarch Common Stock if (a) demands by
Monarch Shareholders for Monarch to purchase such shares of Monarch Common Stock
are submitted to Monarch with respect to five percent or more of the outstanding
Monarch Common Stock on or before the date of the Monarch Meeting; (b) Monarch
Shareholders submitting such demands vote against approval of the principal
terms of the Merger; and (c) Monarch Shareholders who submit such demands comply
with the other requirements of Chapter 13 of the CGCL. In the event that the
Monarch Common Stock is not designated for quotation on the NASDAQ National
Market at the Effective Time and CCB waives that condition to effecting the
Merger, a Monarch Shareholder will have Dissenters' Rights if he/she perfects
his/her Dissenters' Rights in the same manner as a CCB Shareholder. As of the
date hereof, Monarch expects that it will be successful in having its shares
designated for quotation on the NASDAQ National Market, and accordingly each
Monarch Shareholder who intends to perfect its Dissenters' Rights should submit
a demand for purchase of his/her shares of Monarch Common Stock on or before the
date of the Monarch Meeting, vote against the Merger at the Monarch Meeting and
take all other action necessary to perfect his/her Dissenters' Rights pursuant
to Chapter 13 of the CGCL in order to avoid the risk of waiving his/her
Dissenters' Rights.
As a result of the foregoing requirements, a holder of shares of Monarch
Common Stock or CCB Common Stock would effectively waive his or her Dissenters'
Rights unless, in the case of a holder of shares of Monarch Common Stock, such
holder votes against the principal terms of the Merger, or, in the case of a
holder of shares of CCB Common Stock, such holder does not vote in favor of the
principal terms of the Merger.
The Merger Agreement provides that Monarch's obligation to consummate the
Merger is subject to the condition that shareholders of either Monarch or CCB
voting against the Merger Agreement or giving notice of dissent from the Merger
Agreement, in the aggregate, shall not hold more than five percent of the shares
of Monarch or CCB, as the case may be. The Merger Agreement expressly provides,
however, that Monarch may, in its sole discretion, waive this condition whether
prior to or subsequent to the approval by the shareholders of Monarch and CCB of
the principal terms of the Merger.
CERTAIN EFFECTS OF THE MERGER ON THE RIGHTS OF CCB SHAREHOLDERS
Upon consummation of the Merger, holders of shares of CCB Common Stock will
become shareholders of Monarch, as the Surviving Corporation. The internal
affairs of Monarch will be governed by
18
<PAGE>
Monarch's Amended Articles of Incorporation and By-Laws. However, because both
Monarch and CCB are California corporations and because their respective By-Laws
are substantially similar in all material respects, there is no material
difference between the rights of the holders of Monarch Common Stock and the
rights of the holders of CCB Common Stock with regard to voting by shareholders,
declaring and paying dividends, amending the Articles of Incorporation or
By-Laws, electing directors to the Board of Directors, calling special meetings
of shareholders, inspecting corporate records, acting by written consent of
shareholders without a meeting and indemnification of directors. See
"DESCRIPTION OF MONARCH CAPITAL STOCK AND COMPARISON OF SHAREHOLDER RIGHTS."
RISK FACTORS
In deciding whether to vote for the approval of the principal terms of the
Merger, shareholders of both CCB and Monarch should carefully evaluate the
matters set forth under "RISK FACTORS" herein in addition to the other matters
described herein.
MARKETS AND MARKET PRICES
MONARCH
There were, as of the Monarch Record Date, 750 holders of record of Monarch
Common Stock. No shares of Monarch's preferred stock have been issued or are
outstanding. Trading in Monarch Common Stock, occurring solely "over the
counter," heretofore has not been extensive.
The following table summarizes those trades of Monarch Common Stock of which
Monarch is aware, setting forth the approximate high and low sales prices for
each quarterly period since December 31, 1994. Prices represent quotations by
dealers making a market in Monarch Common Stock and reflect inter-dealer prices,
without adjustments for mark-ups, mark-downs or commissions, and may not
necessarily represent actual transactions. Trading in Monarch Common Stock is
limited in volume and may not be a reliable indicator of its market value. The
sales prices in the following table have not been adjusted for the Reverse Stock
Split.
<TABLE>
<CAPTION>
APPROXIMATE SALES
PRICES
QUARTER ENDED --------------------
(LAST TRADING DAY) HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
March 31, 1995............................................................... $ 1.50 $ 1.20
June 30, 1995................................................................ * *
September 30, 1995........................................................... 1.35 1.20
December 31, 1995............................................................ 1.35 1.20
March 31, 1996............................................................... 1.30 1.05
June 30, 1996................................................................ 2.00 1.00
September 30, 1996........................................................... 1.75 1.00
December 31, 1996............................................................ 3.50 1.63
March 31, 1997............................................................... 4.00 2.25
Through May 9, 1997.......................................................... 4.00 3.36
*No reported trades
</TABLE>
The last trading price of Monarch Common Stock of which Monarch is aware
prior to the announcement of the Merger on December 19, 1996 was $2.31 (without
giving effect to the Reverse Stock Split), and the last trading price of Monarch
Common Stock of which Monarch is aware prior to the announcement of the SCB
Merger on April 29, 1997 was $3.62 (without giving effect to the Reverse Stock
Split). The trading price of Monarch Common Stock on May 9, 1997, was $3.36
without giving effect to the Reverse Stock Split ($28.69 after giving effect to
the Reverse Stock Split).
19
<PAGE>
Because the Conversion Number is fixed, a change in the trading price of
Monarch Common Stock before the Effective Time will affect the implied market
value of the Monarch Common Stock to be received in the Merger by CCB
Shareholders. THERE CAN BE NO ASSURANCE AS TO THE MARKET PRICE OF MONARCH COMMON
STOCK AT ANY TIME BEFORE, AT OR AFTER THE EFFECTIVE TIME. SHAREHOLDERS OF
MONARCH AND CCB ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR MONARCH COMMON
STOCK AND CCB COMMON STOCK.
Upon consummation of the Merger, it is expected that there will be
approximately 1,000 holders of record of Monarch Common Stock. It is a condition
to CCB's obligation to consummate the Merger that Monarch Common Stock is
designated for quotation on the NASDAQ National Market, and on May 5, 1997
application to the National Association of Securities Dealers ("NASD") was made
to have the Monarch Common Stock so designated. As a result, Monarch and CCB
expect (although there can be no assurances) that a more active market for the
Monarch Common Stock will develop once the Merger has been effected.
CCB
As of the CCB Record Date (as defined herein), there were approximately 300
holders of record of CCB Common Stock. No shares of CCB's preferred stock have
been issued or are outstanding. Trading in CCB Common Stock, occurring solely
"over the counter," heretofore has not been extensive.
The following table summarizes those trades of CCB Common Stock of which CCB
is aware, setting forth the approximate high and low sales prices for each
quarterly period since December 31, 1994. Prices represent quotations by dealers
making a market in CCB Common Stock and reflect inter-dealer prices, without
adjustments for mark-ups, mark-downs or commissions, and may not necessarily
represent actual transactions. Trading in CCB Common Stock is limited in volume
and may not be a reliable indicator of its market value.
<TABLE>
<CAPTION>
APPROXIMATE SALES
PRICES
QUARTER ENDED --------------------
(LAST TRADING DAY) HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
March 31, 1995............................................................... $ 6.38 $ 5.00
June 30, 1995................................................................ 6.63 6.00
September 30, 1995........................................................... 7.50 6.57
December 31, 1995............................................................ 7.97 7.40
March 31, 1996............................................................... 7.40 5.25
June 30, 1996................................................................ 7.25 5.25
September 30, 1996........................................................... 8.19 7.38
December 31, 1996............................................................ 15.38 8.75
March 31, 1997............................................................... 23.75 15.50
Through May 9, 1997.......................................................... 25.88 23.00
</TABLE>
The last trading price of CCB Common Stock of which CCB is aware prior to
the announcement of the Merger on December 19, 1996 was $9.69, and the last
trading price of CCB Common Stock of which CCB is aware prior to the
announcement of the SCB Merger on April 29, 1997 was 23.88. The trading price of
CCB Common Stock on May 9, 1997 was $24.25.
20
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
MONARCH
The following selected historical financial data for the five years ended
December 31, 1996 are derived from the audited financial statements of Monarch.
The data should be read in conjunction with the financial statements, related
notes, and other financial information included or incorporated by reference in
this Joint Proxy Statement-- Prospectus. All share data has been adjusted to
reflect the Reverse Stock Split.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS
ENDED DECEMBER 31,
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996(1) 1995(2) 1994 1993 1992
---------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS:
Interest Income......................................... $ 12,497 $ 4,491 $ 3,938 $ 4,348 $ 5,028
Interest Expense........................................ 3,952 1,148 947 1,148 1,632
---------- --------- --------- --------- ---------
NET INTEREST INCOME..................................... 8,545 3,343 2,991 3,200 3,396
Provision for loan losses............................... 228 425 995 1,280 67
---------- --------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES..... 8,317 2,918 1,996 1,920 3,329
Non-interest income..................................... 1,375 933 649 960 999
Non-interest expense.................................... 8,602 3,664 4,494 4,220 4,119
---------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES....................... 1,090 187 (1,849) (1,340) 209
Income tax expense (benefit)............................ 352 (496) 2 2 34
---------- --------- --------- --------- ---------
NET INCOME (LOSS)....................................... $ 738 $ 683 $ (1,851) $ (1,342) $ 175
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
ENDING BALANCE SHEET DATA:
Assets.................................................. $ 512,361 $ 70,101 $ 59,974 $ 67,119 $ 68,499
Securities.............................................. 164,724 28,665 16,138 18,198 7,284
Loans, net of deferred fees and costs................... 260,116 32,520 30,988 35,251 46,038
Allowance for loan losses............................... 5,393 854 1,137 1,056 575
Goodwill................................................ 29,342 -- -- -- --
Deposits................................................ 442,984 58,742 58,643 63,715 63,963
Borrowed funds.......................................... 11,000 132 173 211 250
Common shareholders' equity............................. 54,128 10,997 702 2,923 3,888
PER SHARE DATA AND OTHER SELECTED RATIOS:
Earnings (loss) per common and common equivalent
share................................................. $ 0.42 $ 1.14 $ (19.81) $ (14.51) $ 2.09
Dividends declared per share............................ 0.00 0.00 0.00 0.00 0.00
Book value per share.................................... $ 13.39 $ 11.36 $ 7.52 $ 31.28 $ 44.82
Shareholders' equity to assets at period end............ 10.56% 15.69% 1.17% 4.35% 5.68%
Return on average assets................................ 0.40 1.08 (2.92) (1.96) 0.28
Return on average equity................................ 3.37 9.91 (74.55) (33.22) 4.41
Average equity/average assets........................... 11.85 10.92 3.92 5.90 6.24
Net interest margin..................................... 5.43 5.84 5.34 5.20 5.87
</TABLE>
- ------------------------
(1) On September 30, 1996, Monarch acquired Western Bank. At September 30, 1996,
Western had approximately $410 million in assets, $198 million in net loans
and $353 million in deposits. At the time of the acquisition, Monarch also
raised approximately $42 million in additional equity in a private placement
by issuing 3,076,045 (approximately 26.1 million shares before the Reverse
Stock Split) shares of Monarch Common Stock. Western Bank's results of
operations are included only for the fourth quarter of fiscal 1996. Due to
the relatively large size of these transactions, any comparison of data as
of and for the year ended December 31, 1996 against data as of or for prior
dates or periods may not be meaningful.
21
<PAGE>
(2) In 1995 Monarch, through a private placement and a separate shareholders'
rights and public offering, raised approximately $9.1 million in additional
equity, net of approximately $470,000 in offering costs, in connection with
the issuance of 874,589 shares (approximately 7.4 million shares before the
Reverse Stock Split) of Monarch Common Stock.
CCB
The following selected historical financial data for the five years ended
December 31, 1996 are derived from the audited financial statements of CCB. The
data should be read in conjunction with the financial statements, related notes,
and other financial information included or incorporated by reference in this
Joint Proxy Statement--Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS
ENDED DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(1) 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest Income.................................... $ 26,773 $ 24,742 $ 22,721 $ 23,642 $ 28,861
Interest Expense................................... 6,809 7,289 6,336 8,086 11,231
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME................................ 19,964 17,453 16,385 15,556 17,630
Provision for loan losses.......................... 1,260 6,600 3,365 4,889 4,775
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES........................................... 18,704 10,853 13,020 10,667 12,855
Non-interest income................................ 3,758 2,355 2,128 2,158 2,051
Non-interest expense............................... 18,555 18,479 13,745 16,595 13,831
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................. 3,907 (5,271) 1,403 (3,770) 1,075
Income tax expense (benefit)....................... 111 (1,930) 544 (955) 568
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS).................................. $ 3,796 $ (3,341) $ 859 $ (2,815) $ 507
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
ENDING BALANCE SHEET DATA:
Assets............................................. $ 351,464 $ 334,043 $ 300,665 $ 324,550 $ 372,762
Securities......................................... 91,504 62,283 72,075 81,137 60,609
Loans, net of deferred fees and costs.............. 210,067 194,212 200,863 213,591 244,137
Allowance for loan losses.......................... 5,417 6,542 5,660 7,221 6,235
Deposits........................................... 318,704 308,504 277,389 299,726 343,137
Borrowed funds..................................... 2,350 2,351 2,351 2,351 3,000
Common shareholders' equity........................ 25,000 21,119 19,728 20,187 22,695
PER SHARE DATA AND OTHER SELECTED RATIOS:
Earnings (loss) per common and common equivalent
share............................................ $ 1.26 $ (1.30) $ 0.35 $ (1.14) $ 0.20
Dividends declared per share....................... 0.00 0.00 0.00 0.00 0.00
Book value per share............................... $ 8.38 $ 7.23 $ 8.14 $ 8.33 $ 9.68
Shareholders' equity to assets at period end....... 7.11% 6.32% 6.56% 6.22% 6.09%
Return on average assets........................... 1.10 (1.07) 0.27 (0.82) 0.14
Return on average equity........................... 16.76 (15.56) 4.19 (12.95) 2.24
Average equity/average assets...................... 6.54 6.88 6.45 6.31 6.33
Net interest margin................................ 6.35 6.12 5.61 4.97 5.35
</TABLE>
- ------------------------
(1) In 1995 CCB through a private placement raised approximately $3.2 million in
additional equity in connection with the issuance of shares of CCB Common
Stock.
22
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
POOLING-OF-INTERESTS TREATMENT
The following table sets forth certain unaudited pro forma combined
financial data for Monarch after giving effect to the Merger, as if it had
occurred as of the beginning of each of the periods presented and using the
Conversion Number of one and accounting for the Merger as a "pooling-of-
interests." See "THE MERGER--Accounting Treatment." This information should
be read in conjunction with the historical consolidated financial statements
of Monarch and CCB including the notes thereto, appearing elsewhere in this
Joint Proxy Statement--Prospectus or incorporated herein by reference. See
"UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION."
<TABLE>
<CAPTION>
AT OR FOR THE YEARS
ENDED DECEMBER 31,
-------------------------------
1996(1) 1995(2) 1994
--------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest Income............................................... $ 39,270 $ 29,233 $ 26,659
Interest Expense.............................................. 10,761 8,437 7,283
--------- --------- ---------
NET INTEREST INCOME........................................... 28,509 20,796 19,376
Provision for loan losses..................................... 1,488 7,025 4,360
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........... 27,021 13,771 15,016
Non-interest income........................................... 5,133 3,288 2,777
Non-interest expense.......................................... 27,157 22,143 18,239
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES............................. 4,997 (5,084) (446)
Income tax expense (benefit).................................. 463 (2,426) 546
--------- --------- ---------
NET INCOME (LOSS)............................................. $ 4,534 $ (2,658) $ (992)
--------- --------- ---------
--------- --------- ---------
ENDING BALANCE SHEET DATA:
Assets........................................................ $ 863,825 $ 404,144 $ 360,639
Securities.................................................... 256,228 90,948 88,213
Loans, net of deferred fees and costs......................... 470,183 226,732 231,851
Allowance for loan losses..................................... 10,810 7,396 6,797
Goodwill...................................................... 29,342 -- --
Deposits...................................................... 761,688 367,246 336,032
Borrowed funds................................................ 13,350 2,483 2,524
Common shareholders' equity................................... 77,082 32,116 20,430
PER SHARE DATA AND OTHER SELECTED RATIOS:
Earnings (loss) per common and common equivalent share........ $ 0.95 $ (0.84) $ (0.39)
Dividends declared per share.................................. 0.00 0.00 0.00
Book value per share.......................................... $ 10.97 $ 8.26 $ 8.12
Shareholders' equity to assets at period end.................. 8.92% 7.95% 5.66%
Return on average assets...................................... 0.85 (0.71) (0.26)
Return on average equity...................................... 10.18 (9.37) (4.31)
Average equity/average assets................................. 8.39 7.56 6.01
Net interest margin........................................... 6.04 6.07 5.57
</TABLE>
- ------------------------
(1) On September 30, 1996, Monarch acquired Western Bank. At September 30, 1996,
Western had approximately $410 million in assets, $198 million in net loans
and $353 million in deposits. At the time of the acquisition, Monarch also
raised approximately $42 million in additional equity in a private placement
by issuing 3,076,045 (approximately 26.1 million shares before the Reverse
Stock
23
<PAGE>
Split) shares of Monarch Common Stock. Western Bank's results of operations
are included only for the fourth quarter of fiscal 1996. Due to the
relatively large size of these transactions, any comparison of data as of
and for the year ended December 31, 1996 against data as of or for prior
dates or periods may not be meaningful.
(2) In 1995 Monarch, through a private placement and a separate shareholders'
rights and public offering, raised approximately $9.1 million in additional
equity, net of approximately $470,000 in offering costs, in connection with
the issuance of 874,589 shares (approximately 7.4 million shares before the
Reverse Stock Split) of Monarch Common Stock.
PURCHASE TREATMENT
Although the Merger is expected to be accounted for as a
"pooling-of-interests," the Merger will qualify for such treatment only if
numerous requirements, some of which relate to matters or events that will not
occur until after the Effective Date, are met including, but not limited to,
satisfaction of the Dissenters' Rights Condition. If the Merger does not qualify
for "pooling-of-interests" treatment, the Merger Agreement expressly provides
that Monarch and CCB may waive their respective Pooling Conditions and that
Monarch may waive the Dissenters' Rights Condition, in which event the parties
could proceed with the Merger under "purchase" accounting. See "UNAUDITED PRO
FORMA COMBINED CONDENSED FINANCIAL INFORMATION--Purchase Accounting" and "THE
MERGER-- Accounting Treatment."
The following table sets forth certain unaudited pro forma combined
financial data for Monarch after giving effect to the Merger, as if it had
occurred as of January 1, 1996, after giving effect to certain pro forma
adjustments using the Conversion Number of one. The information presented below
assumes that the Merger will be accounted for as a "purchase" and is applicable
only in the event the "pooling-of-interests" treatment is unavailable but the
parties nonetheless agree to proceed with the Merger. See "THE
MERGER--Accounting Treatment." This information should be read in conjunction
with the historical consolidated financial statements of Monarch and CCB
including the notes thereto, appearing elsewhere in this Proxy
Statement--Prospectus. See "UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION."
24
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER
31, 1996
-----------------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C>
RESULTS OF OPERATIONS:
Interest Income........................................................ $ 39,411
Interest Expense....................................................... 10,759
--------
NET INTEREST INCOME.................................................... 28,652
Provision for loan losses.............................................. 1,488
--------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.................... 27,164
Other income........................................................... 5,133
--------
Goodwill amortization.................................................. 4,064
Other expense.......................................................... 26,658
--------
INCOME BEFORE INCOME TAXES............................................. 1,575
Income tax expense..................................................... 522
--------
NET INCOME............................................................. $ 1,053
--------
--------
ENDING BALANCE SHEET DATA:
Assets................................................................. $ 917,082
Securities............................................................. 256,228
Loans, net of deferred fees and costs.................................. 469,620
Allowance for loan losses.............................................. 10,810
Goodwill............................................................... 82,820
Deposits............................................................... 761,699
Borrowed funds......................................................... 13,350
Common shareholders' equity............................................ 130,224
PER SHARE DATA AND OTHER SELECTED RATIOS:
Earnings per common and common equivalent share........................ $ 0.22
Dividends declared per share........................................... 0.00
Book value per share................................................... $ 18.53
Shareholders' equity to assets at period end........................... 14.20 %
Return on average assets............................................... 0.18
Return on average equity............................................... 1.12
Average equity/average assets.......................................... 16.11
Net interest margin.................................................... 6.08
</TABLE>
25
<PAGE>
SELECTED HISTORICAL AND PRO FORMA PER SHARE DATA
The following table sets forth for Monarch Common Stock and CCB Common Stock
certain historical and unaudited pro forma equivalent per share information at
the end of and for each of the three years ended December 31, 1996, giving
effect to the Merger using the "pooling-of-interests" method of accounting. The
information is derived from the historical consolidated financial statements of
Monarch and the historical financial statements of CCB, including the related
notes thereto, and the pro forma combined financial information giving effect to
the Merger, including the related notes thereto, appearing elsewhere herein. The
information below should be read in conjunction with the historical and pro
forma combined financial information of Monarch and CCB, including the notes
thereto, appearing elsewhere in this Joint Proxy Statement--Prospectus. See
"UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION."
<TABLE>
<CAPTION>
AT OR FOR THE YEARS
ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996(3) 1995 1994
--------- --------- ---------
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE(1):
Monarch............................................................................ $ 0.42 $ 1.14 $ (19.81)
CCB................................................................................ 1.26 (1.30) 0.35
Monarch combined pro forma......................................................... 0.95 (0.84) (0.39)
CCB equivalent pro forma........................................................... 0.95 (0.84) (0.39)
BOOK VALUE PER SHARE(2):
Monarch............................................................................ $ 13.39
CCB................................................................................ 8.38
Monarch combined pro forma......................................................... 10.97
CCB equivalent pro forma........................................................... 10.97
</TABLE>
- ------------------------
(1) The Monarch combined pro forma earnings per common and common equivalent
share were calculated by using aggregate historical income information for
Monarch and CCB divided by the average pro forma shares outstanding of the
combined entity. The average pro forma shares of the combined entity were
calculated by combining the Monarch historical average shares with the
historical average shares of CCB as adjusted by the Conversion Number of
one. See "THE MERGER AGREEMENT--The Merger." The CCB equivalent pro forma
earnings per share amounts were computed by multiplying the Monarch combined
pro forma amounts by the Conversion Number.
(2) The Monarch combined pro forma book value per share is based on the
aggregate historical common stockholders' equity of Monarch and CCB divided
by the total pro forma common shares of the combined entity based on the
Conversion Number of one. The CCB equivalent pro forma book value per share
at period end represents the Monarch pro forma amounts multiplied by the
Conversion Number. See "THE MERGER AGREEMENT--The Merger."
(3) Under certain circumstances, Monarch and CCB may agree to waive the
conditions relating to the ability to account for the Merger as a
"pooling-of-interests," and proceed with the consummation of the Merger
using the purchase method of accounting. In that event, the Monarch combined
pro forma earnings per common and common equivalent share for the year ended
December 31, 1996 and book value per share at December 31, 1996 would be
$0.22 and $18.53, respectively; and the CCB equivalent pro forma earnings
per common and common equivalent share for the year ended December 31, 1996
and book value per share at December 31, 1996 would be $0.22 and $18.53,
respectively. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION" and "THE MERGER--Accounting Treatment."
26
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION (SCB)
The following selected historical financial data for the three years ended
December 31, 1996 are derived solely from the audited financial statements of
SCB, which were provided to Monarch by SCB in connection with the execution and
delivery of the SCB Merger Agreement (the "SCB Financial Statements"). The data
should be read in conjunction with the financial statements, related notes, and
other financial information included in the SCB Financial Statements and SCB's
annual report on Form 10-K for the year ended December 31, 1996, which are
available through the SEC and may be obtained at the locations set forth under
"AVAILABLE INFORMATION."
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest Income.................................................................. $ 34,967 $ 33,396 $ 26,420
Interest Expense................................................................. 11,727 12,015 6,279
--------- --------- ---------
NET INTEREST INCOME............................................................ 23,240 21,381 20,141
Provision for (recovery of) loan loss............................................ (470) 1,539 (850)
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............................ 23,710 19,842 20,991
Non-interest income.............................................................. 5,166 5,013 6,683
Non-interest expense............................................................. 21,228 23,293 23,835
--------- --------- ---------
INCOME BEFORE INCOME TAXES..................................................... 7,648 1,562 3,839
Income tax expense............................................................... 3,193 693 1,134
--------- --------- ---------
NET INCOME..................................................................... $ 4,455 $ 869 $ 2,705
--------- --------- ---------
--------- --------- ---------
ENDING BALANCE SHEET DATA:
Assets........................................................................... $ 476,013 $ 461,779 $ 398,555
Securities....................................................................... 76,590 94,030 131,881
Loans, net of deferred fees and costs............................................ 347,175 316,310 207,390
Allowance for loan losses........................................................ 4,947 5,734 5,318
Goodwill......................................................................... 3,626 4,131 2,464
Deposits......................................................................... 415,326 406,811 339,939
Borrowed funds................................................................... 8,096 6,407 13,771
Common shareholders' equity...................................................... 49,919 45,512 41,844
PER SHARE DATA AND OTHER SELECTED RATIOS:
Earnings per common and common equivalent share.................................. $ 0.60 $ 0.12 $ 0.49
Dividends declared per share..................................................... 0.00 0.00 0.00
Book value per share............................................................. $ 6.67 $ 6.09 $ 5.60
Shareholders' equity to assets at period end..................................... 10.49% 9.86% 10.50%
Return on average assets......................................................... 0.96 0.19 0.67
Return on average equity......................................................... 9.40 2.14 6.59
Average equity/average assets.................................................... 10.23 8.87 10.15
Net interest margin.............................................................. 5.58 5.30 5.75
</TABLE>
27
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (SCB)
POOLING-OF-INTERESTS TREATMENT FOR THE MERGER. The following table sets
forth certain unaudited pro forma combined condensed financial data for Monarch
(after giving effect to the Merger with CCB) and SCB, as if the Merger and the
SCB Merger each had occurred at the beginning of each of the periods presented
and using the Conversion Number of one and accounting for the Merger as a
"pooling-of-interests," and after giving effect to the SCB Merger at the
exchange ratio of 0.4631 (based upon the last known Monarch Common Stock price
of 30.77 (or $3.62 before the Reverse Stock Split) preceding the announcement of
the SCB Merger Agreement). See "THE MERGER--Accounting Treatment" and "PROPOSED
SC BANCORP ACQUISITION." This information should be read in conjunction with the
historical consolidated financial statements of Monarch and CCB including the
notes thereto, appearing elsewhere in this Joint Proxy Statement-Prospectus or
incorporated herein by reference. Financial data for SCB included herein are
derived solely from the SCB Financial Statements. See "UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION." The subsequent merger with SCB is
expected to be accounted for using pooling-of-interests accounting.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1996(1) 1995(2) 1994
--------- --------- ---------
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest Income................................................................ $ 74,237 $ 62,629 $ 53,079
Interest Expense............................................................... 22,488 20,452 13,562
--------- --------- ---------
NET INTEREST INCOME.......................................................... 51,749 42,177 39,517
Provision for loan loss........................................................ 1,018 8,564 3,510
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.......................... 50,731 33,613 36,007
Other income................................................................... 10,299 8,301 9,460
Other expense.................................................................. 48,385 45,436 42,074
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES............................................ 12,645 (3,522) 3,393
Income tax expense (benefit)................................................... 3,656 (1,733) 1,680
--------- --------- ---------
NET INCOME (LOSS)............................................................ $ 8,989 $ (1,789) $ 1,713
--------- --------- ---------
--------- --------- ---------
ENDING BALANCE SHEET DATA:
Assets......................................................................... $1,338,749 $ 865,923 $ 759,194
Securities..................................................................... 332,818 184,978 220,094
Loans, net of deferred fees and costs.......................................... 817,358 543,042 439,241
Allowance for loan losses...................................................... 19,469 13,130 12,115
Goodwill....................................................................... 32,968 4,131 2,464
Deposits....................................................................... 1,177,014 774,057 675,971
Borrowed funds................................................................. 21,446 8,890 16,295
Common shareholders' equity.................................................... 118,388 77,628 62,274
PER SHARE DATA AND OTHER SELECTED RATIOS:
Earnings (loss) per common and common equivalent share......................... $ 1.09 $ (0.27) $ 0.34
Dividends declared per share................................................... 0.00 0.00 0.00
Book value per share........................................................... $ 11.28 $ 10.56 $ 10.42
Shareholders' equity to assets at period end................................... 8.84% 8.96% 8.20%
Return on average assets....................................................... 0.90 (0.21) 0.22
Return on average equity....................................................... 9.78 (2.60) 2.67
Average equity/average assets.................................................. 9.25 8.28 8.14
Net interest margin............................................................ 5.82 5.65 5.66
</TABLE>
- ------------------------
(1) On September 30, 1996, Monarch acquired Western Bank. At September 30, 1996,
Western had approximately $410 million in assets, $198 million in net loans
and $353 million in deposits. At the time of the acquisition, Monarch also
raised approximately $42 million in additional equity in a private placement
by issuing 3,076,045 (approximately 26.1 million shares before the Reverse
Stock Split) shares of Monarch Common Stock. Western Bank's results of
operations are included only for
28
<PAGE>
the fourth quarter of fiscal 1996. Due to the relatively large size of these
transactions, any comparison of data as of and for the year ended December
31, 1996 against data as of or for prior dates or periods may not be
meaningful.
(2) In 1995 Monarch, through a private placement and a separate shareholders'
rights and public offering, raised approximately $9.1 million in additional
equity, net of approximately $470,000 in offering costs, in connection with
the issuance of 874,589 shares (approximately 7.4 million shares before the
Reverse Stock Split) of Monarch Common Stock.
PURCHASE TREATMENT. Although the Merger with CCB is expected to be
accounted for as a "pooling-of-interests," the Merger will qualify for such
treatment only if numerous requirements, some of which relate to matters or
events that will not occur until after the Effective Date, are met, including,
but not limited to, satisfaction of the Dissenters' Rights Pooling Requirement
(as defined herein). If the Merger does not qualify for the "pooling-of
interests" treatment, the Merger Agreement expressly provides that Monarch and
CCB may waive their respective Pooling Conditions and that Monarch may waive the
Dissenters' Rights Condition, in which event the parties could proceed with the
Merger under "purchase accounting."
The following table sets forth certain unaudited pro forma combined
financial data for Monarch (after giving effect to the Merger) and SCB, as if
the Merger and the SCB Merger each had occurred as of January 1, 1996, after
giving effect to certain pro forma adjustments using the Conversion Number of
one and the exchange ratio of 0.4631 (based upon the last known Monarch Common
Stock price of 30.77 (or $3.62 before the Reverse Stock Split) preceding the
announcement of the SCB Merger Agreement). The information presented below
assumes that the Merger with CCB will be accounted for as a "purchase" and is
applicable only in the event the "pooling-of-interests" treatment is unavailable
but the parties nonetheless agree to proceed with the Merger. See "THE
MERGER--Accounting Treatment." The subsequent merger with SCB will be accounted
for using pooling-of-interests accounting. This information should be read in
conjunction with the historical consolidated financial statements of Monarch and
CCB including the notes thereto, appearing elsewhere in this Proxy
Statement-Prospectus. Financial data for SCB included herein are derived solely
from the SCB Financial Statements. See "UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION."
29
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR
THE
YEAR
ENDED
DECEMBER 31,
1996
------------
<S> <C>
RESULTS OF OPERATIONS:
Interest Income................................................................................... $ 74,378
Interest Expense.................................................................................. 22,486
------------
NET INTEREST INCOME............................................................................. 51,892
Provision for loan losses......................................................................... 1,018
------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............................................. 50,874
Other income...................................................................................... 10,299
Goodwill amortization............................................................................. 4,569
Other expense..................................................................................... 47,381
------------
INCOME BEFORE INCOME TAXES...................................................................... 9,223
Income tax expense................................................................................ 3,715
------------
NET INCOME...................................................................................... $ 5,508
------------
------------
ENDING BALANCE SHEET DATA:
Assets............................................................................................ 1,392,006
Securities........................................................................................ 332,818
Loans, net of deferred fees and costs............................................................. 816,795
Allowance for loan losses......................................................................... 19,469
Goodwill.......................................................................................... 86,446
Deposits.......................................................................................... 1,177,025
Borrowed funds.................................................................................... 21,446
Common shareholders' equity....................................................................... 171,530
PER SHARE DATA AND OTHER SELECTED RATIOS:
Earnings (loss) per common and common equivalent share............................................ $ 0.67
Dividends declared per share...................................................................... 0.00
Book value per share.............................................................................. $ 16.34
Shareholders' equity to assets at period end...................................................... 12.32%
Return on average assets.......................................................................... 0.53
Return on average equity.......................................................................... 3.90
Average equity/average assets..................................................................... 13.51
Net interest margin............................................................................... 5.84
</TABLE>
SELECTED HISTORICAL AND PRO FORMA PER SHARE DATA (SCB)
The following table sets forth for Monarch Common Stock and CCB Common Stock
certain historical and unaudited pro forma equivalent per share information at
the end of and for each of the three years ended December 31, 1996, using the
"pooling-of-interests" method of accounting for the Merger with CCB and for the
subsequent merger with SCB, using an exchange ratio of 0.4631 (based upon the
last known Monarch Common Stock price of 30.77 (or $3.62 before the Reverse
Stock Split) preceding the announcement of the SCB Merger Agreement). The
information is derived from the historical consolidated financial statements of
Monarch, the historical consolidated financial statements of CCB and the summary
historical financial information of SCB included elsewhere herein, including the
related notes thereto, and the unaudited pro forma combined financial
information giving effect to the Merger and the subsequent merger with SC
Bancorp, including the related notes thereto, appearing elsewhere herein. The
information below should be read in conjunction with the historical and pro
forma combined financial information of Monarch and CCB, including the notes
thereto, and the pro forma combined financial
30
<PAGE>
information giving effect to the SCB Merger, all appearing elsewhere in this
Joint Proxy Statement-- Prospectus. See "UNAUDITED PRO FORMA CONDENSED FINANCIAL
INFORMATION."
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1996(3) 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE(1):
Monarch........................................................................... $ 0.42 $ 1.14 $ (19.81)
CCB............................................................................... 1.26 (1.30) 0.35
Monarch combined pro forma with CCB............................................... 0.95 (0.84) (0.39)
Monarch combined pro forma with CCB and SC Bancorp................................ 1.09 (0.27) 0.34
CCB equivalent pro forma with Monarch............................................. 0.95 (0.84) (0.39)
CCB equivalent pro forma with Monarch and SC Bancorp.............................. 1.09 (0.27) 0.34
BOOK VALUE PER SHARE(2):
Monarch........................................................................... $ 13.39
CCB............................................................................... 8.38
Monarch combined pro forma with CCB............................................... 10.97
Monarch combined pro forma with CCB and SC Bancorp................................ 11.28
CCB equivalent pro forma with Monarch............................................. 10.97
CCB equivalent pro forma with Monarch and SC Bancorp.............................. 11.28
</TABLE>
- ------------------------
(1) The Monarch combined pro forma earnings per common and common equivalent
share were calculated by using aggregate historical income information for
Monarch, CCB and SCB divided by the average pro forma shares outstanding of
the combined entity. The average pro forma shares of the combined entity
were calculated by combining the Monarch historical average shares with the
historical average shares of CCB as adjusted by the Conversion Number of one
and the historical average shares of SCB as adjusted by the Exchange Ratio
of 0.4631 (based upon the last known Monarch Common Stock price of 30.77 (or
$3.62 before the Reverse Stock Split) preceding the announcement of the SCB
Merger Agreement). See "THE MERGER AGREEMENT--The Merger." CCB equivalent
pro forma earnings per share amounts were computed by multiplying the
Monarch combined pro forma amounts by the Conversion Number of one.
(2) The Monarch combined pro forma book value per share is based on the
aggregate historical common stockholders' equity of Monarch, CCB and SCB
divided by the total pro forma common shares of the combined entity based on
the Conversion Number of one for CCB shares and the Exchange Ratio of 0.4631
(based upon the last known Monarch Common Stock price of 30.77 (or $3.62
before the Reverse Stock Split) preceding the announcement of the SCB Merger
Agreement) for SCB. The CCB equivalent pro forma book value per share at
period end represents the Monarch pro forma amounts multiplied by the
Conversion Number of one. See "THE MERGER AGREEMENT--The Merger."
(3) Under certain circumstances, Monarch and CCB may agree to waive the
conditions relating to the ability to account for the Merger as a
"pooling-of-interests," and proceed with the consummation of the Merger
using the purchase method of accounting. In that event, the Monarch combined
pro forma earnings per common and common equivalent share for the year ended
December 31, 1996 and book value per share at December 31, 1996 would be
$0.67 and $16.34, respectively; and the CCB equivalent pro forma earnings
per common and common equivalent share for the year ended December 31, 1996
and book value per share at December 31, 1996 would be $0.67 and $16.34
respectively.
31
<PAGE>
RISK FACTORS
IN ADDITION TO THE INFORMATION CONTAINED ELSEWHERE IN THIS JOINT PROXY
STATEMENT--PROSPECTUS OR INCORPORATED HEREIN BY REFERENCE, PROSPECTIVE INVESTORS
IN MONARCH, INCLUDING CCB SHAREHOLDERS CONSIDERING THE PROPOSAL TO APPROVE THE
MERGER AGREEMENT, SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AMONG OTHERS,
BEFORE MAKING ANY FINAL DECISION.
COMPETITION
The banking business in California generally, and in Monarch's and CCB's
service area in particular, is highly competitive with respect to both loans and
deposits and is dominated by a relatively small number of major banks which have
many offices operating throughout wide geographic areas. In addition, there are
numerous other independent commercial banks within Monarch's primary service
area, many of which have greater resources, greater capital and, in some cases,
less stringent regulatory limitations. Certain of their competitors may be
better able to respond to changing capital and other regulatory requirements and
better able to maintain or improve market share. See Part I, Item 1.
Business--Competition in CCB's Annual Report attached hereto as Appendix A, and
Part I, Item I. Business--Competition in Monarch's Annual Report attached hereto
as Appendix B.
ABILITY TO INTEGRATE THE OPERATIONS OF MONARCH AND CCB
Because the markets in which Monarch and CCB operate are highly competitive
and because of the inherent uncertainties associated with merging two companies,
there can be no assurance that the Surviving Corporation will be able to fully
realize the operating officiencies Monarch currently expects to realize as a
result of the Merger and the consolidation of the administrative operations of
Monarch and CCB or that such operating efficiencies will be realized in the time
frame currently anticipated. See "THE MERGER--Background of the Merger."
GENERAL BUSINESS RISK
The business of Monarch and CCB is subject to various business risks. The
volume of loan originations is dependent upon demand for loans of the type
originated and serviced by Monarch and CCB. The level of consumer confidence,
fluctuations in real estate values, fluctuations in prevailing interest rates
and fluctuations in investment returns expected by the financial community could
combine to make loans of the type originated by Monarch less attractive. In
addition, Monarch and CCB may be adversely affected by other factors that could
(a) increase the cost to the borrower of loans originated by Monarch and CCB,
(b) create alternative lending sources for such borrowers, or (c) increase the
cost of funds of Monarch and CCB at a faster rate than any increase in interest
income, thereby narrowing their net interest rate margin. In recent months, the
continued recovery of the Southern California economy, particularly in Orange
County, has resulted in strong growth in deposits at both Monarch and CCB,
significantly above historical growth. Although both Monarch and CCB have also
seen continued improvement in loan demand consistent with overall market growth
during the continued recovery of the Southern California economy, the increase
in demand to date has not been sufficient to permit either Monarch or CCB fully
to utilize new deposits to fund loans, and accordingly each has increased its
relative holdings of securities investments. Managements of both Monarch and CCB
believe that loan demand will continue to improve, but there can be no assurance
that there will be sufficient loan demand in the future to keep pace with
increases in deposits such that desirable levels of securities held relative to
loans can be maintained. Governmental interventions through elimination of tax
benefits for home equity loans, regulation of an increased scope of loans or
introduction of additional regulations aimed at mortgage loans could also
adversely affect Monarch's or CCB's business.
In the ordinary course of its business, Monarch and CCB are subject to
claims made against them by borrowers and investors arising from, among other
things, losses which are claimed to have been incurred
32
<PAGE>
as a result of allegations relating to (a) breaches of fiduciary obligation, (b)
misrepresentations, errors or omissions by employees and officers of Monarch or
CCB (including their appraisers), (c) incomplete documentation, or (d) failure
by Monarch or CCB to comply with various laws and regulations applicable to its
business. Monarch believes that any liability with respect to any currently
asserted claims or legal actions against Monarch or CCB is not likely to be
material to the consolidated financial position or results of operations of the
Surviving Corporation; however, any claims asserted in the future may result in
legal expense or liabilities which could have a material adverse effect on the
Surviving Corporation's financial position and results of operations. During
1996, CCB established $950,000 in reserves for litigation pending at December
31, 1996. See "FIP LITIGATION" and Part I, Item 3. in CCB's Annual Report
attached hereto as Appendix A.
CONCENTRATION OF OPERATIONS; RECESSIONARY ENVIRONMENTS; DECLINE IN REAL ESTATE
VALUES
Monarch and CCB currently limit their business to Southern California, with
the majority of their business concentrated in Los Angeles and Orange counties,
and the business of Monarch after the Merger is expected to continue to be
concentrated in Southern California for the foreseeable future. Although Monarch
intends to expand within Southern California, there can be no assurance when or
if such expansion will take place. Consequently, the results of operations and
financial condition of Monarch and CCB are dependent upon general trends in the
Los Angeles County, Orange County and Southern California economies and
residential real estate markets. The risks to which the business of Monarch and
CCB is subject, and to which the business of Monarch after the Merger will be
subject, become more acute during an economic slow-down or recession such as
that which has been experienced during the recent California recession. During
such periods, delinquencies and foreclosures generally increase and could result
in increased incidents of claims and legal actions and a decline in demand for
the services provided by Monarch and CCB. In addition, a significant decline in
market values of properties of the type which secure loans originated by Monarch
and CCB would reduce homeowners equity in their homes thereby reducing their
borrowing power and also weakening collateral coverage on loans made previously
by Monarch and CCB. Such a decline could also diminish the market for loans
originated by Monarch and CCB. Any of the foregoing could have a material
adverse affect on the financial position and results of operations of Monarch
after the Merger, and could have a greater adverse impact on Monarch than
certain of its competitors which may have greater resources and capital. In
addition, the concentration of the Surviving Corporation's operations in Los
Angeles and Orange Counties exposes it to greater risk in the event of
catastrophes, such as earthquakes, fires and floods in this region, than other
banking companies with a wider geographic base.
ACCOUNTING TREATMENT
In the event the Merger cannot be accounted for as a pooling-of-interests
(or the availability of the pooling-of-interests method of accounting with
respect to the Merger cannot be determined prior to the consummation of the
Merger), the parties may nonetheless determine to proceed with the consummation
of the Merger using the purchase method of accounting. See "THE
MERGER--Accounting Treatment" and "THE MERGER AGREEMENT--Waiver and Amendment."
In such event, Monarch will be required to recognize additional goodwill of
approximately $53,478,000, which will be amortized over a period of 15 years,
resulting in a reduction of net income of approximately $3,565,000 per year. See
"UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION." Although
management of Monarch and CCB currently expect that the Merger will be accounted
for as a pooling-of-interests, there can be no assurance that such accounting
treatment will be available, and Monarch and CCB may determine to consummate the
Merger whether or not such accounting treatment is available.
33
<PAGE>
INTEREST RATE RISK
It is expected that the Surviving Corporation, through its subsidiaries,
will continue to realize income primarily from the differential or "spread"
between the interest earned on loans, securities and other interest-earning
assets, and interest paid on deposits, borrowings and other interest-bearing
liabilities. Net interest spreads are affected by the difference between the
maturities and repricing characteristics of interest-earning assets and
interest-bearing liabilities. In addition, loan volume and yields are affected
by market interest rates on loans, and rising interest rates generally are
associated with a lower volume of loan originations. There can be no assurance
that the Surviving Corporation's interest rate risk will be minimized or
eliminated. In addition, an increase in the general level of interest rates may
adversely affect the ability of certain borrowers to pay the interest on and
principal of their obligations. Accordingly, changes in levels of market
interest rates could materially adversely affect the Surviving Corporation's net
interest spread, asset quality, loan origination volume and overall results of
operation. See Part I, Item 1. Business--Liquidity and Interest Rate Sensitivity
in CCB's Annual Report attached hereto as Appendix A and Part I, Item 1.
Business--Interest Rates and Interest Rate Differentials; Maturities and
Sensitivities of Loans to Changes in Interest Rates; and Liquidity and Interest
Rate Risk in Monarch's Annual Report attached hereto as Appendix B.
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION
Shares of Monarch Common Stock eligible for future sale could have a
dilutive effect on the market for Monarch Common Stock and could adversely
affect market prices. As of the Monarch Record Date, the Amended Articles of
Incorporation of Monarch authorize 100,000,000 shares of Monarch Common Stock,
of which 4,043,885 shares were outstanding, and up to 3,043,226 additional
shares will be issued in the Merger to CCB Shareholders, assuming no shares of
CCB Common Stock reserved for issuance on April 11, 1997 are issued on or prior
to the Effective Date. Pursuant to its stock option plans, Monarch had
outstanding options to purchase an additional 146,775 shares of Monarch Common
Stock at April 21, 1997 with exercise prices of between $13.77 and $14.03.
Monarch also had outstanding warrants to purchase an additional 140,684 shares
of Monarch Common Stock with exercise prices between $13.77 and $16.83. In
addition, CCB had outstanding options to purchase 144,250 shares of CCB Common
Stock at April 11, 1997 with exercise prices of between $5.25 and $6.50.
Financial Institutions Partners, L.P. ("FIP") has asserted that it has the right
to acquire up to 266,659 additional shares of CCB Common Stock at $6.75 per
share. See "FIP LITIGATION." If the Merger is consummated the options to
purchase CCB Common Stock will be converted into options to acquire 144,250
shares of Monarch Common Stock with exercise prices of between $5.25 and $6.50.
Sales of substantial amounts of Monarch Common Stock in the public market
following the Merger could adversely affect the market price of Monarch Common
Stock. There are no restrictions in the Merger Agreement preventing Monarch from
issuing additional shares.
On April 29, 1997, Monarch entered into a definitive agreement providing for
the SCB Merger which, if consummated, would require Monarch to issue up to
4,756,030 shares of Monarch Common Stock to shareholders of SCB. See "PROPOSED
SC BANCORP ACQUISITION." It is Monarch's intention to pursue additional
acquisitions of other financial institutions from time to time where such
acquisitions are believed by Monarch to enhance shareholder value or satisfy
other strategic objectives, although there are no specific pending or
contemplated acquisitions at present other than the proposed acquisition of SCB.
Such acquisitions, if any, could be accomplished by the issuance of additional
shares of Monarch Common Stock or other securities convertible into or
exercisable for Monarch Common Stock.
There can be no assurance as to the market value of Monarch Common Stock
after the Merger, which market value may be affected by the dilutive effects of
the matters described above, if any and other factors.
34
<PAGE>
REGULATION
The operations of Monarch and CCB are subject to extensive regulation by
federal, state and local governmental authorities and are subject to various
laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of their respective operations. Monarch and CCB each
believe that it is in substantial compliance in all material respects with
applicable local, state and federal laws, rules and regulations. Because the
business of each of Monarch and CCB is highly regulated, the laws, rules and
regulations applicable to Monarch and CCB are subject to regular modification
and change. There are currently proposed various laws, rules and regulations
which, if adopted, would impact the Surviving Corporation. There can be no
assurance that these proposed laws, rules and regulations, or other such laws,
rules or regulations, will not be adopted in the future which could make
compliance much more difficult or expensive, restrict the Surviving
Corporation's ability to originate, broker or sell loans, further limit or
restrict the amount of commissions, interest or other charges earned on loans
originated or sold by the Surviving Corporation or otherwise adversely affect
the business or prospects of the Surviving Corporation. See Part I, Item 1.
Business--Supervision and Regulation in CCB's Annual Report attached hereto as
Appendix A and Part I, Item 1. Business--Supervision in and Regulation in
Monarch's Annual Report attached hereto as Appendix B.
LIMITED MARKET FOR MONARCH COMMON STOCK
There is currently only a limited trading market for the Monarch Common
Stock. Monarch Common Stock trades on the National Daily Quotation Service "pink
sheets" which is a limited market and subject to substantial restrictions and
limitations in comparison to the NASDAQ National Market. It is a condition to
consummation of the Merger that Monarch Common Stock be included for quotation
on the NASDAQ National Market, and application will be made to have the Monarch
Common Stock designated for quotation thereon. The approval of such application
will be contingent upon, among other things, meeting certain quantitative
requirements relating to net tangible assets, net income, the aggregate market
value of shares of Monarch Common Stock held by non-affiliates and the number of
publicly traded shares of Monarch Common Stock, as well as the existence of at
least two market makers willing to make a market in the Monarch Common Stock.
While Monarch currently expects that all such requirements will be met and that
its application will be approved, whether or not the Monarch Common Stock is
ultimately designated for quotation on the NASDAQ National Market, there can be
no assurance that a substantial trading market will develop (or be sustained, if
developed) for Monarch Common Stock upon completion of the Merger, or that
Monarch Shareholders will be able to resell their securities or otherwise
liquidate their investment without considerable delay, if at all, or
considerable impact on the sales price. See "THE MERGER--Markets and Market
Prices."
INFORMATION REGARDING CCB
BUSINESS OF CCB
CCB is a bank holding company headquartered in Orange County, California.
CCB's banking subsidiary, NBSC, is a full service commercial bank which serves
the financial needs of its clients through regional offices in Fountain Valley,
Lake Forest, Newport Beach, Orange and Santa Ana, California. NBSC provides a
wide range of banking services to business, professional and individual clients.
NBSC emphasizes deposit and operational services, commercial loans, construction
loans, SBA guaranteed loans, escrow services, courier service, electronic
banking and other services intended to make banking more convenient for its
clients. At March 31, 1997, CCB had consolidated assets, total deposits and
shareholders' equity of $356,100,000, $324,845,000 and $26,029,000,
respectively.
On April 8, 1992, NBSC entered into a formal agreement with the OCC pursuant
to which NBSC agreed to take certain actions to improve the condition of NBSC.
Under the terms of the formal agreement, NBSC agreed to (i) conduct studies of
various parts of its operations and develop written
35
<PAGE>
action plans and policies designed to address any issues raised by those
studies, (ii) develop and implement a program designed to decrease the level of
NBSC's criticized assets, (iii) implement an effective and ongoing loan review
system, (iv) establish a program for maintaining an adequate allowance for loan
and lease losses, (v) develop and implement a program to improve NBSC's loan
administration, (vi) update NBSC's real estate appraisal program and procedures,
(vii) develop a program for the management of NBSC's other real estate owned,
(viii) develop a capital program and maintain total capital at least equal to
nine percent of its risk-weighted assets and Tier 1 capital at least equal to
six percent of its actual adjusted total assets, (ix) maintain liquidity at a
level sufficient to sustain NBSC's operations, and (x) develop a program for
supervision of management by the Board of Directors of NBSC. In addition, the
formal agreement prohibited the payment of any cash dividends by NBSC to CCB
without the prior written consent of the OCC. On November 15, 1996, following an
examination of NBSC by the OCC, the OCC agreed to terminate the formal
agreement.
On May 27, 1993, CCB executed a Memorandum of Understanding with the Federal
Reserve Board pursuant to which CCB agreed to take certain actions to improve
conditions at NBSC and to refrain from certain actions without Federal Reserve
Board approval. Included in these actions were undertakings to improve the
financial condition of NBSC, not declare cash dividends without prior notice to
the Federal Reserve Board and to obtain prior approval of changes in directors
and executive officers. On March 13, 1997, the Federal Reserve Board agreed to
terminate the Memorandum of Understanding. See Part I, Item 1.
Business--Supervision and Regulation in CCB's Annual Report attached hereto as
Appendix A.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
Financial and other information relating to CCB is set forth in CCB's Annual
Report, a copy of which is attached hereto as Appendix A and is delivered
herewith. See also "AVAILABLE INFORMATION," INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE" and "SUMMARY--Summary Historical Financial Information."
INFORMATION REGARDING MONARCH
BUSINESS OF MONARCH
Monarch is a bank holding company registered under the BHCA, and its
principal business is to serve as a holding company for its banking
subsidiaries, Monarch Bank and Western Bank. Monarch was organized on May 20,
1983 as a California corporation and commenced operation as a bank holding
company on June 18, 1984. Western Bank was acquired by Monarch on September 30,
1996. Monarch's principal executive offices are located at 30000 Town Center
Drive, Laguna Niguel, California 92677, and its telephone number is (714)
495-3300. At March 31, 1997, Monarch had consolidated total assets, total
deposits and shareholders' equity of $494,042,000, $427,837,000, and
$54,632,000, respectively. Monarch Bank's primary market area is southern Orange
County, California, and its head office is in Laguna Niguel, California. Western
Bank has five branches in Los Angeles County, with its head office in Westwood,
California. Monarch Bank and Western Bank both offer a broad range of banking
products and services, including many types of business and personal savings and
checking accounts and other consumer banking services.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
Financial and other information relating to Monarch is set forth in
Monarch's Annual Report, a copy of which is attached hereto as Appendix B and is
delivered herewith. See also "AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" and "SUMMARY-- Summary Historical Financial
Information."
36
<PAGE>
RECENT DEVELOPMENTS
FIRST QUARTER 1997 FINANCIAL RESULTS FOR MONARCH
On April 9, 1997, Monarch announced its unaudited results for the quarter
ended March 31, 1997. Consolidated net income for the quarter ended March 31,
1997 was $893,000, or $0.03 per share of Monarch Common Stock, as compared with
earnings of $79,000 or $0.01 per share of Monarch Common Stock for the quarter
ended March 31, 1996.
Earnings for the first quarter of 1997 included the earnings of Western Bank
which was acquired on September 30, 1996. The acquisition of Western Bank was
accounted for using the purchase method of accounting and, therefore, the
earnings of Western Bank were not included in the consolidated results for the
first quarter of 1996.
Return on average assets increased to 0.73 percent for the first quarter of
1997 versus 0.47 percent for the first quarter of 1996. Return on average equity
increased from 2.89 percent to 6.59 percent for the first quarter of 1997 versus
the first quarter of 1996. The efficiency ratio in the first quarter of 1997 was
69.0 percent.
The following table sets forth selected unaudited financial data as of and
for the periods indicated (in thousands except per share amounts).
<TABLE>
<CAPTION>
AT MARCH 31, 1997 AT DECEMBER 31, 1996
----------------- --------------------
<S> <C> <C>
Balance Sheet Data:
Loans (net)............................................................ $ 245,331 $ 254,723
Goodwill............................................................... 28,843 29,342
Total Assets........................................................... 494,042 512,361
Deposits............................................................... 427,837 442,984
Total shareholders' equity............................................. 54,632 54,128
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Results of Operations:
Net interest income................................................................. $ 5,871 $ 935
Provision for loan losses........................................................... 225 50
Non-interest income................................................................. 680 182
Goodwill amortization............................................................... 499 --
Non-interest expense................................................................ 4,445 928
Net income.......................................................................... 893 79
Number of common shares and equivalents (weighted average).......................... 35,514 8,228
Income per share (dollars).......................................................... 0.03 0.01
</TABLE>
See "PROPOSED SC BANCORP ACQUISITION" for information concerning the SCB
Merger.
FIRST QUARTER 1997 FINANCIAL RESULTS FOR CCB
On April 9, 1997, CCB announced its unaudited results for the quarter ended
March 31, 1997. Consolidated net income for the quarter ended March 31, 1997 was
$938,000, or $0.30 per share of CCB Common Stock, as compared with earnings of
$468,000 or $0.16 per share of CCB Common Stock for the quarter ended March 31,
1996.
During the quarter, CCB paid $2,000,000 of a $2,350,000 loan made to CCB by
Robert L. McKay, a director and shareholder of CCB. See Note 7 to the Audited
Financial Statements of CCB for the year
37
<PAGE>
ended December 31, 1996, included in CCB's Annual Report attached hereto as
Appendix A. In April 1997, the outstanding balance of this loan was paid in
full.
Return on average assets increased to 1.08 percent for the first quarter of
1997 versus 0.57 percent for the first quarter of 1996. Return on average equity
increased from 8.83 percent to 14.52 percent for the first quarter of 1997
versus the first quarter of 1996. The efficiency ratio in the first quarter of
1997 was 70.2 percent.
The following table sets forth selected unaudited financial data as of and
for the periods indicated (in thousands except per share amounts).
<TABLE>
<CAPTION>
AT MARCH 31, 1997 AT DECEMBER 31, 1996
----------------- --------------------
<S> <C> <C>
Balance Sheet Data:
Loans and leases (net)................................................. $ 218,152 $ 204,650
Total assets........................................................... 356,100 351,464
Deposits............................................................... 324,845 318,704
Total shareholders' equity............................................. 26,029 25,000
</TABLE>
<TABLE>
<S> <C> <C>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1996
--------- ---------
Results of Operations:
Net interest income.................................................................... $ 5,089 $ 4,546
Provision for loan losses.............................................................. 150 300
Non-interest income.................................................................... 663 703
Non-interest expense................................................................... 4,037 4,167
Net income............................................................................. 938 470
Number of shares and equivalents (weighted average).................................... 3,162 2,950
Income per share (dollars)............................................................. 0.03 0.01
</TABLE>
PROPOSED SC BANCORP ACQUISITION
On April 29, 1997, Monarch executed the SCB Merger Agreement with SCB
pursuant to which SCB has agreed to merge with and into Monarch with Monarch
being the surviving entity. The SCB Merger Agreement provides that each
shareholder of SCB will receive shares of Monarch based upon a purchase price of
$14.25 per share of SCB Common Stock and a floating exchange ratio for Monarch
Common Stock within a market price ranging from $23.38 to $31.88 per share
(after giving effect to the Reverse Stock Split). All vested options to purchase
SCB Common Stock outstanding at the effective time of the SCB Merger will be
cancelled, with holders thereof receiving shares of Monarch Common Stock (plus
cash in lieu of fractional shares) having a value (based on the market price of
Monarch Common Stock used to determine the exchange ratio) equal to the
difference between $14.25 and the applicable exercise price of the options. The
SCB Merger Agreement provides that SCB may terminate the SCB Merger Agreement if
the volume weighted average trading price ("Average Trading Price") of Monarch
Common Stock over certain specified periods (each a "Measurement Period")
beginning ten trading days after the close of the Merger falls below (i) $23.38,
and the Average Trading Price of Monarch Common Stock declines by ten percent or
more below the decline in the Keefe Bank Index, in each case from April 29, 1997
to the end of the applicable Measurement Period, or (ii) $19.13. Based upon a
market price of Monarch Common Stock of $31.88 per share, each holder of SCB
Common Stock would receive approximately .4471 shares of Monarch Common Stock
and 3,488,205 shares in the aggregate would be issued in connection with the SCB
Merger. Based on a market price of Monarch Common of $23.38 per share, each
holder would receive approximately .6096 shares, and 4,756,030 shares in the
aggregate would be issued. Based on a market price of Monarch Common Stock of
$30.77 per share (the price at which the shares were traded on the day
immediately prior to the announcement of the SCB Merger Agreement), each holder
would
38
<PAGE>
receive 0.4631 shares, and 3,613,051 shares in the aggregate would be issued.
Upon completion of the SCB Merger, Monarch will be the sole shareholder of SCB's
wholly-owned subsidiary, Southern California Bank. It is anticipated that the
SCB Merger will be consummated by the end of the fourth quarter of 1997,
assuming shareholder and regulatory approvals are obtained and the other closing
conditions satisfied. Approval of the principal terms of the Merger solicated
hereby is independent of and does not constitute approval of the SCB Merger.
Monarch has agreed to set the record date for holders of Monarch Common Stock
entitled to vote on the SCB Merger after the date on which the Merger is
consummated. As a result, if the Merger is consumated, CCB Shareholders (other
than those perfecting Dissenters' Rights) will be entitled to vote on the SCB
Merger as Monarch Shareholders. Another shareholders meeting will be held to
consider and vote upon the SCB Merger, and more detailed information will be
provided to Monarch Shareholders (including CCB Shareholders who become Monarch
Shareholders) prior to that meeting.
Pursuant to the SCB Merger Agreement, the respective obligations of Monarch
and SCB to consummate the SCB Merger are subject to certain conditions,
including, among others, conditions as to (a) the approval by the requisite vote
of the shareholders of both Monarch and SCB in accordance with applicable law;
(b) receipt of all regulatory approvals required; (c) the ability to account for
the SCB Merger as a pooling-of-interests; (d) consummation of the Merger upon
the terms disclosed in this Joint Proxy Statement--Prospectus; and (e) other
conditions customary in similar transactions.
At April 11, 1997, there were outstanding (i) 3,043,226 shares of CCB Common
Stock, (ii) 144,250 shares of CCB Common Stock reserved for issuance upon
exercise of employee stock options to acquire CCB Common Stock, (iii) 4,043,885
shares of Monarch Common Stock, and (iv) 287,458 shares of Monarch Common Stock
reserved for issuance upon exercise of employee stock options and warrants to
acquire Monarch Common Stock. Based on the foregoing, assuming that (a) no
Dissenters' Rights are exercised by either the Monarch Shareholders or the CCB
shareholders, and no dissenters' rights available to the shareholders of Monarch
and SCB in connection with the SCB Merger are exercised, and (b) no cash is paid
in lieu of fractional shares in the SCB Merger, then, at an assumed market price
of Monarch Common Stock of $30.77 per share (the last trading price of which
Monarch is aware prior to the announcement of the SCB Merger Agreement), the
current Monarch Shareholders, CCB Shareholders and holders of SCB Common Stock
would hold 37.8 percent, 28.4 percent and 33.8 percent of the Monarch Common
Stock, respectively, upon consummation of the SCB Merger, assuming that none of
the shares of Monarch Common Stock and CCB Common Stock reserved for issuance
were issued by the effective date of the SCB Merger, and 38.9 percent, 28.6
percent and 32.5 percent, respectively, if all such reserved shares were issued
at the effective date of the SCB Merger. See "THE ANNUAL MEETING OF CCB
SHAREHOLDERS--Matters to be Considered at the CCB Meeting."
For information concerning the financial impact of the SCB Merger on
Monarch, after giving effect to the Merger, See "UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION--SCB Merger."
39
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
POOLING-OF-INTERESTS ACCOUNTING
The following Unaudited Pro Forma Combined Condensed Financial Information
combines the historical Consolidated Condensed Financial Statements of Monarch
and CCB giving effect to the Merger as if it had been effective on December 31,
1996, with respect to the Pro Forma Combined Balance Sheet, and as of the
beginning of the periods indicated, with respect to the Pro Forma Combined
Statements of Income. This information is presented under pooling-of-interests
accounting after giving effect to the Reverse Stock Split. This information
should be read in conjunction with the historical consolidated financial
statements of Monarch and CCB, including their respective notes thereto, which
are included and incorporated by reference into this Joint Proxy
Statement--Prospectus, and in conjunction with the condensed historical selected
financial data and other pro forma combined financial information, including the
notes thereto, appearing elsewhere in this Joint Proxy Statement--Prospectus.
See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE," the Financial
Statements contained in Monarch's Annual Report attached hereto as Appendix B
and the Financial Statements contained in CCB's Annual Report attached hereto as
Appendix A. The effect of estimated merger and reorganization costs expected to
be incurred in connection with the Merger has been reflected in the pro forma
combined balance sheet; however, since the estimated costs are nonrecurring,
they have not been reflected in the pro forma combined statements of income. The
unaudited pro forma combined condensed financial information does not give
effect to any anticipated operating efficiencies in conjunction with the Merger.
The pro forma balance sheet is not necessarily indicative of the actual
financial position that would have existed had the Merger been consummated on
December 31, 1996, or that may exist in the future. The pro forma combined
condensed statements of income are not necessarily indicative of the results
that would have occurred had the Merger been consummated on the dates indicated
or that may be achieved in the future. Assuming the consummation of the Merger,
the actual financial position and results of operations will differ, perhaps
significantly, from the pro forma amounts reflected herein because of a variety
of factors, including changes in value and changes in operating results between
the dates of the pro forma financial data and the date on which the Merger takes
place.
40
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
POOLING-OF-INTERESTS ACCOUNTING
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONARCH CCB PRO FORMA MONARCH
(HISTORICAL) (HISTORICAL)(1) ADJUSTMENTS(1) PRO FORMA
----------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS:
Cash and due from banks.................................. $ 37,385 $ 28,849 $ - $ 66,234
Federal funds sold....................................... 4,217 14,500 - 18,717
----------- ------------- ------- -----------
TOTAL CASH & CASH EQUIVALENTS.......................... 41,602 43,349 - 84,951
Securities:
Securities held to maturity............................ 7,270 - - 7,270
Securities available for sale.......................... 157,454 91,504 - 248,958
----------- ------------- ------- -----------
TOTAL SECURITIES..................................... 164,724 91,504 - 256,228
Net loans................................................ 254,723 204,650 - 459,373
Property, plant and equipment............................ 5,780 1,435 - 7,215
Other real estate owned.................................. 3,889 2,657 - 6,546
Goodwill................................................. 29,342 - - 29,342
Other assets............................................. 12,301 7,869 - 20,170
----------- ------------- ------- -----------
TOTAL ASSETS........................................... $ 512,361 $ 351,464 $ - $ 863,825
----------- ------------- ------- -----------
----------- ------------- ------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Non-interest bearing deposits............................ $ 150,694 $ 146,257 $ - $ 296,951
Interest bearing deposits................................ 292,290 172,447 - 464,737
----------- ------------- ------- -----------
TOTAL DEPOSITS......................................... 442,984 318,704 - 761,688
Borrowed funds........................................... 11,000 2,350 - 13,350
Accrued interest payable & other liabilities............. 4,249 5,410 2,046(2) 11,705
----------- ------------- ------- -----------
TOTAL LIABILITIES.................................... 458,233 326,464 2,046 786,743
SHAREHOLDERS' EQUITY:
Preferred stock.......................................... - - - -
Common stock............................................. 58,709 14,382 - 73,091
Additional paid-in capital............................... - 497 - 497
Retained earnings (deficit).............................. (4,716) 10,244 (2,046)(2) 3,482
Unrealized net gains (losses) on investments available
for sale, net.......................................... 135 (123) - 12
----------- ------------- ------- -----------
TOTAL SHAREHOLDERS' EQUITY............................. 54,128 25,000 (2,046) 77,082
----------- ------------- ------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............... $ 512,361 $ 351,464 $ - $ 863,825
----------- ------------- ------- -----------
----------- ------------- ------- -----------
Number of common shares outstanding...................... 4,043.9 2,984.0 7,027.9
Common shareholders' equity per share.................... $ 13.39 $ 8.38 $ 10.97
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Information"
41
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
POOLING-OF-INTERESTS ACCOUNTING
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONARCH CCB PRO FORMA MONARCH
(HISTORICAL) (HISTORICAL)(1) ADJUSTMENTS(1) PRO FORMA
----------- ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans...................... $ 8,207 $ 20,022 $ - $ 28,229
Interest on interest bearing deposits in other
banks........................................... 3 - - 3
Interest on investment securities............... 3,683 4,923 - 8,606
Interest on federal funds sold.................. 604 1,828 - 2,432
----------- ------------ ------------ -----------
TOTAL INTEREST INCOME......................... 12,497 26,773 - 39,270
INTEREST EXPENSE:
Interest expense on deposits.................... 3,761 6,531 - 10,292
Interest expense on notes payable............... 191 278 - 469
----------- ------------ ------------ -----------
TOTAL INTEREST EXPENSE........................ 3,952 6,809 - 10,761
----------- ------------ ------------ -----------
NET INTEREST INCOME............................... 8,545 19,964 - 28,509
Less: provision for loan losses................. 228 1,260 - 1,488
----------- ------------ ------------ -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES.......................................... 8,317 18,704 - 27,021
NON-INTEREST INCOME:
Service charges................................. 903 1,157 - 2,060
Escrow fees..................................... - 781 - 781
Data processing income.......................... 100 - - 100
Gain on sale of loans........................... - 665 - 665
Securities gains (losses)....................... 267 - - 267
Other income.................................... 105 1,155 - 1,260
----------- ------------ ------------ -----------
TOTAL NON-INTEREST INCOME................... 1,375 3,758 - 5,133
NON-INTEREST EXPENSE:
Salaries and benefits........................... 4,323 8,546 - 12,869
Occupancy, furniture and equipment.............. 1,031 2,562 - 3,593
Advertising and business development............ 152 347 - 499
Other real estate owned......................... (151) (422) - (573)
Professional services........................... 1,469 2,386 - 3,855
Telephone, stationary and supplies.............. 380 420 - 800
Goodwill amortization........................... 499 - - 499
Data processing for company..................... 186 587 - 773
Data processing for customers................... - 510 - 510
Other........................................... 713 3,619 - 4,332
----------- ------------ ------------ -----------
TOTAL NON-INTEREST EXPENSE.................. 8,602 18,555 - 27,157
----------- ------------ ------------ -----------
Income before income taxes........................ 1,090 3,907 - 4,997
Income taxes...................................... 352 111 - 463
----------- ------------ ------------ -----------
NET INCOME.................................... $ 738 $ 3,796 $ - $ 4,534
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
PER SHARE INFORMATION:
Number of shares (weighted average)........... 1,761.8 3,009.0 4,770.8
Income per share.............................. $ 0.42 $ 1.26 $ 0.95
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Information"
42
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
POOLING-OF-INTERESTS ACCOUNTING
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONARCH CCB PRO FORMA MONARCH
(HISTORICAL) (HISTORICAL)(1) ADJUSTMENTS(1) PRO FORMA
----------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans............................. $ 3,054 $ 20,000 - $ 23,054
Interest on interest bearing deposits in other banks... 43 - - 43
Interest on investment securities...................... 1,018 3,409 - 4,427
Interest on federal funds sold......................... 376 1,333 - 1,709
----------- ------------- ------- -----------
TOTAL INTEREST INCOME.............................. 4,491 24,742 - 29,233
INTEREST EXPENSE:
Interest expense on deposits........................... 1,147 7,022 - 8,169
Interest expense on notes payable...................... 1 267 - 268
----------- ------------- ------- -----------
TOTAL INTEREST EXPENSE............................. 1,148 7,289 - 8,437
----------- ------------- ------- -----------
NET INTEREST INCOME...................................... 3,343 17,453 - 20,796
Less: provision for loan losses........................ 425 6,600 - 7,025
----------- ------------- ------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...... 2,918 10,853 - 13,771
NON-INTEREST INCOME:
Service charges........................................ 545 983 - 1,528
Escrow fees............................................ - 308 - 308
Data processing income................................. 70 - - 70
Gain on sale of loans.................................. - - - -
Securities gains (losses).............................. - (72) - (72)
Other income........................................... 318 1,136 - 1,454
----------- ------------- ------- -----------
TOTAL NON-INTEREST INCOME.......................... 933 2,355 - 3,288
NON-INTEREST EXPENSE:
Salaries and benefits.................................. 1,657 7,513 - 9,170
Occupancy, furniture and equipment..................... 622 2,129 - 2,751
Advertising and business development................... 116 243 - 359
Other real estate owned................................ 62 2,799 - 2,861
Professional services.................................. 398 1,439 - 1,837
Telephone, stationary and supplies..................... 186 321 - 507
Lower of cost or market adjustment on loans available
for sale............................................. - 756 - 756
Data processing for company............................ - 174 - 174
Data processing for customers.......................... - 184 - 184
Other.................................................. 623 2,921 - 3,544
----------- ------------- ------- -----------
TOTAL NON-INTEREST EXPENSE......................... 3,664 18,479 - 22,143
----------- ------------- ------- -----------
Income (loss) before income taxes........................ 187 (5,271) - (5,084)
Income taxes............................................. (496) (1,930) (2,426)
----------- ------------- ------- -----------
NET INCOME (LOSS).................................. $ 683 $ (3,341) $ - $ (2,658)
----------- ------------- ------- -----------
----------- ------------- ------- -----------
PER SHARE INFORMATION:
Number of shares (weighted average).................... 596.6 2,564.0 3,160.6
Income (loss) per share................................ $ 1.14 $ (1.30) $ (0.84)
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Information"
43
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
POOLING-OF-INTERESTS ACCOUNTING
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
MONARCH CCB PRO FORMA MONARCH
(HISTORICAL) (HISTORICAL)(1) ADJUSTMENTS(1) PRO FORMA
----------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans............................. $ 2,878 $ 18,347 $ - $ 21,225
Interest on interest bearing deposits in other banks... 111 - - 111
Interest on investment securities...................... 794 3,873 - 4,667
Interest on federal funds sold......................... 155 501 - 656
----------- ------------- ------- -----------
TOTAL INTEREST INCOME.............................. 3,938 22,721 - 26,659
INTEREST EXPENSE:
Interest expense on deposits........................... 945 6,036 - 6,981
Interest expense on notes payable...................... 2 300 - 302
----------- ------------- ------- -----------
TOTAL INTEREST EXPENSE............................. 947 6,336 - 7,283
----------- ------------- ------- -----------
NET INTEREST INCOME...................................... 2,991 16,385 - 19,376
Less: provision for loan losses........................ 995 3,365 - 4,360
----------- ------------- ------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...... 1,996 13,020 - 15,016
NON-INTEREST INCOME:
Service charges........................................ 503 969 - 1,472
Escrow fees............................................ - 304 - 304
Data processing income................................. 122 - - 122
Gain on sale of loans.................................. - - - -
Securities gains (losses).............................. (47) 6 - (41)
Other income........................................... 71 849 - 920
----------- ------------- ------- -----------
TOTAL NON-INTEREST INCOME.......................... 649 2,128 2,777
NON-INTEREST EXPENSE:
Salaries and benefits.................................. 1,788 6,454 - 8,242
Occupancy, furniture and equipment..................... 682 2,008 - 2,690
Advertising and business development................... 110 88 - 198
Other real estate owned................................ 243 1,070 - 1,313
Professional services.................................. 642 660 - 1,302
Telephone, stationary and supplies..................... 178 267 - 445
Data processing for company............................ - 130 - 130
Data processing for customers.......................... - 173 - 173
Other.................................................. 851 2,895 - 3,746
----------- ------------- ------- -----------
TOTAL NON-INTEREST EXPENSE......................... 4,494 13,745 - 18,239
----------- ------------- ------- -----------
Income (loss) before income taxes........................ (1,849) 1,403 - (446)
Income taxes............................................. 2 544 - 546
----------- ------------- ------- -----------
NET INCOME (LOSS).................................. $ (1,851) $ 859 $ - $ (992)
----------- ------------- ------- -----------
----------- ------------- ------- -----------
PER SHARE INFORMATION:
Number of shares (weighted average).................... 93.4 2,427.0 2,520.4
Income (loss) per share................................ $ (19.81) $ 0.35 $ (0.39)
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Information"
44
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
POOLING-OF-INTERESTS ACCOUNTING
NOTE 1: BASIS OF PRESENTATION
Certain historical data of CCB have been reclassified on a pro forma basis
to conform to Monarch's classifications.
NOTE 2: MERGER COSTS
Reflects management's current estimate, for purposes of pro forma
presentation, of the aggregate estimated merger costs of $2,150,000 ($2,046,250
net of taxes, computed using the combined federal and state tax rate of 41.5%)
expected to be incurred in connection with the Merger. While a portion of these
costs may be required to be recognized over time, the current estimate of these
costs has been recorded in the pro forma combined balance sheet in order to
disclose the aggregate effect of these activities on Monarch's pro forma
combined financial position. The estimated aggregate costs, primarily comprised
of anticipated cash charges, include the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
Investment banking and other professional fees...................... $ 1,900
Employee reduction costs and conversion............................. 250
------
$ 2,150
------
------
</TABLE>
Management's cost estimates are forward looking. While the costs represent
management's current estimate of merger and restructuring costs that will be
incurred, the ultimate level and timing of recognition of such costs will be
based on the final merger and integration plan to be completed prior to
consummation of the Merger, which is currently being developed by various
Monarch and CCB task forces and integration committees. The completion of this
merger and integration plan and the resulting management plans detailing actions
to be undertaken to effect the Merger will impact these estimates; the type and
amount of actual costs incurred could vary materially from these estimates if
future developments differ from the underlying assumptions used by management in
determining its current estimate of these costs.
45
<PAGE>
PURCHASE ACCOUNTING
Although the Merger is expected to be accounted for as a
"pooling-of-interests," the Merger will qualify for such treatment only if
numerous requirements are met including, but not limited to, the requirement
(the "Dissenters' Rights Pooling Requirement") that there not be more than ten
percent of either the Monarch Shareholders or the CCB Shareholders perfecting
their Dissenters' Rights. See "THE MERGER--Dissenters' Rights." The Dissenters'
Rights Pooling Requirement, as well as the requirement that certain "affiliates"
of CCB not sell shares of CCB Common Stock prior to the Merger or shares of
Monarch Common Stock subsequent to the Merger, in each case for specified
periods of time, relate to matters or events that will not occur, if at all,
until after the effective date, although such "affiliates" have been requested
to agree not to sell any such shares during the specified period. See "THE
MERGER-- Accounting Treatment" and "--Resale of Monarch Common Stock." FIP
beneficially owns approximately 11.3 percent of CCB Common Stock. As a result,
if FIP exercises its dissenters' rights, the Dissenters' Rights Pooling
Requirement will not be satisfied. See "FIP LITIGATION." If the Merger does not
qualify for "pooling-of-interests" treatment, the Merger Agreement expressly
provides that Monarch and CCB may waive their respective Pooling Conditions and
that Monarch may waive the Dissenters' Rights condition, in each case whether
prior to or subsequent to the approval of the principal terms of the Merger by
the shareholders of Monarch and CCB, in which event the parties could proceed
with the Merger under "purchase" accounting.
The following Unaudited Pro Forma Combined Condensed Financial Information
combines the historical Consolidated Financial Statements of Monarch and CCB
giving effect to the Merger as if it had been effective on December 31, 1996,
with respect to the Pro Forma Combined Condensed Balance Sheet, and as of
January 1, 1996, with respect to the Pro Forma Combined Condensed Statement of
Income.
This information is presented under purchase accounting after giving effect
to the Reverse Stock Split and is applicable only in the event the
"pooling-of-interests" treatment is unavailable but the parties nonetheless
agree to proceed with the Merger. Under this method of accounting, assets and
liabilities of CCB are adjusted to their estimated fair value and combined with
the recorded book values of the assets and liabilities of Monarch. Applicable
income tax effects of such adjustments are included as a component of Monarch's
net deferred taxes with a corresponding offset to goodwill.
This information should be read in conjunction with the historical
consolidated financial statements of Monarch and CCB, including their respective
notes thereto, which are included and incorporated by reference into this Joint
Proxy Statement--Prospectus, and in conjunction with the condensed historical
selected financial data and other pro forma combined financial information,
including the notes thereto, appearing elsewhere in this Joint Proxy
Statement--Prospectus. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE,"
the Financial Statements contained in Monarch's Annual Report attached hereto as
Appendix B and the Financial Statements contained in CCB's Annual Report
attached hereto as Appendix A. The effect of estimated merger and reorganization
costs expected to be incurred in connection with the Merger has been reflected
in the pro forma combined balance sheet; however, since the estimated costs are
nonrecurring, they have not been reflected in the pro forma combined statement
of income. The unaudited pro forma combined financial information does not give
effect to any anticipated operating efficiencies in conjunction with the Merger.
The pro forma balance sheet is not necessarily indicative of the actual
financial position that would have existed had the Merger been consummated on
December 31, 1996, or that may exist in the future. The pro forma combined
statement of income is not necessarily indicative of the results that would have
occurred had the Merger been consummated on the date indicated or that may be
achieved in the future. Assuming the consummation of the Merger, the actual
financial position and results of operations will differ, perhaps significantly,
from the pro forma amounts reflected herein because of a variety of factors,
including changes in value and changes in operating results between the dates of
the pro forma financial data and the date on which the Merger takes place.
46
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
PURCHASE ACCOUNTING
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
MONARCH CCB ADJUSTMENTS MONARCH
(HISTORICAL) (HISTORICAL)(1) (2),(3),(4) PRO FORMA
----------- ------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks.................................... $ 37,385 $ 28,849 $ -- $ 66,234
Federal funds sold......................................... 4,217 14,500 - 18,717
----------- ------------- ----------- -----------
TOTAL CASH & CASH EQUIVALENTS............................ 41,602 43,349 - 84,951
Securities:
Securities held to maturity.............................. 7,270 - - 7,270
Securities available for sale............................ 157,454 91,504 - 248,958
----------- ------------- ----------- -----------
TOTAL SECURITIES....................................... 164,724 91,504 - 256,228
Net loans.................................................. 254,723 204,650 (563) 458,810
Property, plant and equipment.............................. 5,780 1,435 - 7,215
Other real estate owned.................................... 3,889 2,657 - 6,546
Goodwill................................................... 29,342 - 53,478 82,820
Other assets............................................... 12,301 7,869 342 20,512
----------- ------------- ----------- -----------
TOTAL ASSETS............................................. $ 512,361 $ 351,464 $ 53,257 $ 917,082
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Non-interest bearing deposits.............................. $ 150,694 $ 146,257 $ - $ 296,951
Interest bearing deposits.................................. 292,290 172,447 11 464,748
----------- ------------- ----------- -----------
TOTAL DEPOSITS........................................... 442,984 318,704 11 761,699
Borrowed funds............................................. 11,000 2,350 - 13,350
Accrued interest payable & other liabilities............... 4,249 5,410 2,150 11,809
----------- ------------- ----------- -----------
TOTAL LIABILITIES........................................ 458,233 326,464 2,161 786,858
SHAREHOLDERS' EQUITY:
Preferred stock............................................ - - - -
Common stock............................................... 58,709 14,382 61,714 134,805
Additional paid-in capital................................. - 497 (497) -
Retained earnings (deficit)................................ (4,716) 10,244 (10,244) (4,716)
Unrealized net gains (losses) on investments available for
sale, net................................................. 135 (123) 123 135
----------- ------------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY............................... 54,128 25,000 51,096 130,224
----------- ------------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $ 512,361 $ 351,464 $ 53,257 $ 917,082
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Number of common shares outstanding........................ 4,043.9 2,984.0 7,027.9
Common shareholders' equity per share...................... $ 13.39 $ 8.38 $ 18.53
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Information"
47
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
PURCHASE ACCOUNTING
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONARCH CCB PRO FORMA MONARCH
(HISTORICAL) (HISTORICAL)(1) ADJUSTMENTS(3) PRO FORMA
----------- ------------- -------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans............................. $ 8,207 $ 20,022 $ 141 $ 28,370
Interest on interest bearing deposits in other banks... 3 - - 3
Interest on investment securities...................... 3,683 4,923 - 8,606
Interest on federal funds sold......................... 604 1,828 - 2,432
----------- ------------- -------------- -----------
TOTAL INTEREST INCOME................................ 12,497 26,773 141 39,411
INTEREST EXPENSE:
Interest expense on deposits........................... 3,761 6,531 (2) 10,290
Interest expense on notes payable...................... 191 278 - 469
----------- ------------- -------------- -----------
TOTAL INTEREST EXPENSE............................... 3,952 6,809 (2) 10,759
----------- ------------- -------------- -----------
NET INTEREST INCOME...................................... 8,545 19,964 143 28,652
Less: provision for loan losses........................ 228 1,260 - 1,488
----------- ------------- -------------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...... 8,317 18,704 143 27,164
NON-INTEREST INCOME:
Service charges........................................ 903 1,157 - 2,060
Escrow fees............................................ - 781 - 781
Data processing income................................. 100 - - 100
Gain on sale of loans.................................. - 665 - 665
Securities gains....................................... 267 - - 267
Other income........................................... 105 1,155 - 1,260
----------- ------------- -------------- -----------
TOTAL NON-INTEREST INCOME............................ 1,375 3,758 - 5,133
NON-INTEREST EXPENSE:
Salaries and benefits.................................. 4,323 8,546 - 12,869
Occupancy, furniture and equipment..................... 1,031 2,562 - 3,593
Advertising and business development................... 152 347 - 499
Other real estate owned................................ (151) (422) - (573)
Professional services.................................. 1,469 2,386 - 3,855
Telephone, stationary and supplies..................... 380 420 - 800
Goodwill amortization.................................. 499 - 3,565 4,064
Data processing for company............................ 186 587 - 773
Data processing for customers.......................... - 510 - 510
Other.................................................. 713 3,619 - 4,332
----------- ------------- -------------- -----------
TOTAL NON-INTEREST EXPENSE........................... 8,602 18,555 3,565 30,722
----------- ------------- -------------- -----------
Income before income taxes............................. 1,090 3,907 (3,422) 1,575
Income taxes........................................... 352 111 59 522
----------- ------------- -------------- -----------
NET INCOME........................................... $ 738 $ 3,796 $ (3,481) $ 1,053
----------- ------------- -------------- -----------
----------- ------------- -------------- -----------
PER SHARE INFORMATION:
Number of shares (weighted average).................... 1,761.8 3,009.0 4,770.8
Income per share....................................... $ 0.42 $ 1.26 $ 0.22
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Information"
48
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
PURCHASE ACCOUNTING
NOTE 1: BASIS OF PRESENTATION
Certain historical data of CCB have been reclassified on a pro forma basis
to conform to Monarch's classifications.
NOTE 2: PURCHASE PRICE
The purchase price is based on the 8.5 shares of Monarch Common Stock (prior
to the Reverse Stock Split) to be issued in exchange for each share of CCB
Common Stock outstanding at December 31, 1996, at the closing price per share of
Monarch Common Stock at December 31, 1996.
The total market value of the Monarch Common Stock to be issued in
connection with the Merger is calculated as follows:
<TABLE>
<S> <C>
Shares of CCB Common Stock outstanding at December 31, 1996 (in
thousands)........................................................ 2,984
Exchange ratio..................................................... 8.5
---------
Monarch Common Stock to be issued (in thousands)................... 25,365
Closing market price per share of Monarch at December 31, 1996..... $ 3.00
---------
TOTAL MARKET VALUE OF MONARCH COMMON STOCK TO BE ISSUED (in
thousands)........................................................ $ 76,096
---------
---------
</TABLE>
NOTE 3: ALLOCATION OF PURCHASE PRICE
The purchase price of CCB has been allocated as follows (in thousands):
<TABLE>
<S> <C>
Cash and equivalents............................................. $ 43,349
Securities....................................................... 91,504
Net loans........................................................ 204,087
Goodwill......................................................... 53,478
Other assets..................................................... 12,303
Deposits......................................................... (318,715)
Borrowed funds................................................... (2,350)
Other liabilities................................................ (7,560)
---------
Total purchase price........................................... $ 76,096
---------
---------
</TABLE>
In allocating the purchase price, the following adjustments were made to
CCB's historical amounts. Loans and deposits were reduced and increased by
$563,000 and $11,000, respectively, representing the discount necessary to state
such amounts at fair value. Other liabilities were increased by $2,150,000,
representing the estimated merger costs. Other assets were increased by
$342,000, representing the tax effects of the fair value adjustments and certain
of the estimated merger costs. For further information, see "Unaudited Pro Forma
Combined Condensed Financial Information--Purchase Accounting--Unaudited Pro
Forma Combined Condensed Balance Sheet, Purchase Accounting, December 31, 1996."
The discount on loans is accreted using the level yield method over a period
of seven years. The discount on deposits is accreted on a straight line basis
over five years. Goodwill is amortized on a straight line basis over fifteen
years. The deferred tax asset is amortized in conjunction with the applicable
discounts.
NOTE 4: MERGER COSTS
Reflects Monarch's current estimate, for purposes of pro forma presentation,
of the aggregate estimated merger costs of $2,150,000 ($2,046,250 net of taxes,
computed using the combined federal and
49
<PAGE>
state tax rate of 41.5%) expected to be incurred in connection with the Merger.
While a portion of these costs may be required to be recognized over time, the
current estimate of these costs has been recorded in the pro forma combined
balance sheet in order to disclose the aggregate effect of these activities on
Monarch's pro forma combined financial position. The estimated aggregate costs,
primarily comprised of anticipated cash charges, include the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
Investment banking and other professional fees................................ $ 1,900
Employee reduction costs and conversion....................................... 250
------
TOTAL ESTIMATED COSTS..................................................... $ 2,150
------
------
</TABLE>
Monarch's cost estimates are forward looking. While the costs represent
management's current estimate of merger and restructuring costs that will be
incurred, the ultimate level and timing of recognition of such costs will be
based on the final merger and integration plan to be completed prior to
consummation of the Merger, which is currently being developed by various
Monarch and CCB task forces and integration committees. The completion of this
merger and integration plan and the resulting management plans detailing actions
to be undertaken to effect the Merger will impact these estimates; the type and
amount of actual costs incurred could vary materially from these estimates if
future developments differ from the underlying assumptions used by management in
determining its current estimate of these costs.
50
<PAGE>
SC BANCORP
As described under "Proposed SC Bancorp Acquisition," Monarch executed and
delivered the SCB Merger Agreement, providing for the SCB Merger, on April 29,
1997. The SCB Merger Agreement provides that the consummation of the Merger is a
condition to the SCB Merger; as such, the SCB Merger will become effective only
if the Merger (which, as described elsewhere, could be accounted for as either a
pooling-of-interests or a purchase, depending on certain circumstances) is
successfully consummated prior thereto. Accordingly, the following Unaudited Pro
Forma Combined Condensed Financial Information (the "SCB Unaudited Pro Forma
Information") combines the historical consolidated financial information of SCB
with (i) the Unaudited Pro Forma Combined Condensed Financial Information giving
effect to the Merger of CCB with and into Monarch, accounted for as a
pooling-of-interests (as set forth under "--Pooling-of-Interests Accounting"
above), and (ii) the Unaudited Pro Forma Combined Condensed Financial
Information giving effect to the Merger of CCB with and into Monarch, accounted
for as a purchase (as set forth under "--Purchase Accounting" above). All
information presented give effect to the SCB Merger as a pooling-of-interests.
The historical consolidated financial information of SCB have been derived from,
and are used herein solely in reliance upon, the SCB Financial Statements. See
"SUMMARY--Summary Historical Financial Information (SCB)."
THE SCB MERGER, USING POOLING-OF-INTERESTS ACCOUNTING FOR THE MERGER
The following Unaudited Pro Forma Combined Financial Information combines
(i) the Unaudited Pro Forma Combined Condensed Financial Information of Monarch
and CCB giving effect to the Merger of CCB with and into Monarch and (ii) the
SCB Merger, as if they had been effective on December 31, 1996, with respect to
the Pro Forma Combined Condensed Balance Sheet, and as of the beginning of the
periods indicated herein, with respect to the Pro Forma Combined Condensed
Statements of Income. This information is presented under pooling-of-interests
accounting for both the Merger and the SCB Merger, after giving effect to the
Reverse Stock Split. This information should be read in conjunction with the
other information set forth herein under "--Pooling-of-Interests Accounting"
with respects to the Merger. This information should also be read in conjunction
with the historical consolidated financial statements of Monarch and CCB,
including their respective notes thereto, which are incorporated by reference
into this Joint Proxy Statement--Prospectus, and in conjunction with the
condensed historical selected financial data and other pro forma combined
financial information, including the notes thereto, appearing elsewhere in this
Joint Proxy Statement--Prospectus. See "INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE." The effect of estimated merger and reorganization costs expected to
be incurred in connection with the SCB Merger has been reflected in the pro
forma combined balance sheet; however, since the estimated costs are
nonrecurring, they have not been reflected in the pro forma combined statements
of income. The pro forma combined financial information does not give effect to
any anticipated cost savings in conjunction with the SCB Merger. The pro forma
balance sheet is not necessarily indicative of the actual financial position
that would have existed had the SCB Merger been consummated on December 31,
1996, or that may exist in the future. The pro forma combined statements of
income are not necessarily indicative of the results that would have occurred
had the SCB Merger been consummated on the dates indicated or that may be
achieved in the future.
51
<PAGE>
MONARCH--CCB--SC BANCORP
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
POOLING-OF-INTERESTS ACCOUNTING FOR THE MONARCH--CCB MERGER
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONARCH & CCB SC BANCORP PRO FORMA MONARCH PRO
PRO FORMA(1) (HISTORICAL)(1) ADJUSTMENTS(2) FORMA
------------- ------------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks............................... $ 66,234 $ 29,968 $ - $ 96,202
Federal funds sold.................................... 18,717 3,800 - 22,517
------------- ------------- ------- -----------
TOTAL CASH & CASH EQUIVALENTS..................... 84,951 33,768 - 118,719
Securities:
Securities held to maturity......................... 7,270 2,057 - 9,327
Securities available for sale....................... 248,958 74,533 - 323,491
------------- ------------- ------- -----------
TOTAL SECURITIES.................................. 256,228 76,590 - 332,818
Net loans............................................. 459,373 342,228 (3,712) 797,889
Property, plant and equipment......................... 7,215 7,740 (99) 14,856
Other real estate owned............................... 6,546 536 - 7,082
Goodwill.............................................. 29,342 3,626 - 32,968
Other assets.......................................... 20,170 11,525 2,722 34,417
------------- ------------- ------- -----------
TOTAL ASSETS...................................... $ 863,825 $ 476,013 $ (1,089) $ 1,338,749
------------- ------------- ------- -----------
------------- ------------- ------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Non-interest bearing deposits......................... $ 296,951 $ 289,423 $ - $ 586,374
Interest bearing deposits............................. 464,737 125,903 - 590,640
------------- ------------- ------- -----------
TOTAL DEPOSITS.................................... 761,688 415,326 - 1,177,014
Borrowed funds........................................ 13,350 8,096 - 21,446
Accrued interest payable & other liabilities.......... 11,705 2,672 7,524 21,901
------------- ------------- ------- -----------
TOTAL LIABILITIES................................. 786,743 426,094 7,524 1,220,361
SHAREHOLDERS' EQUITY:
Preferred stock....................................... - - - -
Common stock.......................................... 73,091 37,738 - 110,829
Additional paid-in capital............................ 497 - - 497
Retained earnings..................................... 3,482 13,055 (8,613) 7,924
Unrealized net gains (losses) on investments available
for sale, net......................................... 12 (874) - (862)
------------- ------------- ------- -----------
TOTAL SHAREHOLDERS' EQUITY........................ 77,082 49,919 (8,613) 118,388
------------- ------------- ------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.......... $ 863,825 $ 476,013 $ (1,089) $ 1,338,749
------------- ------------- ------- -----------
------------- ------------- ------- -----------
Number of common shares outstanding................... 7,027.9 7,486.4 10,494.8
Common shareholders' equity per share................. $ 10.97 $ 6.67 $ 11.28
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Information"
52
<PAGE>
MONARCH--CCB--SC BANCORP
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
POOLING-OF-INTERESTS ACCOUNTING FOR THE MONARCH--CCB MERGER
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONARCH & CCB SC BANCORP PRO FORMA MONARCH PRO
PRO FORMA(1) (HISTORICAL)(1) ADJUSTMENTS(2) FORMA
------------- ------------- -------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans........................... $ 28,229 $ 30,145 $ 58,374
Interest on interest bearing deposits in other
banks.............................................. 3 - 3
Interest on investment securities.................... 8,606 4,256 12,862
Interest on federal funds sold....................... 2,432 566 2,998
------------- ------------- ------- -----------
TOTAL INTEREST INCOME............................ 39,270 34,967 - 74,237
INTEREST EXPENSE:
Interest expense on deposits......................... 10,292 11,090 21,382
Interest expense on notes payable.................... 469 637 1,106
------------- ------------- ------- -----------
TOTAL INTEREST EXPENSE........................... 10,761 11,727 - 22,488
------------- ------------- ------- -----------
NET INTEREST INCOME.................................... 28,509 23,240 - 51,749
Less: provision for (recovery of) loan losses........ 1,488 (470) 1,018
------------- ------------- ------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.... 27,021 23,710 - 50,731
Non-interest income
Service charges...................................... 2,060 4,698 6,758
Escrow fees.......................................... 781 - 781
Data processing income............................... 100 - 100
Gain (loss) on sale of loans and other assets........ 665 (28) 637
Securities gains..................................... 267 14 281
Other income......................................... 1,260 482 1,742
------------- ------------- ------- -----------
TOTAL NON-INTEREST INCOME........................ 5,133 5,166 - 10,299
NON-INTEREST EXPENSE:
Salaries and benefits................................ 12,869 10,147 23,016
Occupancy, furniture and equipment................... 3,593 4,056 7,649
Advertising and business development................. 499 472 971
Other real estate owned.............................. (573) 439 (134)
Professional services................................ 3,855 1,676 5,531
Telephone, stationery and supplies................... 800 1,280 2,080
Goodwill amortization................................ 499 505 1,004
Data processing for company.......................... 773 291 1,064
Data processing for customers........................ 510 - 510
Other................................................ 4,332 2,362 6,694
------------- ------------- ------- -----------
TOTAL NON-INTEREST EXPENSE....................... 27,157 21,228 - 48,385
------------- ------------- ------- -----------
Income before income taxes............................. 4,997 7,648 - 12,645
Income taxes........................................... 463 3,193 3,656
------------- ------------- ------- -----------
NET INCOME....................................... $ 4,534 $ 4,455 $ - $ 8,989
------------- ------------- ------- -----------
------------- ------------- ------- -----------
PER SHARE INFORMATION:
Number of shares (weighted average).................. 4,770.8 7,476.0 8,232.9
Income per share (dollars)........................... $ 0.95 $ 0.60 $ 1.09
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Information"
53
<PAGE>
MONARCH--CCB--SC BANCORP
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
POOLING-OF-INTERESTS ACCOUNTING FOR THE MONARCH--CCB MERGER
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONARCH & CCB SC BANCORP PRO FORMA MONARCH PRO
PRO FORMA(1) (HISTORICAL)(1) ADJUSTMENTS(2) FORMA
------------- ------------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans........................... $ 23,054 $ 25,960 $ 49,014
Interest on interest bearing deposits in other
banks.............................................. 43 - 43
Interest on investment securities.................... 4,427 6,299 10,726
Interest on federal funds sold....................... 1,709 1,137 2,846
------------- ------------- ------- -----------
TOTAL INTEREST INCOME............................ 29,233 33,396 - 62,629
INTEREST EXPENSE:
Interest expense on deposits......................... 8,169 10,998 19,167
Interest expense on notes payable.................... 268 1,017 1,285
------------- ------------- ------- -----------
TOTAL INTEREST EXPENSE........................... 8,437 12,015 - 20,452
------------- ------------- ------- -----------
NET INTEREST INCOME.................................... 20,796 21,381 - 42,177
Less: provision for loan losses...................... 7,025 1,539 8,564
------------- ------------- ------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.... 13,771 19,842 - 33,613
NON-INTEREST INCOME:
Service charges...................................... 1,528 4,787 6,315
Escrow fees.......................................... 308 - 308
Data processing income............................... 70 - 70
Gain on sale of other assets......................... - 58 58
Securities gains (losses)............................ (72) (620) (692)
Other income......................................... 1,454 788 2,242
------------- ------------- ------- -----------
TOTAL NON-INTEREST INCOME........................ 3,288 5,013 - 8,301
NON-INTEREST EXPENSE:
Salaries and benefits................................ 9,170 10,405 19,575
Occupancy, furniture and equipment................... 2,751 5,127 7,878
Advertising and business development................. 359 530 889
Other real estate owned.............................. 2,861 219 3,080
Professional services................................ 1,837 1,288 3,125
Telephone, stationery and supplies................... 507 1,458 1,965
Goodwill amortization................................ - 821 821
Lower of cost or market adjustment on loans available
for sale........................................... 756 - 756
Data processing for company.......................... 174 253 427
Data processing for customers........................ 184 - 184
Other................................................ 3,544 3,192 6,736
------------- ------------- ------- -----------
TOTAL NON-INTEREST EXPENSE....................... 22,143 23,293 - 45,436
------------- ------------- ------- -----------
Income (loss) before income taxes...................... (5,084) 1,562 - (3,522)
Income taxes (benefits)................................ (2,426) 693 (1,733)
------------- ------------- ------- -----------
NET INCOME (LOSS)................................ $ (2,658) $ 869 $ - $ (1,789)
------------- ------------- ------- -----------
------------- ------------- ------- -----------
PER SHARE INFORMATION:
Number of shares (weighted average).................. 3,160.6 7,468.8 6,619.4
Income (loss) per share (dollars).................... $ (0.84) $ 0.12 $ (0.27)
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Information"
54
<PAGE>
MONARCH--CCB--SC BANCORP
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
POOLING-OF-INTERESTS ACCOUNTING FOR THE MONARCH--CCB MERGER
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
MONARCH & CCB SC BANCORP PRO FORMA MONARCH PRO
PRO FORMA(1) (HISTORICAL)(1) ADJUSTMENTS(2) FORMA
------------- ------------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans........................... $ 21,225 $ 18,971 $ 40,196
Interest on interest bearing deposits in other
banks.............................................. 111 - 111
Interest on investment securities.................... 4,667 7,166 11,833
Interest on federal funds sold....................... 656 283 939
------------- ------------- ------- -----------
TOTAL INTEREST INCOME............................ 26,659 26,420 - 53,079
INTEREST EXPENSE:
Interest expense on deposits......................... 6,981 5,956 12,937
Interest expense on notes payable.................... 302 323 625
------------- ------------- ------- -----------
TOTAL INTEREST EXPENSE........................... 7,283 6,279 - 13,562
------------- ------------- ------- -----------
NET INTEREST INCOME.................................... 19,376 20,141 - 39,517
Less: provision for (recovery of) loan losses........ 4,360 (850) 3,510
------------- ------------- ------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.... 15,016 20,991 - 36,007
NON-INTEREST INCOME:
Service charges...................................... 1,472 5,640 7,112
Escrow fees.......................................... 304 - 304
Data processing income............................... 122 - 122
Gain on sale of other assets......................... - 624 624
Securities gains (losses)............................ (41) 17 (24)
Other income......................................... 920 402 1,322
------------- ------------- ------- -----------
TOTAL NON-INTEREST INCOME........................ 2,777 6,683 - 9,460
NON-INTEREST EXPENSE:
Salaries and benefits................................ 8,242 9,518 17,760
Occupancy, furniture and equipment................... 2,690 4,678 7,368
Advertising and business development................. 198 426 624
Other real estate owned.............................. 1,313 1,832 3,145
Professional services................................ 1,302 1,476 2,778
Telephone, stationery and supplies................... 445 1,297 1,742
Goodwill amortization................................ - 211 211
Data processing for company.......................... 130 235 365
Data processing for customers........................ 173 - 173
Other................................................ 3,746 4,162 7,908
------------- ------------- ------- -----------
TOTAL NON-INTEREST EXPENSE....................... 18,239 23,835 - 42,074
------------- ------------- ------- -----------
Income (loss) before income taxes...................... (446) 3,839 - 3,393
Income taxes........................................... 546 1,134 1,680
------------- ------------- ------- -----------
NET INCOME (LOSS)................................ $ (992) $ 2,705 $ - $ 1,713
------------- ------------- ------- -----------
------------- ------------- ------- -----------
PER SHARE INFORMATION:
Number of shares (weighted average).................. 2,520.4 5,507.0 5,070.7
Income (loss) per share (dollars).................... $ (0.39) $ 0.49 $ 0.34
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Information"
55
<PAGE>
THE SCB MERGER, USING PURCHASE ACCOUNTING FOR THE MERGER
The following Unaudited Pro Forma Combined Financial Information combines
(i) the Unaudited Pro Forma Combined Condensed Financial Information of Monarch
and CCB giving effect to the Merger and (ii) the SCB Merger, as if they had been
effective on December 31, 1996, with respect to the Pro Forma Combined Condensed
Balance Sheet, and as of the beginning of the periods indicated herein, with
respect to the Pro Forma Combined Condensed Statements of Income. This
information is presented under purchase accounting with respect to the Merger,
but gives effect to the SCB Merger as a pooling-of-interests. Under the purchase
method of accounting, assets and liabilities of CCB are adjusted to their
estimated fair value and combined with the recorded book values of the assets
and liabilities of Monarch. Applicable income tax effects of such adjustments
are included as a component of Monarch's net deferred taxes with a corresponding
offset to goodwill. This information should be read in conjunction with the
other information set forth under "--Purchase Accounting" with respect to the
Merger. This information should also be read in conjunction with the historical
consolidated financial statements of Monarch and CCB, including their respective
notes thereto, which are incorporated by reference into this Joint Proxy
Statement-Prospectus, and in conjunction with the condensed historical selected
financial data and other pro forma combined financial information, including the
notes thereto, appearing elsewhere in this Joint Proxy Statement-Prospectus. See
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE", the Financial Statements
contained in Monarch's Annual Report attached hereto as Appendix B and the
Financial Statements contained in CCB's Annual Report attached hereto as
Appendix A. The effect of estimated merger and reorganization costs expected to
be incurred in connection with the SCB Merger has been reflected in the pro
forma combined balance sheet; however, since the estimated costs are
nonrecurring, they have not been reflected in the pro forma combined statements
of income. The pro forma combined condensed financial information does not give
effect to any anticipated cost savings in conjunction with the SCB Merger. The
pro forma balance sheet is not necessarily indicative of the actual financial
position that would have existed had the SCB Merger been consummated on December
31, 1996, or that may exist in the future. The pro forma combined statements of
income are not necessarily indicative of the results that would have occurred
had the SCB Merger been consummated on the dates indicated or that may be
achieved in the future.
56
<PAGE>
MONARCH--CCB--SC BANCORP
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
PURCHASE ACCOUNTING FOR THE MONARCH--CCB MERGER
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONARCH & CCB SC BANCORP PRO FORMA MONARCH PRO
PRO FORMA(1) (HISTORICAL)(1) ADJUSTMENTS(2) FORMA
------------- ------------- -------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks............................... $ 66,234 $ 29,968 $ - $ 96,202
Federal funds sold.................................... 18,717 3,800 - 22,517
------------- ------------- -------------- -----------
TOTAL CASH & CASH EQUIVALENTS..................... 84,951 33,768 - 118,719
Securities:
Securities held to maturity......................... 7,270 2,057 - 9,327
Securities available for sale....................... 248,958 74,533 - 323,491
------------- ------------- -------------- -----------
TOTAL SECURITIES.................................. 256,228 76,590 - 332,818
Net loans............................................. 458,810 342,228 (3,712) 797,326
Property, plant and equipment......................... 7,215 7,740 (99) 14,856
Other real estate owned............................... 6,546 536 - 7,082
Goodwill.............................................. 82,820 3,626 - 86,446
Other assets.......................................... 20,512 11,525 2,722 34,759
------------- ------------- -------------- -----------
TOTAL ASSETS...................................... $ 917,082 $ 476,013 $ (1,089) $ 1,392,006
------------- ------------- -------------- -----------
------------- ------------- -------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES
Non-interest bearing deposits......................... $ 296,951 $ 289,423 - $ 586,374
Interest bearing deposits............................. 464,748 125,903 - 590,651
------------- ------------- -------------- -----------
TOTAL DEPOSITS.................................... 761,699 415,326 - 1,177,025
Borrowed funds........................................ 13,350 8,096 - 21,446
Accrued interest payable & other liabilities.......... 11,809 2,672 7,524 22,005
------------- ------------- -------------- -----------
TOTAL LIABILITIES................................. 786,858 426,094 7,524 1,220,476
SHAREHOLDERS' EQUITY:
Preferred stock....................................... - - - -
Common stock.......................................... 134,805 37,738 - 172,543
Additional paid-in capital............................ - - - -
Retained earnings (deficit)........................... (4,716) 13,055 (8,613) (274)
Unrealized net gains (losses) on investments.......... -
available for sale, net............................. 135 (874) - (739)
------------- ------------- -------------- -----------
TOTAL SHAREHOLDERS' EQUITY........................ 130,224 49,919 (8,613) 171,530
TOTAL LIABILITIES
------------- ------------- -------------- -----------
$ 917,082 $ 476,013 $ (1,089) $ 1,392,006
------------- ------------- -------------- -----------
------------- ------------- -------------- -----------
Number of common shares outstanding................... 7,027.9 7,486.4 10,494.8
Common shareholders' equity per share................. $ 18.53 $ 6.67 $ 16.34
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Information"
57
<PAGE>
MONARCH--CCB--SC BANCORP
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
PURCHASE ACCOUNTING FOR THE MONARCH--CCB MERGER
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONARCH & CCB SC BANCORP PRO FORMA MONARCH PRO
PRO FORMA(1) (HISTORICAL)(1) ADJUSTMENTS(2) FORMA
------------- ------------- ----------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans........................... $ 28,370 $ 30,145 $ 58,515
Interest on interest bearing deposits in other
banks.............................................. 3 - 3
Interest on investment securities.................... 8,606 4,256 12,862
Interest on federal funds sold....................... 2,432 566 2,998
------------- ------------- ----- -----------
TOTAL INTEREST INCOME.............................. 39,411 34,967 - 74,378
INTEREST EXPENSE:
Interest expense on deposits......................... 10,290 11,090 21,380
Interest expense on notes payable.................... 469 637 1,106
------------- ------------- ----- -----------
TOTAL INTEREST EXPENSE............................. 10,759 11,727 - 22,486
------------- ------------- ----- -----------
NET INTEREST INCOME.................................... 28,652 23,240 - 51,892
Less: provision for (recovery of) loan losses........ 1,488 (470) 1,018
------------- ------------- ----- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.... 27,164 23,710 - 50,874
NON-INTEREST INCOME:
Service charges...................................... 2,060 4,698 6,758
Escrow fees.......................................... 781 - 781
Data processing income............................... 100 - 100
Gain on sale of loans................................ 665 (28) 637
Securities gains (losses)............................ 267 14 281
Other income......................................... 1,260 482 1,742
------------- ------------- ----- -----------
TOTAL NON-INTEREST INCOME.......................... 5,133 5,166 - 10,299
NON-INTEREST EXPENSE:
Salaries and benefits................................ 12,869 10,147 23,016
Occupancy, furniture and equipment................... 3,593 4,056 7,649
Advertising and business development................. 499 472 971
Other real estate owned.............................. (573) 439 (134)
Professional services................................ 3,855 1,676 5,531
Telephone, stationery and supplies................... 800 1,280 2,080
Goodwill amortization................................ 4,064 505 4,569
Data processing for company.......................... 773 291 1,064
Data processing for customers........................ 510 - 510
Other................................................ 4,332 2,362 6,694
------------- ------------- ----- -----------
TOTAL NON-INTEREST EXPENSE......................... 30,722 21,228 - 51,950
------------- ------------- ----- -----------
Income before income taxes............................. 1,575 7,648 - 9,223
Income taxes........................................... 522 3,193 3,715
------------- ------------- ----- -----------
NET INCOME......................................... $ 1,053 $ 4,455 $ - $ 5,508
------------- ------------- ----- -----------
------------- ------------- ----- -----------
PER SHARE INFORMATION:
Number of shares (weighted average).................. 4,770.8 7,476.0 8,232.9
Income per share (dollars)........................... $ 0.22 $ 0.60 $ 0.67
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Information"
58
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
NOTE 1: BASIS OF PRESENTATION
The Monarch and CCB unaudited pro forma combined condensed financial
statements are presented earlier in this Joint Proxy Statement--Prospectus
together with footnotes for pooling-of-interests and purchase accounting for the
Merger. These pro forma combined financial statements should be read in
conjunction with those financial statements and footnotes. Certain historical
data of SCB have been reclassified on a pro forma basis to conform to Monarch's
classifications. Transactions between Monarch, CCB and SCB are not material in
relation to the pro forma combined financial statements, and have not been
eliminated from the pro forma combined amounts. The pro forma number of common
shares outstanding, common shareholders' equity per share, number of shares
(weighted average) and income per share are based on the pro forma share amounts
for Monarch and CCB plus the historical share amounts for SCB multiplied by the
exchange ratio of 0.4651. This exchange ratio is computed using the last known
Monarch Common Stock price of $30.77 ($3.62 pre-Reverse Stock Split) preceding
the announcement of the SCB Merger.
NOTE 2: MERGER COSTS
Reflects management's current estimate, for purposes of pro forma
presentation, of the aggregate estimated merger costs of $11,871,000 ($8,613,000
net of taxes, computed using the combined federal and state tax rate of 41.5%)
expected to be incurred in connection with the SCB Merger. While a portion of
these costs may be required to be recognized over time, the current estimate of
these costs has been recorded in the pro forma combined condensed balance sheets
in order to disclose the aggregate effect of these activities on Monarch's pro
forma combined financial position. The estimated aggregate costs include the
following:
<TABLE>
<S> <C>
Severance costs................................................. $2,352,000
Write offs of leasehold improvements............................ 99,000
Termination of interest rate swap............................... 902,000
Write off of capitalized data processing costs.................. 328,000
Conversion costs................................................ 250,000
Software cost writeoffs......................................... 208,000
Provision for loan losses....................................... 3,712,000
---------
7,851,000
Tax effects..................................................... (3,258,000)
---------
4,593,000
Investment banking and other professional fees.................. 4,020,000
---------
TOTAL ESTIMATED AGGREGATE COSTS............................... $8,613,000
---------
---------
</TABLE>
Management's cost estimates are forward looking. While the costs represent
management's current estimate of merger and restructuring costs that will be
incurred, the ultimate level and timing of recognition of such costs will be
based on the final merger and integration plan to be completed prior to
consummation of the SCB Merger, which will soon be developed by various Monarch,
CCB and SCB task forces and integration committees. Readers are cautioned that
the completion of the merger and integration plan and the resulting management
plans detailing actions to be undertaken to effect the SCB merger will impact
these estimates; the type and amount of actual costs incurred could vary
materially from these estimates if future developments differ from the
underlying assumptions used by management in determining the current estimate of
these costs.
59
<PAGE>
THE ANNUAL MEETING OF MONARCH SHAREHOLDERS
GENERAL
This Joint Proxy Statement--Prospectus is being furnished to holders of
Monarch Common Stock in connection with the solicitation of proxies by the
Monarch Board for use at the Monarch Meeting to be held on June 2, 1997 and at
any adjournments or postponements thereof. This Joint Proxy Statement--
Prospectus and the accompanying form of proxy are first being mailed to the
Monarch Shareholders on or about May 16, 1997. The Monarch Meeting is scheduled
to be held in the South Coast Medical Center, located at 31872 Pacific Coast
Highway, Laguna Beach, California 92677 on Monday, June 2, 1997 at 10:00 a.m.,
local time. The presence, in person or proxy, of the holders of stock having at
least a majority of the votes attributable to the Monarch Common Stock
outstanding and entitled to vote at the Monarch Meeting is necessary to
constitute a quorum thereat.
MONARCH SHAREHOLDERS ARE REQUESTED TO PROMPTLY SIGN, DATE AND RETURN THE
ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PAID PRE-ADDRESSED ENVELOPE.
FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE MEETING WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST THE PRINCIPAL TERMS OF THE MERGER AND
OTHER MATTERS TO BE VOTED UPON IN CONNECTION WITH THE MERGER.
MATTERS TO BE CONSIDERED AT THE MONARCH MEETING
The purpose of the Monarch Meeting is to (a) consider and vote upon the
approval of the principal terms of the Merger; (b) elect seven directors to the
Monarch Board to serve until the next annual meeting of Monarch and until their
successors have been elected and duly qualified; (c) consider and vote upon
approval of the Amendments; and (d) transact such other business as may properly
come before the Monarch Meeting or any adjournments or postponements thereof.
THE MONARCH RECORD DATE
The Monarch Board has fixed the close of business on April 21, 1997, as the
record date (the "Monarch Record Date") for the determination of the Monarch
Shareholders entitled to receive notice of and to vote at the Monarch Meeting.
Only holders of record of Monarch Common Stock at the close of business on that
date will be entitled to notice of, and to vote at, the Monarch Meeting and any
postponements or adjournments thereof.
VOTES REQUIRED AND VOTING OF PROXIES
As of the Monarch Record Date, there were 4,043,885 shares of Monarch Common
Stock outstanding. Subject to the cumulative voting rights described below with
respect to the election of directors, each holder of shares of Monarch Common
Stock outstanding on the Monarch Record Date will be entitled to one vote for
each share held of record upon each matter properly submitted at the Monarch
Meeting and any postponement or adjournment thereof.
Monarch will appoint one or three employees to function as inspectors of the
election in advance of the Monarch Meeting, to tabulate votes, to ascertain
whether a quorum is present and to determine the voting results on all matters
presented to the Monarch Shareholders. A majority of all shares of Monarch
Common Stock entitled to vote, represented in person or by proxy, constitutes a
quorum. Abstentions and broker non-votes are each included in the determination
of the number of shares present; however, they are not counted for the purpose
of determining the election of each nominee for director and are not counted as
votes in favor of the principal terms of the Merger and the Amendments.
If a quorum is not obtained, or fewer shares of Monarch Common Stock are
voted in favor of the principal terms of the Merger and the Amendments than the
number required for approval of the principal terms of the Merger and the
Amendments, it is expected that the Monarch Meeting will be postponed or
60
<PAGE>
adjourned for the purpose of allowing additional time for obtaining additional
proxies or votes, and at any subsequent reconvening of the Monarch Meeting, all
proxies will be voted in the same manner as such proxies would have been voted
at the original convening of the Monarch Meeting (except for any proxies which
have theretofore effectively been revoked or withdrawn).
The affirmative vote of the holders of at least a majority of the total
number of outstanding shares of Monarch Common Stock entitled to vote at the
Monarch Meeting is required to approve the principal terms of the Merger and the
Amendments. The failure to vote, an abstention or a broker non-vote thus have
the same effect as a vote against the principal terms of the Merger and the
Amendments.
The authorized number of directors of Monarch is seven and the nominees
receiving the highest number of votes, up to the number of directors to be
elected by such votes, will be elected, assuming a quorum is present. Monarch
Shareholders have cumulative voting rights with respect to the election of
directors, if certain conditions are met. Cumulative voting enables a
shareholder to give one nominee for director as many votes as is equal to the
number of directors to be elected multiplied by the number of shares in respect
of which such shareholder is voting, or to distribute such votes on the same
principle among two or more nominees, as such shareholder sees fit. Monarch
Shareholders have the right to cumulate their votes only if the candidates'
names have been placed in nomination prior to the voting and any Monarch
Shareholder has given notice at the meeting prior to voting of that
shareholder's intention to cumulate his or her votes. If any one Monarch
Shareholder has given such notice, all Monarch Shareholders may cumulate their
votes for candidates who have been properly placed in nomination.
Shares of Monarch Common Stock represented by proxies properly executed and
received by Monarch in time to be voted at the Monarch Meeting will be voted in
accordance with the instructions indicated on the proxies and, if no
instructions are indicated, will be voted "FOR" the proposal to approve the
principal terms of the Merger Agreement, "FOR" the Amendments and, in the case
of the election of directors of Monarch, equally "FOR" each of the seven
candidates named in this Joint Proxy Statement-- Prospectus at the Monarch
Meeting or any adjournment or postponement thereof. All proxies voted "FOR" such
matters, including proxies on which no instructions are indicated, may, at the
discretion of the proxy holder, be voted "FOR" a motion to adjourn or postpone
the Monarch Meeting to another time and/or place for the purpose of soliciting
additional proxies or otherwise; PROVIDED, HOWEVER, that no proxy which is voted
against approval of the principal terms of the Merger or on which the relevant
Monarch Shareholder specifically abstains from voting with respect to such
approval will be voted in favor of any such adjournment or postponement.
The Monarch Board is not currently aware of any business to be acted upon at
the Monarch Meeting other than as described herein. If, however, other matters
are properly brought before the Monarch Meeting, persons appointed as proxies
will have discretion to vote or act thereon in their best judgment.
The grant of a proxy does not preclude a Monarch Shareholder from voting in
person. A Monarch Shareholder may revoke a proxy at any time prior to its
exercise by filing with the Secretary of Monarch a duly executed revocation of
proxy or a new proxy, in either case bearing a later date. Attendance at the
Monarch Meeting will not in and of itself constitute revocation of a proxy. See
"Revocability of Proxies."
REVOCABILITY OF PROXIES
The presence of a Monarch Shareholder at the Monarch Meeting (or at any
postponement or adjournment thereof) will not automatically revoke such Monarch
Shareholder's proxy. However, a Monarch Shareholder may revoke a proxy at any
time prior to its exercise by (a) delivery to the Secretary of Monarch of a
written notice of revocation prior to the Monarch Meeting (or, if the Monarch
Meeting is adjourned or postponed, prior to the time the adjourned or postponed
meeting is actually held); (b) delivery to the Secretary of Monarch prior to the
Monarch Meeting (or, if the Monarch Meeting is adjourned or postponed, prior to
the time the adjourned or postponed meeting is actually held) of a duly executed
proxy bearing a later date; or (c) attending the Monarch Meeting (or, if the
Monarch Meeting is
61
<PAGE>
adjourned or postponed, by attending the adjourned or postponed meeting) and
filing a written notice of revocation with the Secretary of the Meeting. Any
written revocation of proxy or other related communications should be addressed
to Arnold C. Hahn, Secretary, Monarch Bancorp, 30000 Town Center Drive, Laguna
Niguel, California 92677.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
Monarch and its subsidiaries may solicit proxies for the Monarch Meeting from
Monarch Shareholders personally or by telephone or telegram without additional
remuneration therefor. Monarch will also provide persons, firms, banks and
corporations holding shares in their names or in the names of nominees, which in
any case are beneficially owned by others, with proxy materials for transmittal
to such beneficial owners and will reimburse such record owners for their
expenses of doing so. The cost of solicitation of proxies for the Monarch
Meeting will be borne by Monarch.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MONARCH MANAGEMENT
As of the Monarch Record Date, the directors and officers of Monarch
beneficially held, in the aggregate, the ability to direct the voting with
respect to 1,635,449 shares of Monarch Common Stock, comprising approximately
39.44 percent of the voting power of the Monarch Common Stock outstanding. Such
directors and executive officers of Monarch have informed Monarch that they
intend to vote their shares of Monarch Common Stock for the approval of the
principal terms of the Merger Agreement.
The following table reflects as of April 21, 1997 the beneficial ownership
of Monarch Common Stock, including stock options which will become exercisable
within 60 days, by Monarch's directors, executive officers and shareholders
known to Monarch to be holding more than five percent of such stock, and by
Monarch's directors and officers as a group, after giving effect to the Reverse
Stock split.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) OF CLASS
- ----------------------------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
Castle Creek Capital Partner's Fund-I (2)................................................ 1,504,156 36.89%
4370 LaJolla Village, Suite 400,
San Diego, CA 92122
Launch & Co. Mutual Discovery Fund....................................................... 400,000 9.89%
51 John F. Kennedy Parkway,
Short Hills, NJ 07078
Keefe Managers, Inc. (3)................................................................. 294,118 7.27%
325 Park Avenue,
New York, NY 10152
Wellington Management (4)................................................................ 294,118 7.27%
75 State Street,
Boston, MA 02109
John M. Eggemeyer (2).................................................................... 1,580,791 38.23%
4370 LaJolla Village, Suite 400,
San Diego, CA 92122
Hugh S. Smith, Jr. (5)................................................................... 0 0.0%
1251 Westwood Blvd.
Los Angeles, CA 90024
Rice E. Brown (6)........................................................................ 1,482(7) 0.04%
27127 Calle Arroyo
Suite 1907
San Juan Capistrano, CA 92675
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) OF CLASS
- ----------------------------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
John W. Rose (6)......................................................................... 29,646(8) 0.73%
c/o FNB Corporation
Hermitage Square
Hermitage, PA 16148
Joseph J. Digange (5).................................................................... 0 0.0%
1251 Westwood Blvd.
Los Angeles, CA 90024
B. Scott Hardt (9)....................................................................... 5,882 0.15%
1251 Westwood Blvd.
Los Angeles, CA 90024
Dale E. Walter (6)....................................................................... 7,059 0.17%
50855 Washington Square
Suite C-211
La Quinta, CA 92253
Matthew P. Wagner (5).................................................................... 10,588 0.26%
1251 Westwood Blvd.
Los Angeles, CA 90024
E. Lynn Caswell (10)..................................................................... 11,122 .28%
------------- -----
Directors and Executive Officers as a group (9 persons) (11)............................. 1,635,449 39.44%
------------- -----
------------- -----
</TABLE>
- ------------------------
(1) The term "beneficial owner" 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. The term "beneficial owner" also includes any person who has the
right to acquire beneficial ownership of such security as defined above
within 60 days of the Monarch Record Date. Ownership includes vested stock
options and warrants exercisable within 60 days.
(2) Mr. Eggemeyer has direct beneficial ownership of 18,879 shares of Monarch
Common Stock and warrants to purchase 57,756 shares of Monarch Common Stock
and has or shares voting power and/or investment power, through Castle Creek
Capital Partner's Fund (the "Fund"), of which he is a principal, with
respect to 1,470,588 shares of Monarch Common Stock and warrants to purchase
33,568 shares of Monarch Common Stock. Mr. Eggemeyer disclaims any
beneficial ownership of the shares held by the Fund except to the extent of
his interest in the Fund. See "--Certain Relationships and Related
Transactions" and "THE MERGER--Interests of Certain Persons in the
Merger--Ownership of BPI."
(3) Shares of Monarch Common Stock beneficially owned by Keefe Managers, Inc.
are held in affiliated entities as follows: 92,000 shares beneficially owned
by Keefe Off Shore Fund, LTD; 108,000 shares beneficially owned by Keefe
Partners L.P. and 94,118 shares beneficially owned by Rainbow Partners.
(4) Shares of Monarch Common Stock beneficially owned by Wellington Management,
Inc. are held in affiliated entities as follows: 200,354 shares beneficially
owned by Bay Pond Partners LP; 71,235 shares beneficially owned by Bay Pond
Investors Bermuda LP and 22,529 shares beneficially owned by Barlow
Partners.
(5) Executive Officer and Director.
(6) Director.
(7) Mr. Brown beneficially owns 894 shares of Monarch Common Stock and options
to purchase
588 shares of Monarch Common Stock.
(8) Mr. Rose beneficially owns 18,886 shares of Monarch Common Stock and
warrants to purchase
10,760 shares of Monarch Common Stock.
63
<PAGE>
(9) Executive Officer.
(10) E. Lynn Caswell is a former Chief Executive Officer and director of
Monarch.
(11) Does not include 11,122 shares beneficially owned by E. Lynn Caswell.
DISSENTERS' RIGHTS
If the principal terms of the Merger Agreement are approved by a majority of
the outstanding shares of Monarch Common Stock entitled to vote thereon, holders
of Monarch Common Stock who elect to dissent from the approval of the principal
terms of the Merger Agreement may be entitled to have their shares purchased in
accordance with Chapter 13 of the CGCL. See "SUMMARY--Dissenters' Rights" and
"THE MERGER--Dissenters' Rights" for a discussion of Dissenters' Rights and a
description of the procedures which must be followed to perfect such rights.
ELECTION OF MONARCH DIRECTORS
At the Monarch Meeting, seven persons are to be elected to the Monarch Board
to serve until the next annual meeting of shareholders of Monarch and until
their successors are elected and have qualified. The By-Laws of Monarch provide
that the authorized number of directors shall not be less than seven nor more
than 13 with the exact number of directors to be fixed from time to time by
resolution of a majority of the full Monarch Board. Pursuant to the Merger
Agreement, upon consummation of the Merger, the Monarch Board will adopt a
resolution fixing the exact number of directors at ten and appointing William H.
Jacoby, Robert L. McKay and Mark H. Stuenkel to fill the vacancies created
thereby. See "THE MERGER--Certain Effects of the Merger."
DIRECTORS AND NOMINEES
The following table sets forth, as to each of the persons nominated for
election as a director of Monarch, such person's age, such person's present
position, and the period during which such person has served as a director of
Monarch.
<TABLE>
<CAPTION>
DIRECTOR OF
NAME AGE PRESENT POSITION MONARCH SINCE
- ------------------------------ --- -------------------------------------------------------- -----------------
<S> <C> <C> <C>
Rice E. Brown 59 Director, Monarch 1988
Joseph J. Digange 70 Director, Monarch; Chairman, Western Bank 1996
John M. Eggemeyer 51 Director, Monarch 1997
John W. Rose 47 Director, Monarch 1995
Hugh S. Smith, Jr. 66 Director, Chairman and Chief Executive Officer, Monarch 1996
Matthew P. Wagner 40 President, Monarch; President and Chief Executive 1996
Officer, Western Bank
Dale E. Walter 62 Director, Monarch 1996
</TABLE>
RICE BROWN, MSFS is a registered investment advisor, registered principal
and President of the firm Rice Brown Financial Services Inc. Mr. Brown's primary
focus is in the area of money management using a fee asset basis and estate
planning. Mr. Brown's firm has been in business for 35 years. Mr. Brown is the
former President of the National Association of Life Underwriters, a Washington,
D.C.-based professional money management group.
JOSEPH J. DIGANGE has been Chairman of Western Bank, since October 1, 1996.
In October 1987, Mr. Digange joined Western Bank, as President and Chief
Operating Officer. From 1973 to 1982 he was President and Chief Executive
Officer of First Los Angeles Bank and from 1982 to 1987 was Vice Chairman of the
Board. Mr. Digange has been in banking since 1950.
64
<PAGE>
JOHN M. EGGEMEYER is an investor and advisor to financial institutions. From
1992 to 1994, Mr. Eggemeyer was a principal of Mabon Securities Corp., an
investment bank, and from 1990 to the present, he has served as President of
Belle Plaine Financial, L.L.C. as well as BPI. Mr. Eggemeyer also serves as the
President of Castle Creek Capital, L.L.C., a registered bank holding company,
and as a director of DLJ Mortgage Capital Corp., DLJ Mortgage Acceptance Corp.,
The Enterprise Fund, Rancho Santa Fe National Bank, TCF Bank--Illinois, and TCF
Financial Corporation.
JOHN W. ROSE is currently an Executive Vice President of FNB Corporation, a
Pennsylvania multi-bank holding company and is responsible for community banks.
He has held this position since March 1995. Since January, 1992 he has also been
President of McAllen Capital Partners, Inc. a financial advisor to banks and
thrifts. From 1988 to 1992, Mr. Rose was President of Livingston Financial
Group, a venture capital firm specializing in troubled banking opportunities.
HUGH S. SMITH, JR. is Chairman of the Board and Chief Executive Officer of
Monarch Bancorp. He also serves on the Board of Western Bank and Monarch Bank.
Prior to September 30, 1996 he was Chairman of the Board and Chief Executive
Officer of Western Bank, a position he held for 23 years.
MATTHEW P. WAGNER is President of Monarch and President and Chief Executive
Officer of Western Bank. In October 1996, Mr. Wagner was elected President and
Chief Executive Officer of Western Bank and in February 1997, was appointed to
the post of President of Monarch. Prior to joining Monarch in 1996, Mr. Wagner
was Executive Vice President of Trust with First Bank System in Minneapolis,
Minnesota since 1991 and a Senior Vice President since 1985.
DALE E. WALTER has over 35 years of banking experience having served as
Chief Executive Officer of several Southern California independent banks
including serving as President and Chief Executive Officer of the Bank of
Industry from 1980 to June 1992, as Chairman and Chief Executive Officer of
Commerce Bancorp from January 1993 to July 1994 and President and Chief
Executive Officer of Guardian Bank from October 1994 to February 1995. From
February 1996 to the present, he has operated a wholesale golf travel company
and currently serves as a director of First Community Bank of the Desert.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ABOVE NOMINEES
COMMITTEES OF THE BOARD OF DIRECTORS
During 1996, the Board of Directors of Monarch held 13 meetings. Five of
these meetings occurred since September 30, 1996 when the Board was
restructured. See Part III, Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the Exchange Act--Directors in
Monarch's Annual Report attached hereto as Appendix B. All Directors attended at
least 75 percent of the Board meetings of Monarch during the time they were
directors.
The Audit Committee of the Board of Directors held four meetings in 1996, to
review the auditing findings, financial reports, and other matters with the
outside auditors. The four Audit Committee meetings were joint meetings of the
Audit Committee of Monarch and Monarch Bank. The current members of the Audit
Committee are Rice E. Brown, John W. Rose and Dale E. Walter.
The Compensation Committee of the Board of Directors consists of Rice E.
Brown, John W. Rose and Dale E. Walter. There were no Compensation Committee
meetings during 1996.
The Executive Committee of the Board of Directors consists of Hugh S. Smith,
Jr., Matthew P. Wagner and Joseph J. Digange. There were no meetings of the
Executive Committee in 1996.
Monarch has adopted a director compensation policy pursuant to which its
non-employee directors are to be paid an annual retainer of $5,000, $750 per
regular meeting attended and $300 per special meeting and committee meeting
attended. In addition, the Monarch Board may grant to non-employee directors
options to purchase that number of shares of Monarch Common Stock equal to
$15,000 divided by the Market Price at the time of grant at specified times. Mr.
Rose has agreed to forego the compensation he would otherwise receive as a
non-employee director (as described in this paragraph) in
65
<PAGE>
cosideration of his engagement as a financial advisor to the Company. See
"--Certain Relationships and Related Transactions." Monarch did not pay director
fees in 1996.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Monarch's directors and executive
officers and the beneficial owners of more than ten percent of Monarch's Common
Stock to file with the SEC initial reports of ownership and reports of changes
in ownership of Monarch Common Stock and other equity securities of Monarch.
Because of the complexity of the reporting rules, Monarch has assumed
responsibility for preparing and filing all reports required to be filed under
Section 16(a) by the directors and executive officers. Monarch believes that
during the last fiscal year all Section 16(a) filing requirements applicable to
its directors and executive officers were complied with, except for the failure
to (a) file a Form 3 for each of the following new executive officers of
Monarch: Hugh S. Smith, Jr., Joseph J. Digange, B. Scott Hardt and Arnold C.
Hahn and (b) file a Form 4 for each director and executive officer who received
stock options in February 1996, in each case within 10 days of the receipt
thereof. Once the omission was discovered, amendments were promptly filed.
EXECUTIVE OFFICERS
The following table sets forth as to each of the persons who currently
serves as an executive officer of Monarch, such person's age, such person's
present position and the period during which the person has served in such
position:
<TABLE>
<CAPTION>
YEAR APPOINTED
NAME AGE PRESENT POSITION TO POSITION
- ------------------------------ --- -------------------------------------------------------- -----------------
<S> <C> <C> <C>
Joseph J. Digange 70 Chairman, Western Bank 1996
Arnold C. Hahn 45 Executive Vice President, 1996
Chief Financial Officer and Secretary, Monarch
B. Scott Hardt 48 Executive Vice President 1996
and Chief Credit Officer,
Western Bank
Hugh S. Smith, Jr. 66 Chairman and Chief 1996
Executive Officer, Monarch
Matthew P. Wagner 40 President, Monarch; President and Chief Executive 1996
Officer, Western Bank
</TABLE>
JOSEPH J. DIGANGE has been Chairman of Western Bank, since October 1, 1996.
In October 1987, Mr. Digange joined Western Bank, as President and Chief
Operating Officer. From 1973 to 1982 he was President and Chief Executive
Officer of First Los Angeles Bank and from 1982 to 1987 was Vice Chairman of the
Board. Mr. Digange has been in banking since 1950.
ARNOLD C. HAHN has been Executive Vice President and Chief Financial Officer
of Monarch Bancorp since November 1996. Prior to joining Monarch Bancorp, Mr.
Hahn spent six years as a Senior Vice President of Finance for First Bank System
in Minneapolis, Minnesota. Prior to joining First Bank, Mr. Hahn was a partner
with Ernst & Young.
SCOTT HARDT is Executive Vice President and Chief Credit Officer of Western
Bank. Mr. Hardt joined the Bank in March 1988 as Senior Vice President and Chief
Credit Officer and was promoted to his current position in August 1994. Over the
past 22 years and prior to joining Western Bank, Mr. Hardt has held various
credit and marketing positions in banking. Mr. Hardt began his career with First
Interstate Bank in multi-national lending.
HUGH S. SMITH, JR. is Chairman of the Board and Chief Executive Officer of
Monarch Bancorp. He also serves on the Board of Western Bank and Monarch Bank.
Prior to September 30, 1996, he was Chairman of the Board and Chief Executive
Officer of Western Bank, a position he held for 23 years.
66
<PAGE>
MATTHEW P. WAGNER is President of Monarch and President and Chief Executive
Officer of Western Bank. In October 1996, Mr. Wagner was appointed President and
Chief Executive Officer of Western Bank, and in February 1997, he was appointed
to the post of President of Monarch Bancorp. Prior to joining Monarch Bancorp in
1996, Mr. Wagner served as Executive Vice President of Trust with First Bank
System in Minneapolis, Minnesota since 1991 and a Senior Vice President since
1985.
EXECUTIVE COMPENSATION
Monarch's executive officers are Hugh S. Smith, Jr., Chief Executive Officer
and Chairman of the Board; Arnold C. Hahn, Executive Vice President, Chief
Financial Officer and Secretary; and Matt Wagner, President. E. Lynn Caswell
served as Chief Executive Officer of Monarch from July 23, 1987 to September 30,
1996. The following table reflects all compensation paid to Mr. Smith, Mr.
Digange, Mr. Hahn, Mr. Hardt, Mr. Wagner and Mr. Caswell. No other officer of
Monarch received a total annual salary and bonus of $100,000 or more.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION AWARDS
----------------------------------- -------------
(E)
OTHER (F)
(A) (B) (C) (D) ANNUAL OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS COMP.(6) SARS(5)
- --------------------------------------------------------- --------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
E. Lynn Caswell (2) ..................................... 1996 138,028 10,800 --
Former Chief Executive Officer 1995 128,182 11,530 7,484
1994 128,182 10,555 --
Hugh S. Smith, Jr. ...................................... 1996 188,260 50,000 8,533 23,529
Chairman and Chief Executive Officer, Monarch (1)(3)
Joseph J. Digange ....................................... 1996 178,454 50,000 13,396 23,529
Chairman, Western Bank (1)(3)
Arnold C. Hahn .......................................... 1996 25,029 100,000 2,000 15,882
Executive Vice President and Chief Financial Officer,
Monarch (3)
B. Scott Hardt .......................................... 1996 126,524 50,000 10,800 9,412
Executive Vice President and Chief Credit Officer,
Western Bank (1)(3)
Matthew P. Wagner (4) ................................... 1996 43,750 100,000 3,608 58,824
President, Monarch; President and Chief Executive
Officer, Western Bank
</TABLE>
- ------------------------
(1) Compensation includes amounts received in 1996 from Western Bank.
(2) Mr. E. Lynn Caswell executed an Employment Agreement dated July 23, 1987,
and amended effective July 23, 1989, and July 23, 1991 with Monarch and
Monarch Bank. The Agreement was effective for a three year period with
automatic, subsequent three year renewals, unless notice was given 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 Monarch completed its capital raising
activities conducted through private placements of its Common Stock. In
December 1995, the Board appointed a special committee to review Mr.
Caswell's Agreement and to recommend a new agreement. In February 1997,
Monarch and Mr. Caswell agreed pursuant to a
67
<PAGE>
General Release of Claims and Agreement, dated as of February 1, 1997 (the
"Release"), among Mr. Caswell, Monarch and Monarch Bank to terminate his
Employment Agreement in early 1997 and to a payment by Monarch to Mr.
Caswell of $347,600. This amount was accrued in Monarch's 1996 financial
statements.
(3) Includes incentive payments accrued in Monarch's 1996 financial statements
and paid in February 1997.
(4) Mr. Wagner received an additional $47,265 in consulting fees prior to his
becoming an executive officer.
(5) After giving effect to the Reverse Stock Split.
(6) Consists primarily of company cars, car allowances and club dues paid by
Monarch.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING PERCENT OF TOTAL EXERCISE OR
OPTIONS/SARS OPTIONS/SARS GRANTED TO BASE EXPIRATION
NAME GRANTED (#) EMPLOYEES IN FISCAL YEAR PRICE ($/SHARE) DATE
- -------------------------------------------- ------------- --------------------------- --------------- -----------
<S> <C> <C> <C> <C>
Hugh S. Smith, Jr........................... 23,529 17.4% $ 14.03 2001-2006
Joseph J. Digange........................... 23,529 17.4% $ 14.03 2001-2006
Arnold C. Hahn.............................. 15,882 11.8% $ 14.03 2001-2006
B. Scott Hardt.............................. 10,000 7.4% $ 14.03 2001-2006
Matthew P. Wagner........................... 58,824 43.6% $ 14.03 2001-2006
</TABLE>
Certain stock options issued prior to 1996 to E. Lynn Caswell, the former
CEO of Monarch, were replaced in January 1996 with options to purchase 7,484
shares of Monarch Common Stock at an exercise price of $13.77 per share
(representing approximately 120 percent of the then-current market price). The
Board of Directors at that time determined that the options so replaced carried
exercise prices that were too high to provide Mr. Caswell with any meaningful
opportunity to realize economic value; accordingly, the Board determined that
the issuance of replacement options (which maintained an above-market
exercise-price) was appropriate. Pursuant to the Release, Mr. Caswell has waived
all rights to such options without any additional consideration.
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
OPTIONS/SARS AT FY- OPTIONS/SARS AT FY-END
SHARES ACQUIRED VALUE END (#) EXERCISABLE/ ($) EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------------- ----------------- ------------- --------------------- -----------------------
<S> <C> <C> <C> <C>
0/ $ 0/
Hugh S. Smith, Jr. ................ None None 23,529 $ 270,000
0/ $ 0/
Joseph J. Digange.................. None None 23,529 $ 270,000
0/ $ 0/
Arnold C. Hahn..................... None None 15,882 $ 182,250
0/ $ 0/
B. Scott Hardt..................... None None 10,000 $ 135,000
0/ $ 0/
Matthew P. Wagner.................. None None 58,824 $ 675,000
</TABLE>
68
<PAGE>
There were no options exercised during the fiscal year ended December 31,
1996.
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the directors and executive officers of Monarch and its
subsidiaries, and the companies with which they are associated, are customers
of, and have had banking transactions with, Monarch Bank and Western Bank (the
"Banks"). All banking transactions have taken place in the ordinary course of
the Banks' business, and the Banks expect to have banking transactions with such
persons in the future.
In Monarch'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 Monarch,
together with their associates, amounted to $116,000 on December 31, 1996,
constituting a negligible percentage of Monarch's equity capital accounts on
that date.
Monarch'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 Monarch.
On January 1, 1996 Monarch engaged Mr. Rose, who is a director of Monarch,
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 Monarch. The engagement agreement
provides for a monthly fee of $3,000 plus expenses beginning January 1, 1996.
The agreement may be terminated by either Monarch or Mr. Rose upon 30 days'
written notice.
John M. Eggemeyer is a principal of Belle Plaine Financial, L.L.C. and BPI.
BPI has served as financial advisor to Monarch under an engagement letter dated
May 17, 1995. In that capacity, BPI was paid fees of $1,414,632 for evaluation
and identifying potential acquisitions including the acquisition of Western Bank
which closed September 30, 1996. It is also anticipated that fees of
approximately $1.35 million will be paid under the BPI engagement letter in
connection with the acquisition of CCB by Monarch. Belle Plaine Financial,
L.L.C., of which Mr. Eggemeyer owns 52 percent, was engaged by Monarch to raise
capital to consummate the acquisition of Western Bank. Belle Plaine Financial,
L.L.C. was paid $862,831 for its services with regard to raising approximately
$42 million in a private placement in connection with Monarch's acquisition of
Western Bank and was reimbursed for expenses incurred in the course of that
engagement. The engagement letter may be terminated by either Monarch or BPI
upon 30 days' written notice. See "--Security Ownership of Certain Beneficial
Owners and Monarch Management" and "THE MERGER--Interests of Certain Persons in
the Merger--Ownership of BPI."
SUBMISSION OF SHAREHOLDER PROPOSALS
FOR MONARCH'S 1998 ANNUAL MEETING
Monarch Shareholders may submit proposals for shareholder action at the 1998
annual meeting of Monarch Shareholders if they do so in accordance with
applicable regulations of the SEC. Any such proposals must be submitted to the
Secretary of Monarch no later than January 16, 1998 in order to be considered
for inclusion in Monarch's 1998 proxy materials.
69
<PAGE>
THE ANNUAL MEETING OF CCB SHAREHOLDERS
GENERAL
This Joint Proxy Statement--Prospectus is furnished in connection with the
solicitation by the CCB Board of proxies representing CCB Common Stock to be
voted at the CCB Meeting to be held on June 2, 1997, and at any postponement or
adjournment thereof. This Joint Proxy Statement--Prospectus and accompanying
proxy card are first being mailed to CCB Shareholders on or about May 16, 1997.
MATTERS TO BE CONSIDERED AT THE CCB MEETING
The purpose of the CCB Meeting is to (a) consider and vote upon the
principal terms of the Merger; (b) consider and approve the election of seven
directors to hold office until the Merger is consummated or, if the Merger is
not consummated, until the next annual meeting of CCB and until their successors
have been elected and duly qualified; and (c) transact such other business as
may properly come before the CCB Meeting or any postponement or adjournment
thereof.
Based upon (a) the 3,043,226 shares of CCB Common Stock outstanding on April
11, 1997 and (b) the 144,250 shares of CCB Common Stock reserved for issuance
upon exercise of employee stock options to acquire CCB Common Stock outstanding
on April 11, 1997, and assuming no Dissenters' Rights are perfected by CCB
Shareholders and no cash is paid in lieu of fractional shares, (i) if no shares
of CCB Common Stock which were reserved for issuance on April 11, 1997 were
issued and outstanding on the Effective Date, 3,043,226 shares of Monarch Common
Stock would be issued in the Merger, and (ii) if all shares of CCB Common Stock
which were reserved for issuance on April 11, 1997 were issued and outstanding
on the Effective Date, 3,187,476 shares of Monarch Common Stock would be issued
in the Merger. Based upon the 4,043,885 shares of Monarch Common Stock
outstanding on April 21, 1997 and the 287,458 shares of Monarch Common Stock
reserved for issuance upon exercise of employee stock options and warrants to
acquire Monarch Common Stock outstanding on April 21, 1997, and assuming no
Dissenters' Rights are perfected by any Monarch Shareholder or CCB Shareholder
and no cash is paid in lieu of fractional shares, shares held by Monarch
Shareholders and CCB Shareholders, after consummation of the Merger, would
represent (i) 57.1% and 42.9%, respectively, of the Surviving Corporation, if
none of the shares of CCB Common Stock or Monarch Common Stock which were
reserved for issuance on April 11, 1997 and April 21, 1997, respectively, were
outstanding on the Effective Date, and (ii) 57.6% and 42.4%, respectively, if
all shares of CCB Common Stock and Monarch Common Stock which were reserved for
issuance on April 11, 1997 and April 21, 1997, respectively, were issued by the
Effective Date. Such relative share ownership information will be materially
impacted by the issuance of additional shares of Monarch Common Stock upon
consummation of the SCB Merger. See "PROPOSED SC BANCORP ACQUISITION."
Consummation of the Merger is subject to satisfaction of a number of conditions,
including the receipt of various regulatory approvals for the Merger and the
Bank Merger; the designation for quotation of Monarch Common Stock on the NASDAQ
National Market; and the approval of the principal terms of the Merger by CCB
Shareholders and Monarch Shareholders. See "MERGER AGREEMENT--Conditions."
The Merger Agreement provides, among other things, that Robert L. McKay,
William H. Jacoby and Mark H. Stuenkel will be appointed to the board of
directors of the Surviving Corporation at the time the Merger is consummated.
Accordingly, at the Effective Time, the Monarch Board will adopt resolutions
increasing the number of Monarch directors from seven to ten and appointing
Messrs. Jacoby, McKay and Stuenkel to fill the vacancies created thereby. The
directors and certain officers of CCB as specified by Monarch will be required
to resign, effective upon consummation of the Merger. See "THE MERGER-- Certain
Effects of the Merger." In the event that the Merger is not consummated as
contemplated, all directors of CCB elected at the CCB Meeting will continue to
serve as directors of CCB until the next annual meeting of CCB and until their
successors have been elected and duly qualified.
70
<PAGE>
At the time this Joint Proxy Statement--Prospectus was mailed, CCB knew of
no other matters which might be presented for CCB Shareholder action at the CCB
Meeting.
THE CCB RECORD DATE
The CCB Board has fixed the close of business on April 11, 1997 as the
record date (the "CCB Record Date") for the determination of the CCB
Shareholders entitled to notice of, and to vote at, the CCB Meeting. Only
holders of record of shares of CCB Common Stock at the close of business on the
CCB Record Date are entitled to notice of and to vote at the CCB Meeting. On the
CCB Record Date, 3,043,266 shares of CCB Common Stock were issued and
outstanding.
VOTES REQUIRED AND VOTING OF PROXIES
CCB will appoint one or three employees to function as inspectors of the
election in advance of the CCB Meeting, to tabulate votes, to ascertain whether
a quorum is present and to determine the voting results on all matters presented
to the CCB Shareholders. A majority of all shares of CCB Common Stock entitled
to vote, represented in person or by proxy, constitutes a quorum. Abstentions
and broker non-votes are each included in the determination of the number of
shares present; however, they are not counted for the purpose of determining the
election of each nominee for director and are not counted as votes in favor of
the principal terms of the Merger. Subject to the cumulative voting rights
described below with respect to the election of directors, each share of CCB
Common Stock is entitled to one vote.
If a quorum is not obtained, or fewer shares of CCB Common Stock are voted
in favor of the principal terms of the Merger than the number required for
approval of the principal terms of the Merger, it is expected that the CCB
Meeting will be postponed or adjourned for the purpose of allowing additional
time for obtaining additional proxies or votes, and at any subsequent
reconvening of the CCB Meeting, all proxies will be voted in the same manner as
such proxies would have been voted at the original convening of the CCB Meeting
(except for any proxies which have theretofore effectively been revoked or
withdrawn).
The affirmative vote of the holders of at least a majority of the total
number of outstanding shares of CCB Common Stock entitled to vote at the CCB
Meeting is required to approve the principal terms of the Merger. The failure to
vote, an abstention or a broker non-vote thus have the same effect as a vote
against the principal terms of the Merger.
The authorized number of directors of CCB is seven and the nominees
receiving the highest number of votes, up to the number of directors to be
elected by such votes, will be elected, assuming a quorum is present. CCB
Shareholders have cumulative voting rights with respect to the election of
directors, if certain conditions are met. Cumulative voting enables a
shareholder to give one nominee for director as many votes as is equal to the
number of directors to be elected multiplied by the number of shares in respect
of which such shareholder is voting, or to distribute such votes on the same
principle among two or more nominees, as such shareholder sees fit. CCB
Shareholders have the right to cumulate their votes only if the candidates'
names have been placed in nomination prior to the voting and any CCB Shareholder
has given notice at the meeting prior to voting of that shareholder's intention
to cumulate his or her votes. If any one CCB Shareholder has given such notice,
all CCB Shareholders may cumulate their votes for candidates who have been
properly placed in nomination.
A proxy when executed and not revoked will be voted in accordance with the
instructions given in the proxy. If a choice is not specified in the proxy, the
proxy will be voted as described below.
Unless otherwise instructed, the named CCB proxies intend to vote the CCB
shares represented by such proxies FOR the principal terms of the Merger and, in
the case of the election of directors of CCB, equally FOR each of the seven
candidates for the office of director of CCB named in this Joint Proxy
Statement--Prospectus; however, if sufficient numbers of CCB Shareholders
exercise cumulative voting
71
<PAGE>
rights to elect one or more candidates, the named proxies will determine the
number of directors they are entitled to elect, select such number from among
the named candidates, cumulate their votes, and cast their votes for each
candidate among the number they are entitled to elect. All proxies voted "FOR"
such matters, including proxies on which no instructions are indicated, may, at
the discretion of the proxy holder, be voted "FOR" a motion to adjourn or
postpone the CCB Meeting to another time and/or place for the purpose of
soliciting additional proxies or otherwise; provided, however, that no proxy
which is voted against approval of the principal terms of the Merger or on which
the relevant CCB Shareholder specifically abstains from voting with respect to
such approval will be voted in favor of any such adjournment or postponement.
If any business not described herein should come before the CCB Meeting, it
is intended that the shares represented by the proxies will be voted in
accordance with the best judgment of the persons voting them.
CCB Shareholders holding approximately 43.73 percent of CCB Common Stock
outstanding on the CCB Record Date have agreed, among other things, to vote
"FOR" the adoption and approval of the Merger Agreement and the Merger. See "THE
SHAREHOLDER AGREEMENTS." Monarch has agreed that neither it nor any of its
affiliates will acquire more than five percent of the outstanding CCB Common
Stock prior to the Effective Time. At April 21, 1997, Monarch held no shares of
CCB Common Stock.
REVOCABILITY
Holders of CCB Common Stock who execute proxies retain the right to revoke
them at any time before they are voted. Any proxy given by a CCB Shareholder may
be revoked or superseded by executing a later proxy, or by giving notice of
revocation in writing prior to or at the CCB Meeting (or, if the CCB Meeting is
postponed or adjourned, prior to or at the time the adjourned or postponed
meeting is actually held) addressed to the Assistant Secretary of CCB, 4100
Newport Place, Suite 900, Newport Beach, California 92660, or by attending the
CCB Meeting (or any adjournment or postponement thereof) and voting in person.
SOLICITATION OF PROXIES
The cost of soliciting proxies relating to the CCB Meeting will be paid by
CCB. In addition to the solicitation of proxies by the use of the mail,
directors, officers and employees of CCB and NBSC may solicit proxies
personally, or by other appropriate means. CCB may also request banks, brokerage
houses and other custodians, nominees or fiduciaries holding shares of CCB
Common Stock in their names for others, to send proxy materials and to obtain
proxies from the beneficial owners of such shares and CCB will reimburse them
for their expenses in doing so.
SECURITY OWNERSHIP OF PRINCIPAL CCB SHAREHOLDERS AND MANAGEMENT
The shares of CCB's Common Stock constitute the only outstanding class of
voting securities of CCB. As of April 11, 1997, there were 3,043,226 shares of
CCB Common Stock outstanding and entitled to vote and approximately 300 CCB
Shareholders of record.
The following table sets forth information regarding beneficial ownership of
shares of CCB Common Stock as of April 11, 1997 by all CCB Shareholders known to
CCB to be the beneficial owner of more than five percent of the outstanding
shares of CCB Common Stock, all directors and executive officers of CCB
72
<PAGE>
and all current officers and directors of CCB as a group. Information with
respect to beneficial ownership is based upon CCB's Common Stock records and
data supplied to CCB by CCB Shareholders.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNER
NAME AND ADDRESS AND PERCENT OF CLASS
TITLE OF CLASS OF BENEFICIAL OWNER (1)
- ----------------- --------------------------------------------------------------- ---------------------
<S> <C> <C> <C>
Common Stock Phillip L. Bush................................................ 103,050(3) 3.4%(3)
Director
10061 Talbert Ave.
Fountain Valley, CA 92708
Common Stock Michael Gertner................................................ 32,977(3) 1.1(3)
Director
4340 Campus Drive, Suite 100
Newport Beach, CA 92660
Common Stock James W. Hamilton.............................................. 83,472(3) 2.7(3)
695 Town Center Drive
Costa Mesa, CA 92626
Director
Common Stock Farrell G. Hinkle, DDS, MSD.................................... 139,596(3) 4.6(3)
Director
2740 South Bristol
Santa Ana, CA 92704
Common Stock William H. Jacoby.............................................. 231,664(2) 7.6(2)
President, Chief Executive Officer and Director
4100 Newport Place
Newport Beach, CA 92660
Common Stock Robert L. McKay................................................ 721,049(3) 23.7(3)
Director
4100 Newport Place
Newport Beach, CA 92660
Common Stock Mark H. Stuenkel............................................... 52,149(4) 1.7(4)
Executive Vice President and Director
4100 Newport Place
Newport Beach, CA 92660
Common Stock All Directors and Officers as a group.......................... 1,394,702(6) 44.1(6)
(29 persons)
Common Stock Financial Institutions Partners, L.P........................... 342,797(5) 11.3(5)
c/o Hovde Capital Inc.
1110 Lake Cook Rd. #165
Buffalo Grove, IL 60089-1965
Common Stock Basswood Partners.............................................. 158,701 5.2
52 Forest Ave.
Paramus, NJ 07652
</TABLE>
- ------------------------
(1) Except as otherwise indicated and subject to the Shareholder Agreements
described herein, each of the persons named in the table has the sole power
to vote and dispose of his/her shares of CCB
73
<PAGE>
Common Stock subject to community property laws where applicable. See
"SHAREHOLDER AGREEMENTS."
(2) Includes 13,333 shares of CCB Common Stock which may be purchased on the
exercise of stock options.
(3) Includes 6,667 shares of CCB Common Stock which may be purchased on the
exercise of stock options.
(4) Includes 24,583 shares of CCB Common Stock which may be purchased on the
exercise of stock options.
(5) Includes 53,909 shares of CCB Common Stock held beneficially by Hovde
Financial, Inc, the corporate general partner of Financial Institutions
Partners, L.P. Does not include the 266,659 additional shares of CCB Common
Stock which FIP has asserted a right to acquire. See "FIP LITIGATION."
(6) Includes 92,914 shares of CCB Common Stock which may be purchased on the
exercise of stock options.
DISSENTERS' RIGHTS
If the Merger is consummated, holders of CCB Common Stock who comply with
the requirements of Chapter 13 of the CGCL may have the right to receive a cash
payment in the amount of the fair market value of their shares on December 18,
1996, determined in accordance with the procedures set forth in the CGCL. See
"THE MERGER--Dissenters' Rights" for a discussion of the availability of
Dissenters' Rights and a description of the procedures which must be followed to
perfect such rights.
ELECTION OF CCB DIRECTORS
The persons named below have been nominated for election to serve as
directors of CCB. Under the terms of the Merger Agreement, each of the directors
of CCB will be required to submit their irrevocable resignations as directors of
CCB, effective upon consummation of the Merger. In the event that the Merger is
not consummated, all directors of CCB elected at the CCB Meeting will continue
to serve as directors of CCB until the next annual meeting of CCB and until
their successors have been elected and duly qualified.
The following table sets forth information concerning CCB's nominees for
directors:
<TABLE>
<CAPTION>
NAME AND AGE PRESENT POSITION WITH CCB DIRECTOR OF CCB SINCE
- ------------------------------------------ ---------------------------- -----------------------
<S> <C> <C>
Phillip L. Bush (60)...................... Director 1982
Michael Gertner (57)...................... Director 1982
James W. Hamilton (64).................... Director 1982
Farrell G. Hinkle DDS, MSD (54)........... Director 1982
William H. Jacoby (58).................... President, Chief Executive 1982
Officer and Director
Robert L. McKay (66)...................... Director 1982
Mark H. Stuenkel (44)..................... Executive Vice President and 1987
Director
</TABLE>
74
<PAGE>
Phillip L. Bush is a practicing attorney with the firm of Bush, Bush and
Larsen, in Fountain Valley, California. Mr. Bush's practice is primarily
litigation of personal injury matters. He also has practiced in the areas of
real estate development and syndication, and business enterprise organization
and formation. Mr. Bush has been Secretary of CCB since 1982.
Since 1993, Michael Gertner has been, and is currently, an attorney in the
law firm of Michael Avey Gertner, a Professional Corporation, in Newport Beach.
From 1965 to 1993 he was a partner in the law firm of Howser, Gertner and Brown.
He is licensed to practice law in both California and New York and is also a
Certified Public Accountant. Mr. Gertner specializes in the areas of taxation,
estate planning and estate administration.
James W. Hamilton is Senior Counsel to the law firm of Paul, Hastings,
Janofsky & Walker LLP of which he was a partner from 1965 until 1993. His office
is in the firm's Costa Mesa, California facility. He specializes in securities
and corporate law.
Farrell G. Hinkle is an Orthodontist and has been practicing orthodontics in
the Orange County area since 1973. Dr. Hinkle has a degree in Mathematics and
graduated from the UCLA School of Dentistry as a Regent Scholar in 1971. He also
earned a Certificate in Orthodontics and a Masters Degree from the University of
Washington in 1973.
William H. Jacoby is President and Chief Executive Officer of CCB and also
Chairman of the Board and Chief Executive Officer of NBSC. Mr. Jacoby began his
career in banking in 1960 with First Interstate Bank of California. In 1979, Mr.
Jacoby joined Westlands Bank and served in various positions until joining CCB
in June 1982 during its organizational period.
Since 1981, Robert L. McKay has been a private investor in Orange County,
California, where he oversees his investments in venture capital and real
estate. From 1966 to 1981 Mr. McKay was President of Taco Bell, Inc.
Mark H. Stuenkel is Executive Vice President of CCB and President of NBSC.
In December 1988, Mr. Stuenkel was appointed to his present position as
President of NBSC and in May 1991, he was promoted from Senior Vice President to
Executive Vice President of CCB. Prior to joining CCB and NBSC in 1982, Mr.
Stuenkel held various positions with Security Pacific National Bank.
CCB does not pay its directors for attending meetings. Since February 1991,
non-employee directors of NBSC have been paid $1,000 per meeting attended and
$375 per committee meeting attended. The total amount of fees paid to
non-employee directors of NBSC during 1996, 1995 and 1994 were $160,000,
$140,000 and $130,000, respectively.
COMMITTEES OF THE CCB BOARD
The CCB Board has a CCB Audit Committee, a CCB Compensation Committee, a CCB
Loan Committee, a CCB Compliance Committee and a CCB CRA Committee. The CCB
Audit Committee is comprised of Messrs. Gertner and Hamilton. The CCB Audit
Committee is authorized to handle all matters which it deems appropriate
regarding CCB's and NBSC's independent accountants and to otherwise communicate
and act upon matters relating to the review and audit of the books and records,
including the scope of the annual audit and the accounting methods and systems
to be utilized. The CCB Audit Committee held 2 meetings during 1996.
The CCB Compensation Committee is comprised of Messrs. Bush, Gertner,
Hamilton and McKay. The CCB Compensation Committee makes recommendations to the
Board of Directors with respect to compensation and incentive programs for the
officers of CCB and NBSC. The CCB Compensation Committee held 2 meetings during
1996.
The CCB Loan Committee is comprised of Messrs. Bush, Gertner, Hinkle,
Hamilton, Jacoby, McKay and Stuenkel. The CCB Loan Committee recommends loan
policy to the CCB Board. It also approves
75
<PAGE>
loans in excess of loan limits delegated to the officers of NBSC. The CCB Loan
Committee held 43 meetings during 1996.
The CCB Compliance Committee is comprised of Messrs. Gertner, Hamilton,
Jacoby, McKay and Stuenkel. The CCB Compliance Committee oversees the NBSC's
compliance with applicable laws and regulations. The CCB Compliance Committee
held 2 meetings during 1996.
The CCB CRA Committee is comprised of Messrs. Bush, Gertner, Jacoby and
Stuenkel. The committee oversees CCB's performance under the Community
Reinvestment Act. The CCB CRA Committee held one meeting during 1996.
During 1996, no incumbent director of CCB attended fewer than 75 percent of
the aggregate of (a) the total number of meetings of the CCB Board and (b) the
total number of meetings held by all Committees of the CCB Board on which he
served.
COMPENSATION OF EXECUTIVES OF CCB
EXECUTIVE COMPENSATION. The following summary compensation table sets forth
information for the fiscal year ended December 31, 1996 concerning all plan and
non-plan compensation awarded to, earned by, or paid to (a) CCB's Chief
Executive Officer at the end of such fiscal year, regardless of compensation
level, and (b) CCB's four most highly compensated executive officers other than
the Chief Executive Officer who were serving as executive officers of CCB at the
end of such fiscal year and whose compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------------
AWARDS
ANNUAL COMPENSATION ---------------------------- PAYOUTS
----------------------------------------- -----------
(E) (F)
(A) OTHER RESTRICTED (H)
NAME AND PRINCIPAL (B) (C) (D) ANNUAL STOCK (G) LTIP
POSITION YEAR SALARY ($) BONUS($) COMP.($)(2) AWARD(S) OPTIONS/ SARS PAYOUTS
- --------------------------------- --------- ----------- ----------- --------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
William H. Jacoby................ 1996 238,000(1) 100,000 5,000 0 0 0
Chief Executive Officer 1995 190,000 0 5,000 0 0 0
1994 190,000 22,000 4,000 0 0 0
--------- ----------- ----------- ----- --- --- ---
Mark H. Stuenkel................. 1996 161,000(1) 76,000 4,000 0 0 0
Executive Vice President 1995 144,000 0 4,000 0 0 0
1994 137,000 16,000 2,000 0 0 0
--------- ----------- ----------- ----- --- --- ---
Dannie M. Hayes.................. 1996 108,000 32,000 3,000 0 0 0
1995 108,000 0 3,000 0 0 0
1994 100,000 5,000 2,000 0 0 0
--------- ----------- ----------- ----- --- --- ---
Abdul S. Memon................... 1996 112,000(1) 32,000 3,000 0 0 0
Chief Financial Officer 1995 90,000 0 2,000 0 0 0
1994 85,000 4,000 2,000 0 0 0
<CAPTION>
(A) (I)
NAME AND PRINCIPAL ALL OTHER
POSITION COMP. ($)(3)
- --------------------------------- ---------------
<S> <C>
William H. Jacoby................ 1,000
Chief Executive Officer 1,000
0
-----
Mark H. Stuenkel................. 1,000
Executive Vice President 1,000
0
-----
Dannie M. Hayes.................. 1,000
1,000
0
-----
Abdul S. Memon................... 1,000
Chief Financial Officer 0
0
</TABLE>
- ------------------------
$-Dollar amounts
(1) Includes vacation pay in the amount of $48,000 for Mr. Jacoby, $16,000 for
Mr. Stuenkel and $22,000 for Mr. Memon.
(2) None of the named officers had other annual compensation in excess of
$50,000 or 10 percent of the total annual salary and bonus reported for any
of the last three years.
(3) Represents executives' portion of amount contributed to CCB's Stock Bonus
Plan. The Plan is 100 percent funded by CCB. The contributions are made at
the discretion of the Board of Directors. The distributions are made at the
earliest of 2 years after termination, retirement, death or disability.
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<PAGE>
The following table describes the aggregate option/stock appreciation right
("SAR") exercises during the year ended December 31, 1996 and unexercised
options/SARs for each named executive officer at the end of such year:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(E)
(D) VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
(B) OPTIONS/SARS OPTIONS/SARS AT
SHARES (C) AT FY-END(#) FY-END(S)
ACQUIRED VALUE --------------- -----------------
(A) ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------------------- ----------- ----------- --------------- -----------------
<S> <C> <C> <C> <C>
William H. Jacoby.................................... 10,000 40,000 28,333/16,667 265,000/150,000
Mark H. Stuenkel..................................... 7,500 30,000 27,083/16,667 174,000/150,000
Dannie M. Hayes...................................... NONE N/A 3,333/6,667 32,000/63,000
Abdul S. Memon....................................... 7,820 31,000 2,847/3,333 27,000/32,000
</TABLE>
During the fiscal year ended December 31, 1996, CCB did not reprice any
options or SARs held by a named executive officer or otherwise reduce the terms
of exercise. No options or SARs held by any executive officer of CCB over the
last ten years have been repriced or modified.
STOCK OPTION PLANS. CCB had a Stock Option Plan (the "1982 Plan") for its
directors, officers and full time employees which expired on October 27, 1992.
The CCB Board administers the 1982 Plan. The purpose of the 1982 Plan was to
compensate certain of the organizers of CCB and NBSC, and to provide an
incentive to key employees to remain in the employ of CCB and NBSC.
Options are not transferable under the 1982 Plan other than by will or by
the laws of descent and distribution, and during the participant's lifetime,
options are exercisable only by the participant. The option price per share for
options granted under the 1982 Plan was established to be at least 100 percent
of the fair market value of CCB Common Stock on the date any such options were
granted, except that in the case of a CCB Shareholder owning more than ten
percent of the total combined voting power of all classes of outstanding CCB
Common Stock, the option price for incentive stock options was established to be
at least 110 percent of the fair market value on the date of grant. While
outstanding options to purchase shares which were granted prior to October 27,
1992 may continue to be exercised according to their terms, no new options may
be granted under the 1982 Plan.
As of December 31, 1996, options to purchase 43,680 shares of CCB Common
Stock were outstanding under the 1982 Plan at prices ranging from $5.25 to $5.94
per share. During 1996, all employees as a group exercised options for 38,820
shares of CCB Common Stock which had a net value (market value less exercise
price) of $130,000. Of such options, Mr. Jacoby, Mr. Stuenkel and Mr. Memon
exercised 25,320 options and received 10,000 shares, 7,500 shares and 7,820
shares, respectively, which had a net value of $40,000, $30,000 and $31,000,
respectively.
During 1995, CCB adopted a Stock Award Plan (the "CCB Award Plan") for its
directors, officers and full time employees. The purpose of the CCB Award Plan
is to provide incentives to directors and key employees to remain with CCB and
NBSC.
The CCB Compensation Committee administers the CCB Award Plan and decides to
whom and upon what terms awards will be granted. An aggregate of 750,000 shares
of CCB Common Stock have been reserved for issuance under the CCB Award Plan. No
more than 30,000 shares may be granted to any individual during any twelve month
period. Awards may consist of any combination of stock options (incentive or
nonqualified), restricted stock, stock appreciation rights and performance
shares. Only stock options have currently been granted under the CCB Award Plan.
77
<PAGE>
Options are not transferable under the CCB Award Plan other than by will or
by the laws of descent and distribution, and during the participant's lifetime,
such options are exercisable only by the participant. The option price per share
for options granted under the CCB Award Plan are determined by the CCB
Compensation Committee, provided that in the case of stock option grants to a
person owning more than ten percent of the total combined voting power of all
classes of CCB Common Stock, the option price must be at least 110 percent of
the fair market value of CCB Common Stock on the date of grant. Options granted
under the CCB Award Plan may be exercised as determined by the CCB Compensation
Committee, but in no event after ten years from the date of grant, and must be
exercised within certain specified periods after termination of employment. Upon
expiration or termination of any outstanding options, shares remaining
unexercised become available for grant under the CCB Award Plan.
As of December 31, 1996, options to purchase 134,000 shares of CCB Common
Stock were outstanding under the CCB Award Plan at prices ranging from $5.25 to
$6.50 per share. Of these outstanding options, all employees as a group
exercised options for 1,000 shares of CCB Common Stock during 1996 which had a
net value (market value less exercise price) of $4,000.
All options to acquire CCB Common Stock outstanding under the 1982 Plan and
the CCB Award Plan at the Effective Time will be converted into the right to
receive Monarch Common Stock with the same number of shares issuable thereunder
(reflecting the Conversion Number of one). No change will be made with respect
to the vesting of such options.
STOCK BONUS PLAN. Effective January 1, 1986, CCB adopted a Stock Bonus Plan
(the "CCB Stock Bonus Plan") and established a related trust. Subject to certain
eligibility requirements for time of service, all of CCB's employees participate
in the CCB Stock Bonus Plan. The CCB Stock Bonus Plan is a tax-credit employee
stock ownership plan and is administrable by the CCB Board or the Chief
Executive Officer of CCB. The amount of CCB's contributions of cash or
securities of CCB to the CCB Stock Bonus Plan may be determined by the CCB Board
(or the Chief Executive Officer of CCB). Subject to certain limitations, such
contributions are allocated to each participant's account in proportion to such
participant's compensation earned during the applicable CCB Stock Bonus Plan
year. Allocations to a participant's account vest in accordance with the
schedules set forth in the CCB Stock Bonus Plan. Distributions to participants
are made at participants' death, retirement, disability or termination of
employment. Participants are not permitted to make voluntary contributions to
the CCB Stock Bonus Plan, and the CCB Stock Bonus Plan may not make loans to
participants. Any cash amounts contributed to the CCB Stock Bonus Plan will be
used primarily to purchase securities issued by CCB. CCB contributed $45,000 to
the CCB Stock Bonus Plan for 1996. Of such allocations, Messrs. Jacoby,
Stuenkel, Hayes and Memon received $1,000 each.
401(K) PLAN. Effective February 1, 1989, CCB established a 401(k) plan
which enables employees to defer a portion of their wages tax free, subject to
limitations established by the Internal Revenue Service. All CCB employees at
the completion of certain eligibility requirements for time of service can elect
to participate in the plan. Under the 401(k) plan, CCB can make matching
contributions to the 401(k) plan up to stated limits. Such contributions are
determined by the CCB Board at the beginning of the year. The vesting of such
contributions to the employees of CCB is based on time of service since the
effective date of the 401(k) plan.
CCB does not have any defined benefit retirement or other retirement plans.
EXECUTIVE SALARY CONTINUATION AGREEMENTS. In 1988, NBSC entered into
Executive Salary Continuation Agreements (the "Salary Continuation Agreements")
with Messrs. Jacoby, Stuenkel and Memon (the "Senior Executives"). Pursuant to
the Salary Continuation Agreements, each Senior Executive is entitled to receive
benefits upon his retirement, death or disability or upon termination of service
with NBSC prior thereto unless such Senior Executive's employment with NBSC is
terminated either (i) voluntarily by the Senior Executive, other than for "good
reason" (as defined in his Salary Continuation Agreement) or
78
<PAGE>
(ii) by NBSC for "cause" (as defined in his Salary Continuation Agreement), in
which case no benefits or payments will be paid pursuant to the Salary
Continuation Agreements. Mr. Jacoby's benefits are fully vested in the Salary
Continuation Plan. The benefits of each of the other Senior Executives vest at
the rate of ten percent per year for each year that he has been employed by NBSC
commencing as of January 1, 1988, up to a maximum of 100 percent. At January 2,
1997, the benefits of such other Senior Executives were 90 percent vested and
will be 100 percent vested as of January 2, 1998.
Under the terms of the Salary Continuation Agreements, each of the Senior
Executives will be entitled to receive the following sums annually, assuming
full vesting, for a period of fifteen years after either their retirement from
NBSC or upon their death: Mr. Jacoby, $80,000; Mr. Stuenkel, $62,500; and Mr.
Memon, $23,000. If a Senior Executive's employment with NBSC is terminated
because of disability prior to retirement, such Senior Executive (or his estate)
will be entitled to receive his benefits under the Salary Continuation Agreement
upon retirement or death or to elect to receive a disability benefit in an
amount equal to the present value of such Senior Executive's retirement benefits
under his Salary Continuation Agreement.
Each Salary Continuation Agreement also has provisions which become
effective upon the occurrence of a Change in Control (as defined) of CCB or
NBSC. In such event, the Salary Continuation Agreements become employment
agreements with three-year terms for Mr. Jacoby and Mr. Stuenkel and an
employment agreement with an eighteen-month term for Mr. Memon. The Salary
Continuation Agreements provide that, during such periods of employment, Messrs.
Jacoby, Stuenkel and Memon are entitled to receive $570,000, $495,000 and
$135,000, respectively (or $1,200,000 in the aggregate) as annual base salary,
as well as regular bonuses and other benefits. Such amounts are in addition to
the amounts that each would be paid under the Salary Continuation Agreements
upon retirement. The Salary Continuation Agreements also provide for the Senior
Executives' salary and bonus to increase annually during such terms. The Senior
Executives are also entitled to receive all non-cash forms of compensation and
benefits which they received prior to the Change in Control for the term of the
Salary Continuation Agreements. Under the terms of the Salary Continuation
Agreements, a "Change in Control" is deemed to have occurred if (a) any person
(other than CCB's directors as of the date of the Salary Continuation
Agreements) becomes the beneficial owner of more than 40 percent of CCB Common
Stock (exclusive of shares of CCB Common Stock held by subsidiaries) if such CCB
Common Stock has been acquired after the date of the Salary Continuation
Agreements pursuant to a tender offer, exchange offer or series of purchases or
other acquisitions, or any combination of such transactions; (b) there is a
change in the CCB Board or the board of directors of NBSC at any time within two
years after any tender offer, exchange offer, merger, consolidation, sale of
assets or contested election or any combination of the foregoing so that persons
who are directors of CCB or NBSC immediately before the first such transaction
cease to constitute a majority of the CCB Board or the board of directors of
NBSC or any corporation which may be the successor to CCB or NBSC in any such
transaction; or (c) CCB sells, transfers or otherwise disposes of substantially
all of its assets and properties, including the stock of NBSC or the CCB Common
Stock or CCB causes NBSC to sell, transfer or otherwise dispose of substantially
all of NBSC's assets and properties.
If after a Change in Control one of the Senior Executives either terminates
his employment for "good reason" or is terminated by NBSC for any reason other
than "cause," then NBSC is required to pay cash compensation to such Senior
Executive during his remaining term; provided that Messrs. Jacoby and Stuenkel
will receive no less than two times the annual compensation to which they
otherwise would be entitled and Mr. Memon will receive no less than the annual
compensation to which he otherwise would be entitled. Moreover, all employee
benefit plans and programs in which the Senior Executive is entitled to
participate will continue for the remainder of each Senior Executive's term and
the Senior Executive will continue to be entitled to receive his retirement,
death and disability benefits as provided in the Salary Continuation Agreement.
79
<PAGE>
The consummation of the Merger will constitute a Change in Control as
defined in the Salary Continuation Agreements.
Monarch and Messrs. Jacoby and Stuenkel are currently discussing the
possibility of entering into employment agreements upon consummation of the
Merger. If either or both of Messrs. Jacoby and Stuenkel enter into such
employment agreements, the Salary Continuation Agreement for such party or
parties will be terminated.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION. It is the duty of
the Compensation Committee to administer CCB's compensation program and various
incentive plans, including its stock option plan and its annual bonus plan. In
addition, the Compensation Committee reviews compensation levels of members of
management, evaluates the performance of management, considers management
succession and related matters. The Compensation Committee reviews with the
board in detail all aspects of compensation for senior officers.
The Compensation Committee has reviewed the compensation for each of the
five highest paid officers for 1996 and has reported to the CCB Board that in
the Compensation Committee's opinion, the compensation of all officers is
reasonable in view of CCB's consolidated performance and the contribution of
those officers to that performance. In doing so, the Compensation Committee
takes into account how compensation compares to compensation paid by competing
companies as well as CCB's performance and economic conditions in CCB's service
area. Members of the Compensation Committee also review compensation surveys
provided by the State Banking Department and others.
CCB has an Officer Incentive Program to motivate and compensate officers for
their individual performance as well as to encourage a spirit of cooperation and
teamwork to achieve the maximum performance for CCB as a whole. The Incentive
Program is established prior to the beginning of each year by the CCB Board
after it reviews a recommendation from the Compensation Committee. The CCB Board
establishes a goal for pretax income for CCB at the start of the year based upon
its evaluation of the local economy, a desired performance goal, and any special
circumstances that might affect projected income. Officers participating in the
Incentive Program are those officers who are expected to have a direct impact
upon the net income of NBSC. Additionally, each officer is assigned a specific
goal such as the amount of deposits, loans, or other requirements of his/her
position. A determination is then made by the Compensation Committee at the end
of the year regarding whether NBSC has met its threshold goal and whether the
individuals have met their specific goals. An incentive award is then granted to
officers who have met their goal based upon their level of performance combined
with that of NBSC. For the year ended December 31, 1996, the Compensation
Committee approved an incentive award of $100,000 for William H. Jacoby, $76,000
for Mark H. Stuenkel, $32,000 for Dannie M. Hayes and $32,000 for Abdul S.
Memon.
No member of the Committee is a former or current officer or employee of CCB
or any of its subsidiaries.
The Compensation Committee report was completed by the Compensation
Committee as of February 24, 1997. The members of the Compensation Committee
filing the report were Phillip L. Bush, Michael J. Gertner, James W. Hamilton
and Robert L. McKay.
OTHER TRANSACTIONS. NBSC has had, and expects to have in the future,
banking transactions in the ordinary course of its business with the directors
of CCB, CCB Shareholders and their affiliates on the same terms, including
interest rates and collateral securing the loans, as those prevailing at the
time for comparable transactions with unaffiliated persons, and which do not
involve more than the normal risk of collectibility, nor present other
unfavorable features.
80
<PAGE>
CCB PERFORMANCE GRAPH
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE
<S> <C> <C> <C>
California Banks
Commercial Bankshares S&P 500 (under $500M)
Index Value
12/31/91 100.00 100.00 100.00
12/31/92 64.00 107.62 132.05
12/31/93 32.00 116.47 172.41
12/31/94 42.00 120.03 185.43
12/31/95 57.00 165.13 253.67
12/31/96 106.00 202.89 326.50
</TABLE>
SUBMISSION OF SHAREHOLDER PROPOSALS FOR CCB'S 1998 ANNUAL MEETING
If the Merger is not consummated, any proposal relating to a proper subject
which a CCB Shareholder may intend to present for action at the 1998 Annual
Meeting of CCB Shareholders, and which such CCB Shareholder may wish to have
included in the proxy materials for such meeting, must be received in proper
form by the Secretary of CCB at 4100 Newport Place, Newport Beach, California
92660, not later than January 16, 1998. It is suggested that any such proposal
be submitted by certified mail, return receipt requested.
FIP LITIGATION
In December 1995, FIP purchased 288,888 shares of CCB Common Stock (the
"Initial Shares") in a private placement at $6.75 per share ($1,949,994 in the
aggregate). Under the terms of CCB's agreements with FIP, FIP agreed to purchase
an additional 266,659 shares of CCB Common Stock (the "Additional Shares") on or
prior to May 5, 1996, subject to satisfaction of certain closing conditions.
On April 11, 1996, FIP received confirmation from the Federal Reserve Bank
of San Francisco that no regulatory approval was required for the purchase of
the Additional Shares. On April 24, 1996, Hovde Financial, Inc., the corporate
general partner of FIP, purchased 53,909 shares of CCB Common Stock in the open
market. FIP thereafter refused to purchase the Additional Shares on the grounds
that the closing conditions were not, and could not be, satisfied by CCB.
On June 11, 1996, FIP demanded that CCB either (a) extend the agreement
until December 31, 1996 at an increased purchase price based upon the earnings
of CCB from June 1, 1996 through November 30, 1996, or (b) repurchase the
Initial Shares for an amount equal to the purchase price, plus $6.00 per share,
plus nine percent interest, plus FIP's legal, accounting and due diligence
expenses. CCB had periodic discussions with FIP thereafter regarding the
purchase of the Additional Shares, but was unable to reach agreement with FIP.
On December 12, 1996, FIP informed CCB that it intended to sue CCB for fraud
and breach of contract, unless FIP's demands were met. FIP filed a complaint
dated December 19, 1996 in the United States District Court for the Central
District of California against CCB, NBSC and certain of their respective
officers and directors alleging violation of the Exchange Act and Rule 10b-5
thereunder, intentional misrepresentation, negligent misrepresentation and
suppression of fact and seeking rescission of FIP's purchase of the Initial
Shares, consequential damages in excess of $1,650,000 and punitive
81
<PAGE>
damages. In the alternative, FIP seeks a declaratory judgment requiring CCB to
sell the Additional Shares to FIP at $6.75 per share if FIP determines it wishes
to purchase such shares. See Part I, Item 3. In CCB's Annual Report attached
hereto as Appendix A. CCB estimates that in the unlikely event that the outcome
of the FIP Litigation requires the issuance of the Additional Shares to FIP, the
impact on earnings per share would be approximately $.08 per share, or 6.3%.
Monarch was provided with information related to FIP's demands prior to
execution of the Merger Agreement. Under the terms of the Merger Agreement, if
additional shares of CCB Common Stock are issued to FIP prior to consummation of
the Merger, such shares will be disregarded for purposes of calculating the
adjusted fully diluted book value per share of CCB. Although management of CCB
believes that the reserves which it has established for the FIP litigation are
adequate and that an adverse outcome in the FIP Litigation resulting in the
issuance of additional shares to FIP is unlikely, in the event the litigation
remains unresolved at the time of the Annual Meetings, FIP may exercise its
Dissenters' Rights, which would adversely impact the ability of Monarch and CCB
to account for the Merger as a pooling-of-interests. See "Unaudited Pro Forma
Combined Condensed Financial Information" and "The Merger-- Dissenters' Rights."
THE MERGER
THIS SECTION OF THE JOINT PROXY STATEMENT--PROSPECTUS DESCRIBES CERTAIN
ASPECTS OF THE PROPOSED MERGER, AND SUCH INFORMATION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE OTHER INFORMATION CONTAINED ELSEWHERE IN THIS JOINT
PROXY STATEMENT--PROSPECTUS, INCLUDING THE APPENDICES HERETO, AND THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE. A COPY OF THE MERGER AGREEMENT IS SET FORTH AS
APPENDIX C TO THIS JOINT PROXY STATEMENT--PROSPECTUS AND IS INCORPORATED HEREIN
BY REFERENCE, AND REFERENCE IS MADE THERETO FOR A COMPLETE DESCRIPTION OF THE
TERMS OF THE MERGER. SHAREHOLDERS ARE URGED TO READ THE MERGER AGREEMENT AND
EACH OF THE OTHER APPENDICES HERETO CAREFULLY IN THEIR ENTIRETY.
BACKGROUND OF THE MERGER
Monarch, principally through its wholly-owned subsidiaries Monarch Bank and
Western Bank, and CCB, principally through its wholly-owned subsidiary NBSC,
each conducts general banking operations in southern Orange County, California.
In serving individuals, small businesses and mid-market corporations, each
historically has focused on a community-based approach to banking. Management of
each of Monarch and CCB has been cognizant of the rapidly changing structure of
the banking market in Southern California and Los Angeles and Orange Counties,
in part as a result of the severe problems associated with the savings and loan
industry and the problems experienced by other independent banks within Los
Angeles and Orange counties during the recent recession. As is the case
throughout the United States, the management of Monarch and CCB believe that a
process of consolidation will continue to occur in the Southern California
financial services industry resulting in, among other things, a reduction in the
number of independent banks and bank holding companies.
In order to compete effectively with the larger financial institutions
resulting from the various consolidations and mergers in the industry locally,
the managements of Monarch and CCB saw the need to expand prudently. At the same
time, each recognized the opportunities to build a larger regional, independent
financial institution in the Orange County market as a result of the reduced
number of independent banks headquartered in Orange County. Accordingly, as part
of their efforts to achieve long-term stable profitability, both Monarch and CCB
had sought a strong partner with which to join forces in order to achieve
greater market share in Southern California and Los Angeles and Orange Counties,
as detailed below.
In addition, the managements of Monarch and CCB saw opportunities for
increased operating efficiencies and cost savings due to the high degree of
geographic and operational overlap between the companies. In particular, the
managements believe that costs savings can be achieved as a result of economies
of scale, the elimination of redundant executive management and central staff,
the consolidation of data processing activities and the elimination of
duplicative administrative functions.
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<PAGE>
In 1995, CCB held discussions with a number of potential investors,
including BPI, acting as Monarch's representative. CCB concluded that it was in
its best interests at that time to raise additional capital through a private
placement rather than enter into a business combination with another entity, and
a private placement was completed in the fourth quarter of 1995. Following
completion of the private placement, the management of CCB held informal
discussions with BPI and others concerning the possibility of a business
combination.
On June 19, 1996, BPI made a formal proposal to CCB to combine Monarch and
certain other banks with CCB and NBSC. After discussion and analysis by the
management of CCB, a meeting of the CCB Board was held on June 25, 1996 to
discuss the Monarch proposal as well as the advisability generally of
considering a business combination at that time. About the same time, CCB
management received a proposal from a second financial institution similar to
the BPI proposal.
On August 15, 1996, CCB and NBSC engaged Findley to act as its financial
advisor in connection with a possible transaction involving CCB. Findley was
asked to assist the CCB Board and management with regard to the evaluation of
proposals, the identification of potential acquirors, the issuance of a fairness
opinion and assistance in the negotiation and analysis of the terms and
conditions of any offers made for CCB and ongoing consultation with CCB
management regarding possible transactions. In addition, Findley was asked to
analyze the two merger proposals which had been received by CCB. Before this
analysis was completed, CCB received a merger proposal from a third financial
institution.
A committee of the CCB Board and Findley met with BPI, in its role as
representative of Monarch, and each of the other financial institutions to
discuss various proposals, including possible enhancements to the proposals. In
September 1996, a revised proposal was received from BPI. An analysis of each of
the proposals, including the enhanced proposal from BPI, was prepared by Findley
for presentation to the CCB Board.
The CCB Board considered the various proposals at its meetings in September,
October and November. A comparison of selected financial information for NBSC
and each of the banks owned by the three offerors was presented to the CCB Board
by Findley. In addition, Findley presented information concerning the type of
consideration paid and the value of the consideration received in connection
with the acquisition of California banks in 1995 and 1996 and provided a summary
of the advantages and disadvantages of each of the proposals. A valuation of CCB
was prepared by Findley from a buyer's perspective using a book value and
tangible book value analysis, an analysis of earnings and a discounted cash flow
analysis. Findley also summarized for the CCB Board the advantages and
disadvantages of CCB continuing to operate as a stand-alone entity. After
deliberation, the CCB Board concluded that CCB should consider a business
combination with another community bank, but that none of the proposals which
had been received by CCB were sufficiently beneficial to CCB to be acceptable.
The CCB Board also asked Findley to continue to pursue modifications to the
various offers.
On December 2, 1996, BPI and the management of Monarch met with CCB (the
"December 2 Meeting") and began discussions regarding a proposed merger of the
two entities. At this meeting, senior management of both Monarch and CCB
considered certain preliminary terms of a proposed merger, including relative
valuations for the two companies, due diligence requirements, the structure of
the merger of CCB with and into Monarch, with Monarch as the surviving entity,
including the issuance of Monarch Common Stock as consideration, a formula for
arriving at the Conversion Number and other material terms, and agreed that it
was in the interest of both the Monarch Shareholders and the CCB Shareholders to
discuss further the proposed transaction.
On December 4, 1996, the Monarch Board met to consider the general terms of
the proposed Merger, including the matters that were discussed at the December 2
Meeting. Various studies were taken into consideration, including presentations
by BPI. The Monarch Board concluded that a transaction with CCB would be in the
best interests of Monarch Shareholders and gave its officers authority to
continue discussions with CCB and to perform a full due diligence investigation.
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<PAGE>
Subsequently, during December 1996, the managements of CCB and Monarch
continued to discuss the general terms of the agreement. During the week
commencing December 15, 1996, the parties negotiated the specific terms of the
Merger Agreement, the Stock Option Agreement and the Shareholder Agreements and
gave consideration to and finalized all of the terms upon which the transaction
should be consummated. The parties also discussed personnel and employment
issues that could arise in connection with the Merger and completed due
diligence reviews of each other.
The Monarch Board held a meeting on December 18, 1996, at which the proposed
Merger was considered in detail with Monarch's senior management, BPI and legal
counsel. All members of the Monarch Board were present at the meeting. At the
December 18th meeting, the Merger, the consideration to be paid by Monarch and
the related transactions were discussed in detail. At such meeting, the Monarch
Board unanimously approved the Merger Agreement and the various matters and
related agreements contemplated thereby.
On December 18, 1996, the CCB Board held a meeting to consider approval of
the Merger Agreement. At this meeting, CCB management, as well as CCB's legal
and financial advisors, made presentations regarding their due diligence
findings concerning Monarch Bank and Western Bank and the terms of the
definitive agreements discussed by CCB and Monarch, including a description of
the differences between the terms of the Merger Agreement and the prior Monarch
offers. In addition, Findley prepared a calculation of the Conversion Number,
using certain assumptions regarding the year-end book value of Monarch and CCB.
Findley also rendered an oral opinion (subsequently confirmed in writing) to the
CCB Board to the effect that, as of such date and based upon and subject to
certain matters stated in such opinion, the Conversion Number was fair, from a
financial point of view, to CCB Shareholders. Based upon its consideration of
these presentations and the presentations previously made at meetings of the CCB
Board described above, as well as other factors more fully described below, the
CCB Board (with one director absent) unanimously approved and authorized the
execution and delivery of the Merger Agreement and the Stock Option Agreement by
and between CCB and Monarch.
On December 19, 1997, the Merger Agreement and the Stock Option Agreement
were executed and delivered. In addition, as an inducement to Monarch entering
into the Merger Agreement, William H. Jacoby, Robert L. McKay, Mark A. Stuenkel
and James W. Hamilton each entered into a Shareholder Agreement with Monarch,
pursuant to which each committed to vote his respective shares in favor of the
Merger and against certain other transactions. Pursuant to a requirement under
the Merger Agreement, Phillip L. Bush, Farrell G. Hinkle and Michael J. Gertner
each entered into a similar agreement in January 1997. Messrs. Jacoby, McKay and
Stuenkel each also agreed not to compete with Monarch for a period of three
years in the banking business in the counties of Los Angeles, Orange and San
Diego in the State of California so long as Monarch or its assigns remain
engaged in the banking business in such counties.
Immediately after its execution and delivery, the Merger Agreement was
publicly announced. Managements of Monarch and CCB believe that Monarch and CCB
complement each other both in their community-based approach to banking and in
terms of geographic service areas. Consequently, Monarch and CCB believe that by
combining forces, they will be able more effectively to compete and successfully
to take advantage of banking opportunities in the Southern California market.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARD OF DIRECTORS
MONARCH
The Monarch Board has unanimously approved the principal terms of the Merger
Agreement and has determined that the Merger is fair to, and in the best
interest of, the Monarch Shareholders. The Monarch Board, therefore, unanimously
recommends that the Monarch Shareholders vote "FOR" the approval of the
principal terms of the Merger Agreement. The Monarch Board believes that the
Merger will enable Monarch Shareholders to realize significant value on their
investment and also enable them to participate
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in opportunities for growth that the Monarch Board believes the Merger makes
possible. See "--Background of the Merger" and "--Opinions of Financial
Advisors."
In reaching its determination that the Merger Agreement is fair to, and in
the best interest of, Monarch Shareholders, the Monarch Board considered a
number of factors, from both a short-term and long-term perspective, including,
without limitation, the following:
(a) Monarch's business, financial condition, results of operations and
prospects, including, but not limited to, its potential growth, development,
productivity and profitability;
(b) The current and prospective environment in which Monarch operates,
including national and local economic conditions, the competitive
environment for banks and other financial institutions generally, the
increased regulatory burden on financial institutions generally and the
trend towards consolidation in the financial services industry;
(c) Information concerning the business, financial condition, results of
operations and prospects of CCB;
(d) The review by the Monarch Board with its legal advisors and BPI of
the provisions of the proposed Merger Agreement;
(e) The likelihood that the proposed transaction would be consummated;
(f) The effect of the proposed transaction on employees and customers of
Monarch; and
(g) The compatibility of the respective businesses and management
philosophies of Monarch and CCB.
While each member of the Monarch Board individually evaluated each of the
foregoing as well as other factors, the Monarch Board collectively did not
assign any specific or relative weight to the factors under consideration and
did not make any determinations with respect to any individual factor. The
Monarch Board collectively made its determination with respect to the Merger
based on the unanimous conclusion reached by its members that the Merger, in
light of the factors that each of them individually considered as appropriate,
is fair and in the best interest of the Monarch Shareholders.
CCB
The CCB Board has unanimously concluded (with one director absent) that the
Merger and the Bank Merger are in the best interests of CCB Shareholders and
unanimously recommends that CCB Shareholders approve the principal terms of the
Merger Agreement. In reaching its determination to approve the principal terms
of the Merger Agreement, the CCB Board considered the following factors, which
constitute all of the material factors considered by the CCB Board:
(a) Information concerning the financial performance and condition,
business operations, capital levels, asset quality and prospects of Monarch,
the other offerors and CCB on a stand-alone basis and the due diligence
review of Monarch's loan portfolio, material contracts, litigation and other
contingent liabilities conducted by CCB and its advisors;
(b) Information concerning the ability of Monarch, the other offerors
and CCB to achieve operating efficiencies;
(c) The current and prospective economic, regulatory and competitive
environment facing CCB, including in particular the franchise value of CCB
due to its branch locations in Orange County, its high level of demand
deposits and business lending focus, its leverage capital ratios and data
processing systems. The CCB Board also considered the unprecedented
consolidation currently underway in the banking industry and increased
competition from larger independent banks in California;
(d) The business strategies and management of Monarch and the other
offerors and the extent of their interest in continuing CCB's significant
business relationships in Orange County;
(e) The geographic concentration of Monarch in Southern California;
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(f) The advantages of being part of a larger entity, including the
potential for operating efficiencies, a higher legal lending limit, the
generally higher trading multiples of larger financial institutions and the
ability to include for quotation of the stock of the combined entity on the
NASDAQ National Market, thereby potentially increasing the liquidity of the
stock held by CCB Shareholders;
(g) The value of the consideration offered by Monarch and the other
offerors compared to the value of the consideration offered in other
acquisitions of financial institutions in California during 1995 and 1996
and the prospects for enhanced value of the combined entity in the future
through operating efficiencies, increases in market share and additional
acquisitions;
(h) The terms of the Merger Agreement, the Stock Option Agreement and
other agreements to be executed in connection with the Merger and its review
of those agreements with its financial and legal advisors; and
(i) The financial and other presentations of Findley (including the
assumptions and methodologies underlying its analyses and presentations of
pro forma financial information with respect to both the Merger and the
other offers), the results of the contacts and discussions between CCB, its
advisors and various third parties and the written opinions of Findley dated
December 19, 1996 and May 12, 1997 that, as of the date of such opinions,
and based upon, and subject to, the matters stated in such opinions, the
Conversion Number is fair, from a financial point of view, to CCB
Shareholders.
The foregoing discussion of the information and factors considered by the
CCB Board is not intended to be exhaustive, but constitutes the material factors
considered by the CCB Board. In reaching its determination to approve and
recommend the principal terms of the Merger Agreement, the CCB Board did not
assign relative or specific weights to the foregoing factors and individual
directors may have weighed such factors differently.
FOR THE REASONS SET FORTH ABOVE, THE CCB BOARD (WITH ONE DIRECTOR ABSENT)
HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AS IN THE BEST INTERESTS OF CCB
AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT CCB SHAREHOLDERS APPROVE
THE PRINCIPAL TERMS OF THE MERGER AGREEMENT.
OPINIONS OF FINANCIAL ADVISORS
CCB
CCB retained Findley to act as its financial advisor in connection with the
Merger pursuant to an engagement letter dated August 15, 1996 and subsequently
amended on December 18, 1996 (the "Findley Engagement Letter") based upon its
qualifications, expertise and reputation and the prior business relationships of
Findley with CCB.
Findley has been involved in the representation of financial institutions in
California and the Western United States since the mid-1950s. Since that time,
Findley has been actively involved as a representative of either buyers or
sellers in mergers and acquisitions of financial institutions. In addition to
being investment bankers and management consultants to financial institutions,
principals of Findley publish THE FINDLEY REPORTS which is an annual financial
analysis of all California commercial banking institutions. THE FINDLEY REPORTS
also publishes a monthly newsletter which evaluates, among other things, mergers
and acquisitions involving commercial banking institutions in the State of
California. THE FINDLEY REPORTS has been reporting on merger and acquisition
transactions in California involving commercial banking institutions since the
early 1960s.
Findley rendered to the CCB Board its oral opinion on December 18, 1996,
which was confirmed in writing by delivery of written opinions dated December
19, 1996 and as of the date hereof pursuant to the terms of the Merger Agreement
that, subject to the assumptions and limitations set forth therein, the
Conversion Number is fair, from a financial point of view, to CCB Shareholders.
A copy of the opinion of Findley, dated as of the date hereof, is attached as
Appendix E to this Joint Proxy Statement--Prospectus and should be read in its
entirety. The following summary is qualified in its entirety by reference to the
full
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text of the opinion attached as Appendix E. The opinions are addressed to the
CCB Board and do not constitute a recommendation to any CCB Shareholder as to
how such CCB Shareholder should vote at the CCB Meeting.
In connection with its opinions, Findley has informed the CCB Board that
among other things, it: (a) reviewed certain publicly available financial
information and other data with respect to CCB and Monarch, including the
consolidated financial statements for recent years and interim periods to
September 31, 1996, the September 30, 1996 and September 31, 1996 bank call
reports for Monarch Bank, Western Bank and NBSC and certain other relevant
financial and operating data relating to CCB and Monarch made available to
Findley from published sources and from the internal records of CCB and Monarch;
(b) reviewed the Merger Agreement and the Stock Option Agreement; (c) reviewed
the private placement memoranda for Monarch for 1995 and 1996; (d) reviewed
certain historical market prices and trading volumes of Monarch Common Stock;
(e) reviewed CCB's 1995 private placement memorandum for CCB Common Stock; (f)
compared CCB and Monarch from a financial point of view with certain other
financial institutions that Findley deemed to be relevant; (g) considered
financial terms, to the extent publicly available, of selected recent business
combinations of selected banks in California that Findley deemed to be
comparable, in whole or in part, to the Merger; (h) reviewed and discussed with
representatives of the management of CCB certain information of a business and
financial nature regarding CCB and Monarch furnished to Findley by CCB and
Monarch, including financial forecasts and related assumptions of CCB and
Monarch; (i) made inquiries regarding and discussed the Merger and the Merger
Agreement and other matters related thereto with CCB's counsel; (j) reviewed a
draft of this Joint Proxy Statement-- Prospectus; (k) reviewed litigation
reports for both CCB and Monarch; (l) reviewed the results of its due diligence
review of Monarch with management of CCB and the CCB Board; and (m) performed
such other analyses and examinations as Findley deemed appropriate, none of
which were material, individually or in the aggregate, other than those
described below.
In its analysis, Findley did not give effect to the Reverse Stock Split.
Consequently, all data regarding Monarch Common Stock in the following analysis
is given on a pre-Reverse Stock Split basis. Findley also assumed a Conversion
Number of 8.17 and a stock price for Monarch of $2.00 per share in its December
19, 1996 opinion. The actual Conversion Number pursuant to the Merger Agreement
was subsequently determined to be 8.5 on a pre-Reverse Stock Split basis, or one
on a post-Reverse Stock Split basis, and the updated Findley opinion dated the
date hereof is based on the actual Conversion Number. The discussion of
Findley's opinion below is based on the December 19, 1996 opinion, which assumed
a Conversion Number that was less favorable to CCB Shareholders than the actual
Conversion Number. The value of Monarch Common Stock on December 18, 1996, the
day before execution of the Merger Agreement was $2.31 on a pre-Reverse Stock
Split basis, and $3.36 on May 9, 1997 on a pre-Reverse Stock Split basis ($19.64
and $28.69, respectively, after giving effect to the Reverse Stock Split). In
its analysis, Findley did not review any of the terms or conditions of the SCB
Merger nor did it take into account the potential impact of the SBC Merger. It
is a condition to the SCB Merger that Monarch receive an opinion stating that
the SCB Merger is fair to Monarch Shareholders (which will include CCB
Shareholders who become Monarch Shareholders) from a financial point of view.
ANALYSIS OF SELECTED BANK MERGER TRANSACTIONS. Findley reviewed the
consideration paid in recently announced transactions whereby certain banks were
acquired. Specifically, Findley reviewed 53 transactions involving acquisitions
of selected banks in California completed since January 1, 1995 (the "California
Acquisitions"). For each bank acquired in such transactions, Findley compiled
figures illustrating, among other things, the ratio of the premium (i.e.,
purchase price in excess of book value) to deposits, purchase price to book
value and purchase price to previous year's earnings.
The figures for all banks acquired in the California Acquisitions produced:
(a) a median percentage of premium to deposits of 2.63 percent (b) a median
ratio of purchase price to book value of 1.28; and (c) a median ratio of
purchase price to previous year's earnings of 12.85.
In comparison, assuming that the Conversion Number to be paid in the Merger
equals $16.33 per share (using a value for Monarch Common Stock of $2.00 per
share) Findley determined that the
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Conversion Number in the Merger, assuming all outstanding options and warrants
were exercised, represented a percentage of premium to deposits of 7.81 percent,
a ratio of purchase price to book value of 2.03 and a ratio of purchase price to
estimated 1996 earnings of 14.90. The high and low sale price for Monarch Common
Stock for the fourth quarter of 1996 prior to announcement of the execution of
the Merger Agreement was $2.75 ($23.38 after giving effect to the Reverse Stock
Split) and $1.63 ($13.81 after giving effect to the Reverse Stock Split),
respectively, and the last reported sale price for Monarch Common Stock
immediately prior to the announcement of the execution of the Merger Agreement
was $2.31 ($19.69 after giving effect to the Reverse Stock Split). Trading in
Monarch Common Stock has heretofore not been extensive and may not be a reliable
indicator of market value. See "SUMMARY-- Markets and Market Prices."
Findley also reviewed thirty-one transactions involving select acquisitions
of banks in the United States with considerations between $25 million and $100
million taking place in 1996 (the "National Bank Acquisitions"). For each Bank
acquired in such transactions, Findley compiled figures illustrating, among
other things, purchase price to book value, purchase price to previous year's
earnings, and the buyer book value received as a multiple of seller book value.
The figures for the National Bank Acquisitions produced:
a) a median ratio of purchase price to book value of 2.19,
b) a median ratio to purchase price of previous year's earnings of 21.96,
and
c) a ratio of buyer book value received per seller book value of 1.31.
In comparison, assuming that the Conversion Number to be paid in the Merger
equals $16.33 per share (using a value from Monarch common stock of $2.00 per
share) Findley determined that the Conversion Number in the Merger, assuming all
options and warrants were exercised, represented a ratio of purchase price to
book value of 2.03, a ratio of purchase price to estimated 1996 earnings of
14.90 and a ratio of book value received per seller book value of 1.60.
No other company or transaction used in the above analysis as a comparison
is identical to CCB, Monarch or the Merger. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which Monarch, CCB and the Merger are being
compared.
CONTRIBUTION ANALYSIS. Findley analyzed the contribution of each of CCB and
Monarch to, among other things, common equity and net income of the pro forma
Surviving Corporation for the period ending September 30, 1996, adjusted through
December 31, 1996. This analysis showed, among other things, that based on pro
forma combined balance sheets and income statements for CCB and Monarch as of
September 30, 1996, adjusted through year-end 1996 for the recent acquisitions
of Western Bank by Monarch completed on September 30, 1996, CCB would have
contributed 43.7 percent of the deposits and 30.8 percent of the shareholders'
equity of the Surviving Corporation (before taking into account any operating
efficiencies). Based upon the consideration to be paid in the Merger, the CCB
Shareholders would own approximately 41.4 percent of the Surviving Corporation,
assuming all options and warrants were exercised.
DISCOUNTED CASH FLOW ANALYSIS. Findley examined the results of a discounted
cash flow analysis designed to compare the Conversion Number with the present
value, under certain assumptions, that would be attained if CCB remained
independent through the year 2000, assuming that at such time CCB would be
acquired by a larger financial institution. The cash flows for the Surviving
Corporation assumed that the Conversion Number equals $16.33 per share. The
results produced in the analyses do not purport to be indicative of actual
values or expected values of CCB or the Surviving Corporation at such future
date. All cases were analyzed assuming realization of operating efficiencies,
estimated by Monarch, in the amounts and time periods forecasted by Monarch.
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The discount rates used ranged from eight percent to 14 percent. For the CCB
stand-alone analysis, the terminal price multiples applied to the year 2000
estimated earnings per share ranged from 12.0 to 16.0. The lower levels of the
price to earnings value multiples range reflected an estimated future trading
range of CCB or the Surviving Corporation, while the higher levels of the price
to earnings value multiples range were more indicative of a future sale of CCB
or the Surviving Corporation to a larger financial institution.
For the CCB stand-alone analysis, the cash flows were comprised of the
projected cash flows for years 1996 through 2000, assuming that no dividends are
paid, plus the terminal value of CCB Common Stock at the year-end 2000
(calculated by applying each one of the assumed terminal price to earnings value
multiples as stated above to the year 2000 projected CCB earnings per share). A
similar analysis was done for the Surviving Corporation. The discount rates
above were then applied to these cash flows to obtain the present values per
share of CCB Common Stock.
The analysis assumed that projected earnings, among other things, would be
achieved and that certain assumed operating efficiencies would be realized (for
the Surviving Corporation case). Assuming a present value discount rate of
twelve percent, a terminal price to earnings value multiple of 15.0 and that CCB
remained independent through the year 2000 and was then acquired by a larger
financial institution, the analysis indicates that a holder of one share of CCB
Common Stock on December 31, 1996 would receive cash flows with a present value
of $16.12. Using the same present value discount rate and the same terminal
price to earnings value multiple and assuming the Merger was consummated and
that the Surviving Corporation remained independent through the year 2000 and
was then acquired by a larger financial institution, the analysis indicates that
a holder of one share of CCB Common Stock on December 31, 1996 would receive
cash flows with a present value of at least $21.66.
Using the same assumptions regarding projected earnings and operating
efficiencies, the analysis indicates cash flows with a present value per share
ranging from $12.01 to $19.88, assuming that CCB remained independent through
the year 2000 before being acquired by a larger financial institution, and
$16.12 to $26.70, assuming that the Surviving Corporation remained independent
through the year 2000 before being acquired by a larger financial institution.
COMPARABLE COMPANY ANALYSIS. Using public and other available information,
Findley compared certain financial ratios of CCB and Monarch (including the
ratio of net income to average total assets ("Return on Average Assets"), the
ratio of net income to average total equity ("Return on Average Equity"), the
ratio of average equity to average assets and certain credit ratios for the year
ended December 31, 1995 and the interim period ending September 30, 1996) to a
peer group consisting of 20 selected banks located in California. No company
used in the analysis is identical to CCB or Monarch. The analysis necessarily
involved complex considerations and judgments concerning differences in
financial and operating characteristics of the companies. The results of this
analysis indicated that both CCB and Monarch performed slightly below the peer
group level on the basis of profitability in 1995, but in 1996 profit levels for
both CCB and Monarch improved. Monarch's net income, total assets and
shareholder equity significantly changed in 1996, with the acquisition of
Western Bank for cash during the third quarter of 1996 and the sale of Monarch
Common Stock through a private placement completed during the third quarter of
1996. Income for Monarch through September 30, 1996 reflected the cost of the
Western Bank acquisition and additional income to reflect the Western Bank
acquisition which was completed on September 30, 1996. Monarch performed better
than the peer group on net interest margins and return on equity for 1996. CCB's
financial performance in 1995 and for most of 1996 reflected a higher than peer
group level of nonperforming assets and a higher level of noninterest expenses.
CCB's performance improved due to the recent reductions in nonperforming assets
of NBSC. While CCB's Return on Average Assets was below peer group levels, CCB's
Return on Average Equity was higher due to CCB's lower capital to asset ratios.
The foregoing summarizes the material portions of Findley's report, but does
not purport to be a complete description of the presentation by Findley to the
CCB Board or the analyses performed by Findley. The preparation of a fairness
opinion is not necessarily susceptible to partial analysis or summary
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description. Findley believes that its analyses and the summary set forth above
must be considered as a whole and that selecting a portion of its analyses and
of the factors considered, without considering all analyses and factors, would
create an incomplete view of the process underlying the analyses set forth in
its presentation to the CCB Board.
In performing its analyses, Findley made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Monarch or CCB. The analyses
performed by Findley are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as part of Findley's
analysis of the fairness, from a financial standpoint, of the Conversion Number
to CCB Shareholders and were provided to the CCB Board in connection with the
delivery of Findley's opinion. The analyses do not purport to be appraisals or
to reflect the prices at which any securities may trade at the present time or
at any time in the future. Findley used in its analyses various projections of
future performance prepared by the management of CCB and Monarch. The
projections are based on numerous variables and assumptions which are inherently
unpredictable and must be considered not certain of occurrence as projected.
Accordingly, actual results could vary significantly from those set forth in
such projections.
In rendering its opinions, Findley relied upon and assumed without
independent verification the accuracy and completeness of all of the financial
and other information reviewed by Findley for purposes of its opinion. Findley
did not make an independent evaluation or appraisal of the assets and
liabilities of Monarch, CCB or any of their respective subsidiaries. CCB did not
impose any limitations or restrictions with respect to the scope of Findley's
investigation or the procedures or methods it followed, or with regard to any
other matters relating to Findley's rendering its opinions. In connection with
its opinion dated as of the date of this Joint Proxy Statement--Prospectus,
Findley confirmed the appropriateness of its reliance on the analyses used to
render its opinion dated December 19, 1996 by performing procedures to update
certain of such analyses and by reviewing the assumptions upon which such
analyses were based and the factors considered in connection therewith.
Pursuant to the Findley Engagement Letter, CCB agreed to pay Findley a fee
for its time and expenses plus $50,000 for Findley's services rendered to CCB in
connection with this transaction, which services included the issuance of
Findley's opinions and assistance in the negotiation of the Merger Agreement and
the underlying transactions. Gary Steven Findley, an affiliate of The Findley
Group and special counsel for CCB, also participated in negotiations regarding
the Merger Agreement. Upon consummation of the Merger, Findley will be paid
$50,000. To date, $130,022 has been paid to Findley including $32,317 for
services rendered by the law firm of Gary Steven Findley & Associates for acting
as special counsel in connection with this transaction. CCB has agreed to
indemnify Findley against certain liabilities and expenses in connection with
its services as financial advisor to CCB.
CCB has employed the law firm of Gary Steven Findley & Associates, an
affiliate of Findley, as special counsel during the past two years. Gary Steven
Findley is the principal of the firm and The Findley Group. The law firm has
been paid fees of $34,030 for its services over the last two years. No other
amounts have been paid to other Findley affiliates or Findley over the last two
years for bank related consulting services.
MONARCH
The Board of Directors of Monarch retained RP Financial in February 1997 to
provide certain financial advisory and investment banking services to Monarch in
conjunction with the Merger, including the rendering of an opinion with respect
to the fairness of the Conversion Number from a financial point of view to
Monarch Shareholders. In requesting RP Financial's advice and opinion, the Board
of Directors of Monarch did not give any special instructions to RP Financial,
or impose any limitations upon the scope of the investigation which RP Financial
might wish to conduct to enable it to give its opinion. RP Financial was
selected by Monarch to act as its financial advisor because of RP Financial's
expertise in the valuation of financial institutions and their securities for a
variety of purposes including its expertise in connection with mergers and
acquisitions of banking entities, including commercial banks, bank holding
companies,
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and savings institutions. RP Financial previously acted as financial advisor to
Monarch in valuation matters not related to the Merger.
On March 19, 1997, at a meeting of the Monarch Board, RP Financial rendered
its opinion to the Monarch Board that, as of such date, the Conversion Number
was fair to Monarch Shareholders from a financial point of view. That opinion
was updated as of the date of this Joint Proxy Statement--Prospectus. In
connection with its opinion dated the date hereof, RP Financial also confirmed
the appropriateness of its reliance on the analysis used to render its previous
opinion by performing procedures to update certain of such analyses and by
reviewing the assumptions on which such analyses were based and the factors
considered in connection therewith.
The full text of the opinion of RP Financial, dated as of the date hereof,
which sets forth the assumptions made, matters considered and limitations on the
review undertaken, is attached as Appendix D to this Joint Proxy
Statement--Prospectus and is incorporated herein by reference. Monarch's
shareholders are urged to read the opinion in its entirety.
THE OPINION OF RP FINANCIAL IS DIRECTED TO THE BOARD OF DIRECTORS OF MONARCH
IN ITS CONSIDERATION OF THE MERGER CONSIDERATION AS DESCRIBED IN THE MERGER
AGREEMENT, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF
MONARCH AS TO ANY ACTION THAT SUCH SHAREHOLDER SHOULD TAKE IN CONNECTION WITH
THE MERGER AGREEMENT, OR OTHERWISE. IT IS FURTHER NOTED THAT THE OPINION OF RP
FINANCIAL IS BASED ON MARKET CONDITIONS AND OTHER CIRCUMSTANCES EXISTING ON THE
DATE HEREOF.
The opinion states that RP Financial reviewed and analyzed the following
material in conjunction with its analysis of the Conversion Number: (a) the
Merger Agreement and the Joint Proxy Statement-- Prospectus; (b) the following
information for CCB: (i) audited financial statements for the fiscal years ended
December 31, 1994 through December 31, 1996, incorporated in Annual Reports to
shareholders or in Form 10-K for such years, shareholder and internal reports,
quarterly financial statements for the quarters ended March 31, 1996, June 30,
1996 and September 30, 1996 incorporated in Form 10-Q for such quarters and
recent developments through March 31, 1997 as disclosed in this Joint Proxy
Statement-- Prospectus; (ii) the Private Placement Memorandum for CCB, dated
September 28, 1995; (iii) proxy statements for the last two fiscal years, and
(iv) unaudited internal and regulatory financial reports and analyses prepared
by management of CCB regarding various aspects of CCB's assets and liabilities,
particularly rates, volumes, maturities, market values, trends, credit risk,
interest rate risk and liquidity risk of assets, liabilities, off-balance sheet
assets, commitments and contingencies of CCB; and (c) the following information
for Monarch: (i) audited financial statements for the fiscal years ended
December 31, 1993 through December 31, 1996, incorporated in Annual Reports to
shareholders or in Form 10-K for such years; (ii) recent developments as
disclosed in this Joint Proxy Statement--Prospectus, including interim financial
results through March 31, 1997 and the summary description and pro forma impact
of the proposed acquisition of SCB by Monarch pursuant to the SCB Merger
Agreement; (iii) the Private Placement Memorandum for Monarch, dated May 6,
1996, prepared in conjunction with Monarch's acquisition of Western Bank; (iv)
proxy statements for the last two fiscal years, and (v) unaudited internal and
regulatory financial reports and analyses prepared by management of Monarch
regarding various aspects of Monarch's assets and liabilities, particularly
rates, volumes, maturities, market values, trends, credit risk, interest rate
risk and liquidity risk of assets, liabilities, off-balance sheet assets,
commitments and contingencies of Monarch.
The opinion further states that RP Financial viewed the trading activity of
the Monarch Common Stock and CCB Common Stock, and compared it to similar
information for banking institutions with comparable resources, financial
condition, earnings, operations and markets as well as for more widely
publicly-traded banking institutions with comparable financial condition,
earnings, operations and markets. The opinion further states that in the course
of its evaluation and analyses, RP Financial conducted discussions with
managements of Monarch and CCB regarding past and current business operations,
financial condition, and future prospects. RP Financial reviewed CCB's
financial, operational and market
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area characteristics compared to similar information for comparable banking
institutions, evaluated the potential for growth and profitability for CCB in
its market, specifically regarding competition by other banks, thrifts, mortgage
banking companies, and other financial services companies, economic projections
in the local market area, the impact of the regulatory, legislative and economic
environments on operations and the public perception of the banking industry,
and the pro forma impact on Monarch's financial condition and operations of the
Merger, including potential operating efficiencies and earnings improvements
available to Monarch as a result of the Merger. The opinion also states that RP
Financial considered the potential impact of the proposed SCB acquisition in its
analysis, and that RP Financial evaluated those components of the proposed SCB
acquisition that could reasonably affect RP Financial's fairness conclusion.
As set forth in the opinion, RP Financial relied, without independent
verification, on the accuracy and completeness of the information concerning
Monarch and CCB furnished to RP Financial by the respective companies, as well
as publicly-available information regarding other financial institutions and
economic data. RP Financial relied upon the managements of Monarch and CCB as to
the reasonableness and achievability of the financial forecasts (and the
assumptions and bases therefor) provided to RP Financial, and assumed that such
forecasts reflected the best currently available estimates and judgments of such
managements and that such financial forecasts would be realized in the amounts
and in the time periods estimated by such managements. RP Financial did not
perform or obtain any independent appraisals or evaluations of the assets and
liabilities and potential and/or contingent liabilities of Monarch or CCB.
Moreover, RP Financial expressed no opinion on matters of a legal, accounting or
tax nature or the ability of the Merger to be consummated as set forth in the
Merger Agreement.
The financial forecasts reviewed by RP Financial were prepared by the
managements of Monarch and CCB and their advisors. Neither Monarch nor CCB
publicly discloses internal management forecasts of the type provided to the
Monarch Board and RP Financial in connection with the review of the Merger, and
such financial forecasts were not prepared with a view towards public
disclosure. The financial forecasts were based upon numerous variables and
assumptions which are inherently uncertain, including without limitation factors
related to general economic and competitive conditions, as well as trends in
asset quality. Accordingly, actual results could vary significantly from those
set forth in such financial forecasts.
In connection with rendering its opinion, RP Financial performed a variety
of analyses, which are summarized below. The preparation of a fairness opinion
is a complex process involving subjective judgments and is not necessarily
susceptible to partial analyses or summary description. RP Financial stated that
its analyses must be considered as a whole and that selecting portions of such
analyses and of the factors considered by RP Financial without considering all
such analyses and factors could create an incomplete view of the process
underlying RP Financial's opinion. In its analyses, RP Financial made numerous
assumptions with respect to industry performance, business and economic
conditions, applicable laws and regulations, and other matters, many of which
are beyond the control of Monarch. Any estimates contained in RP Financial's
analyses are not necessarily indicative of future results or values, which may
be significantly more or less favorable than such estimates. No company or
transaction utilized in RP Financial's analyses was identical to Monarch, CCB or
the Merger. None of the analyses performed by RP Financial was assigned a
greater significance by RP Financial than any other.
The following is a summary of the material financial analyses performed by
RP Financial in connection with providing its opinion. In its analysis, RP
Financial did not give effect to the Reverse Stock Split. Consequently all data
regarding shares of Monarch Common Stock in the following analysis is on a
pre-Reverse Stock Split basis, with post-Reverse Stock Split data reflected in
parentheses.
TRANSACTION SUMMARY. RP Financial summarized the terms of the Merger,
including the conversion of each share of CCB Common Stock into the right to
receive Monarch Common Stock pursuant to the Conversion Number. RP Financial
also summarized the accounting treatment of the Merger, the methodology utilized
to determine the Conversion Number, and the pricing ratios indicated by the
Conversion Number relative to the book value, tangible book value, assets,
deposits and earnings of CCB.
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COMPARABLE TRANSACTIONS ANALYSIS. In this analysis, RP Financial conducted
an evaluation of the financial terms, financial condition, and operating
condition of other recent business combinations among comparable banking
institutions both pending and completed. In conjunction with its analysis, RP
Financial considered the multiples of book value, earnings, deposits, and assets
implied by the terms in such completed and pending comparable transactions. The
comparable transactions involved selling companies whose financial
characteristics were comparable to those of CCB including companies operating in
the Western United States and California. More specifically, the criteria
included selling companies with total assets of between $100 million and $1.5
billion, tangible equity to assets of between four percent and eleven percent,
year-to-date return on averages assets greater than 0.25 percent, and a ratio of
nonperforming assets to total assets less than five percent. A total of 22
transactions were announced between October 1, 1994 and December 18, 1996
meeting the aforementioned criteria, and these constitute the "Comparable
Transactions." A second group of comparable transactions was selected using the
same criteria as above, EXCEPT that the geographic restriction was eliminated to
result in a larger comparable group consisting of all transactions in the United
States announced between January 1, 1996 and December 31, 1996. A total of 82
transactions met the criteria, and these constitute the "All U.S. Transactions."
RP Financial calculated the pricing ratios implied by the Conversion Number by
valuing the Monarch Common Stock at $2.31 per share ($19.64 per share after
giving effect to the Reverse Stock Split), the average bid price for the five
trades which were reported between November 6, 1996 and December 27, 1996. The
price-to-tangible book value ratio indicated by the Conversion Number was 2.34x,
versus a median price-to-tangible book value ratio indicated by the All U.S.
Transactions of 2.22x. The price-to-earnings multiple indicated by the
Conversion Number was 15.6x trailing twelve month earnings, versus a median
price-to-earnings multiple of 16.5x for the Comparable Transactions and a median
of 17.7x for the All U.S. Transactions. The core deposit premium indicated by
the Conversion Number was 10.5 percent, versus a median deposit premium of 8.8
percent for the Comparable Transactions and median deposit premium of 12.8
percent for the All U.S. Transactions. And the price-to-assets ratio indicated
by the Conversion Number was 16.7 percent, versus a median price-to-assets ratio
indicated by the Comparable Transactions of 15.9 percent and a median
price-to-assets ratio indicated by the All U.S. Transactions of 17.6 percent.
The price-to-tangible book value comparison suggested that the Conversion Number
exceeded the prices indicated by the Comparable Transactions and the All U.S.
Transactions. However, the price-to-earnings, deposit premium, and
price-to-assets comparisons suggested that the Conversion Number was equivalent
to or more favorable than the prices indicated by the Comparable Transactions
and the All U.S. Transactions. RP Financial concluded that the most meaningful
determinate of long term value is earnings, and that the more favorable earnings
multiple implied by the Conversion Number relative to both the median for the
Comparable Transactions and the median for the All U.S. Transactions supported
the fairness conclusion.
IMPACT ANALYSIS. In this analysis, RP Financial analyzed certain balance
sheet and income statement data for Monarch and CCB on a pro forma combined
basis. Such analysis reviewed the pro forma and forecasted profitability,
capital, tangible capital, credit quality, and asset size of Monarch and CCB.
The analysis was based on pooling-of-interests accounting treatment and showed,
among other things, that the combined company will have approximately $864
million in assets and stockholders' equity of approximately $77 million on a pro
forma combined basis after the Merger. Profitability was evaluated assuming
certain specific levels of expense savings. The financial terms of the Merger
were analyzed on a fully diluted basis, including the impact of existing options
and the options to be issued in conjunction with the Merger. Based on the impact
analysis, the Merger was forecasted to be initially dilutive to Monarch's fully
diluted book value per share, with fully diluted book value per share realizing
a decrease of approximately 19 percent. At the same time, the Merger was
forecasted to be accretive to Monarch's fully diluted tangible book value per
share, with fully diluted tangible book value per share realizing an increase of
approximately 6 percent. Relative to fully diluted earnings per share, the
Merger was forecasted to be accretive to Monarch's forecasted 1997 and 1998
earnings per share, with fiscal 1997 fully diluted earnings per share realizing
an increase of approximately 12 percent and fiscal 1998 fully diluted earnings
per share realizing an increase of approximately 22 percent. The benefits to the
holders of Monarch Common Stock of the
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tangible book value and earnings accretion were evaluated relative to the
dilution in reported book value per share. RP Financial also reviewed the impact
analysis, assuming that the Merger was accounted for using purchase accounting
treatment. RP Financial determined that the economic benefit of the Merger, and
consequently the fairness conclusion, were unchanged by the form of accounting
treatment applied. RP Financial also took into account such factors as Monarch's
greater market capitalization and the greater liquidity of the Monarch Common
Stock on a combined pro forma basis, as well as the competitive advantages
anticipated to be realized by Monarch as a result of the Merger in terms of
increased asset size, available economies of scale, expanded number of markets
served through the expanded branch network, and future opportunities for
expansion. The Impact Analysis was based on data available at the time performed
and should not be construed as indicative of the actual impact of the Merger
upon consummation or future impact of the Merger following consummation.
DISCOUNTED CASH FLOW ANALYSIS. RP Financial prepared two discounted cash
flow ("DCF") analyses, both of which incorporated a five year financial
projection and cash flow analysis to shareholders. For purposes of
comparability, both DCF analyses were prepared without reflecting the impact of
the Reverse Stock Split.
Monarch Stand-Alone Business Plan. The first DCF analysis considered Monarch
on a stand-alone basis, without considering the impact of the Merger. The
stand-alone DCF analysis was based on internal forecasts prepared by management
of Monarch and their advisors, which incorporated several specific factors
reflecting the operating environment of Monarch, including growth prospects in
the local market, the level of competition from other financial institutions,
and future earnings projections for Monarch under the current business plan. The
projections of future cash flows to shareholders included the payment of cash
dividends during interim years and the receipt of consideration at the end of
five years, assuming a terminal value for the Monarch Common Stock. The
projections of future cash flows assumed payment of cash dividends to common
stockholders, asset growth of approximately 4.8 percent annually, return on
average assets ranging from 1.1 percent to 1.5 percent of average assets over
the five year projection period, and realization of a terminal value at the end
of five years of operations. Cash dividends were assumed to reflect the payout
of excess capital, assumed to be all tangible capital in excess of six percent
of assets, to common stockholders equity. The terminal value was calculated
using an assumption of 16.5x year five earnings and 1.78x year five tangible
book value, each measure weighted equally, which represent the median
sale-of-control valuations from the Comparable Transactions analysis discussed
previously. The cash flow represented by the dividends and terminal value was
discounted to present value using a discount rate of 12 percent. The stand-alone
DCF analysis indicated present value to Monarch Shareholders of approximately
$2.69 per share ($22.87 per share after giving effect to the Reverse Stock
Split).
Merger Scenario. The second DCF analysis considered the operations of
Monarch on a pro forma basis, considering the impact of the Merger including
issuance of the Monarch Common Stock based on the Conversion Number, the
estimated transaction adjustments, and incorporating the impact of consolidating
the operations of CCB and achieving operating synergies. The merger scenario was
based on internal forecasts prepared by management of Monarch and their
advisors. The projections of future cash flows to shareholders included cash
dividends and the receipt of consideration at the end of five years, assuming a
terminal value for the Monarch Common Stock. The assumptions with regard to cash
dividend policy and terminal value were unchanged from the "Stand-Alone Business
Plan" scenario. The Merger Scenario assumed asset growth for the merged company
of approximately 4.7 percent annually, return on average assets ranging from 1.4
percent to 1.6 percent over the five year period, and realization of a terminal
value at the end of five years of operations. The cash flow represented by the
dividends and terminal value was discounted to present value using a discount
rate of 12 percent. The Merger DCF analysis indicated a present value to Monarch
Shareholders of approximately $2.85 per share ($24.23 per share after giving
effect to the Reverse Stock Split). RP Financial considered the results of these
two DCF analyses in its fairness analysis, concluding that the superior present
value per share generated under the Merger DCF Analysis supporting the fairness
conclusion.
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In addition to these financial analyses, RP Financial considered several
other considerations in reaching its fairness conclusion. Such other
considerations included the greater market capitalization of the merged company
relative to Monarch on a stand-alone basis, suggesting the potential for greater
liquidity in the shares of Monarch Common Stock; the likelihood that the merged
company would be attractive to a greater number of institutional and other
investors by virtue of its greater asset size and market capitalization relative
to Monarch on a stand-alone basis; and, the potential benefits of combining two
companies with adjacent market areas, particularly in terms of greater economies
of scale, market presence and the complementary branch structure.
On the basis of these analyses, RP Financial concluded that the Conversion
Number, as described in the Merger Agreement, is fair to the shareholders of
Monarch from a financial point of view. As described above, RP Financial's
opinion and presentation to the Monarch Board was one of many factors taken into
consideration by the Monarch Board in making its determination to approve the
Merger Agreement. Although the foregoing summary describes the material
components of the analyses presented by RP Financial to the Monarch Board, it
does not purport to be a complete description of all the analyses performed by
RP Financial and is qualified by reference to the written opinion of RP
Financial set forth as Exhibit D hereto, which the Monarch Shareholders are
urged to read in its entirety.
Pursuant to a letter dated February 3, 1997 (the "RP Financial Engagement
Letter"), RP Financial estimates that it will receive from Monarch total fees of
$40,000, of which $35,000 has been paid to date, plus reimbursement of certain
out-of-pocket expenses, for its services in connection with the Merger. In
addition, Monarch has agreed to indemnify RP Financial against certain
liabilities, including liabilities under the federal securities laws.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences of the Merger. The discussion may not apply in the special
circumstances of particular CCB Shareholders, such as CCB Shareholders that are
insurance companies, securities dealers, financial institutions, foreign persons
or persons who hold CCB Common Stock as part of a straddle or hedging or
conversion transaction. Further, the following does not discuss any aspects of
state, local or foreign taxation. This discussion is based upon laws,
regulations, rulings and decisions now in effect and on proposed regulations,
all of which are subject to change (possibly with retroactive effect) by
legislation, administrative action or judicial decision. No ruling has been or
will be requested from the Internal Revenue Service on any tax matter relating
to the Merger.
As of the date of the Joint Proxy Statement--Prospectus, Sullivan &
Cromwell, special counsel to Monarch, and O'Melveny & Myers LLP, special counsel
to CCB, have advised Monarch and CCB respectively, that in their opinion:
(a) the Merger will constitute a tax-free reorganization under Section
368(a) of the Code and that Monarch and CCB will each be a party to the
reorganization;
(b) no income, gain or loss will be recognized by either Monarch or CCB
as a result of the consummation of the Merger;
(c) no income, gain or loss will be recognized by any CCB Shareholder
upon the exchange of shares of CCB Common Stock for Monarch Common Stock;
(d) the adjusted tax basis of Monarch Common Stock received by each CCB
Shareholder pursuant to the Merger will be the same as the adjusted tax
basis of the shares of CCB Common Stock surrendered in exchange therefor;
and
(e) the holding period of Monarch Common Stock received by each CCB
Shareholder in the Merger will include the period during which the shares of
CCB Common Stock surrendered and exchanged therefor were held, provided that
such CCB Common Stock is held as a capital asset by the CCB Shareholder at
the Effective Time.
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CCB Shareholders and Monarch Shareholders who exercise their Dissenters'
Rights and who receive cash in exchange for their respective shares will be
treated as having received such payment in redemption of the shares. In general,
if the shares are held as a capital asset at the Effective Time, the holder will
recognize capital gain or loss measured by the difference between the amount of
cash received and the holder's adjusted tax basis for the shares. If, however,
the holder owns, either actually or constructively, any CCB Common Stock that is
exchanged in the Merger for Monarch Common Stock, the payment for dissenting
shares to such holder could, in certain circumstances, be treated as dividend
income. In general, under the constructive ownership rules of the Code, a holder
may be considered to own stock that is owned, and in some cases constructively
owned, by certain related individuals or entities, as well as stock that the
holder (or related individuals or entities) has the right to acquire by
exercising an option or converting a convertible security. Each holder who
contemplates exercising Dissenters' Rights should consult such holder's own tax
advisor as to the possibility that any payment to such holder will be treated as
dividend income.
Consummation of the Merger is conditioned, among other things, on receipt by
Monarch of an opinion of Sullivan & Cromwell and receipt by CCB of an opinion of
O'Melveny & Myers LLP, each dated the Effective Date, to the effect that (i) the
Merger constitutes a reorganization under Section 368 of the Code, and (ii)
Monarch and CCB will each be a party to that reorganization, thereby satisfying
the Tax-Free Reorganization Condition. An opinion of counsel is not binding on
the Internal Revenue Service, and there can be no assurance that the Internal
Revenue Service will not take a position contrary to one or more of the
positions reflected herein or that the positions herein will be upheld by the
courts if challenged by the Internal Revenue Service. The opinions of Sullivan &
Cromwell and O'Melveny & Myers LLP summarized above are or will be based, among
other things, on representations contained in certificates of Monarch, CCB and
others. The Tax-Free Reorganization Condition is a principal term of the Merger,
and as such the condition may not be waived under California law by either
Monarch or CCB after their shareholders have approved the principal terms of the
Merger. See "THE MERGER AGREEMENT-- WAIVER AND AMENDMENT."
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BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING ON THE
PARTICULAR CIRCUMSTANCES OF EACH HOLDER OF MONARCH COMMON STOCK AND CCB COMMON
STOCK AND OTHER FACTORS, EACH SUCH HOLDER IS URGED TO CONSULT SUCH HOLDER'S OWN
TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO SUCH
HOLDER (INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER
TAX LAWS).
REGULATORY APPROVALS
The Merger is subject to prior approval by the Federal Reserve Board under
Section 3 of the BHCA, which requires that the Federal Reserve Board take into
consideration, among other things, competition, the financial and managerial
resources and future prospects of the institutions and the convenience and needs
of the communities to be served. The BHCA prohibits the Federal Reserve Board
from approving the Merger if (a) it would result in a monopoly or in furtherance
of any combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any part of the United States; or (b) its effect in any
section of the country may be substantially to lessen competition or tend to
create a monopoly, or if it would in any other manner be a restraint of trade,
unless the Federal Reserve Board finds that the anti-competitive effects of the
Merger are clearly outweighed by the public interest and the probable effect of
the transaction in meeting the convenience and needs of the communities to be
served. The Federal Reserve Board has the authority to deny an application if it
concludes that the combined organization would have an inadequate capital
structure, taking into account, among other factors, the nature of the business
and operations and plans for expansion. Furthermore, the Federal Reserve Board
must also assess the records of the depository subsidiaries of Monarch and CCB
under the Community Reinvestment Act of 1977, as amended (the "CRA"). The CRA
requires that the Federal Reserve Board analyze and take into account, when
evaluating an application, each depository institution record of meeting the
credit needs of its local communities, including low- and moderate-income
neighborhoods, consistent with safe and sound operation. NBSC, Monarch Bank and
Western Bank have CRA ratings of "outstanding," "satisfactory" and
"satisfactory," respectively.
Under the BHCA, the Merger may not be consummated until the fifteenth day
following the date of Federal Reserve Board approval. If the United States
Department of Justice commenced an action challenging the Merger on antitrust
grounds during such fifteen-day period, commencement of such action would stay
the effectiveness of the Federal Reserve Board approval, unless a court
specifically orders otherwise.
The Bank Merger is subject to prior approval by the OCC. The Bank Merger Act
prohibits the OCC from approving a bank merger (a) if it would result in a
monopoly or be in furtherance of any combination or conspiracy to monopolize or
to attempt to monopolize the business of banking in any part of the United
States, or (b) if its effect in any section of the country may be substantially
to lessen competition or tend to create a monopoly, or if it would in any other
manner be a restraint of trade, unless the OCC finds that the anticompetitive
effects of the merger are clearly outweighed by the public interest and the
probable effect of the transaction in meeting the convenience and needs of the
communities to be served. Under the Bank Merger Act and applicable regulations,
the Bank Merger may not be consummated until the fifteenth day following the
date of receipt of OCC approval, during which time the United States Department
of Justice may challenge the Bank Merger on antitrust grounds. In addition, the
Bank Merger Act requires that the OCC take into consideration, among other
factors, the financial and managerial resources and future prospects of the
institutions and the convenience and needs of the communities to be served. The
OCC has the authority to deny an application if it concludes that the combined
organization would have an inadequate capital position or if the requirements of
the Community Reinvestment Act are not satisfied. An application for the
requisite approval of the Bank Merger by the OCC has been submitted. No
assurances can be given, however, that such approval will be received or that
the Bank Merger will be consummated.
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Monarch and CCB are not aware of any material governmental approvals or
actions that are required for consummation of the Merger and the Bank Merger,
except as described above. Should any such approval or action be required, it is
currently contemplated that such approval or action would be sought.
The Merger cannot proceed in the absence of the regulatory approvals.
Monarch and CCB have agreed in the Merger Agreement to use reasonable best
efforts promptly to take all actions necessary, proper or advisable to
consummate the transactions contemplated by the Merger Agreement, including
using efforts to obtain all necessary approvals from all applicable governmental
entities, making all necessary registrations, applications and filings and
obtaining any contractual consents and regulatory approvals. However, there can
be no assurance that such regulatory approvals will be obtained or as to the
date of any such approval. There can also be no assurance that any such approval
will not contain a condition or requirement which causes such approvals to fail
to satisfy the conditions set forth in the Merger Agreement and described below
under "THE MERGER AGREEMENT--Conditions."
Monarch and CCB submitted initial applications seeking approval of the
Merger and related matters to the Federal Reserve Board on March 17, 1997, and
the Federal Reserve Board accepted final applications for processing on April
17, 1997. Monarch and CCB each expect to obtain approvals of such applications
by May 17, 1997. On March 28, 1997, Monarch Bank and NBSC also submitted an
application to the OCC seeking approval of the Bank Merger, and Monarch Bank and
NBSC each expects to obtain approval of such application by May 15, 1997.
RESALE OF MONARCH COMMON STOCK
All shares of Monarch Common Stock received by CCB Shareholders in the
Merger will be freely transferrable, except that shares of Monarch Common Stock
received by such shareholders who are deemed to be "affiliates" (as defined for
purposes of Rule 145 under the Securities Act) of CCB as of the date of the CCB
Meeting may be resold by them only pursuant to an effective registration
statement under the Securities Act covering resales of such shares or in
transactions permitted by the resale provisions of Rule 145 of the Securities
Act (or pursuant to Rule 144 under the Securities Act in the case of such
persons who become affiliates of Monarch) or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of CCB or Monarch
generally include individuals or entities that control, are controlled by, or
are under common control with, such entities and may include certain officers
and directors of such entities as well as principal shareholders of such
entities.
CCB has agreed in the Merger Agreement to use all reasonable efforts to
cause each director and executive officer who is identified as a possible
affiliate of CCB to enter into an agreement providing that such person will not
offer, sell, pledge, transfer or otherwise dispose of any shares of Monarch
Common Stock to be received by such person in the Merger, except in compliance
with the applicable provisions of the Securities Act and until such time as
financial results covering at least thirty days of combined operations of
Monarch and CCB have been published. In addition, each person who is an
affiliate of Monarch or will become an affiliate of Monarch on the Effective
Date will be required to execute a standstill letter with respect to his/her
ability to sell shares of Monarch Common Stock acquired in the Merger following
consummation of the Merger. See "THE MERGER AGREEMENT--Exchange of Stock
Certificates."
It is a condition to the consummation of the Merger that the Merger be
accounted for as a "pooling-of-interests" for accounting and financial reporting
purposes (although such condition may be waived by the mutual agreement of the
parties as discussed elsewhere herein). Certain SEC guidelines indicate that the
"pooling-of-interests" method generally will not be challenged on the basis of
selling of shares by affiliates of the acquiring or the acquired company if such
affiliates do not dispose of any shares (other than a "DE MINIMIS" number of
shares) of the stock they received in connection with the Merger during the
period beginning thirty days before the Merger and ending when financial results
covering at least thirty
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days of post-merger operations of the combined enterprise have been published.
See "--Accounting Treatment."
CERTAIN EFFECTS OF THE MERGER
Monarch will be the surviving corporation in the Merger. Once the Merger has
been consummated, the trading of CCB Common Stock will not be reported on the
National Daily Quotation Service "pink sheets," and CCB will no longer be
required to file reports pursuant to the Exchange Act. It is anticipated that
the management and operation of Monarch and CCB will be integrated after the
Merger, but neither the Merger nor the Bank Merger is expected to affect the
day-to-day banking operations of Monarch Bank, Western Bank or NBSC. However,
CCB has agreed, subject to certain conditions, at or before the Effective Time,
to make such accounting adjustments as Monarch requests in order to implement
its plans regarding NBSC or to reflect merger-related expenses and costs. See
"THE MERGER AGREEMENT-- Certain Covenants--Certain Policies of CCB." The Merger
Agreement also provides that the Board of Directors of the Surviving Corporation
will include William H. Jacoby, Robert L. McKay and Mark H. Stuenkel, each
currently a director of CCB. The Monarch Board will consist of the seven
directors elected at the Monarch Annual Meeting until the Effective Time, at
which time the Monarch board will adopt resolutions fixing the exact number of
directors at ten and appointing Messrs. Jacoby, McKay and Stuenkel to fill the
vacancies created thereby. All members of the CCB Board and certain officers of
CCB as specified by Monarch will resign as of the Effective Time. See "THE
MERGER AGREEMENT-- Conditions."
The Merger Agreement also provides that Monarch and CCB will take all
actions necessary to consummate and make effective the Bank Merger immediately
following the Effective Time on the Effective Date. Monarch Bank and NBSC have
entered into the Bank Merger Agreement, which provides, among other things, that
the existing directors of NBSC will continue as directors following the Bank
Merger. See "THE MERGER AGREEMENT--The Bank Merger."
After the Merger, the Surviving Corporation will be headquartered at 30000
Town Center Drive, Laguna Niguel, California 92677. The telephone number at such
offices will be (714) 495-3300.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
GENERAL
In considering the recommendations of the Monarch Board and the CCB Board,
the Monarch Shareholders and the CCB Shareholders should be aware that certain
members of management of each of Monarch and CCB and of the Monarch Board and
the CCB Board have certain interests in the transactions contemplated by the
Merger Agreement that are in addition to the interests of shareholders generally
and which may create potential conflicts of interest. These interests include,
among others, provisions in the Merger Agreement relating to the indemnification
of CCB and NBSC officers and directors; directors' and officers' liability
insurance; the appointment of three members of the CCB Board to the Monarch
Board at the Effective Time; certain employment agreements and employee benefits
discussed below; and the beneficial ownership by John M. Eggemeyer, a Monarch
Director, of 80 percent of BPI which provided financial advisory and consulting
services in connection with the Merger.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
The Merger Agreement provides that from and after the Effective Time,
Monarch will indemnify each director and officer of CCB and NBSC, determined as
of the Effective Time, against certain liabilities arising out of matters
existing or occurring at or prior to the Effective Time to the extent to which
such indemnified parties were entitled under California law and CCB's Articles
of Incorporation or By-Laws in effect on December 19, 1996. Monarch will also
advance expenses as incurred to the extent permitted under California law and
CCB's Articles of Incorporation and By-Laws. In addition, for a period of six
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years after the Effective Time, Monarch will use its reasonable best efforts to
cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by CCB, provided that Monarch may
substitute therefor policies of comparable coverage with respect to claims
arising from facts or events which occurred before the Effective Time. See "THE
MERGER AGREEMENT--Conditions-- Indemnification; Directors' and Officers'
Insurance."
APPOINTMENT OF DIRECTORS
The Merger Agreement provides that William H. Jacoby, Robert L. McKay and
Mark H. Stuenkel, each currently a director of CCB, will be appointed a member
of the Board of Directors of Monarch upon consummation of the Merger. The
Monarch Board will consist of the seven directors elected at the Monarch Annual
Meeting until the Effective Time, at which time the Monarch Board will adopt
resolutions fixing the exact number of directors at ten and appointing Messrs.
Jacoby, McKay and Stuenkel to fill the vacancies created thereby. Each of the
current directors of NBSC will remain directors of NBSC.
EMPLOYMENT AGREEMENTS
Monarch will honor the Salary Continuation Agreements of William H. Jacoby,
Mark H. Stuenkel and Abdul Memon in accordance with their terms. Monarch and
Messrs. Jacoby and Stuenkel are currently discussing the possibility of entering
into employment agreements upon consummation of the Merger. If either or both of
Messrs. Jacoby and Stuenkel enter into such employment agreements, the Salary
Continuation Agreement for such party or parties will be terminated. See "THE
ANNUAL MEETING OF CCB SHAREHOLDERS--Compensation of Executives of CCB--Executive
Salary Continuation Agreements."
In February 1997, E. Lynn Caswell, Monarch and Monarch Bank entered into the
Release pursuant to which Mr. Caswell agreed to resign as President and Chief
Executive Officer of Monarch Bank and as a Director of Monarch and to waive all
rights to any and all options to purchase shares of Monarch Common Stock. In
connection with the Release, Mr. Caswell received a payment of $347,600. Mr.
Caswell will continue to serve as Vice Chairman of Monarch.
EMPLOYEE BENEFITS
Pursuant to the Merger Agreement, the employee plans of CCB and NBSC in
effect on December 19, 1996 (except the 1982 Plan and the CCB Award Plan) will
remain in effect for a period of at least six months after the Effective Time
with respect to employees of CCB and NBSC covered by such plans at the Effective
Time. Monarch will take such steps as are required so that each person employed
by CCB or NBSC prior to the Effective Time who remains an employee of the
Surviving Corporation or its subsidiaries following the Effective Time (each a
"Continued Employee") will be entitled to participate in the employee benefit
plans that are in effect generally for employees of Monarch's subsidiaries from
time to time (all such plans, collectively, "Monarch's Benefit Plans"), if such
Continued Employee shall be eligible (or, with respect to discretionary
Monarch's Benefit Plans, selected) for participation therein and otherwise are
not participating in a similar plan which continues to be maintained by the
Surviving Corporation and its subsidiaries. Continued Employees will be eligible
to participate on the same basis as similarly situated employees of Monarch or
Monarch's subsidiaries. All such participation will be subject to such terms of
Monarch's Benefit Plans as may be in effect from time to time. Monarch and
Monarch's subsidiaries will, solely for purposes of vesting and eligibility to
participate in Monarch's Benefit Plans, recognize credit for each Continued
Employee's term of service with CCB and CCB's subsidiaries. See "THE ANNUAL
MEETING OF MONARCH SHAREHOLDERS--Executive Compensation" and "THE MERGER
AGREEMENT--Certain Covenants--Employee Benefits."
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STOCK PURCHASE RIGHTS
Pursuant to the terms of a Holding Company Support Agreement, dated as of
October 1, 1994, among CCB, Robert L. McKay, Chairman of the Board of CCB and
CCB's largest shareholder, and the Robert L. McKay and Elaine McKay Family
Trust, dated January 29, 1991 (the "Support Agreement"), CCB was obligated to
issue to Robert L. McKay warrants to acquire shares of CCB Common Stock on each
March 19 until a note originally in the aggregate principal amount of $2,350,000
issued by CCB to Mr. McKay was paid in full. The note was executed by CCB in
consideration for the repayment by Mr. McKay of a loan made to CCB by Bank of
America. The number of warrants which may be issued originally was 25,000 but,
in accordance with the terms of the Support Agreement, has been reduced to zero
to reflect a prepayment of the Note in full. The warrants are exercisable for a
period of seven years at an exercise price equal to 80 percent of the book value
of CCB at the end of the quarter preceding the date the warrants are issued.
Warrants to purchase 3,723 shares of CCB Common Stock were issued to Mr. McKay
at an exercise price of $6.60 per share on March 19, 1997, prior to prepayment
in full of the note. All such warrants were exercised by Mr. McKay prior to the
date hereof.
OWNERSHIP OF BPI
BPI, an entity 80 percent of which is beneficially owned by John M.
Eggemeyer, serves as a financial advisor to Monarch under an engagement letter
dated May 17, 1995. In that capacity, it is anticipated that BPI will be paid
fees of approximately $1.35 million in connection with the acquisition of CCB by
Monarch. See "THE ANNUAL MEETING OF MONARCH SHAREHOLDERS--Security Ownership of
Certain Beneficial Ownership and Monarch Management" and "--Certain
Relationships and Related Transactions."
RELATED TRANSACTIONS
Other than the Merger Agreement, the Stock Option Agreement, the Shareholder
Agreements, the employment agreements that may be negotiated for Messrs. Jacoby
and Stuenkel and the transactions contemplated by and described in this Joint
Proxy Statement--Prospectus, Monarch and CCB do not know of any past, present or
proposed material contracts, arrangements or understandings between Monarch or
its affiliates on the one hand and CCB and its affiliates on the other hand.
PROPOSED AMENDMENTS TO MONARCH'S AMENDED ARTICLES OF INCORPORATION
The Monarch Board is unanimously proposing to amend Monarch's Amended
Articles of Incorporation to change the name of Monarch to "Western Bancorp." In
addition, the Monarch Board is unanimously proposing to amend Monarch's Amended
Articles of Incorporation to effect the Reverse Stock Split, pursuant to which
each 8.5 shares of the currently outstanding Monarch Common Stock will represent
one new share. Such amendments will not become effective until immediately prior
to the Effective Time. The name change will not affect in any way the validity
or transferability of stock certificates currently outstanding. Monarch
Shareholders will not be required to surrender for exchange any certificates
currently held by them. Monarch Shareholders desiring to exchange current
Monarch stock certificates for stock certificates of Western Bancorp
representing shares giving effect to the Reverse Stock Split will be able to do
so after the Merger by mailing their Monarch stock certificates with an
appropriate written request to U.S Stock Transfer Corporation, the transfer
agent, at the following address:
U.S. Stock Transfer Corporation
1745 Gardena Avenue, Suite 200
Glendale, California 91204-2991
Attention: William Garsa
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DISSENTERS' RIGHTS
In connection with the Merger, Monarch Shareholders and CCB Shareholders may
be entitled to dissenters' rights under Chapter 13 of the CGCL ("Dissenters'
Rights"), the text of which is attached hereto as Appendix F hereto. The
description of Dissenters' Rights contained in this Joint Proxy
Statement--Prospectus is qualified in its entirety by reference to Chapter 13 of
the CGCL.
If no instructions are indicated on proxies received by Monarch or CCB, such
proxies will be voted for the proposal to approve the principal terms of the
Merger Agreement at the CCB Meeting and the Monarch Meeting. Those Monarch
Shareholders and CCB Shareholders who return their proxies without instructions,
resulting in a vote for the approval of the principal terms of the Merger
Agreement, will not be entitled to Dissenters' Rights.
CCB DISSENTERS' RIGHTS
If the Merger is approved, a holder of shares of CCB Common Stock
("Dissenting CCB Shares") who objects to the Merger ("Dissenting CCB
Shareholder") will be entitled to payment in cash of the fair market value as of
December 18, 1996 of the Dissenting CCB Shares held by such Dissenting CCB
Shareholder and such shares will not be converted into or represent the right to
receive such shareholder's respective pro rata portion of the Merger
Consideration (as defined herein), provided that (a) such shares were
outstanding immediately prior to the date for the determination of the CCB
Shareholders entitled to vote on the Merger; (b) the Dissenting CCB Shareholder
did not vote his/her shares in favor of the Merger; (c) the Dissenting CCB
Shareholder made a demand (the "CCB Demand") within the time period allotted as
described below that CCB purchase the Dissenting CCB Shares at their fair market
value as of December 18, 1996, in accordance with Section 1301 of the CGCL; and
(d) the Dissenting CCB Shareholder has submitted for endorsement certificates
representing the Dissenting CCB Shares, in accordance with Section 1302 of the
CGCL. However, it is a condition to Monarch's obligation to consummate the
Merger that Dissenters' Rights have been exercised by no more than five percent
of the outstanding shares of CCB Common Stock. Consequently, if CCB Demands are
made by holders of more than five percent of the CCB Common Stock, the Merger
will not be consummated unless Monarch waives the Dissenters' Rights Condition.
See "--Accounting Treatment."
The CCB Demand must (a) be a written demand to purchase the Dissenting CCB
Shares and make payment to the Dissenting CCB Shareholder in cash of their fair
market value as of December 18, 1996; (b) be received by CCB within thirty days
after the date on which the notice of approval of the Merger by the CCB
Shareholders was mailed to the Dissenting CCB Shareholder (as described in the
second following paragraph); (c) reasonably inform CCB of the Dissenting CCB
Shareholder's identity and of the Dissenting CCB Shareholder's intention thereby
to demand the purchase of its Dissenting CCB Shares; (d) state the number and
class of the shares held of record by the Dissenting CCB Shareholder which the
Dissenting CCB Shareholder demands CCB to purchase; and (e) contain a statement
of what the Dissenting CCB Shareholder claims to be the fair market value of
his/her Dissenting CCB Shares as of December 18, 1996. Such statement of the
fair market value constitutes an offer by the Dissenting CCB Shareholder to sell
his/her Dissenting CCB Shares at such price. A Dissenting CCB Shareholder who
has made CCB Demand may not withdraw such CCB Demand unless Monarch consents
thereto. A proxy or vote against the approval of the principal terms of the
Merger Agreement does not in itself constitute a CCB Demand.
The Dissenting CCB Shareholder must submit the certificates representing the
Dissenting CCB Shares for endorsement as Dissenting CCB Shares to CCB (which
term, for purposes of this description of Dissenters' Rights, shall be deemed to
refer to Monarch if, at the relevant time, the Merger has been consummated) at
its principal office or at the office of any transfer agent of CCB within thirty
days after the date notice of approval of the Merger by CCB Shareholders was
mailed to such Dissenting Shareholder.
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If any CCB Shareholder may have Dissenters' Rights, CCB will mail to such
CCB Shareholder a notice of the approval of the Merger by CCB Shareholders
within ten days after the date of such approval, accompanied by (a) a copy of
Sections 1300, 1302, 1303 and 1304 of Chapter 13 of the CGCL; (b) a statement of
the price determined by CCB to represent the fair market value of the Dissenting
CCB Shares; and (c) a brief description of the procedure to be followed if the
CCB Shareholder desires to exercise his/her Dissenters' Rights under such
sections. CCB's statement of price constitutes an offer by CCB to purchase any
Dissenting CCB Shares.
If CCB denies that shares submitted to it as Dissenting CCB Shares are
Dissenting CCB Shares, or if CCB and a Dissenting CCB Shareholder fail to agree
on the fair market value of the Dissenting CCB Shares, either such Dissenting
CCB Shareholder or CCB may file a complaint in the Superior Court of the proper
county in California requesting that the court determine such issue. Such
complaint must be filed within six months after the date on which notice of
approval of the Merger by the CCB Shareholders is mailed to the Dissenting CCB
Shareholders.
On trial of the action, the court will first determine if the shares are
Dissenting CCB Shares, and if so determined, the court will either determine the
fair market value or appoint an impartial appraiser to do so. If both CCB and
the Dissenting CCB Shareholder fail to file a complaint within six months after
the date on which notice of the approval of the Merger was mailed to the
Dissenting CCB Shareholders, the Dissenting CCB Shareholder will lose his/her
Dissenters' Rights. In addition, if the Dissenting CCB Shareholder transfers
such Dissenting CCB Shares prior to their submission for the required
endorsement, such shares will lose their status as Dissenting CCB Shares.
Any demands, notices, certificates or other documents delivered to CCB prior
to the Merger may be sent to Abdul Memon, Assistant Secretary, California
Commercial Bankshares, 4100 Newport Place, Newport Beach, California, 92660.
Thereafter, they may be sent to, Arnold C. Hahn, Secretary, Monarch Bancorp,
30000 Town Center Drive, Laguna Niguel, California 92677.
FAILURE TO TAKE ANY NECESSARY STEP WILL RESULT IN A TERMINATION OR WAIVER OF
THE RIGHTS OF THE HOLDER UNDER CHAPTER 13 OF THE CGCL. A PERSON HAVING A
BENEFICIAL INTEREST IN CCB COMMON STOCK THAT IS HELD OF RECORD IN THE NAME OF
ANOTHER PERSON, SUCH AS A TRUSTEE OR NOMINEE, MUST ACT PROMPTLY TO CAUSE THE
RECORD HOLDER TO FOLLOW THE REQUIREMENTS OF CHAPTER 13 OF THE CGCL IN A TIMELY
MANNER IF SUCH PERSON ELECTS TO DEMAND PAYMENT OF THE FAIR MARKET VALUE OF SUCH
SHARES.
MONARCH DISSENTERS' RIGHTS
The Merger is conditioned on the designation for quotation of Monarch Common
Stock on the NASDAQ National Market upon consummation of the Merger. Assuming
that condition is satisfied immediately prior to the consummation of the Merger,
Monarch Shareholders will not have Dissenters' Rights unless demands for
purchase in cash of such shares at their fair market value as of December 18,
1996 pursuant to Section 1301 of the CGCL (a "Monarch Demand") are made with
respect to five percent or more of the outstanding shares of Monarch Common
Stock (before giving effect to the Merger). Such Monarch Demands must be
received by Monarch or its transfer agent not later than the date of the Monarch
Meeting. In the event that Monarch Demands are made with respect to five percent
or more of the outstanding shares of Monarch Common Stock on or before the date
of the Monarch Meeting, the Monarch Shareholders who made Monarch Demands will
be entitled to Dissenters' Rights, provided that such Dissenters' Rights are
perfected pursuant to Chapter 13 of the CGCL. However, it is a condition to
Monarch's obligation to consummate the Merger that Dissenters' Rights have been
exercised by no more than five percent of the outstanding shares of Monarch
Common Stock. Consequently, if Monarch Demands are made by holders of more than
five percent of the Monarch Common Stock giving rise to
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Dissenters' Rights for Monarch Shareholders who have perfected such Dissenters'
Rights, the Merger will not be consummated unless Monarch waives the Dissenters'
Rights Condition.
In the event that (i) the Merger is approved by the shareholders of Monarch
and CCB, (ii) Monarch Demands are made by holders of more than five percent of
the Monarch Common Stock and (iii) Monarch elects nonetheless to proceed with
the Merger, a holder of Monarch Common Stock ("Dissenting Monarch Shares") who
objects to the Merger ("Dissenting Monarch Shareholder") will be entitled to
payment in cash of the fair market value as of December 18, 1996 of their
Dissenting Monarch Shares, provided that (a) such shares were outstanding
immediately prior to the date for the determination of shareholders entitled to
vote on the Merger; (b) the Dissenting Monarch Shareholder voted his/her shares
against the approval of the principal terms of the Merger Agreement; (c) the
Dissenting Monarch Shareholder made a Monarch Demand; and (d) the Dissenting
Monarch Shareholder has submitted for endorsement certificates representing
his/her Dissenting Monarch Shares, in accordance with Section 1302 of the CGCL.
The Monarch Demand must (a) be a written demand to purchase the Dissenting
Monarch Shares and make payment to the Dissenting Monarch Shareholder in cash of
their fair market value as of December 18, 1996; (b) be received by Monarch on
or before the date of the Monarch Meeting; (c) reasonably inform Monarch of the
Dissenting Monarch Shareholder's identity and of the Dissenting Monarch
Shareholder's intention thereby to demand the purchase of its Dissenting Monarch
Shares; (d) state the number and class of the shares held of record by the
Dissenting Monarch Shareholder which the Dissenting Monarch Shareholder demands
Monarch to purchase; and (e) contain a statement of what the Dissenting Monarch
Shareholder claims to be the fair market value of his/her Dissenting Monarch
Shares as of December 18, 1996. Such statement of the fair market value
constitutes an offer by the Dissenting Monarch Shareholder to sell his/her
Dissenting Monarch Shares at such price. A Monarch Dissenting Shareholder who
has made such a demand for payment may not withdraw such Demand unless Monarch
consents thereto. A proxy or vote against the approval of the principal terms of
the Merger Agreement does not in itself constitute a Demand.
The Dissenting Monarch Shareholder must submit the certificates representing
the Dissenting Monarch Shares for endorsement as Dissenting Monarch Shares to
Monarch at its principal office or at the office of any transfer agent of
Monarch within thirty days after the date notice of approval of the Merger by
Monarch Shareholders was mailed to such Dissenting Monarch Shareholder.
If any Monarch Shareholder may have Dissenters' Rights, Monarch will mail to
each such shareholder a notice of the approval of the Merger by the Monarch
Shareholders within ten days after the date of such approval, accompanied by (a)
a copy of Sections 1300, 1302, 1303 and 1304 of Chapter 13 of the CGCL; (b) a
statement of the price determined by Monarch to represent the fair market value
as of December 18, 1996 of the Dissenting Monarch Shares; and (c) a brief
description of the procedure to be followed if the shareholder desires to
exercise his/her Dissenters' Rights under such sections. Monarch's statement of
price constitutes an offer by Monarch to purchase such Dissenting Monarch
Shares.
If Monarch denies that shares submitted to it as Dissenting Monarch Shares
are Dissenting Monarch Shares, or if Monarch and a Dissenting Monarch
Shareholder fail to agree on the fair market value of Dissenting Monarch Shares,
either such Dissenting Monarch Shareholder or Monarch may file a complaint in
the Superior Court of the proper county in California requesting that the court
determine such issue. Such complaint must be filed within six months after the
date on which notice of approval of the Merger is mailed to Dissenting Monarch
Shareholders.
On trial of the action, the court will first determine if the shares are
Dissenting Monarch Shares, and if so determined, the court will either determine
the fair market value or appoint an impartial appraiser to do so. If both
Monarch and the Dissenting Monarch Shareholder fail to file a complaint within
six months after the date on which notice of the approval of the Merger was
mailed to the Dissenting Monarch Shareholders, such Dissenting Monarch
Shareholder will lose his/her Dissenters' Rights. In addition, if the
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Dissenting Monarch Shareholder transfers such Dissenting Monarch Shares prior to
their submission for the required endorsement, such shares will lose their
status as Dissenting Monarch Shares.
Any demands, notices, certificates or other documents delivered to Monarch
may be sent to Arnold C. Hahn, Secretary, Monarch Bancorp, 30000 Town Center
Drive, Laguna Niguel, California 92677.
In the event that the Monarch Common Stock is not designated for quotation
on the NASDAQ National Market at the Effective Time and CCB waives that
condition to its obligation to consummate the Merger, Monarch Shareholders
electing to perfect their Dissenters' Rights may do so by following the
procedures described above under "--CCB Dissenters' Rights" MUTATIS MUTANDIS. As
of the date hereof, Monarch expects that it will be successful in having its
shares designated for quotation on the NASDAQ National Market, and accordingly
each Monarch Shareholder who intends to exercise its Dissenters' Rights should
submit a Monarch Demand on or before the date of the Monarch Annual Meeting,
vote against the Merger at the Monarch Annual Meeting and take all other action
necessary to perfect his/her Dissenters' Rights pursuant to Chapter 13 of the
CGCL in order to avoid the risk of waiving his/her Dissenters' Rights.
FAILURE TO TAKE ANY NECESSARY STEP WILL RESULT IN A TERMINATION OR WAIVER OF
THE RIGHTS OF THE HOLDER UNDER CHAPTER 13 OF THE CGCL. A PERSON HAVING A
BENEFICIAL INTEREST IN MONARCH COMMON STOCK THAT IS HELD OF RECORD IN THE NAME
OF ANOTHER PERSON, SUCH AS A TRUSTEE OR NOMINEE, MUST ACT PROMPTLY TO CAUSE THE
RECORD HOLDER TO FOLLOW THE REQUIREMENTS OF CHAPTER 13 OF THE CGCL IN A TIMELY
MANNER IF SUCH PERSON ELECTS TO DEMAND PAYMENT OF THE FAIR MARKET VALUE OF SUCH
SHARES.
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, it is currently expected
that the Merger will be accounted for as a "pooling-of-interests" in accordance
with generally accepted accounting principles, and confirmation by the
independent accountants for both Monarch and CCB of the ability to use such
accounting treatment is one of the conditions to the consummation of the Merger.
Under this method of accounting, the previously recorded assets and liabilities
of Monarch and CCB would be carried forward to the Surviving Corporation at
their recorded amounts; income and expenses of the Surviving Corporation would
include income and expenses of Monarch and CCB for the entire fiscal year in
which the Merger occurs; and the reported results of the separate corporations
for prior periods would be combined and restated as the results of the Surviving
Corporation. The results of the pooling treatment for accounting purposes would
not be reflected in historical consolidated financial statements of Monarch.
Although the Merger is expected to be accounted for as a
"pooling-of-interests," the Merger will qualify for such treatment only if
numerous requirements are met, including, but not limited to, satisfaction of
the Dissenters' Rights Pooling Requirement. If the Merger does not qualify for
"pooling-of-interests" treatment, the Merger Agreement expressly provides that
Monarch and CCB may waive their respective Pooling Conditions and that Monarch
may waive the Dissenters' Rights Condition, in which event the parties could
proceed with the Merger under "purchase" accounting. See "RISK FACTORS--
Accounting Treatment," "UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION" and "THE MERGER AGREEMENT--Conditions" and "--Waiver and
Amendment."
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MARKETS AND MARKET PRICES
MONARCH
There were, as of the Monarch Record Date, approximately 750 holders of
record of Monarch Common Stock. No shares of Monarch's preferred stock have been
issued or are outstanding. Trading in Monarch Common Stock, occurring solely
"over the counter," heretofore has not been extensive.
The following table summarizes those trades of Monarch Common Stock of which
Monarch is aware, setting forth the approximate high and low sales prices for
each quarterly period since December 31, 1994. Prices represent quotations by
dealers making a market in Monarch Common Stock and reflect inter-dealer prices,
without adjustments for mark-ups, mark-downs or commissions, and may not
necessarily represent actual transactions. Trading in Monarch Common Stock is
limited in volume and may not be a reliable indicator of its market value. The
sales prices in the following table have not been adjusted to reflect the
Revenue Stock Split.
<TABLE>
<CAPTION>
APPROXIMATE SALES
PRICES
QUARTER ENDED --------------------
(LAST TRADING DAY) HIGH LOW
- -------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
March 31, 1995............................................................ $ 1.50 $ 1.20
June 30, 1995............................................................. * *
September 30, 1995........................................................ 1.35 1.20
December 31, 1995......................................................... 1.35 1.20
March 31, 1996............................................................ 1.30 1.05
June 30, 1996............................................................. 2.00 1.00
September 30, 1996........................................................ 1.75 1.00
December 31, 1996......................................................... 3.50 1.63
March 31, 1997............................................................ 4.00 2.25
Through May 9, 1997....................................................... 4.00 3.36
</TABLE>
- ------------------------
* No reported trades
The last trading price of Monarch Common Stock of which Monarch is aware
prior to the announcement of the Merger on December 19, 1996 was $2.31 (without
giving effect to the Reverse Stock Split), and the last trading price of Monarch
Common Stock of which Monarch is aware prior to the announcement of the SCB
Merger on April 29, 1997 was $3.62. The trading price of Monarch Common Stock on
May 9, 1997, was $3.36 prior to giving effect to the Reverse Stock Split (or
$28.69 after giving effect to the Reverse Stock Split).
Because the Conversion Number is fixed at one a change in the trading price
of Monarch Common Stock before the Effective Time will affect the implied market
value of Monarch Common Stock to be received in the Merger in exchange for CCB
Common Stock. THERE CAN BE NO ASSURANCE AS TO THE TRADING VALUE OF MONARCH
COMMON STOCK AT ANY TIME BEFORE, AT OR AFTER THE EFFECTIVE TIME. SHAREHOLDERS OF
CCB AND MONARCH ARE URGED TO OBTAIN CURRENT QUOTATIONS FOR MONARCH COMMON STOCK
AND CCB COMMON STOCK.
Upon consummation of the Merger, it is expected that there will be
approximately 1,000 holders of record of Monarch Common Stock. It is a condition
to CCB's obligation to consummate the Merger that Monarch Common Stock is
designated for quotation on the NASDAQ National Market, and application to the
NASD will be made to have the Monarch Common Stock so designated. As a result,
Monarch and CCB expect (although there can be no assurances) that a more active
market for the Monarch Common Stock will develop once the Merger has been
effected. See "RISK FACTORS--Limited Market for Monarch Common Stock."
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CCB
As of the CCB Record Date, there were approximately 300 shareholders of
record of CCB Common Stock. No shares of CCB's preferred stock have been issued
or are outstanding.
Trading in CCB Common Stock, occurring solely "over the counter," heretofore
has not been extensive.
The following table summarizes those trades of CCB Common Stock of which CCB
is aware, setting forth the approximate high and low sales prices for each
quarterly period since December 31, 1994. Prices represent quotations by dealers
making a market in CCB Common Stock and reflect inter-dealer prices, without
adjustments for mark-ups, mark-downs or commissions, and may not necessarily
represent actual transactions. Trading in CCB Common Stock is limited in volume
and may not be a reliable indicator of its market value.
<TABLE>
<CAPTION>
APPROXIMATE SALES
PRICES
QUARTER ENDED --------------------
(LAST TRADING DAY) HIGH LOW
- ------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
March 31, 1995........................................................... $ 6.38 5.00
June 30, 1995............................................................ 6.63 6.00
September 30, 1995....................................................... 7.50 6.57
December 31, 1995........................................................ 7.97 7.40
March 31, 1996........................................................... 7.40 5.25
June 30, 1996............................................................ 7.25 5.25
September 30, 1996....................................................... 8.19 7.38
December 31, 1996........................................................ 15.38 8.75
March 31, 1997........................................................... 23.75 15.50
Through May 9, 1997...................................................... 25.88 23.00
</TABLE>
The last trading price of CCB Common Stock of which CCB is aware prior to
the announcement of the Merger on December 19, 1996 was $9.69, and the last
trading price of CCB Common Stock of which CCB is aware prior to the
announcement of the SCB Merger on April 29, 1997 was $23.88. The trading price
of CCB Common Stock on May 9, 1997, was $24.25.
THE MERGER AGREEMENT
SET FORTH BELOW IS A DESCRIPTION OF CERTAIN OF THE TERMS AND CONDITIONS OF
THE MERGER AGREEMENT AND RELATED MATTERS. THIS SUMMARY OF THE TERMS AND
CONDITIONS OF THE MERGER AGREEMENT DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERGER AGREEMENT
AS SET FORTH IN APPENDIX C HERETO AND THE TEXT THEREOF IS INCORPORATED BY
REFERENCE HEREIN.
THE MERGER
The Merger Agreement was entered into by and between Monarch and CCB on
December 19, 1996 and subsequently amended and restated. Pursuant to the Merger
Agreement, at the Effective Time, CCB will merge with and into Monarch, and
Monarch will be the Surviving Corporation in the Merger. The separate corporate
existence of CCB will then cease.
Under the terms of the Merger, each share of CCB Common Stock issued and
outstanding at the Effective Time (other than (a) shares which have not been
voted in favor of the approval of the principal terms of the Merger Agreement
and with respect to which Dissenters' Rights shall have been perfected in
accordance with the CGCL and (b) shares held directly or indirectly by Monarch,
other than shares held in a fiduciary capacity or in satisfaction of a debt
previously contracted) will be converted into one share (referred to herein as
the "Conversion Number") of Monarch Common Stock (after giving effect to the
Reverse Stock Split). Pursuant to the Merger Agreement, the Conversion Number
was determined as the quotient obtained by dividing (i) 1.6 times CCB's Per
Share Book Value (as defined) by (ii) Monarch's Per Share Book Value (as
defined). The aggregate of all such shares of Monarch Common Stock is referred
to
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as the "Merger Consideration." See "THE ANNUAL MEETING OF CCB
SHAREHOLDERS--Matters To Be Considered At the CCB Meeting" for information
concerning the number of shares of Monarch to be outstanding upon consummation
of the Merger and related matters.
Pursuant to the Merger Agreement, all options granted to directors, officers
and employees of CCB to purchase shares of CCB Common Stock will be converted
into the right to receive Monarch Common Stock, with the shares issuable
thereunder and the exercise prices therefor being adjusted appropriately to
reflect the Conversion Number. The Merger Agreement provides that, to the extent
permitted by applicable law, preemptive rights with respect to the purchase of
CCB Common Stock, if any, shall terminate and cease to exist at the Effective
Time.
A summary description of rights, privileges and preferences of the Monarch
Common Stock to be issued to CCB Shareholders in the Merger is set forth below
under "DESCRIPTION OF MONARCH CAPITAL STOCK AND COMPARISON OF SHAREHOLDERS
RIGHTS."
EFFECTIVE TIME AND EFFECTIVE DATE
On a date to be selected by Monarch, which will be within 30 days after the
last to occur of the expiration of all applicable waiting periods in connection
with the approvals of governmental authorities, the receipt of all approvals of
government authorities and satisfaction or waiver of all other conditions to the
consummation of the Merger, or on such earlier or later date as may be agreed in
writing by the parties, an agreement of merger, a certificate of merger and
related documents will be executed in accordance with the provisions and
requirements of the CGCL. The Merger will become effective upon filing of or at
such time on such date as may be specified in such articles of merger. The date
of such filing or such later effective date is herein called the "Effective
Date." The "Effective Time" of the Merger is the time of such filing or such
later time, if any, as is set forth in such articles of merger.
EXCHANGE OF STOCK CERTIFICATES
As of the Effective Time, Monarch will deposit, or will cause to be
deposited, with the Exchange Agent, U.S. Stock Transfer Corporation
(hereinafter, together with any substitute exchange agent selected by Monarch,
the "Exchange Agent"), for the benefit of CCB Shareholders, certificates
representing the shares of Monarch Common Stock issuable in connection with the
Merger in exchange for CCB Common Stock.
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented shares of CCB Common Stock
("Certificate" or "Certificates") whose shares were converted pursuant to the
Merger into shares of Monarch Common Stock the following:
(a) a form letter of transmittal specifying that delivery will be
effected, and risk of loss and title to the Certificates shall pass, only
upon delivery of the Certificates and, in the case of holders of more than
five percent of the CCB Common Stock at the Effective Time, the standstill
letters provided for in Section 4.13(b) of the Merger Agreement (relating to
the ability of certain "affiliates" to sell their shares) to the Exchange
Agent; and
(b) instructions for use in effecting the surrender of the Certificates
in exchange for the applicable portion of the Merger Consideration.
Upon surrender of a Certificate or Certificates to the Exchange Agent,
together with a duly executed letter of transmittal, and, if applicable, a
standstill letter, a holder of such Certificate(s) will be entitled to receive
in exchange therefor a certificate representing the number of whole shares of
Monarch Common Stock into which the shares represented by the Certificate(s)
surrendered have been converted pursuant to the Merger Agreement, and the
Certificate or Certificates so surrendered will be canceled.
In the event of a transfer of ownership of CCB Common Stock that is not
registered in the transfer records of CCB, a certificate representing the
appropriate number of shares of Monarch Common Stock may be issued to a
transferee if the Certificate(s) representing such CCB Common Stock is presented
to
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the Exchange Agent accompanied by documents sufficient, in the discretion of
Monarch and the Exchange Agent, to evidence and effect such transfer and to
evidence that all applicable stock transfer taxes have been paid. In the event
that any Certificate has been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such Certificate to be lost,
stolen or destroyed and the posting by such person of a bond in such amount as
the Exchange Agent may direct as an indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate a certificate
representing the appropriate number of shares of Monarch Common Stock.
Any former CCB Shareholder who has not exchanged his/her shares of CCB
Common Stock in accordance with the Merger Agreement within six months of the
Effective Time may look only to Monarch to claim his/her shares of Monarch
Common Stock and any dividends or distributions with respect to Monarch Common
Stock, in each case without interest thereon.
In no event will any interest accrue or be paid in respect of any part of
the Merger Consideration.
NO FRACTIONAL SHARES
Although the Merger Agreement provides that cash will be paid in lieu of
fractional shares, because the Conversion Number is one, the conversion of CCB
Common Stock into Monarch Common Stock will not require any payment of cash in
lieu of the issuance of fractional shares.
CONDUCT OF THE BUSINESS OF CCB AND MONARCH PRIOR TO THE MERGER
Pursuant to the Merger Agreement, each of Monarch and CCB has agreed that,
during the period from the date of the Merger Agreement until the Effective
Time, except as permitted by the Merger Agreement, it and each of its
subsidiaries will (a) conduct its business in the usual, regular and ordinary
course of business consistent with past practice; (b) use its reasonable best
efforts to maintain and preserve intact its business organization, properties,
leases, employees and advantageous business relationships and retain the
services of its officers and key employees; (c) take no action which would
adversely affect or delay the ability of CCB or Monarch to obtain any necessary
approvals, consents or waivers of any governmental authority required for the
transactions contemplated by the Merger Agreement or to perform its covenants
and agreements on a timely basis under the Merger Agreement; and (d) take no
action that is reasonably likely to have a material adverse effect on either
Monarch or CCB.
In addition, both Monarch and CCB have agreed that, during the same period,
neither will, nor permit any of its respective subsidiaries to, without the
prior consent of the other (a) incur any indebtedness for borrowed money (other
than federal funds borrowing) or assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any other person; (b)
except as provided in the Stock Option Agreement and except for the Reverse
Stock Split, (i) adjust, split, combine or reclassify any capital stock, (ii)
make, declare or pay any dividend or redeem shares of its capital stock, or
(iii) grant any right to acquire capital stock or issue any additional shares of
capital stock except pursuant to the exercise of stock options, warrants, awards
and other rights outstanding as of the date of the Merger Agreement; (c) other
than in the ordinary course of business, dispose of any of its properties,
leases or assets, or cancel, release or assign any indebtedness, except (i)
pursuant to agreements in force as of the date of the Merger Agreement, or (ii)
any such action or series of related actions which result in a pre-tax loss of
not more than $100,000; (d) make any capital expenditures other than in the
ordinary course of business in amounts not exceeding $25,000 individually or
$100,000 in the aggregate; (e) increase the compensation of employees or
directors, or make any other changes with respect to compensation, other than
(i) general increases in compensation for employees in the ordinary course of
business, (ii) bonuses accrued on CCB's financial statements at and for the year
ended December 31, 1996 in the ordinary course of business or (iii) in
accordance with applicable law; (f) other than in the ordinary course of
business, in individual amounts not in excess of $100,000, make any investment,
other than purchases of direct obligations of the United States with maturities
of three years or less, or acquire business operations (with certain limited
exceptions); (g) enter into or terminate any contract or agreement, other than
those
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involving less than $25,000 in aggregate damages or value of goods or services
provided; (h) settle any claim, action or proceeding involving more than $25,000
or material restrictions upon the operations of such parties; (i) except in the
ordinary course of business and in amounts less than $100,000, waive or release
any material right or collateral or compromise any extension of credit or other
debt or claim; (j) make or renew any extension of credit except in the ordinary
course of business or extensions of credit which such party has a legally
binding obligation to make; (k) change its method of accounting as in effect at
December 31, 1995; (l) engage in any merger, consolidation or other similar
transaction; or (m) amend its articles of incorporation or bylaws, other than
the Amendments.
CCB, pursuant to action of the CCB Board, gave its consent to the SCB Merger
prior to the execution and delivery of the SCB Merger Agreement on April 29,
1997.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties relating to, among other things, (a) organization and similar
corporate matters with respect to each of Monarch, CCB and certain of their
respective subsidiaries; (b) each of Monarch's and CCB's capital structure; (c)
authorization, execution, delivery, performance and enforceability of the Merger
Agreement and related matters; (d) conflicts under articles or by-laws, required
consents or approvals, and violations of any agreements or law; (e) documents
filed with the SEC and the accuracy of information contained therein; (f)
absence of certain material adverse events, changes, effects or undisclosed
liabilities; (g) retirement and other employee plans and matters relating to the
Employee Retirement Income Security Act of 1974, as amended; (h) litigation; (i)
compliance with law, including environmental compliance; (j) tax returns and
audits; (k) ownership of real property; (l) absence of regulatory actions; and
(m) labor matters.
CERTAIN COVENANTS
ACQUISITION PROPOSALS
Pursuant to the Merger Agreement, CCB has agreed that none of it, NBSC or
any of their respective officers and directors will, and that CCB will direct
and use its reasonable best efforts to cause its employees, agents and
representatives not to, (i) initiate, solicit or encourage, directly or
indirectly, any inquiries or the making of any proposal or offer (including,
without limitation, any proposal or offer to CCB Shareholders) with respect to a
merger, consolidation or similar transaction, other than pursuant to the Merger
Agreement, involving, or any purchase of all or any significant portion of the
assets or any equity securities of, CCB or NBSC (any such proposal or offer
being referred to as an "Acquisition Proposal") or (ii) except to the extent
legally required for the discharge by the CCB Board of its fiduciary duties as
advised in writing by its counsel, engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal.
CCB also has agreed, as of the date of the Merger Agreement, to immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any parties conducted theretofore with respect to any of the
foregoing and to make all reasonable efforts to enforce any confidentiality
agreements to which it or NBSC is a party. In addition, CCB will take the
necessary steps to inform the appropriate individuals or entities referred to in
the first sentence hereof of the obligations it has undertaken under the Merger
Agreement with respect to Acquisition Proposals. CCB will also notify Monarch
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, CCB.
CERTAIN POLICIES OF CCB
At or before the Effective Time, CCB will make such accounting entries or
adjustments as Monarch requests in order to implement its plans for NBSC
following the Merger or to reflect merger-related expenses and costs; PROVIDED,
HOWEVER, that (a) CCB will not be required to take such action more than two
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days prior to the Effective Time, (b) no such adjustment will require, based
upon consultation with counsel and accountants for CCB, any filing with any
governmental agency, or violate any law, rule or regulation applicable to CCB,
(c) no such adjustment will require any changes in net income or shareholders'
equity that will be required to be contained in any financial statement required
to be filed by CCB under the rules of the SEC if CCB reasonably believes that
all of the conditions to the Merger set forth in the Merger Agreement will not
be either satisfied or waived; and further provided, that in any event no
accrual or reserve made by CCB or NBSC pursuant to this covenant will constitute
or be deemed to be a breach or violation of or failure to satisfy any
representation, warranty, covenant, condition or other provision of the Merger
Agreement or otherwise be considered in determining whether any such breach,
violation or failure to satisfy has occurred. The recording of such adjustments
will not be deemed to imply any misstatement of previously furnished financial
statements or information and will not be construed as concurrence of CCB's
management with any such adjustments.
EMPLOYEE BENEFITS
Monarch and CCB have agreed that, unless otherwise mutually determined or
otherwise set forth in the Merger Agreement, the employee benefit plans of CCB
and NBSC in effect at the date of the Merger Agreement (with certain exceptions)
will remain in effect for a period of at least six months after the Effective
Time with respect to employees of CCB and NBSC covered by such plans at the
Effective Time. Monarch will take such steps as are required so that each
Continued Employee will be entitled to participate in Monarch's Benefit Plans,
if such Continued Employee is eligible (or, with respect to discretionary
Monarch's Benefit Plans, selected) for participation therein and otherwise is
not participating in a similar plan which continues to be maintained by the
Surviving Corporation and its subsidiaries. Continued Employees will be eligible
to participate on the same basis as similarly situated employees of Monarch or
Monarch's subsidiaries. All such participation will be subject to the terms of
Monarch's Benefit Plans as may be in effect from time to time. Monarch or
Monarch's subsidiaries will, solely for purposes of vesting and eligibility to
participate in Monarch's Benefit Plans, recognize credit for each Continued
Employee's term of service with CCB and CCB's subsidiaries. Options outstanding
under the 1982 Plan and the CCB Stock Award Plan on the Effective Date will be
converted into options to acquire Monarch Common Stock with the shares issuable
thereunder and the exercise prices therefor being adjusted appropriately to
reflect the Conversion Number.
Monarch will honor, to the extent set forth in the Merger Agreement, the
Salary Continuation Agreements, in accordance with their terms.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
From and after the Effective Time, Monarch has agreed to indemnify and hold
harmless each director and officer of CCB or NBSC, determined as of the
Effective Time (the "Indemnified Parties"), against any costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities (collectively, "Costs") incurred in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of matters existing or occurring at
or prior to the Effective Time (including with respect to the Merger Agreement
or any of the transactions contemplated thereby), whether asserted, claimed or
arising prior to, at or after the Effective Time, to the extent to which such
Indemnified Parties were entitled under California law and CCB's articles of
incorporation or by-laws in effect on December 19, 1996, and Monarch will also
advance expenses as incurred to the extent permitted under California law and
CCB's articles of incorporation and by-laws.
Any Indemnified Party wishing to claim indemnification under the Merger
Agreement, upon learning of any such claim, action, suit, proceeding or
investigation, must as promptly as possible notify Monarch thereof, but the
failure so to notify will not relieve Monarch of any liability it may have to
such Indemnified Party if such failure does not materially prejudice Monarch. In
the event of any such claim, action, suit, proceeding or investigation (whether
arising before or after the Effective Time), (a) Monarch will have the right to
assume the defense thereof and Monarch will not be liable to such Indemnified
Parties for any
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legal expenses of other counsel or any other expenses subsequently incurred by
such Indemnified Parties in connection with the defense thereof, except that if
Monarch elects not to assume such defense or counsel for the Indemnified Parties
advises that there are issues which raise conflicts of interest between Monarch
and the Indemnified Parties, the Indemnified Parties may retain counsel
satisfactory to them, and Monarch will pay the reasonable fees and expenses of
one such counsel for the Indemnified Parties in any jurisdiction promptly as
statements thereof are received unless the use of one counsel for such
Indemnified Parties would present such counsel with a conflict of interest; (b)
the Indemnified Parties will cooperate in the defense of any such matter; and
(c) Monarch will not be liable for any settlement effected without its prior
written consent. Notwithstanding the foregoing, Monarch will not have any
obligation under the Merger Agreement to any Indemnified Party when and if a
court of competent jurisdiction ultimately determines, and such determination
becomes final and nonappealable, that the indemnification of such Indemnified
Party in the manner contemplated hereby is not permitted or is prohibited by
applicable law.
Monarch has also agreed that for a period of six years after the Effective
Time, it will use its reasonable best efforts to cause to be maintained in
effect the policies of directors' and officers' liability insurance maintained
by CCB as of December 19, 1996 (provided that Monarch may substitute therefor
policies of comparable coverage with respect to claims arising from facts or
events which occurred before the Effective Time); PROVIDED, HOWEVER, that in no
event will Monarch be obligated to expend, in order to maintain or provide
insurance coverage pursuant to the Merger Agreement, any amount per annum in
excess of 200 percent of the amount of the annual premiums paid as of the date
of the Merger Agreement by CCB for such insurance (the "Maximum Amount"). If the
amount of the annual premiums necessary to maintain or procure such insurance
coverage exceeds the Maximum Amount, Monarch will use all reasonable efforts to
maintain the most advantageous policies of directors' and officers' insurance
obtainable for an annual premium equal to the Maximum Amount. Notwithstanding
the foregoing, prior to the Effective Time, Monarch may request CCB to, and CCB
thereupon will, purchase insurance coverage, on such terms and conditions as
shall be acceptable to Monarch, extending for a period of six years CCB's
directors' and officers' liability insurance coverage in effect as of the date
of the Merger Agreement (covering past or future claims with respect to periods
before the Effective Time) and such coverage will satisfy Monarch's obligations
under the Merger Agreement.
If Monarch or any of its successors or assigns (a) consolidate with or merge
into any other corporation or entity and shall not be the continuing or
surviving corporation or entity of such consolidation or merger, or (b) transfer
all or substantially all of its properties and assets to any individual,
corporation or other entity, then and in each such case, proper provision will
be made to ensure that the successors and assigns of Monarch assume the
obligations described above.
NOTIFICATION OF CERTAIN MATTERS
Monarch and CCB each has agreed to give the other prompt notice to the other
of: (a) any notice of, or other communication relating to, a default or event
that, with notice or lapse of time or both, would become a default, received by
it or any of its subsidiaries subsequent to the date of the Merger Agreement and
prior to the Effective Time, under any contract material to the financial
condition, properties, businesses or results of operations of such party taken
as a whole to which such party or any subsidiary is a party or is subject; and
(b) any material adverse change in the condition (financial or other),
properties, assets, business, results of operations or prospects of it and its
subsidiaries taken as a whole or the occurrence of any event which, so far as
reasonably can be foreseen at the time of its occurrence, is reasonably likely
to result in any such change. Each of CCB and Monarch will give prompt notice to
the other party of any notice or other communication from any third party
alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by the Merger Agreement.
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SECURITIES ACT
As soon as practicable after the date of the CCB Meeting, CCB will identify
to Monarch all persons who CCB believes to be affiliates of CCB as that term is
used in paragraphs (c) and (d) of Rule 145 under the Securities Act
("Affiliates"). CCB will use its best efforts to obtain a written agreement from
each person identified as an Affiliate who is an officer or director of CCB,
providing that each such person will agree not to sell, pledge, transfer or
otherwise dispose of the shares of Monarch Common Stock to be received by such
person in the Merger except in compliance with the applicable provisions of the
Securities Act and until such time as financial results covering at least 30
days of combined operations of Monarch and CCB shall have been published. CCB
will cause forms of such written agreement to be delivered to each other person
who CCB believes may be or become an Affiliate of Monarch for purposes of
enabling such persons to comply with the exchange procedures set forth in the
Merger Agreement.
CONSUMMATION OF THE BANK MERGER
Monarch and CCB have agreed to take promptly, or cause to be taken promptly,
all actions necessary to consummate and make effective the Bank Merger
immediately following the Effective Time on the Effective Date. The merger
agreement with respect to the Bank Merger provides, among other things, that the
existing directors of NBSC shall continue as directors following the Bank
Merger. See "--The Bank Merger."
CONDITIONS
The respective obligations of Monarch and CCB to consummate the Merger are
subject to certain conditions, including (a) the approval by the shareholders of
Monarch and CCB of the principal terms of the Merger; (b) receipt of approvals,
consents and waivers required by law in connection with the Merger and the Bank
Merger and the other transactions contemplated by the Merger Agreement,
including approval by the Board of Governors of the Federal Reserve System and
the OCC (the parties having agreed that no such approval, consent or waiver will
be deemed to have been received if it includes any condition or requirement that
would result in a material adverse effect (as defined) on Monarch or CCB or
would reduce the economic benefits of the Merger in so significant and adverse a
manner for either party that such party would not have entered into the Merger
Agreement had such condition or requirement been known to it); (c) the absence
of any statute, rule, regulation, order, injunction or decree being in effect
and prohibiting or restricting the consummation of the Merger, the Bank Merger
or any other transaction contemplated by the Merger Agreement; (d) the
Registration Statement having become effective and there being issued no stop
order suspending the effectiveness of the Registration Statement and no
proceedings for that purpose initiated or threatened by the SEC; (e) receipt of
an opinion of counsel by each of Monarch and CCB, from their respective special
counsel, to the effect that the Merger will be a tax-free reorganization within
the meaning of Section 368(a) of the Code and that Monarch and CCB will each be
a party to that reorganization, thereby satisfying the Tax-Free Reorganization
Condition. The Tax-Free Reorganization Condition is a principal term of the
Merger, and as such may not be waived under California law by either Monarch or
CCB after their shareholders have approved the principal terms of the Merger.
See "THE MERGER--WAIVER AND AMENDMENT."
The obligation of Monarch to consummate the Merger is also subject to the
fulfillment or waiver by Monarch prior to the Effective Time of certain
conditions, including the following: (a) the representations and warranties of
CCB being true and correct unless the failure so to be true and correct is not
likely to have a material adverse effect on CCB; (b) the performance by CCB in
all material respects of all covenants and agreements contained in the Merger
Agreement required to be performed by CCB before the Effective Time; (c) receipt
by Monarch of a customary "cold comfort" letter from D&T with respect to certain
financial statements and data of CCB; (d) receipt by Monarch of a letter from
KPMG satisfying the Monarch Pooling Condition; (e) receipt by Monarch of the
opinion of O'Melveny & Myers LLP, special counsel to CCB, dated the Effective
Date; (f) receipt by Monarch of written resignations, effective as of the
Effective Time, of each CCB Director and certain officers of CCB as specified by
Monarch; (g) receipt
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by Monarch, prior to the solicitation of shareholder approval, of an opinion of
RP Financial, LC confirming the fairness of the terms of the Merger from a
financial point of view; (h) receipt by Monarch of a certificate of satisfaction
of the Franchise Tax Board of the State of California that all taxes imposed on
CCB have been paid or secured; and (i) Dissenters' Rights having been exercised
by no more than five percent of the outstanding shares of CCB Common Stock or
Monarch Common Stock, thereby satisfying the Dissenters' Rights Condition. The
Merger Agreement expressly provides that the Monarch Pooling Condition and the
Dissenters' Rights Condition may be waived by Monarch in its sole discretion
either prior to or subsequent to the approval by the Monarch Shareholders and
the CCB Shareholders of the principal terms of the Merger. Monarch currently
anticipates waiving these conditions only if CCB agrees to waive the CCB Pooling
Condition and the parties agree to account for the Merger as a purchase. See
"THE MERGER--Accounting Treatment."
In addition, the obligation of CCB to consummate the Merger is also subject
to the fulfillment or waiver by CCB prior to the Effective Time of certain
conditions, including the following: (a) the representations and warranties of
Monarch being true and correct unless the failure so to be true and correct is
not likely to have a material adverse effect on Monarch; (b) the performance by
Monarch in all material respects of all covenants and agreements contained in
the Merger Agreement required to be performed before the Effective Time; (c)
receipt by CCB of a customary "cold comfort" letter from KPMG with respect to
certain financial statements and data of Monarch; (d) receipt by CCB of a letter
from D&T satisfying the CCB Pooling Condition; (e) receipt by CCB of an opinion
of Sullivan & Cromwell, special counsel to Monarch, dated the Effective Date;
(f) William H. Jacoby, Robert L. McKay and Mark H. Stuenkel having been elected
to the Board of Directors of Monarch; (g) receipt by CCB, prior to the
solicitation of shareholder approval, of an opinion of Findley confirming the
fairness of the terms of the Merger to the CCB Shareholders from a financial
point of view; and (h) as of the Effective Time, the Monarch Common Stock being
designated for quotation on the NASDAQ National Market. See "THE MERGER--
Regulatory Approvals." The Merger Agreement expressly provides that the CCB
Pooling Condition may be waived by CCB in its sole discretion either prior to or
subsequent to the approval by the Monarch Shareholders and the CCB Shareholders
of the principal terms of the Merger. CCB currently anticipates waiving the CCB
Pooling Condition only if Monarch agrees to waive the Monarch Pooling Condition
and the Dissenters' Rights Condition and the parties agree to account for the
Merger as a purchase. See "The MERGER--Accounting Treatment."
WAIVER AND AMENDMENT
Prior to the Effective Time, the conditions to each party's obligation to
consummate the Merger may be waived by such party in whole or in part to the
extent permitted by applicable law. In addition, Monarch and CCB may amend the
Merger Agreement at any time prior to the Effective Time by written agreement,
approved by their respective Boards, so long as the principal terms of the
Merger are not changed after approval by the CCB Shareholders and the Monarch
Shareholders. The Merger Agreement expressly provides that Monarch may waive the
Monarch Pooling Condition and the Dissenters' Rights Condition and that CCB may
waive the CCB Pooling Condition, in either case whether prior to or subsequent
to the approval by the Monarch Shareholders and the CCB Shareholders of the
principal terms of the Merger. Accordingly, Monarch and CCB may determine to
proceed with the Merger notwithstanding the failure of such conditions to be
satisfied (due to the exercise of Dissenters' Rights by more than five percent
of the shareholders of either Monarch or CCB, or otherwise), although neither is
obligated to do so. CCB and Monarch currently anticipate waiving their
respective Pooling Conditions only if the parties agree to account for the
Merger as a purchase. See "The MERGER--Accounting Treatment" and "UNAUDITED PRO
FORMA COMBINED CONDENSED FINANCIAL INFORMATION."
TERMINATION
The Merger Agreement may be terminated, and the Merger abandoned, prior to
the Effective Date, either before or after its approval by the shareholders of
CCB and Monarch: (a) by the mutual consent of Monarch and CCB, if so determined
by their respective Boards; (b) by Monarch or CCB, if so determined
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by their respective Boards, by written notice to the other party, in the event
of (i) the failure of the CCB Shareholders to approve the Merger at the CCB
Meeting, (ii) the failure of the Monarch Shareholders to approve the Merger at
the Monarch Meeting, (iii) a material breach by the other party of any
representation, warranty, covenant or agreement contained in the Merger
Agreement which is not cured or not curable within 30 days after written notice
of such breach is given to the party committing such breach; (c) by Monarch or
CCB, by written notice to the other party, if either (i) any approval, consent
or waiver of a governmental authority required to permit consummation of the
Merger or any transaction necessary to consummate the Merger shall have been
denied or (ii) any governmental authority of competent jurisdiction shall have
issued a final, unappealable order enjoining or otherwise prohibiting
consummation of the Merger or any transaction necessary to consummate the
Merger; (d) by Monarch or CCB by written notice to the other party, if so
determined by their respective Boards, in the event that the Merger is not
consummated by September 30, 1997, unless the failure so to consummate by such
time is due to the breach of any representation, warranty or covenant contained
in the Merger by the party seeking to terminate; (e) by Monarch by written
notice to CCB if CCB takes or allows to be taken any action prohibited under the
Merger Agreement in connection with an Acquisition Proposal; or (f) by CCB, upon
written notice to Monarch prior to the approval by CCB Shareholders of the
Merger, if CCB receives an Acquisition Proposal on terms and conditions which
the CCB Board determines, after receiving the written advice of its outside
counsel, (i) that to proceed with the Merger will violate the fiduciary duties
of the CCB Board to CCB Shareholders and (ii) to accept such proposal.
TERMINATION PAYMENT
If the Merger Agreement is terminated by CCB pursuant to a material breach
of any representation, warranty, covenant or agreement contained therein by
Monarch which is not cured or not curable within 30 days after written notice of
such breach is given to Monarch by CCB, Monarch will pay to CCB $1.25 million
plus all costs and expenses incurred by CCB in connection with the Merger, up to
$500,000. If the Merger Agreement is terminated (a) by Monarch pursuant to a
material breach of any representation, warranty, covenant or agreement contained
therein by CCB which is not cured or not curable within 30 days after written
notice of such breach is given to CCB by Monarch, or (b) under the circumstances
described in clauses (e) and (f) under "--Termination" above, CCB shall pay to
Monarch $1.25 million plus all costs and expenses incurred by Monarch in
connection with the Merger, up to $500,000. The parties agree that any
termination payment made pursuant to the Merger Agreement will represent a
reasonable estimate of the minimum damage to the non-terminating party and will
not constitute a penalty.
EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such costs or expenses, except upon
termination of the Merger Agreement under certain circumstances. See
"--Termination Payments."
THE BANK MERGER
Immediately after consummation of the Merger, Monarch Bank will merge with
and into NBSC, with NBSC being the Surviving Association. By virtue of the Bank
Merger, every nine shares of common stock of Monarch Bank issued and outstanding
at the effective time of the Bank Merger will be converted into one share of
common stock of NBSC, with no consideration being issued in lieu of fractional
shares. The Surviving Association will be responsible for all of the liabilities
of both Monarch Bank and NBSC existing as of the effective time of the Bank
Merger.
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Pursuant to the Bank Merger Agreement, both NBSC and Monarch Bank have
agreed to comply with the covenants regarding conduct pending the Merger as
described in the Merger Agreement. See "--Conduct of the Business of CCB and
Monarch Prior to the Merger." In addition, the Bank Merger Agreement provides
that the directors of NBSC immediately prior to the effective time of the Bank
Merger will continue to be the directors of the Surviving Association after
consummation of the Bank Merger. Monarch Bank will cause to be delivered to NBSC
at the effective time of the Bank Merger the resignations of the members of its
Board of Directors.
The respective obligations of Monarch Bank and NBSC to effect the Bank
Merger are subject to the satisfaction or waiver of the conditions contained in
the Merger Agreement and the condition that the Merger shall have been
consummated. See "--Conditions." The Bank Merger Agreement will terminate and
the Bank Merger will be abandoned, prior to the effective date of the Bank
Merger, upon termination of the Merger Agreement in accordance with its terms.
See "--Termination."
THE STOCK OPTION AGREEMENT
GENERAL
As an inducement and condition to Monarch's willingness to enter into the
Merger Agreement, CCB entered into the Stock Option Agreement with Monarch.
Pursuant to the Stock Option Agreement, CCB granted to Monarch an irrevocable
Option, exercisable only under certain limited and specifically defined
circumstances, none of which, to the best of CCB's and Monarch's knowledge, has
occurred as of the date hereof, to purchase up to a number of authorized but
theretofore unissued shares of CCB Common Stock equal to 19.9 percent of the
shares of CCB Common Stock outstanding at the time of exercise, for a purchase
price of $9.50 per share, subject to adjustment in certain circumstances. The
purchase of CCB Common Stock pursuant to the Stock Option Agreement is subject
to compliance with applicable law, including receipt of any necessary approvals
under the BHCA.
The Stock Option Agreement and the Option are intended to increase the
likelihood that the Merger will be consummated according to the terms set forth
in the Merger Agreement, and may be expected to discourage offers by third
parties to acquire CCB prior to the Merger.
THE STOCK OPTION
Monarch may exercise the Option, in whole or in part, at any time and from
time to time following the occurrence of certain events (each a "Purchase
Event"), including (a) the acquisition by any person other than Monarch or any
subsidiary of Monarch of beneficial ownership of shares of CCB Common Stock,
other than by exercise of existing options, warrants or other rights or as a
result of the execution and delivery of the Shareholder Agreements, such that,
upon the consummation of such acquisition, such person would have Beneficial
Ownership, in the aggregate, of 20 percent or more of the then outstanding
shares of CCB Common Stock if such person is a director or officer of CCB, and
25 percent or more of the then outstanding shares of CCB Common Stock if such
person is not a director or officer of CCB; or (b) the occurrence of certain
other events (each also referred to as a "Preliminary Purchase Event"),
including:
(i) CCB or any of its subsidiaries (each a "CCB Subsidiary"), without
having received Monarch's prior written consent, having entered into an
agreement to engage in an Acquisition Transaction (as defined herein) with
any person other than Monarch or any of its subsidiaries (each a "Monarch
Subsidiary") or the CCB Board having recommended that the CCB Shareholders
approve or accept any Acquisition Transaction with any person other than
Monarch or any Monarch Subsidiary;
(ii) Any person, other than Monarch or any Monarch Subsidiary, having
acquired beneficial ownership or the right to acquire beneficial ownership,
other than by exercise of existing options,
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<PAGE>
warrants or other rights, of shares of CCB Common Stock such that, upon the
consummation of such acquisition, such person would have beneficial
ownership, in the aggregate, of ten percent or more of the then outstanding
shares of CCB Common Stock if such person is a director or officer of CCB,
and 25 percent or more of the then outstanding shares of CCB Common Stock if
such person is not a director or officer of CCB;
(iii) Any person, other than Monarch or any Monarch Subsidiary, having
made a BONA FIDE proposal to CCB or its shareholders, by public announcement
or written communication that is or becomes the subject of public
disclosure, to engage in an Acquisition Transaction;
(iv) After a proposal is made by a third party to CCB or its
shareholders to engage in an Acquisition Transaction, (A) CCB having
breached any covenant or obligation contained in the Merger Agreement which
breach would entitle Monarch to terminate the Merger Agreement or (B) the
holders of CCB Common Stock not approving the Merger Agreement at the
meeting of such shareholders held for the purpose of voting on the Merger
Agreement, such meeting not having been held or having been canceled prior
to termination of the Merger Agreement or the CCB Board having withdrawn or
modified in a manner adverse to Monarch the recommendation of the CCB Board
with respect to the Merger Agreement;
(v) Any person other than Monarch or any of its subsidiaries, other than
in connection with a transaction to which Monarch has given its prior
written consent or in connection with the exercise of existing options,
warrants or other rights, having filed an application or notice with the
Federal Reserve Board or other governmental authority or regulatory or
administrative agency or commission for approval to engage in an Acquisition
Transaction; or
(vi) The CCB Board not recommending that the CCB Shareholders approve
the Merger Agreement.
"Acquisition Transaction" is defined in the Stock Option Agreement to mean
(a) a merger or consolidation, or any similar transaction, involving CCB or any
of CCB's subsidiaries, (b) a purchase, lease or other acquisition of all or
substantially all of the assets of CCB or any of CCB's Subsidiaries or (c) a
purchase or other acquisition of securities representing ten percent or more of
the voting power of CCB or any CCB Subsidiary, other than by exercise of
existing options, warrants or other rights.
The Stock Option Agreement also provides for certain adjustments intended to
protect Monarch against dilution of its rights to acquire CCB Common Stock. The
Stock Option Agreement grants certain registration rights ("Registration
Rights") to Monarch with respect to the shares issuable upon exercise of the
Option.
TERMINATION
The Option will terminate upon the earliest to occur of (a) the time
immediately prior to the Effective Time; (b) 12 months after the first
occurrence of a Purchase Event; (c) 18 months after the termination of the
Merger Agreement following the occurrence of a Preliminary Purchase Event; (d)
termination of the Merger Agreement in accordance with the terms thereof prior
to the occurrence of a Purchase Event or a Preliminary Purchase Event (other
than a termination of the Merger Agreement under the certain circumstances
referred to in the next clause (e)); or (e) 18 months after the termination of
the Merger Agreement upon the happening of certain events, including a material
breach of the Merger Agreement by CCB and certain events relating to an
Acquisition Proposal.
THE SHAREHOLDER AGREEMENTS
Monarch has entered into Shareholder Agreements with certain CCB
Shareholders (the "Party Shareholders"). The Party Shareholders, holding in the
aggregate shares representing approximately 43.73 percent of the total voting
power of CCB Common Stock as of April 11, 1997, each agreed, in
117
<PAGE>
consideration of the substantial expenses incurred by Monarch in connection with
the Merger Agreement and as a condition to Monarch entering into the Merger
Agreement, to vote or to cause to be voted or execute a written consent with
respect to all of such Party Shareholder's shares of CCB Common Stock (a) in
favor of approval of the Merger Agreement at every meeting of the CCB
Shareholders at which such matters are considered and at every adjournment
thereof and in connection with every proposal to take action by written consent
with respect thereto; and (b) against any other Acquisition Proposal at every
meeting of the CCB Shareholders at which such matters are considered and at
every adjournment thereof and in connection with every proposal to take action
by written consent with respect thereto.
Each Shareholder Agreement also provides that the Party Shareholder will
not, and will not permit any entity under its control to, deposit any of such
Party Shareholder's shares in a voting trust or subject any such shares to any
agreement, arrangement or understanding with respect to the voting of such
shares inconsistent with the Shareholder Agreement entered into by that Party
Shareholder. In addition, during the term of the Shareholder Agreements, the
Party Shareholders each agreed, with limited exceptions in some cases, not to
sell, assign, transfer or dispose of any of his shares of CCB Common Stock.
Messrs. Jacoby, McKay and Stuenkel also agreed in the Shareholder Agreements
executed by them that at any time within a three-year period immediately
following the Effective Time, they will not engage in, be employed by, acquire
an equity interest in or start, or otherwise provide any assistance to, directly
or indirectly, any business which provides banking services in the counties of
Los Angeles, Orange and San Diego in the State of California so long as Monarch
or its assigns remain engaged in any banking business in such counties.
The Shareholder Agreements will terminate upon the earlier to occur of the
Effective Time and the date on which the Merger Agreement is terminated in
accordance with its terms.
The Shareholder Agreements bind the actions of the signatories thereto only
in their capacity as CCB Shareholders. Those directors of CCB who signed
Shareholder Agreements are not and could not be contractually bound to abrogate
their fiduciary duties as directors of CCB. Accordingly, while such
shareholders/directors are, under the Shareholder Agreements executed by them,
contractually bound to vote as a CCB Shareholder in favor of the Merger and
against other Acquisition Proposals (should one be presented), their fiduciary
duties as CCB Directors nevertheless required them to act in their capacity as
directors in the best interest of CCB when they decided to approve the Merger.
In addition, such shareholders/directors will continue to be bound by their
fiduciary duties as CCB Directors with respect to any decisions they may take in
connection with the Merger or otherwise.
DESCRIPTION OF MONARCH CAPITAL STOCK AND
COMPARISON OF SHAREHOLDER RIGHTS
DESCRIPTION OF MONARCH CAPITAL STOCK
The authorized capital stock of Monarch as of the Monarch Record Date
consists of 100,000,000 shares of Monarch Common Stock, of which 4,043,885
shares are issued and outstanding and 5,000,000 shares of serial preferred
stock, no par value, none of which are outstanding. The Reverse Stock Split will
not result in any change to the authorized capital stock of Monarch. Holders of
shares of Monarch Common Stock are entitled to one vote for each share of record
on all matters voted upon by Monarch Shareholders, except that in connection
with the election of directors, the shares subject to notice may be voted
cumulatively. Shares of Monarch Common Stock are not subject to redemption,
conversion or sinking fund provisions.
COMPARISON OF CORPORATE STRUCTURE
Both Monarch and CCB are California corporations and as such are governed by
the CGCL. Consequently, except as otherwise noted, there is no material
difference between the rights of the holders
118
<PAGE>
of Monarch Common Stock and the rights of CCB Common Stock with regard to
electing members of the board of directors, amending the articles of
incorporation or by-laws, calling special meetings of shareholders, acting by
written consent of shareholders without a meeting, and indemnifying directors.
Certain differences in the articles of incorporation and by-laws of Monarch
and CCB are discussed below.
VOTING RIGHTS
Both Monarch Shareholders and CCB Shareholders are entitled to one vote for
each share held of record on all matters voted upon by the respective
shareholders of each corporation, except that in connection with the election of
directors, the shares may, under certain circumstances, be voted cumulatively.
Neither the Monarch Common Stock nor the CCB Common Stock are subject to
redemption, conversion, or sinking fund provisions.
DIVIDENDS AND DIVIDEND POLICY
CCB
CCB Shareholders are entitled to receive dividends declared by the CCB Board
out of funds legally available therefor, under the laws of the State of
California. CCB has not paid dividends since its formation.
MONARCH
Holders of Monarch Common Stock are entitled to receive dividends declared
by the Monarch Board out of funds legally available therefore under the laws of
the State of California, subject to the rights of holders of any preferred stock
of Monarch that may be issued after the date hereof. Monarch has not paid any
dividends since its formation, and it is currently ineligible to declare a
dividend because of retained earnings deficits. Although the Surviving
Corporation will not have retained earning deficits after consummation of the
Merger, the Monarch Board currently does not intend to consider the payment of
any cash dividends on the Monarch Common Stock in the foreseeable future. The
declaration of any cash dividends in the future will depend upon, among other
things, Monarch's ability to improve its financial condition and results of
operations, limitations imposed on such dividends by Monarch's debt instruments
and by applicable laws and regulations limiting Monarch's and Monarch's
subsidiaries' ability to pay dividends and Monarch's anticipated future cash
requirements.
NUMBER OF DIRECTORS
The CCB By-Laws provide that the authorized number of directors of CCB shall
be not less than seven nor more than 13, and the exact number is set at seven
until changed by an amendment to the By-Laws.
The authorized number of directors of Monarch is not less than seven nor
more than 13, provided that an amendment to the By-Laws reducing the number of
directors to a number less than five cannot be adopted if the votes cast against
its adoption are equal to more than 16 2/3 percent of the outstanding shares
entitled to vote.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the CGCL authorizes a court to award, or a corporation's
Board of Directors to grant, indemnity to directors, officers and employees in
terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act. Articles Five and Six of Monarch's Amended
Articles of Incorporation and Article VI of Monarch's By-Laws provide for
indemnification of its directors, officers, employees and other agents to
119
<PAGE>
the fullest extent permitted by the CGCL. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of Monarch pursuant to the foregoing
provisions, or otherwise, Monarch has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
VALIDITY OF MONARCH COMMON STOCK
The validity of the shares of Monarch Common Stock to be issued in the
Merger has been passed upon by Sullivan & Cromwell, Los Angeles, California,
special counsel for Monarch.
EXPERTS
The consolidated financial statements of Monarch Bancorp as of December 31,
1996, and for the year then ended, have been incorporated by reference herein
and in the registration statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Monarch Bancorp as of December 31,
1995, and for the year then ended, have been incorporated by reference herein
and in the registration statement in reliance upon the report of Dayton &
Associates, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of CCB and subsidiaries as of December
31, 1996 and 1995 and for each of the three years in the period ended December
31, 1996 incorporated in this Proxy Statement-- Prospectus by reference from
CCB's Annual Report on Form 10-K for the year ended December 31, 1996 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
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TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
1982 Plan.................................................................................................. 77
Acquisition Proposal....................................................................................... 110
Acquisition Transaction.................................................................................... 117
Additional Shares.......................................................................................... 81
Affiliates................................................................................................. 113
All U.S. Transactions...................................................................................... 93
Amendments................................................................................................. 10
Annual Meetings............................................................................................ 1
Average Trading Price...................................................................................... 38
Bank Merger................................................................................................ 1
Bank Merger Agreement...................................................................................... 14
Banks...................................................................................................... 69
BHCA....................................................................................................... 8
BPI........................................................................................................ 16
California Acquisitions.................................................................................... 88
CCB........................................................................................................ 1
CCB Award Plan............................................................................................. 77
CCB Board.................................................................................................. 1
CCB Common Stock........................................................................................... 1
CCB Demand................................................................................................. 102
CCB Meeting................................................................................................ 1
CCB Pooling Condition...................................................................................... 13
CCB Record Date............................................................................................ 71
CCB Shareholders........................................................................................... 1
CCB Stock Bonus Plan....................................................................................... 78
CCB Subsidiary............................................................................................. 116
CCB's Annual Report........................................................................................ 9
Certificate................................................................................................ 108
CGCL....................................................................................................... 1
Change in Control.......................................................................................... 79
Code....................................................................................................... 13
Comparable Transactions.................................................................................... 93
Continued Employee......................................................................................... 100
Conversion Number.......................................................................................... 1
Costs...................................................................................................... 111
CRA........................................................................................................ 97
DCF........................................................................................................ 94
D&T........................................................................................................ 13
December 2 Meeting......................................................................................... 83
Dissenters' Rights......................................................................................... 101
Dissenters' Rights Condition............................................................................... 13
Dissenters' Rights Pooling Requirement..................................................................... 46
Dissenting CCB Shareholder................................................................................. 102
Dissenting CCB Shares...................................................................................... 102
Dissenting Monarch Shareholder............................................................................. 103
Dissenting Monarch Shares.................................................................................. 103
Effective Date............................................................................................. 108
Effective Time............................................................................................. 108
</TABLE>
121
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Exchange Act............................................................................................... 2
Exchange Agent............................................................................................. 108
Findley.................................................................................................... 12
Findley Engagement Letter.................................................................................. 86
FIP........................................................................................................ 34
Form 10-KSB................................................................................................ 3
Fund....................................................................................................... 63
Indemnified Parties........................................................................................ 111
Initial Shares............................................................................................. 81
KMPG....................................................................................................... 13
Maximum Amount............................................................................................. 112
Measurement Period......................................................................................... 38
Merger..................................................................................................... 1
Merger Agreement........................................................................................... 1
Merger Consideration....................................................................................... 108
Monarch.................................................................................................... 1
Monarch Board.............................................................................................. 1
Monarch Common Stock....................................................................................... 1
Monarch Demand............................................................................................. 103
Monarch Meeting............................................................................................ 1
Monarch Pooling Condition.................................................................................. 13
Monarch Record Date........................................................................................ 60
Monarch Shareholders....................................................................................... 1
Monarch Subsidiary......................................................................................... 116
Monarch's Annual Report.................................................................................... 9
Monarch's Benefit Plans.................................................................................... 100
NASD....................................................................................................... 20
National Bank Acquisitions................................................................................. 88
NBSC....................................................................................................... 1
OCC........................................................................................................ 12
Option..................................................................................................... 15
Party Shareholders......................................................................................... 117
Preliminary Purchase Event................................................................................. 116
Purchase Event............................................................................................. 116
Registration Rights........................................................................................ 117
Registration Statement..................................................................................... 2
Release.................................................................................................... 68
Return on Average Assets................................................................................... 89
Return on Average Equity................................................................................... 89
Reverse Stock Split........................................................................................ 8
RP Financial............................................................................................... 12
RP Financial Engagement Letter............................................................................. 95
Salary Continuation Agreements............................................................................. 78
SAR........................................................................................................ 77
SCB........................................................................................................ 9
SCB Common Stock........................................................................................... 9
SCB Financial Statements................................................................................... 27
SCB Merger................................................................................................. 9
SCB Merger Agreement....................................................................................... 9
SCB Unaudited Pro Forma Information........................................................................ 51
</TABLE>
122
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SEC........................................................................................................ 2
Securities Act............................................................................................. 2
Senior Executives.......................................................................................... 78
Stock Option Agreement..................................................................................... 15
Support Agreement.......................................................................................... 100
Surviving Association...................................................................................... 14
Surviving Corporation...................................................................................... 1
Surviving Corporation Common Stock......................................................................... 9
Tax-Free Reorganization Condition.......................................................................... 13
</TABLE>
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APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
FOR THE FISCAL YEAR ENDED 12/31/96
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD TO
COMMISSION FILE NUMBER 2-78788
------------------------
CALIFORNIA COMMERCIAL BANKSHARES
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3748495
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
4100 NEWPORT PLACE, NEWPORT BEACH,
CALIFORNIA 92660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 863-2300
------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. Not applicable.
The aggregate market value of voting stock held by non-affiliates of the
registrant was $38,058,000 on March 6, 1997, based on the average bid and asked
price of $21.75 share as reported on the National Daily Quotation Service "Pink
Sheets".
(Number of shares of Common Stock outstanding as of March 21, 1997)
3,040,000
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
DESCRIPTION PART INTO WHICH INCORPORATED
- ---------------------------------------- --------------------------------------
Joint Proxy Statement/Prospectus Part III
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-1
<PAGE>
PART I.
ITEM 1. BUSINESS.
BUSINESS OF THE COMPANY
California Commercial Bankshares (the "Company") is a bank holding company,
incorporated under the laws of the State of California on June 16, 1982, and is
registered under the Bank Holding Company Act of 1956, as amended. The Company's
primary purpose is to be a bank holding company for its wholly-owned subsidiary,
National Bank of Southern California, a national banking association organized
under the laws of the United States (the "Bank"). At December 31, 1996, the
Company had total assets of $351 million and total shareholders' equity of $25
million.
On January 10, 1983, the Company purchased 450,000 shares of the Bank's
common stock, which constituted all of the issued and outstanding capital stock
of the Bank. The Bank's charter was granted by the Comptroller of the Currency
(the "Comptroller") on January 10, 1983, and the Bank began operations as a
full-service commercial bank on that date.
During 1985, the Company activated another subsidiary, Venture Partners,
Inc., a California corporation incorporated on March 11, 1983 ("Venture"), which
acts primarily as an intermediary for tax deferred exchanges, a service function
for the escrow department of the Bank.
The Company has no other subsidiaries or affiliated businesses other than
the Bank and Venture. The Company's executive offices are located at 4100
Newport Place, Newport Beach, California 92660. Its telephone number is
714-863-2300.
On December 19, 1997, the Company executed an agreement (the "Merger
Agreement") with Monarch Bancorp ("Monarch") for the merger of the Company with
and into Monarch (the "Merger"). The Merger Agreement contemplates that Monarch
Bank, a wholly owned subsidiary of Monarch, will merge with and into the Bank
(the "Bank Merger") immediately following the Merger. The Merger Agreement
provides for the shareholders of the Company to receive 8.5 shares of the common
stock of Monarch for each share of common stock of the Company outstanding,
unless dissenters' rights are exercised and perfected as provided by California
law. The Merger Agreement is subject to satisfaction of certain conditions,
including without limitation, obtaining the requisite vote of the shareholders
of both the Company and Monarch, the designation for quotation of Monarch common
stock on the NASDAQ National Market system and approval of the Merger and Bank
Merger by various regulatory agencies. Following the Merger, the board of
directors of Monarch will consist of seven directors from Monarch and three
directors from the Company. The board of directors of the Bank will be
unchanged. It is contemplated that the Merger and the Bank Merger will be
consummated during the second quarter of 1997, assuming all closing conditions
are either satisfied or waived.
BUSINESS OF THE BANK
The Bank's accounts are insured by the Federal Deposit Insurance Corporation
("FDIC") and it is a member of the Federal Reserve System. In addition to its
headquarters office in Newport Beach, California, the Bank presently operates
five branches located in Santa Ana, El Toro, Orange and Fountain Valley,
California. At December 31, 1996, the Bank had total assets of $351 million,
gross loans and leases of $211 million, total deposits of $320 million and total
shareholders' equity of $26 million.
The Bank is engaged in substantially all of the services customarily
conducted by community banks in California, including checking, savings and time
deposit accounts, commercial, interim construction, personal, home improvement,
mortgage, automobile and other installment and term loans, leasing, traveler's
checks, safe deposit boxes, collection services, night depository facilities,
wire transfers and automatic teller machines.
A-2
<PAGE>
See distribution of assets, liabilities and shareholders' equity, interest
rates and interest differential at pages 18, 19 and 20.
LOANS AND LEASES
The aggregate balances of loans and leases, including loans available for
sale and excluding deferred fees, outstanding at the indicated dates are shown
in the following table according to the type of loan. All loans are domestic
loans.
<TABLE>
<CAPTION>
AT DECEMBER 31:
----------------------------------------------------------
$ IN 000'S 1996 1995 1994 1993 1992
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Real Estate:
Miniperms (Real estate secured
with 1-5 years maturity)......................... $ 72,984 $ 62,466 $ 66,102 $ 62,799 $ 52,479
Equity Lines....................................... 7,487 7,039 8,691 10,838 11,191
Construction....................................... 26,742 24,954 29,792 38,563 56,703
---------- ---------- ---------- ---------- ----------
Total Real Estate.................................... 107,213 94,459 104,585 112,200 120,373
Commercial........................................... 80,927 84,271 82,600 86,887 103,576
Installment and Other................................ 19,706 13,120 10,845 11,290 15,506
Leases............................................... 2,663 3,064 3,615 3,970 5,590
---------- ---------- ---------- ---------- ----------
Total Loans And Leases............................... $ 210,509 $ 194,914 $ 201,645 $ 214,347 $ 245,045
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The total loans declined from 1992 to 1995 as the Bank concentrated its
resources on identifying and collecting problem loans and leases and on
disposing of other real estate owned obtained through foreclosure. During 1996,
the Company increased its loans outstanding thereby improving its yield by
shifting from lower yielding federal funds to higher yielding loans.
The Bank concentrates its lending activities in three principal areas:
(1) REAL ESTATE LOANS. Real estate loans are comprised of construction
loans, miniperm loans collateralized by first or junior trust deeds on specific
properties and equity lines of credit. The properties collateralizing real
estate loans are principally located in the Bank's primary market area of Orange
County and contiguous communities. The construction loans are comprised of loans
on residential and income producing properties, generally have terms less than
two years and typically bear an interest rate that floats with prime. The
miniperm loans finance the purchase and/or ownership of income producing
properties. Miniperm loans generally are made on a thirty-year amortization
schedule with a lump sum, balloon payment due in 1-5 years. Equity lines of
credit are revolving lines of credit collateralized by junior trust deeds on
real properties. They bear a rate of interest that floats with prime and have
maturities of five to seven years. The Bank also makes a small number of loans
on 1-4 family residential properties and 5 or more unit residential properties.
From time to time, the Bank purchases participation interests in loans made by
other institutions. These loans are subject to the same underwriting criteria
and approval processes as loans made directly by the Bank. During 1996, the Bank
purchased $372,000 of participations in real estate loans from other
institutions. At December 31, 1996, the Bank had $1,257,000 outstanding in real
estate participation loans purchased from other institutions.
(2) COMMERCIAL LOANS. Commercial loans are granted to finance operations
or for specific purposes, such as to finance the purchase of equipment. Since
cash flows from operations are generally the primary source of repayment, the
Bank's policies provide specific guidelines regarding required debt coverage and
other important financial ratios. Lines of credit are made to businesses or
individuals based on the financial strength and integrity of the borrower, are
generally collateralized by inventory and accounts receivable, but may be
uncollateralized, and generally have a maturity of one year or less. They
generally bear an interest rate that floats with prime.
A-3
<PAGE>
Commercial term loans are typically made to finance the acquisition of fixed
assets, refinance short term debt originally used to purchase fixed assets or,
in rare cases, to finance purchases of businesses. Commercial term loans
generally have terms from one to five years. Commercial term loans may be
collateralized by the asset being acquired or other available assets.
(3) CONSUMER LOANS. Consumer loans include personal loans, auto loans,
boat loans, home improvement loans, equipment loans, revolving lines of credit
and other loans typically made by banks to individual borrowers. The Bank also
makes leases on new and used automobiles. These leases may be closed-end or
commercial leases, have terms of one to five years and bear interest at a fixed
rate.
The following table shows the consumer loans outstanding as of December 31,
1996 by category:
<TABLE>
<S> <C>
Boat............................................................... $ 5,230
Credit Card and Related Plans...................................... 2,574
Automobile Loans................................................... 6,868
Residential Equity................................................. 841
Unsecured.......................................................... 998
Savings............................................................ 773
Other.............................................................. 488
---------
Total.............................................................. $ 17,772
</TABLE>
The consumer loan portfolio grew over $7,000,000 during 1996 due to the
restructuring of the Bank's consumer function into a centralized unit utilizing
new credit scoring techniques to operate more efficiently. In addition, the Bank
began purchasing qualifying contracts from two new boat dealers. These dealers
sold approximately $3,000,000 in new boat contracts to the Bank during the year.
Consumer customers were also added after a new branch was opened to serve a new
marketplace. This added approximately $3,000,000 in auto loans to the portfolio.
The final growth came from the introduction of a new home equity line of credit
product. This no fee, no point product utilizes the equity in customers' homes
as collateral.
The following tables show the amount of loans outstanding as of December 31,
1996 which, based on remaining scheduled repayments of principal, (1) are due in
the period indicated and (2) for the amounts due after one year, are fixed rate
or floating rate.
<TABLE>
<CAPTION>
MATURING IN MATURING IN MATURING AFTER
$ IN 000'S 1997 1998-2001 2001 TOTAL
- ---------------------------------------------------------- ----------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Real Estate............................................... $ 16,112 $ 43,263 $ 21,096 $ 80,471
Construction.............................................. 26,338 404 0 26,742
Commercial................................................ 46,478 27,009 7,440 80,927
Credit Card & Related Plans............................... 464 1,455 15 1,934
Other Consumer............................................ 3,946 9,546 4,280 17,772
Leases.................................................... 134 2,529 0 2,663
----------- ----------- ------- ----------
TOTAL................................................... $ 93,472 $ 84,206 $ 32,831 $ 210,509
----------- ----------- ------- ----------
----------- ----------- ------- ----------
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY
-------------------------
VARIABLE
$ IN 000'S FIXED RATE RATE
- ------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
Due After One But Within Five Years................................ $ 33,944 $ 3,379
Due After Five Years............................................... 11,601 92
----------- ------------
TOTAL............................................................ $ 45,545 $ 3,471
----------- ------------
----------- ------------
</TABLE>
A-4
<PAGE>
The prime rate with which the interest rate floats may be the prime rate of
a specific money center bank, the prime rate posted in the Wall Street Journal
or the Bank's own posted prime rate. The Bank's prime rate is set by Bank
management. The Bank's prime rate at December 31, 1996 was 9.25%.
The following table shows the concentration of loans by categories.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1996 1995
----------------------- -----------------------
$IN 000'S BALANCE PERCENTAGE BALANCE PERCENTAGE
- ----------------------------------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Real Estate Loans:
Mortgage......................................................... $ 72,984 34.67% $ 62,466 32.05%
Equity Lines..................................................... 7,487 3.56% 7,039 3.61%
Construction..................................................... 26,742 12.70% 24,954 12.80%
---------- ----------- ---------- -----------
TOTAL REAL ESTATE LOANS.......................................... $ 107,213 50.93% $ 94,459 48.46%
Commercial Loans................................................. 80,927 38.44% 84,271 43.24%
Other Installment and Other...................................... 19,706 9.36% 13,120 6.73%
Leases........................................................... 2,663 1.27% 3,064 1.57%
---------- ----------- ---------- -----------
TOTAL LOANS & LEASES............................................. $ 210,509 100.00% $ 194,914 100.00%
Less: Deferred Loan Origination Fee.............................. (442) (702)
Less: Allowance for Loan and Lease Losses........................ (5,417) (6,542)
---------- ----------
NET LOANS & LEASES............................................... $ 204,650 $ 187,670
---------- ----------
---------- ----------
</TABLE>
There are no concentrations of loans exceeding 10% of total loans which were
not otherwise disclosed as a category of loans in the above table.
CLASSIFIED ASSETS AND NONPERFORMING ASSETS. The Company maintains an
internal loan review program. All loans are categorized into one of the five
following groups: Pass loans: loans that contain strong credit quality and
ability to repay. Special mention loans: loans that have an identified weakness
which requires correction to protect the Bank (not considered a classified
loan). Substandard loans: loans that exhibit some weakness and require immediate
attention to correct the deficiency. Doubtful loans: loans that exhibit a
significant weakness and whose full collection is improbable. Loss loans: Loans
that are charged off upon identification of being loss loans. The following
table shows the amounts of special mention loans, classified loans (substandard
or doubtful) and the amount of other real estate owned as of the dates
indicated. It does not include loans available for sale in the amount of
$1,234,000 and $9,620,000 for the years ended December 31, 1996 and 1995,
respectively. (see ITEM 1. BUSINESS, BUSINESS OF THE BANK, ALLOWANCE FOR LOAN
AND LEASE LOSSES FOR A DISCUSSION OF LOANS AND LEASES CHARGED OFF).
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
$ IN 000'S 1996 1995 1994 1993 1992
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Special Mention............................................ $ 3,589 $ 10,458 $ 12,822 $ 11,988 21,510
--------- --------- --------- --------- ---------
Substandard................................................ 8,109 14,704 37,451 39,314 53,762
Doubtful................................................... 619 317 1,505 4,156 1,553
--------- --------- --------- --------- ---------
Total Classified Loans..................................... 8,728 15,021 38,956 43,470 55,315
Other Real Estate Owned.................................... 2,657 2,165 2,676 2,289 12,088
--------- --------- --------- --------- ---------
Total Special Mention Loans, Classified Loans And Other
Real Estate Owned........................................ $ 14,974 $ 27,644 $ 54,454 $ 57,747 $ 88,913
</TABLE>
A-5
<PAGE>
Special mention loans, classified loans and other real estate owned
decreased significantly in 1995 and 1996 as compared to 1994. The balances
decreased as a result of the Bank's high staffing levels of personnel dedicated
to problem loan identification and workout, the disposal of other real estate
owned and improvement in the economy of Southern California.
It is generally the Company's policy to discontinue the accrual of interest
on a loan when any installment payment of interest or principal is 90 days or
more past due, when management otherwise determines the collectibility of the
interest or principal on the loan is unlikely or when the loan is deemed to be a
potential foreclosure. Accrued but unpaid interest on loans placed on nonaccrual
status is generally reversed from income. In certain cases where the value of
the collateral is sufficiently in excess of the balance of principal and
interest owing, the Bank may continue to accrue interest or may not reverse
accrued but unpaid interest from income.
The following table shows the nonaccrual loans, loans past due 90 days and
still accruing and loans restructured during the last 5 years.
<TABLE>
<CAPTION>
$ IN 000'S 1996 1995 1994 1993 1992
- ----------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans................................................. 3,995 15,573 14,771 18,068 10,037
Loans past due 90 days and accruing interest..................... 0 0 851 0 0
Impaired Loans................................................... 4,366 16,544 N/A N/A N/A
</TABLE>
The following table shows the aggregate amount and percentage of the portfolio
of delinquent loans and nonaccrual loans as of December 31, 1996:
LOANS DELINQUENT AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
30-89 DAYS 90 DAYS AND OVER TOTAL LOANS
------------------------ ------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
--------- ------------- --------- ------------- --------- -------------
($ IN 000'S)
<S> <C> <C> <C> <C> <C> <C>
NONACCRUAL LOANS
Real Estate...................................... $ 766 .71% $ 1,803 1.68% $ 2,569 2.39%
Commercial....................................... 0 0% 383 .47% 383 .47%
Installment and Prime Equity..................... 0 0% 1,043 3.83% 1,043 3.83%
Leases........................................... 0 0% 0 0% 0 0%
--------- --- --------- --- --------- ---
Total Nonaccrual Loans....................... $ 766 .36% $ 3,229 1.53% $ 3,995 1.89%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
DELINQUENT ACCRUING LOANS
Real Estate...................................... $ 151 .14% 0 0% $ 151 .14%
Commercial....................................... 894 1.10% 0 0% 894 1.10%
Installment and Prime Equity..................... 138 .50% 0 0% 138 .50%
Leases........................................... 0 0% 0 0% 0 0%
--------- --- --------- --- --------- ---
Total Accruing Delinquent Loans.............. 1,183 .56% 0 0% 1,183 .56%
Total Delinquent Loans....................... $ 1,949 .92% $ 3,229 1.53% $ 5,178 2.45%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
A-6
<PAGE>
The following table sets forth information regarding the Company's
nonperforming assets at December 31, 1996:
<TABLE>
<CAPTION>
SPECIFIC ALLL
PROPERTY DESCRIPTION LOCATION BALANCE ALLOCATION
- --------------------------------------------------------------- -------------------------- --------- -----------------
($ IN 000'S)
<S> <C> <C> <C>
NON-ACCRUAL LOANS
Ind. Building & Finished Lots.................................. Los Angeles County $ 868 0
Commercial Building............................................ Los Angeles County $ 83 0
Single Family Residential...................................... Orange County 182 0
Single Family Residential...................................... Orange County 294 0
Single Family Residential...................................... Orange County 260 0
Single Family Residential...................................... Los Angeles County 85 0
Vacant Land.................................................... San Bernardino County 117 0
Single Family Residential...................................... Washington State 105 0
Single Family Residential...................................... Orange County 400 0
Motel.......................................................... Orange County 528 0
Retail Center.................................................. Orange County 238 0
Office Building................................................ Orange County 639 0
2 Other Loans.................................................. Various 196 0
-
---------
TOTAL NONACCRUAL............................................. $ 3,995 0
OTHER REAL ESTATE OWNED
29 Condo Units................................................. Orange County 743
Condo.......................................................... Orange County 611
Animal Hospital................................................ Orange County 195
Office Condo................................................... Orange County 531
Office Condo................................................... Los Angeles County 182
Land........................................................... San Mateo County 395
---------
TOTAL OTHER REAL ESTATE OWNED................................ 2,657
TOTAL NONACCRUAL LOANS AND OTHER REAL ESTATE OWNED............. $ 6,652 0
-
-
---------
---------
</TABLE>
ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses
is based on an analysis of the portfolio and reflects an amount which, in
management's opinion, is adequate to provide for potential losses after giving
consideration to the portfolio, current economic conditions, past loss
experience and other pertinent factors. Management and the internal credit
review function monitor delinquency reports, new loans, renewals and reports of
on-site inspections to identify credits requiring special attention. Annual
examinations of a sample of the loan portfolio are also performed by an
independent third party credit review professional.
On a quarterly basis, senior management, in conjunction with the board of
directors, reviews the adequacy of the allowance for loan and lease losses. Loan
officers prepare Special Asset Credit Reports ("SAC reports") for each loan on
the special asset report. SAC reports include all pertinent details about the
loan, a write-up of current status, steps being taken to correct any problems, a
detailed workout plan and recommendations as to classification of the loans as
pass, special mention, substandard, doubtful or loss (see ITEM 1. BUSINESS,
BUSINESS OF THE BANK, CLASSIFIED ASSETS AND NONPERFORMING ASSETS) and specific
allocation of the Allowance for Loan and Lease Losses. Loans classified as loss
are charged against the Allowance for Loan and Lease Losses. Specific allowances
are established for loans designated by management based on a reserve track
migration analysis. Quarterly, the credit administration function is responsible
for preparing a historical migration analysis of loans as part of the
determination of the
A-7
<PAGE>
required balance of the Allowance for Loan and Lease Losses. The migration
analysis tracks charged off loans to their original classifications and assigns
a risk factor to each loan in the portfolio based upon classifications of such
loans as pass, special mention, substandard or doubtful. The amount of the
general portion of the allowance is determined by multiplying the aggregate
principal balance of loans in each category by the specified percentage. The
amount of the required general portion of the allowance is added to the specific
allowances previously established to form the total balance of the allowance.
The amount of the allowance is based upon management's evaluation of this
analysis and other factors, including adequacy of collateral, economic
conditions, collateral value trends, nonperforming asset data, delinquencies and
other material.
Management utilizes its best judgement in providing for possible loan losses
and establishing the allowance for loan and lease losses. However, the allowance
is an estimate which is inherently uncertain and depends on the outcome of
future events. Adverse economic conditions and a declining real estate market in
California have adversely affected certain borrowers' ability to repay loans. A
continuation of these conditions or a further decline in the California economy
could result in further deterioration in the quality of the loan portfolio and
could require increased provisions for loan and lease losses that cannot
reasonably be predicted at this date. In January 1994, a severe earthquake
occurred in the San Fernando Valley of Los Angeles, causing over 50 deaths,
destroying property valued in the billions of dollars, causing major impediments
to Southern California transportation networks and affecting the business
community. Damage in the Bank's service area was relatively minimal and, after
contacting customers and investigating its potential exposure, the Bank is not
aware of any of its borrowers who were directly affected by the earthquake.
Since the calculation of the adequacy of the allowance for credit losses is
based largely on loan classification categories and not only whether a loan is
performing or nonperforming, changes in the amount of nonperforming loans will
not necessarily be reflected in corresponding changes in the ratio of the
allowance for loan and lease losses to nonperforming loans. The following table
shows the ratios of the allowance for loan and lease losses to total loans and
the balance of the allowance for loan and lease losses to nonperforming loans as
of December 31:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Ratio of the Allowance for Loan and Lease Losses to Total Loans........ 2.57% 3.36%
Ratio of the Allowance for Loan and Lease Losses to Nonperforming
Loans................................................................ 135.59% 42.01%
</TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes loan and
lease balances of the Bank at December 31, 1996, 1995, 1994, 1993 and 1992,
changes in the allowance for possible loan losses
A-8
<PAGE>
arising from loans charged off, additions to the allowance for loan and lease
losses which have been charged to expense and the ratio of net charge-offs
during the periods to average loans and leases:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
($ IN 000'S)
<S> <C> <C> <C> <C> <C>
Amount of Gross Loans and Leases Outstanding at the
End of the Period................................ $ 210,509 $ 194,914 $ 201,645 $ 214,347 $ 245,045
Balance of Allowance for Loan and Lease Losses at
the Beginning of the Period...................... $ 6,542 $ 5,660 $ 7,221 $ 6,253 $ 7,107
Loans and Leases Charged Off (1)................... (2,938) (6,212) (6,082) (4,664) (6,434)
Recoveries of Previously Charged Off Loans and
Leases (1)....................................... 553 494 1,156 743 805
---------- ---------- ---------- ---------- ----------
Net Loans Charged Off.............................. (2,385) (5,718) (4,926) (3,921) (5,629)
Additions to the Allowance Charged to Expense...... 1,260 6,600 3,365 4,889 4,775
---------- ---------- ---------- ---------- ----------
Balance of the Allowance for Loan and Lease Losses
at the Ending of the Period...................... $ 5,417 $ 6,542 $ 5,660 $ 7,221 $ 6,253
---------- ---------- ---------- ---------- ----------
Ratio of Net Charge-offs During the Period to
Average Loans Outstanding........................ 1.20% 2.93% 2.44% 1.74% 2.08%
---------- ---------- ---------- ---------- ----------
</TABLE>
(1) See the table below for summary of the amounts of loans and leases
charged off and recoveries of loans and leases previously charged off.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
($ IN 000'S)
<S> <C> <C> <C> <C> <C>
Loans and Leases Charged Off:
Commercial..................................................... $ 663 $ 1,332 $ 1,150 $ 2,763 $ 5,712
Real Estate--Mortgage and Construction......................... 1,943 4,569 4,764 1,274 344
Installment & Other............................................ 305 300 120 507 252
Leases......................................................... 27 11 48 120 126
--------- --------- --------- --------- ---------
Total Loans and Leases Charged Off............................... $ 2,938 $ 6,212 $ 6,082 $ 4,664 $ 6,434
--------- --------- --------- --------- ---------
Recoveries of Loans and Leases
Previously Charged off:
Commercial..................................................... $ 378 $ 35 $ 593 $ 669 $ 795
Real Estate--Mortgage and Construction......................... 126 408 461 0 0
Installment & Other............................................ 49 17 50 62 7
Lease.......................................................... 0 34 52 12 3
--------- --------- --------- --------- ---------
Total Recoveries of Loans and Leases............................. $ 553 $ 494 $ 1,156 $ 743 $ 805
--------- --------- --------- --------- ---------
Net Loans and Leases Charged Off................................. $ 2,385 $ 5,718 $ 4,926 $ 3,921 $ 5,629
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
A-9
<PAGE>
The allowance for loan and lease losses has been allocated between the
following categories of loans and leases according to the amount deemed adequate
to provide for the possibility of losses being incurred at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
---------------------------- ---------------------------- ---------------------------- -----------------
RATIO OF RATIO OF RATIO OF RATIO OF
ALLOWANCE TO % OF ALLOWANCE TO % OF ALLOWANCE TO % OF ALLOWANCE TO
OUTSTANDING LOANS TO OUTSTANDING LOANS TO OUTSTANDING LOANS TO OUTSTANDING
----------------- TOTAL ----------------- TOTAL ----------------- TOTAL -----------------
$ IN 000'S ALLOWANCE LOANS LOANS ALLOWANCE LOANS LOANS ALLOWANCE LOANS LOANS ALLOWANCE LOANS
- -------------------- --------- ----- -------- --------- ----- -------- --------- ----- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.......... $1,144 1.40% 38.44 $1,838 2.14% 43.23 $1,151 1.39% 40.96 $2,573 2.96%
Real
Estate--Construction... 278 1.03% 12.70 796 3.27% 12.80 2,516 8.45% 14.77 3,095 8.03%
Real
Estate--Mortgage... 1,701 2.32% 38.23 2,122 3.38% 32.04 1,355 2.05% 32.78 100 .16%
Installment &
Equity............ 562 2.07% 9.36 556 2.80% 10.34 352 1.90% 9.69 281 2.50%
Leases.............. 47 1.76% 1.27 47 1.55% 1.57 88 2.43% 1.79 85 2.14%
Not Allocated....... 1,685 0.80% 1,183 .60% 198 .10% 1,087
--------- --------- --------- ---------
TOTAL............... $5,417 $6,542 $5,660 $7,221
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1992
----------------------------
RATIO OF
% OF ALLOWANCE TO % OF
LOANS TO OUTSTANDING LOANS TO
TOTAL ----------------- TOTAL
$ IN 000'S LOANS ALLOWANCE LOANS LOANS
- -------------------- -------- --------- ----- --------
<S> <C> <C> <C> <C>
Commercial.......... 40.54 $4,256 4.11% 42.27
Real
Estate--Construction 17.99 1,500 2.65% 23.14
Real
Estate--Mortgage... 29.29 67 .10% 21.41
Installment &
Equity............ 10.32 250 1.60% 10.89
Leases.............. 1.85 125 2.24% 2.28
Not Allocated....... 55
---------
TOTAL............... $6,253
---------
---------
</TABLE>
In accordance with SFAS 114, as of December 31, 1996, the Company had
written down all its nonperforming loans to the current collateral value or had
established specific reserves that the management believes are adequate to cover
future exposure.
A-10
<PAGE>
Provision for the ALLL are calculated using a combination of migration
analysis and historical loan loss percentages. The loan portfolio is separated
into four loan pools: commercial, real estate, home equity lines of credit and
all other consumer loans. The commercial and real estate pools use migration
analysis techniques to calculate the required percentage while the consumer
pools are considered homogeneous loan pools with reserves calculated using a
historical loss percentage. Migration analysis covers a period of 26 quarters
which is considered sufficient to mitigate any concerns about portfolio
volatility. The ALLL analysis also considers such factors as delinquent loan
percentages, nonaccrual loan totals, off-balance sheet items, and any specific
allocations against certain identified loans. The large loss in 1995 was a one
time event related to the FASB 65 mark to market analysis of loans considered
assets available for sale. This write-down was required during the OCC
examination and was substantially over the normal rate calculated by the ALLL
analysis due to factors outside the normal scope of the analysis.
The adequacy of the ALLL account is analyzed quarterly utilizing migration
analysis, historical loan loss percentages, past due total, nonaccrual totals,
changes in the volume of loans in the portfolio, off-balance sheet items,
specific allocation against certain identified loans, and any other factor that
is deemed pertinent to analyzing portfolio risk. During 1992, the Bank's primary
market place, Orange County, was in the midst of the most prolonged recession
since the Depression. While all sectors of the economy were affected at that
time, the business sector was the hardest hit with the Bank experiencing losses
mostly in the commercial loan portfolio. By 1993, the real estate market was
beginning to feel the slowdown with rapidly rising vacancies in the business
sector leading to a reduction in rental rates and subsequent devaluation of real
estate. The bank began experiencing more losses in the real estate portfolio at
the same time that losses in the commercial portfolio were diminishing.
Throughout this time, the ALLL analysis was considered adequate for the
perceived risk in the portfolio. In 1994, the volume of newly identified problem
credits began to level off and remained static for the year. Losses were also
about the same as the previous year. Toward the end of 1994, the Orange County
economy was beginning to recover from the recession but this recovery had not
even gathered much steam when Orange County declared bankruptcy. The effect was
immediate and not positive. Real estate values stagnated until the results of
the bankruptcy declaration could be evaluated. For the Bank, this meant
continued losses in attempting to resolve problem real estate loans. Novel ways
of disposing of problem real estate loans were explored, resulting in the Bank
entering a small pool of loans into a county-wide auction. The outcome of this
decision was a subsequent ruling by the OCC that those loans were to be
considered as an "asset available for sale" and the notes were to be valued on a
"mark to market" basis. During the ALLL analysis, these loans had been evaluated
on the basis of their collateral value and not their value upon sale of the
note. This ruling had major consequences to the Bank in that the Bank was
required to charge a significant amount to the ALLL. These losses then affected
the migration analysis, therefore requiring higher reserves due to the higher
losses. Normal loan losses for the Bank during 1995 were actually on the same
level as the previous year. In 1996, most of the loans considered as "assets
available for sale" have been favorably resolved resulting in substantial gains
to the Bank. These gains were not realized into ALLL but as gains on the sale of
assets available for sale. A current analysis of the adequacy of the ALLL
account indicates the existence of an overage resulting from the fact that
problem assets continue to be resolved at a much faster rate than new problem
credits are being identified.
A-11
<PAGE>
INVESTMENT PORTFOLIO
The following table sets forth the book value and estimated fair value of
investment securities available for sale as of December 31, 1996 and 1995 and
investment securities of the Company as of December 31, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ ------------------------
DESCRIPTION AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
$ IN 000'S COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
- ------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government securities................. $ 31,038 $ 31,080 $ 35,314 $ 35,457 $ 60,099 $ 58,778
U.S. Government agencies or insured
obligations.............................. 57,537 57,297 23,611 23,656 9,657 9,262
State political subdivisions............... 413 411 423 416 1,509 1,274
Mortgage-backed securities-
U.S. agencies............................ 880 884 1,047 1,070 1,186 1,132
Other securities........................... 1,841 1,832 1,697 1,684 1,653 1,629
----------- ----------- ----------- ----------- ----------- -----------
Total securities........................... $ 91,709 $ 91,504 $ 62,092 $ 62,283 $ 74,104 $ 72,075
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
As of January 1, 1995 the Bank had classified all its Debt Securities as
"Available for Sale."
As of December 31, 1996 the Bank had no derivatives.
The following table sets forth the maturities of investment securities of
the Company at December 31, 1996 and the weighted average yields of such
securities (calculated available for sale on the basis of the cost and effective
yields weighted for the scheduled maturity of each security):
<TABLE>
<CAPTION>
1997 1998-2001 2002-2006 OVER 2006
---------------------- ---------------------- ------------------------ -----------
$ IN 000'S AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
- ------------------------------------------- --------- ----- --------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. government securities................. $ 25,057 5.84% $ 6,022 5.77% $ 0 0 $ 0
U.S. government agencies or insured
obligations.............................. 21,960 5.28% 35,338 6.17% 466 8.08% 418
State and political subdivisions........... 411 4.88% 0 0 0 0 0
Other...................................... 0 0 0 0 0 0 54
--------- --- --------- --- ----- --- -----
Total...................................... $ 47,428 5.57% $ 41,360 6.11% $ 466 8.08% $ 472
--------- --- --------- --- ----- --- -----
--------- --- --------- --- ----- --- -----
<CAPTION>
$ IN 000'S YIELD
- ------------------------------------------- -----
<S> <C>
U.S. government securities................. 0
U.S. government agencies or insured
obligations.............................. 6.40%
State and political subdivisions........... 0
Other...................................... .55%
---
Total...................................... 5.73%
---
---
</TABLE>
DEPOSITS
The Bank's major source of funds for lending and other investment purposes
is deposits. In addition to deposits, the Bank derives funds from principal and
interest repayments on loans, maturities and sales of investment securities, and
Federal funds sold.
The Bank's deposit strategy has been to emphasize business deposits through
its five branch offices and by a network of couriers employed by the Bank. From
time to time retail deposits and time certificates of deposits have also been
gathered through listings in various national publications.
Business demand deposits earn credits for collected balances against which
the Bank charges fees for various products and services used by the customer. In
some cases, the Bank pays for data processing fees for business customers with
significant balances. The Bank has four business customers, each of which
maintains demand deposit balances in excess of 1% of total deposits. The
balances in these accounts averaged an aggregate of $36.1 million and $33
million during 1996 and 1995, respectively, and totaled an aggregate of $41.5
million and $35.7 million, or 13.0% and 11.6%, respectively, at December 31,
1996 and 1995.
A-12
<PAGE>
Guidelines by federal regulatory agencies specify that time certificates of
deposit may be considered to be brokered if the rate on the deposit exceeds 75
basis points over (i) the average rate paid locally for certificates of deposit
of similar maturities or (ii) 120% of the rate for treasury bills and notes of
similar maturities.
As of December 31, 1996, the Bank had no brokered deposits.
The following table shows the average daily amount of deposits and average
interest rates paid for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR 1996 FOR THE YEAR 1995 FOR THE YEAR 1994
------------------------- ------------------------- -------------------------
DAILY AVERAGE DAILY AVERAGE DAILY AVERAGE
AVERAGE INTEREST RATE AVERAGE INTEREST RATE AVERAGE INTEREST RATE
$ IN 000'S BALANCE PAID BALANCE PAID BALANCE PAID
- ------------------------------------------- ---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Demand Deposit............................. $ 133,371 $ 100,526 $ 101,022
Money Market and Saving Deposits........... 127,063 2.86% 121,110 2.82% 120,120 2.58%
Time Deposits Less than $100,000........... 26,286 4.90% 31,620 5.55% 37,354 4.23%
Time Deposits $100,000 or More............. 31,630 5.04% 32,632 5.68% 33,941 3.98%
---------- --- ---------- --- ---------- ---
TOTAL.................................... $ 318,350 $ 285,888 $ 292,437
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
The following table shows the repricing data of time certificates of deposit
of $100,000 or more at December 31, 1996:
<TABLE>
<CAPTION>
3 MONTHS OR 4 MONTHS TO 7 MONTHS TO OVER 12
LESS 6 MONTHS 12 MONTHS MONTHS TOTAL
----------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Fixed Rate Time Deposits............................ $ 18,707 $ 3,338 $ 3,218 $ 1,211 $ 26,474
Variable Rate Time Deposits......................... 5,850 5,850
----------- ----------- ------ ----------- ---------
Total............................................. $ 24,557 $ 3,338 $ 3,218 $ 1,211 $ 32,324
</TABLE>
The following table shows maturities of time certificates of deposit of
$100,000 or more at December 31, 1996:
<TABLE>
<S> <C> <C> <C> <C> <C>
Fixed Rate Time Deposits................. $ 18,707 $ 3,338 $ 3,218 $ 1,211 $ 26,474
Variable Rate Time Deposits.............. 2,630 1,765 1,100 355 5,850
----------- ----------- ----------- ----------- ---------
Total.................................. $ 21,337 $ 5,103 $ 4,318 $ 1,566 $ 32,324
</TABLE>
BORROWING ARRANGEMENTS
In December 1988, the Company obtained a $3,000,000 term loan from another
financial institution for the purpose of providing additional capital to the
Bank. The Credit Agreement for this loan was amended pursuant to a Second
Amendment to the Credit Agreement dated August 25, 1994. The Second Amendment
was supported by a Support Agreement between a shareholder Director of the
Company and the Company whereby the shareholder guaranteed the payment of the
loan.
To compensate the shareholder for signing the Support Agreement, the Company
signed a Holding Company Support Agreement whereby the Company: (1) paid the
shareholder a standby fee of $23,500 in 1994 and 1995 and 1996, (2) issued to
the shareholder in March 1996 warrants to purchase 25,000 shares of common stock
of the Company at an exercise price per share equal to 80% of the book value per
share of the Company on December 31, 1996.
In March of 1996, the shareholder paid off the outstanding balance of
$2,350,000 to the lending financial institution to allow the Company to
contribute the maximum amount from the proceeds of the stock offering into the
capital of the Bank. (See Note 7 to Notes to Consolidated Financial Statements).
A-13
<PAGE>
On March 17, 1997, the Company paid down $2,000,000 on the note and based on
the $350,000 remaining balance of the note issued to the shareholder a
proportionate number of warrants to purchase 3,723 shares of the Company's
common stock at an exercise price of $6.60 per share pursuant to the terms of
the Holding Company's Support Agreement. The Company also paid the shareholder a
fee equal to 1% of the unpaid principal balance on March 17, 1997. The remaining
balance of $350,000 is subject to the original terms of the note.
The Bank maintains two lines of credit with outside financial institutions
for the purpose of purchasing Federal funds. The lines of credit bear interest
at a floating rate and provide for borrowing up to $8,000,000 and $5,000,000,
respectively. At December 31, 1996 and 1995, no amounts were outstanding on
these lines of credit.
Under an agreement with the Federal Home Loan Bank, the Bank may obtain an
extension of credit of up to 50% of total assets collateralized by real estate
loans. At December 31, 1996, the Bank had pledged loans amounting to $2,935,000
and had available credit of $1,468,000 based on 50% of the outstanding balance
of pledged loans. No amounts were outstanding on this line of credit at December
31, 1996 and 1995.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The following table shows the components of the Company's liquidity at the
dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------
$ IN 000'S 1996 1995 1994
- -------------------------------------------------------------------- ---------- ---------- ---------
<S> <C> <C> <C>
Cash and Due From Bank.............................................. $ 28,849 $ 28,549 $ 21,315
Federal Funds Sold.................................................. 14,500 45,000 2,000
Investment Securities............................................... 91,504 62,283 72,075
---------- ---------- ---------
134,853 135,832 95,390
Restricted Balances................................................. (8,008) (6,444) (4,029)
---------- ---------- ---------
TOTAL LIQUIDITY..................................................... $ 126,845 $ 129,388 $ 91,361
---------- ---------- ---------
Ratio of Liquidity to Total Assets.................................. 36.09% 38.73% 30.39%
Reserves Held at the Federal Reserve Bank........................... $ 8,900 $ 6,720 $ 8,428
</TABLE>
The principal sources of asset liquidity are balances due from banks,
Federal funds sold and short-term investment securities. Secondary sources of
liquidity are loan repayments, maturing investments, and loans and investments
that can be used as collateral for other borrowings. In addition, in 1995, the
Company obtained $3,200,000 from a private placement of its common stock. The
majority of the Company's loans are short-term and if paid in accordance with
their terms, provide continuous additional cash inflow. The following chart
shows the distribution of loans by their maturities and ratio to total loans and
total assets as of December 31, 1996:
<TABLE>
<CAPTION>
$ IN 000'S UNDER 1 YEAR 1-5 YEARS OVER 5 YEARS TOTAL
- --------------------------------------------------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C>
LOANS AND LEASES................................... $ 93,472 $ 84,206 $ 32,831 $ 210,509
Ratio to Total Loans and Leases.................... 44.40% 40.00% 15.60% 100.00%
Ratio to Total Assets.............................. 26.60% 23.96% 9.34% 59.90%
</TABLE>
Liability-based liquidity includes interest-bearing and noninterest-bearing
deposits, largely from local businesses and professionals, time deposits from
financial institutions throughout the United States and obtained through
listings in national publications and Federal funds purchased. From time to time
the
A-14
<PAGE>
Bank has used brokered deposits as an additional source of funds. As of December
31, 1996, the Bank had no brokered deposits.
The Company maintains an Interest Rate Risk simulation model which enables
management to measure the Bank's Interest Rate Risk (IRR) exposure using various
assumptions and interest rate scenarios, and to incorporate alternative
strategies for the reduction of IRR exposure. The Bank measures its IRR using
several methods to provide a comprehensive view of its IRR from various
perspectives. These methods include analysis of repricing and maturity
mismatches, or gaps, between assets and liabilities, and analysis of the size
and sources of basis risk.
Gap analysis measures the difference between financial assets and financial
liabilities scheduled and expected to mature or reprice within a specified time
period. The gap is positive when repricing and maturing assets exceed repricing
and maturing liabilities. The gap is negative when repricing and maturing
liabilities exceed repricing and maturing assets. A positive or negative
cumulative gap indicates in a general way how the Bank's net interest income
should respond to interest rate fluctuations. A positive cumulative gap for a
period generally means that rising interest rates would be reflected sooner in
financial assets than in financial liabilities, thereby increasing net interest
income over that period. A negative cumulative gap for a period would produce an
increase in net interest income over that period if interest rates declined.
The following maturity and interest rate sensitivity analysis summarizes the
asset and liability balances of the Company at December 31, 1996 on the basis of
rate adjustments due to occur within the periods indicated:
REPRICING OPPORTUNITIES
<TABLE>
<CAPTION>
1 TO 5
$ IN 000'S 3 MONTHS OR LESS 4 TO 12 MONTHS YEARS OVER 5 YEARS TOTAL
- ----------------------------------------- ---------------- -------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Investments.............................. $ 29,403 $ 18,417 $ 41,596 $ 2,293 $ 91,709
Fed Funds................................ 14,500 14,500
Real Estate Loans........................ 69,628 8,513 20,175 8,897 107,213
Commercial Loans......................... 67,020 6,988 6,876 43 80,927
Consumer Loans........................... 6,923 2,288 7,742 2,753 19,706
Leasing.................................. 33 100 2,530 2,663
-------- ------- ----------- ------------ ----------
Interest-Earning Assets.................. 187,507 36,306 78,919 13,986 316,718
NOW Deposits............................. 15,438 15,438
Money Market Deposits.................... 57,407 57,407
Savings Deposits......................... 46,179 46,179
Time Deposits less $100,000.............. 13,007 5,851 2,241 21,099
Time Deposits over $100,000.............. 24,557 6,556 1,211 32,324
-------- ------- ----------- ------------ ----------
Interest-bearing Liabilities............. 156,588 12,407 3,452 172,447
-------- ------- ----------- ------------ ----------
Cumulative Interest Sensitivity Gap...... $ 30,919 $ 54,818 $ 130,285 $ 144,271
-------- ------- ----------- ------------ ----------
-------- ------- ----------- ------------ ----------
</TABLE>
Interest-earning assets include loans and leases on which the accrual of
interest has been discontinued in the amount of $3,995,000.
As of December 31, 1996 the Company had a positive gap of $144,271,000 with
a cumulative positive gap of $54,818,000 over a one-year period. The Board of
Directors has established limits on total net interest income exposure for a one
year time horizon based on 1% rate change. While the gap analysis is a useful
asset/liability management tool, it does not fully assess IRR.
A-15
<PAGE>
In assessing the interest rate risk, the Company assumes federal funds sold,
NOW deposits, money market deposits and savings deposits as repriceable
immediately. Floating rate loans and variable time certificates of deposits are
repriced immediately or on their scheduled rate change date. Fixed rate loans,
fixed rate time certificates of deposit and investment securities are repriced
based on their scheduled paydowns or at maturities. All paid-down matured
investment securities, loans and deposits are repriced at the current prevailing
rate. The Company uses the above method of repricing with the following rate
scenarios.
1. No interest rate change
2. 1% rise in interest rates
3. 2% rise in interest rates
4. 1% decline in interest rates
5. 2% decline in interest rates
As of December 31, 1996 the interest rate exposure for a one year time
horizon was a decline in net interest income of $373,000 in the event the rates
declined by 1% and an increase in net interest income of $373,000 in the event
the rates increased by 1%.
A-16
<PAGE>
INTEREST RATES AND INTEREST RATE DIFFERENTIAL. The following tables set
forth the average amounts outstanding for major categories of interest-earning
assets, interest bearing liabilities, the average interest rates earned thereon
and interest income/expenses for the Bank as of and for the years ended:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995 VARIANCE
--------------------------------------- --------------------------------------- -----------------------
AVERAGE AVERAGE AVERAGE
ASSET/LIAB INCOME- AVERAGE YIELD/ ASSET/LIAB INCOME- AVERAGE YIELD/ ASSET/LIAB INCOME-
$ IN 000'S AMOUNT EXPENSE COST(%) AMOUNT EXPENSE COST(%) AMOUNT EXPENSE
- -------------------- ------------- ------- -------------- ------------- ------- -------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal Funds
Sold.............. $ 32,522 $ 1,733 5.33% $ 22,855 $ 1,333 5.83% $ 9,667 $ 400
Investment
Securities........ 83,309 5,001 6.00% 61,727 3,409 5.52% 21,582 1,592
Loans and Leases
(1)............... 198,615 19,321 9.73% 200,757 19,094 9.51% (2,142) 227
------------- ------- ----- ------------- ------- ----- ------------- -------
Total
Interest-Earning
Assets............ $314,446 $26,055 8.29% 285,339 23,836 8.35% $ 29,107 $ 2,219
------------- -------
------------- -------
Due From Banks
(Non-int)......... 28,411 22,289
Other Assets........ 3,443 4,239
------------- -------------
TOTAL ASSETS (2).... $346,300 $ 311,867
------------- -------------
------------- -------------
LIABILITIES & EQUITY
Savings Deposits.... $127,063 $ 3,633 2.86% $ 121,110 $ 3,412 2.82% $ 5,953 $ 221
Time Deposits....... 57,916 2,881 4.97% 64,252 3,610 5.62% (6,336) (729)
Securities Sold
Under Agreements
to Repurchase..... 107 5 4.67% 123 8 6.50% (16) (3)
Capital Note........ 2,350 273 11.62% 2,351 259 11.02% )(1 14
------------- ------- ----- ------------- ------- ----- ------------- -------
Total
Interest-Bearing
Liabilities....... $187,436 6,792 3.62% 187,836 7,289 3.88% $ (400) $ (497)
------- ----- ------- ----- ------------- -------
Demand Deposits..... 133,371 100,526
Other Liabilities... 2,846 1,810
Shareholders' Equity
(2)............... 22,647 21,695
------------- -------------
TOTAL LIABILITIES &
SHAREHOLDERS'
EQUITY............ $346,300 $ 311,867
------------- -------------
------------- -------------
Net Yield on
Interest-Earning
Assets............ $19,263 6.13% $16,547 5.80%
------- ----- ------- -----
------- ----- ------- -----
<CAPTION>
AVERAGE YIELD/
$ IN 000'S COST(%)
- -------------------- --------------
<S> <C>
ASSETS
Federal Funds
Sold.............. (.50)%
Investment
Securities........ .48%
Loans and Leases
(1)............... .22%
-----
Total
Interest-Earning
Assets............ (.06)%
-----
-----
Due From Banks
(Non-int).........
Other Assets........
TOTAL ASSETS (2)....
LIABILITIES & EQUITY
Savings Deposits.... .04%
Time Deposits....... (.64)%
Securities Sold
Under Agreements
to Repurchase..... (1.83)%
Capital Note........ .60%
-----
Total
Interest-Bearing
Liabilities....... (.26)%
-----
Demand Deposits.....
Other Liabilities...
Shareholders' Equity
(2)...............
TOTAL LIABILITIES &
SHAREHOLDERS'
EQUITY............
Net Yield on
Interest-Earning
Assets............
</TABLE>
- ------------------------
(1) Average loans and leases include non-performing loans and leases; however,
income does not include foregone interest. In addition, loan fees have not
been included in interest income and in calculating the rate realized on
loans and leases.
(2) Average Assets and Average Equity do not include unrealized gains or losses
on Investment Securities.
A-17
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994 VARIANCE
--------------------------------------- --------------------------------------- -----------------------
AVERAGE AVERAGE AVERAGE
ASSET/LIAB INCOME- AVERAGE YIELD/ ASSET/LIAB INCOME- AVERAGE YIELD/ ASSET/LIAB INCOME-
$ IN 000'S AMOUNT EXPENSE COST(%) AMOUNT EXPENSE COST(%) AMOUNT EXPENSE
- -------------------- ------------- ------- -------------- ------------- ------- -------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal Funds
Sold.............. $ 22,855 $ 1,333 5.83% $ 13,255 $ 501 3.78% $ 9,600 $ 832
Investment
Securities........ 61,727 3,409 5.52% 76,796 3,873 5.04% (15,069) (464)
Loans and Leases
(1)............... 200,757 19,094 9.51% 202,009 17,599 8.71% (1,252) 1,495
------------- ------- ----- ------------- ------- ----- ------------- -------
Total
Interest-Earning
Assets............ $285,339 $23,836 8.35% $ 292,060 21,973 7.52% (6,721) 1,863
------------- -------
------------- -------
Due From Banks
(Non-int)......... 22,289 23,326
Other Assets........ 4,239 3,743
------------- -------------
TOTAL ASSETS (2).... $311,867 $ 319,129
------------- -------------
------------- -------------
LIABILITIES & EQUITY
Savings Deposits.... $121,110 $ 3,412 2.82% $ 120,120 $ 3,103 2.58% $ 990 $ 309
Time Deposits....... 64,252 3,610 5.62% 71,295 2,933 4.11% (7,043) 677
Securities Sold
Under Agreements
to Repurchase..... 123 8 6.50% 1,135 59 5.20% (1,012) (51)
Capital Note........ 2,351 259 11.02% 2,351 241 10.25% 0 18
------------- ------- ----- ------------- ------- ----- ------------- -------
Total
Interest-Bearing
Liabilities....... 187,836 7,289 3.88% 194,901 6,336 3.25% (7,065) 953
------- ----- ------- ----- ------------- -------
------------- -------
Demand Deposits..... 100,526 101,022
Other Liabilities... 1,810 2,160
Shareholders' Equity
(2)............... 21,695 21,046
------------- -------------
TOTAL LIABILITIES &
SHAREHOLDERS'
EQUITY............ $311,867 $ 319,129
------------- -------------
------------- -------------
Net Yield on
Interest-
Earning Assets.... $16,547 5.80% $15,637 5.35%
------- ----- ------- -----
------- ----- ------- -----
<CAPTION>
AVERAGE YIELD/
$ IN 000'S COST(%)
- -------------------- --------------
<S> <C>
ASSETS
Federal Funds
Sold.............. 2.05%
Investment
Securities........ .48%
Loans and Leases
(1)............... .80%
-----
Total
Interest-Earning
Assets............ .83%
-----
-----
Due From Banks
(Non-int).........
Other Assets........
TOTAL ASSETS (2)....
LIABILITIES & EQUITY
Savings Deposits.... .23%
Time Deposits....... 1.50%
Securities Sold
Under Agreements
to Repurchase..... 1.31%
Capital Note........ .77%
-----
Total
Interest-Bearing
Liabilities....... .63%
-----
-----
Demand Deposits.....
Other Liabilities...
Shareholders' Equity
(2)...............
TOTAL LIABILITIES &
SHAREHOLDERS'
EQUITY............
Net Yield on
Interest-
Earning Assets....
</TABLE>
- ------------------------
(1) Average loans and leases include non-performing loans and leases; however,
income does not include foregone interest. In addition, loans fees have not
been included in interest income and in calculating the rate realized on
loans and leases.
(2) Average Assets and Average Equity do not include unrealized gains or losses
on Investment Securities.
A-18
<PAGE>
INTEREST EARNED AND INTEREST INCURRED RESULTING FROM CHANGES IN VOLUME AND
CHANGES IN RATES. The following table sets forth, for the periods indicated, a
summary of the changes in interest earned and interest incurred resulting from
changes in volume and changes in rates:
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
------------------------------------------------ ------------------------------------------------
VOLUME OLD VOLUME VOLUME VOLUME OLD VOLUME VOLUME
CHANGE X X RATE CHANGE X NET CHANGE X X RATE CHANGE X NET
$ IN 000'S OLD RATE CHANGE RATE CHANGE EFFECT OLD RATE CHANGE RATE CHANGE EFFECT
- ------------------------ ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Federal Funds Sold...... $ 564 $ (115) $ (49) $ 400 $ 363 $ 270 $ 196 $ 829
Investment Securities... 1,192 296 104 1,592 (760) 372 (73) (461)
Loans................... (204) 437 (5) 228 (109) 1,614 (10) 1,495
----------- ----- --- --------- ----- ----------- ----- ---------
TOTAL INTEREST-EARNING
ASSETS................ $ 1,552 $ 618 $ 50 $ 2,220 $ (506) $ 2,256 $ 113 $ 1,863
INTEREST PAID ON:
Savings Deposits........ $ 168 $ 51 $ 2 $ 221 $ 26 $ 281 $ 2 $ 309
Time Deposits........... (356) (414) 41 (729) (290) 1,073 (106) 677
Securities Sold Under
Agreement to
Repurchase............ (1) (2) 0 (3) (53) 15 (13) (51)
Note Payable............ 0 14 0 14 0 19 0 19
----------- ----- --- --------- ----- ----------- ----- ---------
TOTAL INTEREST-BEARING
LIABILITIES........... $ (189) $ (351) $ 43 $ (497) $ (317) $ 1,388 $ (117) $ 954
----------- ----- --- --------- ----- ----------- ----- ---------
NET INTEREST EARNINGS... $ 1,741 $ 969 $ 7 $ 2,717 $ (189) $ 868 $ 230 $ 909
----------- ----- --- --------- ----- ----------- ----- ---------
----------- ----- --- --------- ----- ----------- ----- ---------
</TABLE>
In calculating interest rates and volumes and related changes,
non-performing loans and leases have been included in loan and lease volumes;
however, foregone interest has been excluded. Loan fees were not included in
interest income in calculating the rate realized on loans.
COMPETITION
The banking business in California generally, and in the Bank's service area
in particular, is highly competitive with respect to both loans and deposits and
is dominated by a relatively small number of major banks which have many offices
operating throughout wide geographic areas. In addition, there are numerous
other independent commercial banks within the Bank's primary service areas, many
of which have greater resources, greater capital and, in some cases, less
stringent regulatory limitations. Certain of its competitors may be better able
to respond to changing capital and other regulatory requirements and better able
to maintain or improve market share.
The primary factors in competing for deposits are interest rates,
personalized services, quality and range of financial services, convenience of
office locations and banking hours. The Bank competes for deposits and loans
principally with banks, savings and loan associations, thrift and loan
associations, credit unions, mortgage companies, insurance companies, other
lending institutions, money market and mutual funds and other investment
alternatives. Competition for loans comes primarily from other commercial banks,
savings institutions, mortgage banking firms, credit unions and other financial
intermediaries. Among the advantages that some of these institutions have over
the Bank is their ability to undertake
A-19
<PAGE>
extensive advertising campaigns and to allocate their investment assets to areas
of highest yield and demand. Many of the major commercial banks operating in the
Bank's service area offer certain other services which are not offered directly
by the Bank, such as trust, investment and international banking services, and
by virtue of their greater total capitalization, such banks have substantially
higher lending limits than the Bank. In competing for deposits, the Bank is
subject to certain limitations not applicable to non-bank financial
institutions.
SUPERVISION AND REGULATION
THE COMPANY
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, which include, but are not limited
to, the filing of annual, quarterly and other reports with the Securities and
Exchange Commission.
The Company is a bank holding company subject to regulation under the Bank
Holding Company Act (the "Act"), and is registered with and subject to the
supervision of the Board of Governors of the Federal Reserve System (the
"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 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 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 the 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
non-affiliated 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.
A-20
<PAGE>
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 are 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 make a 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 such subsidiary does not exceed 10% of such
subsidiary's capital stock and surplus on a per affiliate basis or 20% of such
subsidiary's capital stock and surplus on an aggregate affiliate basis. Such
transactions 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 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 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 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
A-21
<PAGE>
corporation's interest expense for such fiscal years, then the corporation's
current assets equal at least 1 1/4 times its current liabilities.
On May 27, 1993, the Company executed a Memorandum of Understanding
("memorandum") with the Federal Reserve Bank of San Francisco (the "Fed"). On
March 13, 1997, the Fed determined that the continued existence of the
memorandum was no longer necessary and was terminated as of that date.
THE BANK
The Bank is a national banking association whose deposits are insured by the
Bank Insurance Fund ("BIF") as administered by the FDIC, up to the maximum legal
limits of the FDIC $(100,000), and is subject to regulation, supervision, and
regular examination by the Comptroller. The Bank is a member of the Federal
Reserve System, and as such is subject to certain provisions of the Federal
Reserve Board. The Bank is also subject to applicable provisions of California
law, insofar as they do not conflict with, or are not preempted by, federal law.
The regulations of these various agencies govern most aspects of the Bank's
business, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowing, dividends,
and locations of branch offices. California law exempts banks from the
California usury laws.
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 percent of such subsidiary
bank's capital and surplus (as defined by federal regulations) and such secured
loans and investments are limited, in the aggregate, to 20% of such subsidiary
bank's capital and surplus (as defined by federal regulations). Additional
restrictions on transactions with affiliates may be imposed on the Bank under
the prompt corrective action provisions of the FDIC Improvement Act ("FDICIA").
Commercial banking organizations, such as the Bank, may be subject to
potential enforcement actions by the Federal Reserve Board, the FDIC and the
Comptroller 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 FDICIA.
On January 1, 1991, the Comptroller changed the interpretation of the
dividend regulations to simplify the calculation of a bank's dividend-paying
capacity and make them more consistent with generally accepted accounting
principles. The dividend limit is based on retained "net profits" for the
current year plus the two previous years, less any required transfers to surplus
or a fund for the retirement of preferred stock. "Net profits" are defined as
net income as reported in the bank's call report with no adjustments. In
addition, a national bank may not pay any dividends or make other capital
distributions if the capital distribution would cause the national bank to be
undercapitalized, with the exception of repurchases or redemptions of the
national bank's shares that are made in connection with the issuance of
additional shares, or that will impair the national bank's financial condition.
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 a bank on its deposits and its
other borrowings and the interest rate received by a bank
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on loans extended to its customers and securities held in a bank's portfolio
comprise the major portion of a bank's earnings. These rates are highly
sensitive to many factors that are beyond the control of a bank. Accordingly,
the earnings and growth of a 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 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 and before various bank
regulatory and other professional agencies. The likelihood of any major changes
and the impact such changes might have on the Company are impossible to predict.
Certain of the potentially significant changes which have been enacted and
proposals which have been made recently are discussed below.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, FDICIA was enacted into law. Set forth below is a
brief discussion of certain portions of this law and implementing regulations
that have been adopted or proposed by the Federal Reserve Board, the
Comptroller, the Office of Thrift Supervision ("OTS") and the FDIC
(collectively, the "federal banking agencies").
STANDARDS FOR SAFETY AND SOUNDNESS
FDICIA requires the federal banking agencies to prescribe, by regulation,
standards for all insured depository institutions and depository institution
holding companies relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, and asset growth. Standards must also be
prescribed for classified loans, earnings and the ratio of market value to book
value for publicly-traded shares. The FDICIA also requires the federal banking
agencies to issue uniform regulations prescribing standards for real estate
lending that are to consider such factors as the risk to the deposit insurance
fund, the need for safe and sound operation of insured depository institutions
and the availability of credit. Further, FDICIA requires the federal banking
agencies to establish standards prohibiting compensation, fees and benefit
arrangements that are excessive or could lead to financial loss.
PROMPT CORRECTIVE REGULATORY ACTION
FDICIA requires each federal banking agency to take prompt corrective action
to resolve the problems of insured depository institutions that fall below one
or more prescribed minimum capital ratios. The purpose of this law is to resolve
the problems of insured depository institutions at the least possible long-term
cost to the appropriate deposit insurance fund.
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The law requires each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized (significantly exceeding the required minimum capital requirements),
adequately capitalized (meeting the required capital requirements),
undercapitalized (failing to meet any one of the capital requirements),
significantly undercapitalized (significantly below any one capital requirement)
and critically undercapitalized (failing to meet all capital requirements).
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of FDICIA.
Under the regulations, an insured depository institution will be deemed to be:
- "well capitalized" if it (i) has total risk-based capital of 10 percent or
greater, Tier 1 risk-based capital of 6 percent or greater and a leverage
capital ratio of 5 percent or greater and (ii) is not subject to an order,
written agreement, capital directive or prompt corrective action directive
to meet and maintain a specific capital level for any capital measure;
- "adequately capitalized" if it has total risk-based capital of 8 percent
or greater, Tier 1 risk-based capital of 4 percent or greater and a
leverage capital ratio of 4 percent or greater (or a leverage capital
ratio of 3 percent or greater if the institution is rated composite 1
under the applicable regulatory rating system in its most recent report of
examination);
- "undercapitalized" if it has total risk-based capital that is less than 8
percent, Tier 1 risk-based capital that is less than 4 percent or a
leverage capital ratio that is less than 4 percent (or a leverage capital
ratio that is less than 3 percent if the institution is rated composite 1
under the applicable regulatory rating system in its most recent report of
examination);
- "significantly undercapitalized" if it has total risk-based capital that
is less than 6 percent, Tier 1 risk-based capital that is less than 3
percent or a leverage capital ratio that is less than 3 percent; and
- "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2 percent.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized, may be reclassified to
the next lower capital category if the appropriate federal banking agency, after
notice and opportunity for hearing, (i) determines that the institution is in an
unsafe or unsound condition or (ii) deems the institution to be engaging in an
unsafe or unsound practice and not to have corrected the deficiency. At each
successive lower capital category, an insured depository institution is subject
to more restrictions and federal banking agencies are given less flexibility in
deciding how to address the problems associated with such category.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions, and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to
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5% of the depository institution's total assets at the time the institution
became undercapitalized or (b) the amount which is necessary to bring the
institution into compliance with all capital standards applicable to such
institution as of the time the institution fails to comply with its capital
restoration plan. Finally, the appropriate federal banking agency may impose any
of the additional restrictions or sanctions that it may impose on significantly
undercapitalized institutions if it determines that such action will further the
purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect to implement,
an acceptable capital restoration plan, is subject to additional restrictions
and sanctions. These include, among other things: (i) a forced sale of voting
shares to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with affiliates;
(iii) further limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or termination of
specified activities; (vi) replacement of directors or senior executive
officers, subject to certain grandfather provisions for those elected prior to
enactment of FDICIA; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by the
holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by the
appropriate federal banking agency. Although the appropriate federal banking
agency has discretion to determine which of the foregoing restrictions or
sanctions it will seek to impose, it is required to force a sale of voting
shares or merger, impose restrictions on affiliate transactions and impose
restrictions on rates paid on deposits unless it determines that such actions
would not further the purpose of the prompt corrective action provisions. In
addition, without the prior written approval of the appropriate federal banking
agency, a significantly undercapitalized institution may not pay any bonus to
its senior executive officers or provide compensation to any of them at a rate
that exceeds such officer's average rate of base compensation during the 12
calendar months preceding the month in which the institution became
undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
The Comptroller and the Federal Reserve Board have adopted risk-based
minimum 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 percent for
assets with low credit risk, such as certain U.S. Treasury securities, to 100
percent for assets with relatively high credit risk, such as business loans.
In addition to the risk-based guidelines, the Comptroller requires banks to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a bank rated in the highest of the five categories used by
the Comptroller to rate banks, the minimum leverage ratio of Tier 1 capital to
total assets is 3 percent. For all banks not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3
percent minimum, or 4 percent to 5 percent. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the
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Comptroller has the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates on
the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed would
be determined on a case-by-case basis by the examiner and the appropriate
federal banking agency.
In January 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 allowances 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.
OTHER ITEMS
FDICIA also, among other things, (i) limits the percentage of interest paid
on brokered deposits and limits the unrestricted use of such deposits to only
those institutions that are well capitalized; (ii) requires the FDIC to charge
insurance premiums based on the risk profile of each institution; (iii)
eliminates "pass through" deposit insurance for certain employee benefit
accounts unless the depository institution is well capitalized or, under certain
circumstances, adequately capitalized; and (iv) directs the appropriate federal
banking agency to determine the amount of readily marketable purchased mortgage
servicing rights that may be included in calculating such institution's
tangible, core and risk-based capital.
CAPITAL ADEQUACY GUIDELINES
The Comptroller and the Federal Reserve Board have issued guidelines to
implement the risk-based capital requirements. The guidelines are intended to
establish a systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among banking
organizations, takes off-balance sheet items into account in assessing capital
adequacy and minimizes disincentives to holding liquid, low-risk assets. Under
these guidelines, assets and credit equivalent amounts of off-balance sheet
items, such as letters of credit and outstanding loan commitments, are assigned
to one of several risk categories, which range from 0 percent for risk-free
assets, such as cash and certain U.S. Government securities, to 100 percent for
relatively high-risk assets, such as loans and investments in fixed assets,
premises and other real estate owned. The aggregated dollar amount of each
category is then multiplied by the risk-weight associated with that category.
The resulting weighted values from each of the risk categories are then added
together to determine the total risk-weighted assets.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock,
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related surplus and retained earnings, qualifying non-cumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries. Intangibles, such as goodwill, are generally deducted from Tier 1
capital; however, purchased mortgage servicing rights and purchase credit card
relationships may be included, subject to certain limitations. At least 50
percent of the banking organization's total regulatory capital must consist of
Tier 1 capital.
Tier 2 capital may consist of (i) the allowance for possible loan and lease
losses in an amount up to 1.25 percent of risk-weighted assets; (ii) perpetual
preferred stock, cumulative perpetual preferred stock and long-term preferred
stock and related surplus; (iii) hybrid capital instruments (instruments with
characteristics of both debt and equity), perpetual debt and mandatory
convertible debt securities; and (iv) eligible-term subordinated debt and
intermediate-term preferred stock with an original maturity of five years or
more, including related surplus, in an amount up to 50 percent of Tier 1
capital. The inclusion of the foregoing elements of Tier 2 capital are subject
to certain requirements and limitations of the federal banking agencies.
The Comptroller has also adopted a minimum leverage capital ratio of Tier 1
capital to average total assets of 3 percent for the highest rated banks. This
leverage capital ratio is only a minimum. Institutions experiencing or
anticipating significant growth or those with other than minimum risk profiles
are expected to maintain capital well above the minimum level. Furthermore,
higher leverage capital ratios are required to be considered well capitalized or
adequately capitalized under the prompt corrective action provisions of FDICIA.
The Regulatory Capital Guidelines as well as the actual capitalization for
the Bank and the Company as of December 31, 1996 follow:
<TABLE>
<CAPTION>
ADEQUATELY WELL COMPANY
CAPITALIZED CAPITALIZED BANK CONSOLIDATED
----------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Detailed computations of
Tier 1 leverage capital ratio................................... a4.00% a5.00% 7.59% 7.25%
Tier 1 risk-based capital ratio................................. a4.00% a6.00% 10.88% 10.36%
Total risk-based capital........................................ a8.00% a10.00% 12.14% 11.62%
</TABLE>
- ------------------------
Based solely on these ratios, the Bank is deemed to be well capitalized as of
December 31, 1996.
SAFETY AND SOUNDNESS STANDARDS
In February 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
In December 1992, the federal banking agency issued final regulations
prescribing uniform guidelines for real estate lending. The regulations 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.
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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 federal banking agencies' appraisal standards.
Federally-related transactions include the sale, lease, purchase, investment in,
or exchange of, real property or interests in real property, the financing of
real property, and the use 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 percent 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 implemented a final risk-based assessment system, as required by
FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," or 1.25
percent, the total amount raised from BIF members by the risk-based assessment
system may not be less than the amount that would be raised if the assessment
rate for all BIF members were .023 percent of deposits. The FDIC, effective
September 15, 1995, lowered assessments from their rates of $.23 to $.31 per
$100 of insured deposits to rates of $.04 to $.31, depending on the condition of
the bank, as a result of the recapitalization of the BIF. On November 15, 1995,
the FDIC voted to 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. The Bank currently pays deposit insurance premiums to the FDIC
at the rate of $.17 per $100 of deposits.
Congress has recently passed, and President Clinton has signed into law,
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 1980's
and early 1990's. The new law requires savings and loan associations to bear the
cost of recapitalizing the SAIF and, after January 1, 1997, banks must
contribute towards paying off the financing bonds, including interest. In 2000,
the banking industry will assume the bulk of the payments. The new law also aims
to merge the Bank Insurance Fund and SAIF by 1999 but not until the bank and
savings and loan charters are combined. The Treasury Department has until March
31, 1997 to deliver to Congress comments and recommendations on combining the
charters. Additionally, the new law provides "regulatory relief" for the banking
industry by eliminating approximately 30 laws and regulations. The costs and
benefits of the new law to the Banks can not currently be accurately predicted.
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
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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 requirements and conditions as for a merger
transaction. Effective October 2, 1995, California adopted legislation which
"opts California into" the Interstate Act. However, the California Legislation
restricts out-of-state banks from purchasing branches or starting a de novo
branch to enter the California banking market. Such banks may proceed only by
way of purchases of whole banks.
The Interstate Act is likely to increase competition in the Banks' market
areas especially from larger financial institutions and their holding companies.
It is difficult to assess the impact such increased competition will likely have
on the Banks' operations.
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. Based on the examination conducted
during May 1993 and February 1995, the Bank is rated "outstanding."
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.
HAZARDOUS WASTE CLEAN-UP COSTS
Management is aware of recent legislation and cases relating to hazardous
waste clean-up costs and potential liability. Based on a general survey of the
loan portfolios of the Bank, conversations with local authorities and
appraisers, and the type of lending currently and historically done by the Bank
(the Bank has generally 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.
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OTHER REGULATIONS AND POLICIES
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 noninterest-bearing reserves
against deposits, limitations on the nature and amount of loans which may be
made, and restrictions on payment of dividends. California law exempts banks
from the usury laws.
ACCOUNTING PRONOUNCEMENTS
On January 1, 1996, the Company adopted a Statement on Special Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
to Be Disposed Of." This Statement requires that long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, or to be disposed of, be reviewed for impairment based on the fair value
of the asset. Furthermore, this Statement requires that certain long-lived
assets and identifiable intangibles to be disposed of, be reported at the lower
of carrying amount or fair value less cost to sell. The Company has determined
that the impact of this Statement on its operations and financial position is
not material for the year ended December 31, 1996.
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. During 1996, the Company has chosen to
continue to account for stock based compensation using the intrinsic value
method prescribed in Accounting Principal Board No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock on the date of the grant over the amount an
employee must pay to acquire the stock. The pro forma effects of adoption are
disclosed in Note 8 to the Notes to Consolidated Financial Statements.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," as amended in December 1996 by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125." This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. SFAS No. 125 applies prospectively to
financial statements for fiscal years beginning after December 31, 1996.
However, SFAS No. 127 defers for one year the effective date of certain
provisions within SFAS No. 125. SFAS No. 125 does not permit earlier or
retroactive application. As of December 31, 1996, the Company has not adopted
SFAS No. 125, as amended by SFAS No. 127; however, the Company does not believe
the impact on its operations and financial position will be material upon
adoption.
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EMPLOYEES
The Bank currently employs approximately 156 persons in varying capacities.
The Company does not have any full-time employees at this time. (See ITEM 11.
EXECUTIVE COMPENSATION, for further information).
ITEM 2. PROPERTIES.
On December 29, 1982, the Company entered into a sublease (the "Sublease")
for the premises covering approximately 6,147 square feet on the ground floor of
a building located at 3951 South Coast Plaza Drive, Santa Ana, California 92704.
The Sublease ("old Sublease") had an initial term of 10 years, which expired on
January 31, 1993. The Sublease was amended effective February 1, 1993 for a term
of 24 months, terminating on January 31, 1995. It has further been amended to
expire on January 31, 1998. The rent for the premises at the end of the term of
the old Sublease was $2.61 per square foot per month. The rent under the terms
of the "new Sublease" is $1.23 per square foot per month. The Company has
assigned the Sublease to the Bank for the purpose of conducting banking
operations on the premises. The Company does not independently occupy any part
of the premises.
On May 4, 1988, the Bank entered into a lease expiring June 30, 2000 for the
branch located at 22831 Lake Forest Drive, El Toro, California. The El Toro
premises consist of approximately 6,766 square feet and the current monthly rent
is $1.71 per square foot.
On September 19, 1989, the Bank entered into a lease expiring September 18,
1993 for the Service Center located at 17252 Armstrong, Suite H, Irvine,
California. These premises consist of approximately 7,900 square feet. On
September 18, 1996, the Company revised and extended the lease for a period of
twelve months, expiring September 17, 1997, at the current monthly rent of $.72
per square foot.
On October 4, 1989, the Bank entered into a lease expiring December 31, 1999
for the Orange regional office located at 625 The City Drive, Orange,
California. These premises consist of approximately 8,257 square feet and the
current monthly rent is $2.05 per square foot.
On November 29, 1991, the Bank entered into a lease for a branch facility,
commercial loan department and escrow division space covering approximately
14,866 square feet on the ground floor and 14,103 square feet for its
headquarters office on the ninth floor of a building located at 4100 Newport
Place, Newport Beach, California 92660. The Lease has an initial term of 10
years. The current rent for the premises is $1.72 per square foot per month on
the ground floor and $1.70 per square foot per month for the ninth floor.
Pursuant to the Lease, the Bank has an option to lease additional space on the
ninth floor. The Bank is using the ground floor for banking operations and is
using the ninth floor for administrative offices.
On November 1, 1995 the Bank entered into a lease expiring October 31, 2005
for the Beach Cities Regional Office located at 17330 Brookhurst, Fountain
Valley, CA. These premises consist of approximately 5534 square feet and the
current monthly rent is $1.30 per square foot.
All of the premises leased by the Company are used by the Bank and there are
no immediate plans to utilize any of the leased premises for any other purpose.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company or the Bank is a party to claims and legal
proceedings arising in the ordinary course of business. Management of the
Company evaluates the Company's or Bank's exposure to the cases individually and
in the aggregate and provides for potential losses on such litigation if the
amount of the loss is determinable and if the incurrence of the loss is
probable. After taking into consideration information furnished by counsel to
the Company or the Bank as to the current status of various claims
A-31
<PAGE>
and legal proceedings to which the Company or the Bank is a party, management
has accrued $950,000 as a reserve for various litigation pending as of December
31, 1996.
Set forth below is a brief summary of the status of litigation against the
Company or the Bank involving claims in excess of $750,000. Management believes
that the reserves which it has established for these matters is adequate at this
time. However, litigation is inherently uncertain and no assurance can be given
that this or any other litigation will not result in any loss which might be
material to the Company.
PDI LITIGATION. NATIONAL BANK OF SOUTHERN CALIFORNIA V. VINCENT E. GALEWICK,
PERFORMANCE DEVELOPMENT, INC. ET. AL (the "PDI Litigation") is an interpleader
action filed by the Bank on August 22, 1995 in the Orange County Superior Court.
The dispute arose from a demand by the California Department of Corporations
under California Government Code Section 7480 on August 17, 1995 for the
identification of account names and account numbers associated with Vincent
Galewick and Performance Development, Inc. As result of receipt of a declaration
by the California Department of Corporations under California Financial Code
Section 952, the Bank froze $12,301,113.01 in their accounts. On August 21,
1995, a temporary restraining order was issued restraining Performance
Development, Inc., Vincent Galewick and others from transferring funds. The Bank
was thereafter threatened by various parties with lawsuits for refusal to
release the funds, and an attack was made on the applicability of the temporary
restraining order to the funds. The Bank deposited the funds with the Orange
County Superior Court and filed the interpleader action to allow the court to
determine the disposition of the funds. In response, the defendants filed a
cross complaint against the Bank alleging $25 million (the original claim
alleged $45 million and was reduced during discovery) in damages due to lost
opportunities, breach of contract, loss of goodwill and damage to their
reputation due to the inability to use the $12,301,113.01. Additional claims for
an unspecified amount of punitive damages, consequential damages and incidental
damages have been alleged. Discovery has not yet been completed.
A related action was filed by Larry Curran in the Orange County Superior
Court arising out of the same transaction. A request for dismissal, without
prejudice, was filed on behalf of the plaintiff in this action on January 31,
1997.
FIP LITIGATION. In December 1995, Financial Institutions Partners, L.P.
("FIP") purchased 288,888 shares of the Company's Common Stock (the "Initial
Shares") in a private placement at $6.75 per share ($1,949,994 in the
aggregate). Under the terms of the Company's agreements with FIP, FIP agreed to
purchase an additional 266,659 shares of the Company's Common Stock (the
"Additional Shares") on or prior to May 5, 1996, subject to satisfaction of
certain closing conditions.
On April 11, 1996, FIP received confirmation from the Federal Reserve Bank
of San Francisco that no regulatory approval was required for the purchase of
the Additional Shares. On April 24, 1996, Hovde Financial, Inc., the corporate
general partner of FIP, purchased 53,909 shares of the Company's Common Stock in
the open market. FIP thereafter refused to purchase the Additional Shares on the
grounds that the PDI Litigation constituted a material adverse change in the
Company's financial condition and, therefore, the closing conditions were not,
and could not, be satisfied by the Company.
On June 11, 1996, FIP demanded that the Company either (a) extend the
agreement until December 31, 1996 at an increased purchase price based upon the
earnings of the Company from June 1, 1996 through November 30, 1996, or (b)
repurchase the Initial Shares for an amount equal to the purchase price, plus
$6.00 per share, plus nine percent interest, plus FIP's legal, accounting and
due diligence expenses. The Company had periodic discussions with FIP thereafter
regarding the purchase of the Additional Shares, but was unable to reach
agreement with FIP.
FIP filed a complaint dated December 19, 1996 in the United States District
Court for the Central District of California against the Company, the Bank and
certain of their respective officers and directors alleging violation of Section
10(b)(5) promulgated under the Securities Exchange Act of 1934, intentional
misrepresentation, negligent misrepresentation and suppression of fact and
rescission of FIP's purchase of
A-32
<PAGE>
the Initial Shares, consequential damages in excess of $1,650,000 and punitive
damages due to the alleged failure by the Company to disclose all material facts
regarding the PDI Litigation. In the alternative, FIP seeks a declaratory
judgement requiring the Company to sell the Additional Shares to FIP at $6.75
per share if FIP determines it wishes to purchase such shares following a review
of all information regarding the PDI Litigation.
FIP has informed the Company that it intends to file an amended complaint
and has agreed to postpone the due date for the Company's response to the
complaint until after the amended complaint is filed. The amended complaint has
not yet been received by the Company.
FIRST PENSION LITIGATION. ROUSSEAU. ET. AL. V. RANCHO VISTA NATIONAL BANK
AND OTHERS is an action brought in the San Diego Superior Court on October 23,
1995 by a class of investors who invested pension funds with First Pension, a
pension plan administrator, alleging claims against various banks who dealt with
First Pension. The plaintiffs have stated claims for fraud and deceit, aiding
and abetting fraud and deceit, breach of fiduciary duty, constructive fraud and
aiding and abetting constructive fraud against a number of financial
institutions, including the Bank. The Bank and certain of its officers were
named as defendants, based on the fact that First Pension deposited investor
pension funds into an account at the Bank of which the Bank agreed to be
custodian. The plaintiffs allege losses of over $130 million due to the combined
alleged wrongdoing of the bank defendants. No specific damage claim was alleged
against the Bank.
In January 1997, the Bank offered to settle the matter or, in the
alternative, to seek an order from the court dismissing the action for failure
to prosecute. A tentative settlement has been reached whereby the Bank would pay
$30,000 to be distributed to the class, less certain fees and expenses. Before
this settlement would be final, a settlement agreement must be executed, the
class certified and the settlement agreement approved by the Court.
EVAN V. HOME BANK AND OTHERS is a suit brought by the receiver for First
Pension and related entities in the Central District of California based on the
same allegations as in the ROUSSEAU matter. The receiver alleges that the Bank
improperly delegated its fiduciary duties as a custodian of pension funds to
First Pension and failed to ensure that all pension assets were transferred to
the successor custodian. Plaintiffs have not alleged a specific damage claim
against the Bank. Discovery on this matter has just commenced.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to security holders during the fourth quarter of the
fiscal year ended December 31, 1996.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
As of December 31, 1996, there were approximately 300 shareholders of record
of the Company's common stock. No shares of the Company's preferred stock have
been issued or are outstanding.
Although there are at least four broker/dealers purporting to make a market
in the Company's common stock, there is limited trading activity in the
Company's common stock. No cash dividends have been paid on shares of the
Company's common stock since the formation of the Company, and the Company
presently has no intention to pay cash dividends in the foreseeable future.
The following table lists high and low bid prices of the Company's Common
Stock in the over-the-counter market. Prices represent quotations by dealers
making a market in the stock and reflect inter-dealer prices without adjustments
for mark-ups, mark-downs or commissions and may not necessarily
A-33
<PAGE>
represent actual transactions. Trading in the Company's common stock is limited
in volume and may not be a reliable indicator of its market value.
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
First Quarter............................................................... $ 7.40 $ 5.25 $ 6.38 $ 5.00
Second Quarter.............................................................. $ 7.25 $ 5.25 $ 6.63 $ 6.00
Third Quarter............................................................... $ 8.19 $ 7.38 $ 7.50 $ 6.57
Fourth Quarter.............................................................. $ 15.38 $ 8.75 $ 7.97 $ 7.40
</TABLE>
In November, 1995, the Company sold 474,000 shares of its common stock
through a private placement at $6.75 per share.
ITEM 6. SELECTED FINANCIAL DATA.
The following table should be read in conjunction with, and is qualified in
its entirety by, the Company's Consolidated Financial Statements and the notes
thereto contained in Item 8 of this Form 10-K.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
$ IN 000'S 1996 1995(1) 1994 1993 1992
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Results of Operations:
Operating Revenue........................................ $ 30,531 $ 27,097 $ 24,849 $ 25,800 $ 30,912
Interest & Fee Income.................................... 26,773 24,742 22,721 23,642 28,861
Interest Expense......................................... 6,809 7,289 6,336 8,086 11,231
Net Interest and Fee Income.............................. 19,964 17,453 16,385 15,556 17,630
Provision for Loan Loss.................................. 1,260 6,600 3,365 4,789 4,775
Net Income (Loss)........................................ 3,796 (3,341) 859 (2,815) 507
Net Income (Loss) Per Share.............................. 1.26 (1.30) 0.35 (1.14) 0.20
</TABLE>
A-34
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------
$ IN 000'S 1996 1995 1994 1993 1992
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ENDING BALANCE SHEET DATA:
Investment Securities.............................. $ 91,504 $ 62,283 $ 72,075 $ 81,137 $ 60,609
Net Loans & Leases................................. 204,650 187,670 195,203 206,370 237,884
Total Assets....................................... 351,464 334,043 300,665 324,550 372,762
Total Deposits..................................... 318,704 308,504 277,389 299,726 343,137
Total Liabilities.................................. 326,464 312,924 280,937 304,363 350,067
Long-Term Debt..................................... 2,350 2,351 2,351 2,351 3,000
Total Shareholders' Equity......................... 25,000 21,119 19,728 20,187 22,695
PER SHARE DATA AND OTHER SELECTED RATIOS:
Earnings (loss) per common and common equivalent
share............................................ $ 1.26 $ (1.30) $ 0.35 $ (1.14) $ 0.20
Dividends declared per share....................... 0.00 0.00 0.00 0.00 0.00
Book value per share............................... $ 8.38 $ 7.23 $ 8.14 $ 8.33 $ 9.68
Shareholders' equity to assets at period end....... 7.11% 6.32% 6.56% 6.22% 6.09%
Return on average assets........................... 1.10 (1.07) 0.27 (0.82) 0.14
Return on average equity........................... 16.76 (15.56) 4.19 (12.95) 2.24
Average equity/average assets...................... 6.54 6.88 6.45 6.31 6.33
Net interest margin................................ 6.35 6.12 5.61 4.97 5.35
</TABLE>
- ------------------------
(1) In 1995 CCB through a private placement raised approximately $3,200,000 in
additional equity in connection with the issuance of shares of CCB common
stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The purpose of this discussion is to provide additional information about
the Company's financial condition and results of operations which is not
otherwise apparent from the consolidated financial statements included in this
annual report. Since the banking subsidiary represents most of the Company's
activity and investment, the following discussion relates primarily to the
financial condition and operations of the Bank. It should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto
contained in Item 8 of this Form 10-K.
A-35
<PAGE>
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The following chart shows comparative data for selected items of the
financial statements:
SUMMARY
<TABLE>
<CAPTION>
$ IN 000'S EXCEPT INCREASE INCREASE
EARNINGS PER SHARE DATA 1996 (DECREASE) 1995 (DECREASE) 1994
- ----------------------------------------------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Average Total Assets........................... $ 346,300 $ 34,423 $ 311,877 $ (7,252) $ 319,129
11.0% (2.3)%
Average Loans and Leases....................... $ 198,615 $ (2,143 ) $ 200,758 $ (1,251 ) $ 202,009
(1.1 )% (0.6 )%
Average Deposits............................... $ 318,350 $ 32,462 $ 285,888 $ (6,549 ) $ 292,437
11.4% (2.2 )%
Net Interest Income............................ $ 19,964 $ 2,511 $ 17,453 $ 1,068 $ 16,385
14.4% 6.5%
Provision for Loan and Lease Losses............ $ 1,260 $ (5,340 ) $ 6,600 $ 3,235 $ 3,365
(80.9 )% 96.1%
Net Income (Loss).............................. $ 3,796 $ 7,137 $ (3,341) $ (4,200 ) $ 859
N/A N/A
Income (Loss) Per Share........................ $ 1.26 $ 2.56 $ (1.30) $ (1.65 ) $ 0.35
N/A N/A
Return on Average Assets....................... 1.10% 2.17% (1.07)% (1.34 )% .27%
N/A N/A
Return on Average Equity (1)................... 16.76% 32.32% (15.56)% (19.75 )% $ 4.19%
N/A N/A
Ratio of Average Equity to Average Assets...... 6.54% $ (0.34 ) 6.88% $ 0.42 6.45%
(4.9 )% 6.7%
Cash Dividends declared........................ 0 N/A 0 N/A 0
</TABLE>
- ------------------------
(1) Average equity computed based on month end balances
During 1996 the Company's non-performing assets declined from $17,738,000 on
December 31, 1995 to $6,652,000 on December 31, 1996. As a result of significant
reduction in non-performing assets and overall improvement in asset quality
requiring less resources on collection of problem loans, the Company applied
additional resources to generating new business. Gross loans and leases
increased from $194,914,000 to $210,509,000 and deposits increased from
$308,504,000 to $318,704,000 from December 31, 1995 to December 31, 1996.
The average assets, average loans and leases and average deposits decreased
from 1994 through 1995 as the Company concentrated on improving asset quality
and collecting loans rather than on generating new business. Net interest income
increased in 1995 due to improved spreads in interest-earning assets. During
1995, the Company made a provision for loan and lease losses in the amount of
$6,600,000 and charged off loans which amounted to $5,718,000 net of recoveries.
Increased legal expenses and losses on foreclosed properties contributed to a
net loss of $3,341,000 in 1995.
A-36
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- ------------------------------------------------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Total Interest and Fee Income.................... $ 26,773 $ 2,031 $ 24,742 $ 2,021 $ 22,721
8.2% 8.9%
Total Interest Expense........................... 6,809 $ (480) 7,289 $ 953 6,336
(6.6)% 15.0%
Net Interest Income Before Provision for Loan and
Lease Losses................................... $ 19,964 $ 2,511 $ 17,453 $ 1,068 $ 16,385
14.4% 6.5%
Net Interest and Fee Income Earned as a
Percentage of Average Interest-Earning
Assets......................................... 6.35% .23% 6.12% .51% 5.61%
</TABLE>
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES. Net
interest income continued to increase in 1996 from 1995 and 1994 as the interest
spread continued to improve on interest earning assets due to rising interest
rates, increased average noninterest-bearing deposits and decreasing
nonperforming loans. The average noninterest-bearing deposits increased from
$101,022,000 in 1994 to $100,526,000 in 1995 and $133,371,000 in 1996.
The net yield on interest-earning assets including loan fees increased to
6.35% in 1996 from 6.12% in 1995. The net yield on interest-earning assets
excluding loan fees increased to 6.13% in 1996 from 5.80% in 1995. As of
December 31, 1996, the Company had a total of $222,783,000 in interest-earning
assets that would reprice within one year as compared to $170,277,000
interest-bearing liabilities that would reprice within the same period of time.
The short-term impact of any rise or decline in interest rates would therefore
be insignificant.
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- --------------------------------------------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Average Nonaccrual Loans..................... $ 9,526 $ (3,234) 12,760 $ (4,127) $ 16,887
(25.3)% (24.4 )%
Interest Income Not Recognized During the
Period on Nonaccrual Loans................. $ 327 $ (298 ) $ 625 $ (343 ) $ 968
(47.7 )% (35.4 )%
Interest Income Recognized During the Period
on Nonaccrual Loans........................ (20 ) $ 20
(100.00 )%
Average Loans and Leases to Average
Deposits................................... 62.4% (7.8 )% 70.2% 1.1% 69.1%
(11.1 )% 1.6%
Average Interest-Earning Assets.............. $ 314,446 29,107 285,339 $ (6,721 ) $ 292,060
10.2% (2.3 )%
</TABLE>
Loan production and average outstanding loans declined from 1994 to 1995 as
the Company focused on monitoring the performance of the outstanding loans,
identifying potential problems and collecting identified problem loans and real
estate owned. At the same time, the Company refined its loan underwriting and
approval process, seeking higher-quality credits which reduced the volume of
loans meeting the tightened criteria. During 1996, with a significant decline in
nonperforming assets, the
A-37
<PAGE>
Company applied its resources to business development, resulting in an
approximately 10% increase in total average assets and average earning assets.
<TABLE>
<CAPTION>
AVERAGE BALANCES, PERCENT INTEREST PERCENT INTEREST PERCENT
$ IN 000'S 1996 OF TOTAL RATE 1995 OF TOTAL RATE 1994 OF TOTAL
- ------------------------------ --------- --------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings Deposits.............. $ 127,063 39.91% 2.86% $ 121,110 42.36% 2.82% $ 120,120 41.08%
Time Deposits................. 57,916 18.19% 4.97% 64,252 22.48% 5.62% 71,295 24.38%
--------- --------- ----- --------- --------- ----- --------- ---------
Total Interest-Bearing
Deposits.................... 184,979 58.11% 3.52% 185,362 64.84% 3.79% 191,415 65.46%
Demand Deposits............... 133,371 41.90% N/A 100,526 35.16% N/A 101,022 34.54%
--------- --------- ----- --------- --------- ----- --------- ---------
Total Deposits................ $ 318,350 100.00% $ 285,888 100.00% $ 292,437 100.00%
--------- --------- ----- --------- --------- ----- --------- ---------
<CAPTION>
AVERAGE BALANCES, INTEREST
$ IN 000'S RATE
- ------------------------------ -----------
<S> <C>
Savings Deposits.............. 2.58%
Time Deposits................. 4.11%
-----
Total Interest-Bearing
Deposits.................... 3.15%
Demand Deposits............... N/A
-----
Total Deposits................
-----
</TABLE>
Interest expense increased as the interest rates increased in 1995 and
interest expense declined as interest rates fell in 1996. In addition, in 1994,
the Company established a policy not to renew brokered certificates of deposit
and deposits gathered through listings in national publications listing the
rates offered on time deposits by a large number of banks around the country.
Although the rates paid on the certificates of deposit approximate the rates
paid by the Bank on its other certificates of deposit, the decline in balances
of these deposits and replacement with noninterest-bearing deposits caused a
concurrent decline in interest expense.
PROVISION FOR LOAN AND LEASE LOSSES The provision for loan and lease losses
creates an allowance for estimated future loan and lease losses. When losses or
recoveries occur, they are charged against or credited to the allowance.
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- ------------------------------------------------------ --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Loan and Lease Charge-offs (Net of Recoveries)........ $ 2,385 (3,333) $ 5,718 $ 792 $ 4,926
(58.3)% 16.1%
--------- ----------- --------- ----------- ---------
Provision for Loan and Lease Losses................... $ 1,260 $ (5,340 ) $ 6,600 $ 3,235 $ 3,365
(80.9 )% 96.14%
--------- ----------- --------- ----------- ---------
</TABLE>
Due to continued high levels of nonperforming and classified loans and lease
charge-offs, substantial provisions for loan and lease losses have been
necessitated. During 1994 and 1995, the Company charged off $4,926,000 and
$5,718,000 and made a provision for allowance for loan and lease losses in the
amount of $3,365,000 and $6,600,000, respectively. During 1996, as the
nonperforming assets declined, the Company charged off $2,385,000 in loans and
made a provision for loan and lease losses in the amount of $1,260,000. In
addition to provision for loan and lease losses, the Company incurred $1,070,000
in 1994 and $2,799,000 in 1995 in real estate owned expenses. In 1996, the gain
on sale of real estate-owned exceeded the expenses incurred, resulting in a net
gain of $422,000. The expenses on real estate-owned include property taxes,
selling costs, write-downs and losses on sale. These properties have already
been written down to their fair market values less estimated selling costs and
therefore the Company does not expect any significant losses during 1997 related
to these properties.
A-38
<PAGE>
OTHER INCOME The following table sets forth information by category of
other income and the changes in categories of other income between periods for
the periods indicated:
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- ---------------------------------------- --------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Escrow Fees............................. $ 781 $ 473 $ 308 $ 4 $ 304
153.6% 1.30%
Service Charges......................... 1,157 $ 174 983 $ 14 969
17.7% 1.4%
Securities (Losses) Gains............... 0 $ 72 (72) $ (78) 6
N/A N/A
Gain on Sale of Loans................... 665 665 0 N/A 0
Other Income............................ 1,155 $ 19 1,136 $ 287 849
1.7% 33.8%
--------- ------ --------- ----- ---------
Total Other Income (Loss)........... $ 3,758 $ 1,403 $ 2,355 $ 227 $ 2,128
59.6% 10.7%
</TABLE>
OTHER INCOME AND OTHER EXPENSES--Non-interest income increased by $1,403,000
to $3,758,000 in 1996 compared to $2,355,000 in 1995. The changes were due to
the following:
1. Escrow fees increased by $473,000 for the year ended December 31,
1996 compared to 1995. The increase was due to increased marketing efforts
and an increase in staff in the escrow division, along with greater activity
in the local real estate market.
2. Service charges increased by $174,000 for the year ended December
31, 1996 compared to 1995. The increase was due to the increase in deposits.
3. During 1995 the Company sold some securities in the amount of
$21,016,000 at a loss of $72,000. These securities were originally purchased
with very short maturities to meet a projected cash outflow.
4. Gain on sale of loans- During 1996 the Company sold three loans
which were designated as "Available for Sale," at gain of $1,074,000 and
wrote down a loan by $409,000 resulting in net gain of $665,000.
A-39
<PAGE>
OTHER EXPENSE The following table sets forth information by category of
other expense and the changes in categories of other expense between periods for
the periods indicated:
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- ------------------------------------ --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits...... $ 8,546 $ 1,033 $ 7,513 $ 1,059 $ 6,454
13.7% 16.4%
Occupancy, Furniture and
Equipment......................... 2,562 $ 433 2,129 $ 121 2,008
20.3% 6.0%
Data Processing For Customers....... 510 $ 326 184 $ 11 173
177.2% 6.4%
Data Processing For Company......... 587 $ 413 174 $ 44 130
237.4% 33.8%
Legal Fees and Related Costs........ 2,386 $ 947 1,439 $ 779 660
65.8% 118.0%
Regulatory Assessments.............. 576 $ (141) 717 $ (211) 928
(19.7)% (22.7)%
Supplies............................ 420 $ 99 321 $ 54 267
30.8% 20.2%
Other Real Estate Owned............. (422) $ (3,221) 2,799 $ 1,729 1,070
(115.1)% 161.6%
Other............................... 3,390 $ 187 3,203 $ 1,148 2,055
5.8% 55.9%
--------- ----------- --------- ----------- ---------
Total Other Expenses............ $ 18,555 $ 76 $ 18,479 $ 4,734 $ 13,745
0.4% 34.4%
</TABLE>
The total noninterest expense for the year 1996 remained approximately the
same as 1995. However, there were significant variations in individual
categories of noninterest expense between the years 1996 and 1995 as discussed
below:
1. Salaries and benefits increased due to additions to the staff in the
escrow division due to increasing business activity (see Results of
Operation-Other Income), in business development to generate future loan and
deposit growth and opening of a new branch in Fountain Valley.
2. Occupancy expense increased due to an assessment of common area
maintenance charges by the management company for the years 1993 through
1996, which had not been billed for the Newport Beach location. Also,
opening the new branch in Fountain Valley added to the occupancy expense.
3. Data Processing expense for customers increased due to significant
increase in deposits of customers who maintain large profitable accounts.
4. Legal fees remained high as the bank continues to resolve problem
loans and other litigation matters and for that purpose the Company reserved
an additional $950,000 during 1996. Management of the Company evaluates the
Company's or the Bank's exposure to litigation matters individually and in
the aggregate and provides for potential losses on such litigation if, in
management's judgement, the amount of the loss is determinable and the
incurrence of the loss is probable.
5. Regulatory Assessments decreased as FDIC reduced the assessment rate
from .29% per $100 in annualized deposits in 1995 to .17% in 1996.
6. Gain or loss on REO: In 1995, the total losses and expenses on other
real estate owned were $2,799,000. With the reduced amount of other real
estate owned in 1996 the expense declined
A-40
<PAGE>
significantly. Additionally, in 1996 the Company sold several foreclosed
properties at a gain resulting in a net gain of $422,000 for the year 1996.
INCOME TAX EXPENSE
The following table shows the Company's income tax expense or benefit,
related effective tax expense or benefit rate for the periods indicated and the
changes between periods.
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- ---------------------------------------- --------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income Tax Expense (Benefit)............ $ 111 $ 2,041 $ (1,930) $ (2,474) $ 544
N/A N/A
Effective Income Tax....................
Expense (Benefit) Rate................ 2.8% (36.6)% 38.77%
</TABLE>
The effective tax benefit rates are in accordance with the requirements of
SFAS 109, adopted by the Company effective January 1, 1993, that limits the
amount of tax benefit a company can recognize.
During 1996, the Company recognized a tax benefit in the amount of
$1,714,000. The tax benefit could not be recognized in prior years due to
regulatory and accounting limitations.
The major factor affecting the effective tax rate is the Company's valuation
allowance. Each year the valuation allowance is based on analysis of the
Company's probability of realizing the future benefits of its net deferred tax
asset in accordance with SFAS No. 109. To the extent it is not more likely than
not that the Company can recognize its deferred tax asset through a carryback
claim for federal purposes or assumption of future projected income, a valuation
allowance is recorded.
A-41
<PAGE>
FINANCIAL CONDITION
OVERVIEW
The following table sets forth the book values and changes in book values of
selected assets and liabilities of the Company as of December 31, 1996, 1995 and
1994:
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- -------------------------------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Investment Securities........... $ 91,504 $ 29,221 $ 62,283 $ (9,792) $ 72,075
46.9% (13.6)%
Net Loans and Leases............ $ 204,650 $ 16,980 $ 187,670 $ (7,533) $ 195,203
9.0% (3.9)%
Other Real Estate Owned......... $ 2,657 $ 492 $ 2,165 $ (511) $ 2,676
22.7% (19.1)%
Total Assets.................... $ 351,464 $ 17,421 $ 334,043 $ 33,378 $ 300,665
5.2% 11.1%
Total Deposits.................. $ 318,704 $ 10,200 $ 308,504 $ 31,115 $ 277,389
3.3% 11.2%
Total Equity.................... $ 25,000 $ 3,881 $ 21,119 $ 1,391 $ 19,728
18.4% 7.1%
</TABLE>
During the years from 1994 and 1995 the Bank focused its human and financial
resources on identifying and working on problem loans and other real estate
owned. Other real estate owned remained low as the Bank applied significant
resources to disposing of properties.
As the nonperforming assets declined and overall asset quality improved, the
Company applied additional resources in 1996 to business development resulting
in increases in all the categories of assets, deposits and equity.
The primary sources of funds for the Bank's lending programs are local
deposits, loan payments and proceeds from the sale or maturity of investment
securities.
INFLATION
The impact of inflation on a financial institution is significantly
different from that exerted on an industrial concern, mainly because a financial
institution's assets and liabilities consist almost entirely of monetary items.
The relatively low portion of the Company's fixed assets to total assets reduces
both the potential of inflated earnings resulting from understated depreciation,
and the potential understatement of absolute asset values.
A-42
<PAGE>
CAPITAL RESOURCES
On December 31, 1990, new risk-based capital requirements became effective.
Under the requirements, holding companies and banks are required currently to
maintain minimum ratios of total capital and "core" (Tier 1) capital to
risk-weighted assets (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, Capital
Adequacy Guidelines). The regulatory capital requirements, and the Bank and
Company's actual capital ratios are shown in the following table as of the dates
indicated:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------- --------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets)
Consolidated.............................. $28,185,000 11.62%a $19,404,000a 8.0% N/A
Subsidiary Bank......................... $29,357,000 12.14%a $19,347,000a 8.0%a $24,184,000 10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated............................ $25,124,000 10.36%a $9,702,000a 4.0% N/A
Subsidiary Bank......................... $26,304,000 10.88%a $9,674,000a 4.0%a $14,510,000 6.0%
Tier I Capital (to Average Assets) (1)
Consolidated............................ $25,124,000 7.25%a $13,852,000a 4.0% N/A
Subsidiary Bank $26,304,000 7.59%a $13,845,000a 4.0%a $17,306,000 5.0%
As of December 31, 1995:
Total Capital (to Risk-Weighted Assets)
Consolidated............................ $23,817,000 10.70%a $17,766,000a 8.0% N/A
Subsidiary Bank......................... $25,252,000 11.36%a $17,756,000a 8.0%a $22,194,000 10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated............................ $20,995,000 9.45%a $8,883,000a 4.0% N/A
Subsidiary Bank......................... $22,431,000 10.11%a $8,878,000a 4.0%a $13,317,000 6.0%
Tier I Capital (to Average Assets) (1)
Consolidated............................ $20,995,000 6.32%a $8,883,000a 4.0% N/A
Subsidiary Bank......................... $22,431,000 6.76%a $8,878,000a 4.0%a $15,583,000 5.0%
</TABLE>
As of December 31, 1996 and 1995, the Bank and the Company were in
compliance with statutory risk-based capital requirements.
(1) In some circumstances this minimum ratio may be 3%.
During 1995, the Company obtained $3,200,000 in proceeds from a private
placement of its common stock at $6.75 per share.
A-43
<PAGE>
8. FINANCIAL STATEMENTS.
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
-----------
<S> <C>
Independent Auditors' Report............................................................................ 46
Consolidated Balance Sheets, December 31, 1996 and 1995................................................. 47
Consolidated Statements of Operations For The Years Ended December 31, 1996, 1995 and 1994.............. 48
Consolidated Statements of Shareholders' Equity For The Years Ended December 31, 1996, 1995 and 1994.... 49
Consolidated Statements of Cash Flows For The Years Ended December 31, 1996, 1995 and 1994.............. 50, 51
Notes to Consolidated Financial Statements For The Years Ended December 31, 1996, 1995 and 1994......... 52
</TABLE>
A-44
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1996, 1995 AND
1994 AND INDEPENDENT AUDITORS' REPORT
A-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of California Commercial Bankshares:
We have audited the accompanying consolidated balance sheets of California
Commercial Bankshares and subsidiaries (the "Company") as of December 31, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
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 statements. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of California Commercial
Bankshares and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
January 24, 1997
March 17, 1997 as to Notes 7 and 13
Los Angeles, California
A-46
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS (Note 3)................................................. $ 28,849,000 $ 28,549,000
FEDERAL FUNDS SOLD............................................................... 14,500,000 45,000,000
-------------- --------------
TOTAL CASH AND CASH EQUIVALENTS.................................................. 43,349,000 73,549,000
INVESTMENT SECURITIES available for sale at estimated fair value (Note 4)........ 91,504,000 62,283,000
LOANS AND INVESTMENT IN LEASES, net (Notes 5 and 9).............................. 203,416,000 178,050,000
LOANS AVAILABLE FOR SALE, net.................................................... 1,234,000 9,620,000
ACCRUED INTEREST RECEIVABLE...................................................... 2,668,000 2,649,000
PROPERTY, net (Note 6)........................................................... 1,435,000 1,084,000
OTHER REAL ESTATE OWNED, net..................................................... 2,657,000 2,165,000
OTHER ASSETS (Notes 8 and 10).................................................... 5,201,000 4,643,000
-------------- --------------
TOTAL........................................................................ $ 351,464,000 $ 334,043,000
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Demand:
Noninterest-bearing............................................................ $ 146,257,000 $ 130,660,000
Interest-bearing............................................................... 72,845,000 65,301,000
Savings.......................................................................... 46,179,000 45,312,000
Time certificates, $100,000 and over............................................. 32,324,000 34,718,000
Other time deposits.............................................................. 21,099,000 32,513,000
-------------- --------------
Total Deposits............................................................... 318,704,000 308,504,000
NOTE PAYABLE (Note 7)............................................................ 2,350,000 2,351,000
OTHER LIABILITIES (Notes 8 and 12)............................................... 5,410,000 2,069,000
-------------- --------------
Total Liabilities............................................................ 326,464,000 312,924,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY (Notes 7, 8 and 13):
Preferred stock--no par value; authorized, 1,000,000 shares; outstanding, none
Common stock--no par value; authorized, 10,000,000 shares; issued and
outstanding, 2,984,000 in 1996 and 2,922,000 in 1995........................... 14,382,000 14,077,000
Paid-in capital.................................................................. 497,000 470,000
Retained earnings................................................................ 10,244,000 6,448,000
Net unrealized (loss) gain on investment securities available for sale, net of
tax of $82,000 in 1996 and $67,000 in 1995..................................... (123,000) 124,000
-------------- --------------
Total Shareholders' Equity................................................... 25,000,000 21,119,000
-------------- --------------
TOTAL........................................................................ $ 351,464,000 $ 334,043,000
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
A-47
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INTEREST AND FEE INCOME:
Loans and leases, including fees.................................... $ 20,022,000 $ 20,000,000 $ 18,347,000
Investment securities............................................... 4,923,000 3,409,000 3,873,000
Federal funds sold.................................................. 1,828,000 1,333,000 501,000
------------- ------------- -------------
Total Interest and Fee Income................................... 26,773,000 24,742,000 22,721,000
INTEREST EXPENSE:
Deposits............................................................ 6,531,000 7,022,000 6,036,000
Note payable and other (Note 7)..................................... 278,000 267,000 300,000
------------- ------------- -------------
Total Interest Expense.......................................... 6,809,000 7,289,000 6,336,000
------------- ------------- -------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES...... 19,964,000 17,453,000 16,385,000
PROVISION FOR LOAN AND LEASE LOSSES (Note 5)........................ 1,260,000 6,600,000 3,365,000
------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES....... 18,704,000 10,853,000 13,020,000
------------- ------------- -------------
OTHER INCOME:
Escrow fees......................................................... 781,000 308,000 304,000
Service charges..................................................... 1,157,000 983,000 969,000
Securities (loss) gain, net......................................... (72,000) 6,000
Gain on sale of loans, net.......................................... 665,000
Other income........................................................ 1,155,000 1,136,000 849,000
------------- ------------- -------------
Total Other Income.............................................. 3,758,000 2,355,000 2,128,000
------------- ------------- -------------
OTHER EXPENSES:
Salaries and employee benefits (Note 8)............................. 8,546,000 7,513,000 6,454,000
Occupancy, furniture and equipment (Note 11)........................ 2,562,000 2,129,000 2,008,000
Advertising......................................................... 347,000 243,000 88,000
Credit card and other losses (recoveries)........................... 329,000 94,000 (39,000)
Data processing for company......................................... 587,000 174,000 130,000
Data processing for customers....................................... 510,000 184,000 173,000
Legal fees and related costs (Note 12).............................. 2,386,000 1,439,000 660,000
Loan collection and related costs................................... 446,000 414,000 331,000
Lower of cost or market adjustment on loans available for sale...... 756,000
Regulatory assessments.............................................. 576,000 717,000 928,000
Supplies............................................................ 420,000 321,000 267,000
Other real estate owned, net........................................ (422,000) 2,799,000 1,070,000
Other............................................................... 2,268,000 1,696,000 1,675,000
------------- ------------- -------------
Total Other Expenses............................................ 18,555,000 18,479,000 13,745,000
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAX............. 3,907,000 (5,271,000) 1,403,000
PROVISION (BENEFIT) FOR INCOME TAX (Note 10)........................ 111,000 (1,930,000) 544,000
------------- ------------- -------------
NET INCOME (LOSS)................................................... $ 3,796,000 $ (3,341,000) $ 859,000
------------- ------------- -------------
------------- ------------- -------------
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE............ $ 1.26 $ (1.30) $ 0.35
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING....................................................... 3,009,000 2,564,000 2,427,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
A-48
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NET UNREALIZED
(LOSS) GAIN ON
INVESTMENT
COMMON STOCK SECURITIES TOTAL
------------------------- PAID-IN RETAINED AVAILABLE FOR SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SALE EQUITY
---------- ------------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994... 2,423,000 $ 10,782,000 $ 475,000 $ 8,930,000 $ 20,187,000
Net Income................... 859,000 859,000
Net Unrealized Loss On
Investment Securities
Available for Sale......... $ (1,318,000) (1,318,000)
---------- ------------- ---------- ------------- -------------- -------------
Balance at December 31,
1994....................... 2,423,000 10,782,000 475,000 9,789,000 (1,318,000) 19,728,000
Net Loss..................... (3,341,000) (3,341,000)
Stock Options Exercised (Note
8)......................... 25,000 95,000 (83,000) 12,000
Tax Benefit of Stock Options
Exercised.................. 78,000 78,000
Common Shares Sold Under
Private Placement (Note
7)......................... 474,000 3,200,000 3,200,000
Net change in Unrealized Gain
on Investment Securities
Available For Sale......... 1,442,000 1,442,000
---------- ------------- ---------- ------------- -------------- -------------
Balance at December 31,
1995....................... 2,922,000 14,077,000 470,000 6,448,000 124,000 21,119,000
Net Income................... 3,796,000 3,796,000
Stock Options Exercised (Note
8)......................... 62,000 305,000 (24,000) 281,000
Tax Benefit of Stock Options
Exercised.................. 51,000 51,000
Net change in Unrealized Loss
on Investment Securities
Available For Sale......... (247,000) (247,000)
---------- ------------- ---------- ------------- -------------- -------------
Balance at December 31,
1996....................... 2,984,000 $ 14,382,000 $ 497,000 $ 10,244,000 $ (123,000) $ 25,000,000
---------- ------------- ---------- ------------- -------------- -------------
---------- ------------- ---------- ------------- -------------- -------------
</TABLE>
See notes to consolidated financial statements.
A-49
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................. $ 3,796,000 $ (3,341,000) $ 859,000
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization..................................... 419,000 473,000 580,000
Amortization of discounts and premiums on investment securities
available for sale.............................................. 284,000 850,000 795,000
Provision for loan and lease losses............................... 1,260,000 6,600,000 3,365,000
Provision for losses on other real estate owned................... 96,000 177,000 244,000
Deferred income taxes............................................. (143,000) (1,627,000) 621,000
Gain (loss) on sale of investment securities available for sale... 72,000 (6,000)
Loans originated for sale......................................... (9,620,000)
Proceeds from sales of loans originated for sale.................. 3,466,000
(Gain) loss on sale of other real estate owned.................... (1,175,000) 1,675,000 4,000
Gain on sale of loans originated for sale......................... (1,074,000)
Write down of loans available for sale............................ 409,000
(Gain) loss on sale of property................................... (8,000) 2,000 (7,000)
(Increase) decrease in accrued interest receivable................ (19,000) 197,000 (359,000)
(Decrease) increase in deferred loan fees......................... (260,000) (80,000) 27,000
Decrease in unearned lease income................................. (35,000) (145,000) (19,000)
(Increase) decrease in other assets............................... (266,000) (166,000) 686,000
Net increase (decrease) in other liabilities...................... 2,487,000 872,000 (1,156,000)
-------------- ------------- --------------
Net cash provided by (used in) operating activities............... 9,237,000 (4,061,000) 5,634,000
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment securities available for
sale............................................................ 62,685,000 17,232,000 19,350,000
Proceeds from sale of investment securities available for sale.... 21,016,000 49,229,000
Purchases of investment securities available for sale............. (92,586,000) (27,158,000) (62,335,000)
Net (increase) decrease in loans and investment in leases......... (24,533,000) 3,260,000 (505,000)
Recoveries of loans and investment in leases...................... 553,000 494,000 1,156,000
Payments received on in-substance foreclosures.................... 93,000
Purchase of property.............................................. (771,000) (661,000) (251,000)
Proceeds from sale of property.................................... 9,000 24,000 18,000
Proceeds from sale of other real estate owned..................... 4,675,000 5,683,000 6,872,000
Additions to other real estate owned.............................. (390,000)
-------------- ------------- --------------
Net cash (used in) provided by investing activities............... (49,968,000) 19,890,000 13,237,000
-------------- ------------- --------------
</TABLE>
A-50
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994 (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Net increase (decrease) in deposits............................... $ 10,200,000 $ 31,115,000 $ (22,337,000)
Net proceeds from sale of common stock and exercise of common
stock options................................................... 332,000 3,290,000
Payments on note payable.......................................... (1,000)
-------------- ------------- --------------
Net cash provided by (used in) financing activities............... $ 10,531,000 34,405,000 (22,337,000)
-------------- ------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............. (30,200,000) 50,234,000 (3,466,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... 73,549,000 23,315,000 26,781,000
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......................... $ 43,349,000 $ 73,549,000 $ 23,315,000
-------------- ------------- --------------
-------------- ------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest........................................................ $ 6,870,000 $ 7,217,000 $ 6,327,000
-------------- ------------- --------------
-------------- ------------- --------------
Income taxes.................................................... $ 1,107,000 $ 627,000 $ 602,000
-------------- ------------- --------------
-------------- ------------- --------------
SUPPLEMENTAL INFORMATION ON NONCASH INVESTING ACTIVITIES:
Property acquired through foreclosure............................. $ 3,234,000 $ 7,024,000 $ 7,143,000
-------------- ------------- --------------
-------------- ------------- --------------
Assumption of debt through foreclosure............................ $ 854,000 $ $ 67,000
-------------- ------------- --------------
-------------- ------------- --------------
Loan made to facilitate sale of loans available for sale.......... $ 2,593,000 $ $
-------------- ------------- --------------
-------------- ------------- --------------
Tax benefit for exercise of non-qualified stock options........... $ 51,000 $ 78,000 $
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
See notes to consolidated financial statements.
A-51
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. GENERAL
California Commercial Bankshares (the "Company") was incorporated on June
16, 1982 for the purpose of becoming a bank holding company. National Bank of
Southern California (the "Bank") commenced operations as a wholly-owned
subsidiary of the Company on January 10, 1983. The Bank operates five branches
in Orange County, California. The Bank's primary source of revenue is providing
loans to customers who are predominantly middle market businesses and middle
income individuals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION--The consolidated financial statements include the accounts of
the Company, the Bank and Venture Partners, Inc. Venture Partners Inc., a
California corporation, acts primarily as an intermediary for tax deferred
exchanges, a service function of the escrow department of the Bank. All
significant intercompany balances and transactions have been eliminated.
CONSOLIDATED STATEMENTS OF CASH FLOWS--Cash and cash equivalents for the
purpose of the consolidated statements of cash flows are defined as cash and due
from banks and Federal funds sold.
USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS--The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and the reported
amounts of 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.
INVESTMENT SECURITIES--Debt securities that the Bank has the positive intent
and ability to hold to maturity are classified as held to maturity securities
and reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in earnings. The Bank has no held to maturity or trading
securities. Debt and equity securities not classified as either held to maturity
securities or trading securities are classified as available for sale securities
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of equity, net of deferred taxes.
The Bank designates investment securities as held to maturity or available
for sale upon acquisition. Gain or loss on the sales of investment securities is
determined on the specific identification method. Premiums and discounts on
investment securities are amortized or accreted using the interest method over
the expected lives of the related securities.
LOANS AND INVESTMENT IN LEASES--Loans and leases are carried at principal
amounts outstanding, net of deferred net loan origination fees, unearned lease
income and the allowance for loan and lease losses.
Nonaccrual loans are those for which management has discontinued accrual of
interest because (i) there exists reasonable doubt as to the full and timely
collection of either principal or interest or (ii) such loans have become
contractually past due ninety days with respect to principal or interest.
Interest accruals may be continued for loans that have become contractually past
due ninety days when such loans are well secured and in the process of
collection and, accordingly, management has determined such loans to be fully
collectible as to both principal and interest.
A-52
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
For this purpose, loans are considered well secured if they are
collateralized by property having a realizable value in excess of the amount of
principal and accrued interest outstanding or are guaranteed by a financially
capable party. Loans are considered to be in the process of collection if
collection of the loan is proceeding so that management reasonably expects
repayment of the loan or its restoration to a current status in the near future.
When a loan is placed on nonaccrual status, all interest previously accrued
but uncollected is reversed against current period operating results. Income on
such loans is then recognized only to the extent that cash is received and where
the ultimate collection of the carrying amount of the loan is probable, after
giving consideration to borrowers' current financial condition, historical
repayment performance and other factors. Accrual of interest is resumed only
when (i) principal and interest are brought fully current and (ii) such loans
are either considered, in management's judgement, to be fully collectible or
otherwise become well secured and in the process of collection.
Troubled debt restructured loans are those for which the Company has, for
reasons related to borrowers' financial difficulties, granted concessions to
borrowers (including reductions of either interest or principal) that it would
not otherwise consider, whether or not such loans are secured or guaranteed by
others.
The Bank considers a loan to be impaired when it is probable that the Bank
will be unable to collect all contractual principal and interest payments in
accordance with the terms of the original loan agreement. Impaired loans, except
those loans that are accounted for at fair value or at the lower of cost or fair
value, are accounted for at the present value of the 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 Bank applies the measurement provisions to all
loans in its portfolio except for single-family residence and installment loans
which are collectively evaluated for impairment.
LOAN ORIGINATION FEES--Loan origination fees, net of certain related direct
incremental loan origination costs, are deferred and amortized to income over
the term of the loans using the effective interest method.
ALLOWANCE FOR LOAN AND LEASE LOSSES--The allowance for loan and lease losses
is based on an analysis of the loan and lease portfolio and reflects an amount
which, in management's judgment, is adequate to provide for potential loan and
lease losses after giving consideration to the loan and lease portfolio, current
economic conditions, past loan and lease loss experience and other factors that
deserve current recognition in estimating loan and lease losses. While
management uses the best information available to provide for possible losses,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory or other conditions that may be beyond the Company's control.
In each reporting period, the allowance for loan and lease losses is
increased by provisions for losses charged against operations in that period and
recoveries of loans and leases previously charged off, and is reduced by
charge-offs of loans and leases recognized in that period.
LOANS AVAILABLE FOR SALE--Loans available for sale are recorded at the lower
of cost or estimated market value, determined on an aggregate basis, and include
loan origination costs and related fees. Any transfers of loans available for
sale to the investment portfolio are recorded at the lower of cost or estimated
market value on the transfer date. Gains or losses resulting from sales of loans
are recorded at
A-53
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
the time of sale and are determined by the difference between the net sales
proceeds and the carrying value of the loans sold.
OTHER REAL ESTATE OWNED--Other real estate owned, which represents real
estate acquired in settlement of loans, is carried at fair value less estimated
selling costs. Any subsequent operating expenses or income, reduction in
estimated fair values, or gains or losses on disposition of such properties are
charged or credited to current operations.
PROPERTY--Property is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
basis over the estimated useful lives of the related assets (estimated to be one
to five years) or, if shorter, the term of the lease in the case of leasehold
improvements.
INCOME TAXES--The Company accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE--Net income (loss)
per common and common equivalent share is based on the weighted average number
of common and common equivalent shares (stock options) outstanding during the
year.
RECENT ACCOUNTING PRONOUNCEMENTS--On January 1, 1996, the Company adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, or to be disposed of, be reviewed for impairment based on
the fair value of the asset. Furthermore, this Statement requires that certain
long-lived assets and identifiable intangibles to be disposed of, be reported at
the lower of carrying amount or fair value less cost to sell. The Company has
determined that the impact of this Statement on its operations and financial
position is not material for the year ended December 31, 1996.
SFAS No. 123, "Accounting for Stock Based Compensation" encourages, but does
not require companies to record compensation cost for stock based employee
compensation plans at fair value. During 1996, the Company has chosen to
continue to account for stock based compensation using the intrinsic value
method prescribed in Accounting Principal Board No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. The pro forma effects of adoption are
disclosed in Note 8.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," as amended in December 1996 by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125." This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. SFAS No. 125 applies prospectively to
financial statements for fiscal years beginning after December 31, 1996.
However, SFAS No. 127 defers for one year the effective date of certain
provisions within SFAS No. 125. SFAS No. 125 does not permit earlier or
retroactive application. As of December 31, 1996, the Company has not adopted
SFAS No. 125, as amended by SFAS No. 127;
A-54
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
however, the Company does not believe the impact on its operations and financial
position will be material upon adoption.
RECLASSIFICATION--Certain items in the previous years' consolidated
financial statements have been reclassified to conform to the current year
presentation.
3. CASH AND DUE FROM BANKS
The Bank is required to meet statutory reserve requirements. In part, the
Bank meets these requirements by maintaining a balance in a noninterest-bearing
account at a Federal Reserve Bank. During 1996 and 1995, the average balance in
this account was approximately $7,522,000 and $6,669,000, respectively.
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
Book value and estimated fair value of investment securities available for
sale (in thousands of dollars) are summarized as of December 31 as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------
ESTIMATED GROSS UNREALIZED
AMORTIZED FAIR
COST VALUE GAINS LOSSES
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Government securities....................................... $ 31,038 $ 31,080 $ 44 $ (2)
U.S. Government agencies or insured obligations.................. 57,537 57,297 17 (257)
State political subdivisions..................................... 413 411 (2)
Mortgage-backed securities--U.S. agencies........................ 880 884 14 (10)
Other securities................................................. 63 54 (9)
Federal Reserve Bank and Federal Home Loan Bank stocks........... 1,778 1,778
--------- --------- ----- ---------
Total............................................................ $ 91,709 $ 91,504 $ 75 $ (280)
--------- --------- ----- ---------
--------- --------- ----- ---------
<CAPTION>
1995
--------------------------------------------
ESTIMATED GROSS UNREALIZED
AMORTIZED FAIR
COST VALUE GAINS LOSSES
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Government securities....................................... $ 35,314 $ 35,457 $ 168 $ (25)
U.S. Government agencies or insured obligations.................. 23,611 23,657 61 (15)
State political subdivisions..................................... 423 416 (7)
Mortgage-backed securities--U.S. agencies........................ 1,047 1,070 25 (2)
Other securities................................................. 80 66 (14)
Federal Reserve Bank and Federal Home Loan Bank stocks........... 1,617 1,617
--------- --------- ----- ---------
Total............................................................ $ 62,092 $ 62,283 $ 254 $ (63)
--------- --------- ----- ---------
--------- --------- ----- ---------
</TABLE>
A-55
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
The maturity distribution for investment securities available for sale at
December 31, 1996 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
One year or less....................................................... $ 47,392 $ 47,428
Over one through five years............................................ 41,596 41,360
Over five years........................................................ 63 54
----------- -----------
$ 89,051 $ 88,842
Mortgage-backed securities-US Agencies................................. 880 884
Federal Reserve Bank and Federal Home Loan Bank stocks................. 1,778 1,778
----------- -----------
$ 91,709 $ 91,504
----------- -----------
----------- -----------
</TABLE>
No investment securities were sold during the year 1996.
Proceeds from sales of investment securities available for sale were
$21,016,000 and $49,229,000 for the year ended December 31, 1995 and 1994,
respectively. Gross realized losses from the sales of investment securities were
$72,000 for the year ended December 31, 1995. Gross realized gains were $12,000
and gross realized losses were $6,000 from sales of investment securities
available for sale for the year ended December 31, 1994.
The carrying value of investment securities pledged as required or permitted
by law amounted to $8,008,000 and $6,444,000 at December 31, 1996 and 1995,
respectively.
A-56
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
5. LOANS AND INVESTMENT IN LEASES
The loan portfolio and net investment in direct financing leases (in
thousands of dollars) at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Real estate:
Mortgage............................................................ $ 72,617 $ 55,207
Equity lines........................................................ 7,487 7,039
Construction.......................................................... 25,875 22,593
Commercial............................................................ 80,927 84,271
Installment and other................................................. 19,706 13,120
---------- ----------
206,612 182,230
---------- ----------
Less:
Allowance for loan losses........................................... (5,333) (6,431)
Deferred loan origination fees - net................................ (442) (702)
---------- ----------
Loans--net............................................................ 200,837 175,097
---------- ----------
Total minimum lease payments receivable............................... 2,848 3,253
Estimated unguaranteed residual value of leased property.............. 179 210
---------- ----------
3,027 3,463
Less:
Unearned lease income............................................... (364) (399)
Allowance for lease losses.......................................... (84) (111)
---------- ----------
Net investment in leases.............................................. 2,579 2,953
---------- ----------
Total............................................................. $ 203,416 $ 178,050
---------- ----------
---------- ----------
</TABLE>
The Bank grants loans to customers throughout its primary market area of
Southern California. The Bank makes loans to borrowers from a number of
different industries, the largest of which, including undisbursed amounts, are
as follows at December 31 (in thousands of dollars) (see Note 11):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Nonresidential construction............................................. $ 22,477 $ 34,717
Personal................................................................ 37,506 30,384
Real estate agents/developers........................................... 34,285 37,556
Residential construction................................................ 19,628 22,506
</TABLE>
Loans in the commercial loan portfolio are collateralized primarily by
accounts receivable and inventory.
The allowance for loan and lease losses is an estimate involving both
subjective and objective factors and its measurement is inherently uncertain,
pending the outcome of future events. Management's determination of the adequacy
of the allowance is based on an evaluation of the loan and lease portfolio,
previous loan and lease loss experience, current economic conditions, volume,
growth and composition of the loan and lease portfolio, the value of collateral
and other relevant factors. Management believes the
A-57
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
level of the allowance as of December 31, 1996 and 1995 is adequate to absorb
losses inherent in the loan and lease portfolio; however, additional
deterioration of the economy in the Bank's lending area could result in levels
of loan and lease losses that could not be reasonably predicted at that date.
A summary of the changes in the allowance for loan and lease losses (in
thousands of dollars) for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Loans:
Balance at beginning of year................................... $ 6,431 $ 5,572 $ 7,137
Recoveries on loans charged off................................ 553 460 1,104
Provision for loan losses...................................... 1,260 6,600 3,365
Loans charged off.............................................. (2,911) (6,201) (6,034)
--------- --------- ---------
Balance at end of year........................................... 5,333 6,431 5,572
--------- --------- ---------
Leases:
Balance at beginning of year................................... 111 88 84
Recoveries on leases charged off............................... 34 52
Leases charged off............................................. (27) (11) (48)
--------- --------- ---------
Balance at end of year........................................... 84 111 88
--------- --------- ---------
Total...................................................... $ 5,417 $ 6,542 $ 5,660
--------- --------- ---------
--------- --------- ---------
</TABLE>
Loans and leases on which the accrual of interest has been discontinued
amounted to $3,995,000, $15,573,000 and $14,771,000 at December 31, 1996, 1995
and 1994 respectively. If interest on those loans and leases had continued to
accrue, the additional income would have been $327,000, $625,000 and $968,000 in
1996, 1995 and 1994 respectively.
At December 31, 1996, the Bank had pledged real estate loans amounting to
$2,935,000 as collateral for a line of credit with the Federal Home Loan Bank
(See note 7).
At December 31, 1996 and 1995, the Company had classified $45,000 and
$1,397,000 of its loans as impaired with a specific reserve of $34,000 and
$390,000 respectively. In addition, $4,321,000 and $15,147,000 of its loans are
classified as impaired with no related specific loss reserve at December 31,
1996 and 1995, respectively. The Company considers a loan impaired when it is
probable that the Company will be unable to collect all contractual principal
and interest under the terms of the loan agreement. The average recorded
investment in impaired loans during the years ended December 31, 1996 and 1995,
were $5,267,000 and $13,101,000, respectively. It is generally the Company's
policy to place loans on nonaccrual status when they are 90 days past due.
Thereafter, interest income is no longer recognized and the full amount of all
payments received, whether principal or interest, are applied to the principal
balance of the loan. As such, interest income may be recognized on impaired
loans to the extent they are not past due by 90 days or more. Interest income of
$214,000 and $236,000 was recognized on impaired loans during the year ended
December 31, 1996 and 1995, respectively, all of which was collected in cash.
The Company collected cash on impaired loans of $1,432,000 during 1996 and
$2,234,000 during 1995. The Company will charge-off an impaired loan in
accordance with its established charge-off policy.
A-58
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
6. PROPERTY
Property (in thousands of dollars) at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Furniture, fixtures and equipment........................................ $ 4,266 $ 3,976
Leasehold improvements................................................... 1,452 1,416
--------- ---------
5,718 5,392
Less accumulated depreciation and amortization........................... (4,283) (4,308)
--------- ---------
Property--net............................................................ $ 1,435 $ 1,084
--------- ---------
--------- ---------
</TABLE>
7. BORROWING ARRANGEMENTS
In December 1988 the Company obtained a $3,000,000 term loan from another
financial institution for the purpose of providing additional capital to the
Bank. The credit agreement for this loan was amended pursuant to a Second
Amendment to the credit agreement dated August 25, 1994. Interest was payable
monthly on the unpaid principal balance of the loan and required prepayment of
40% of the proceeds of any stock offering or placement of debt or equity. The
Second Amendment was supported by a Support Agreement between a shareholder
director of the Company and the Company whereby the shareholder guaranteed the
payment of the loan.
To compensate the shareholder for signing the Support Agreement and
subsequently paying off the lending institution the Company had signed a Holding
Company Support Agreement whereby the Company agreed to: (1) pay to the
shareholder a fee equal to 1% of the unpaid principal amount of the note on each
anniversary date and (2) issue to the shareholder on or prior to March 31, 1997,
and there after on each anniversary date, warrants to purchase 25,000 shares of
common stock of the Company at an exercise price per share equal to 80% of the
book value per share of the Company on December 31, 1996 and subsequent ending
periods respectively. The shareholder paid off the outstanding balance of
$2,350,000 to the lending institution in March of 1996 and the Company entered
into a new note with the shareholder. The new note bears an interest rate of 3%
over prime rate with interest only payable monthly for the first year; and
thereafter, quarterly principal payable of $125,000 plus interest payable
monthly. Any remaining principal and interest is due on April 1, 1999. On March,
17, 1997, the Company paid down $2,000,000 on this note and based on the
$350,000 remaining balance of the note issued to the Shareholder a proportionate
number of warrants to purchase 3,723 shares of the Company's common stock at an
exercise price of $6.60 per share pursuant to the terms of the Holding Company's
Support Agreement. The Company also paid the shareholder a fee equal to 1% of
the unpaid principal balance on March 17, 1997. The remaining unpaid principal
balance of $350,000 is subject to the original terms of the note.
In November 1995, the Company sold 474,000 shares of its common stock
through private placement at $6.75 per share for the purpose of contributing
most of the proceeds into the Bank as additional capital. Of the total proceeds
of $3,200,000, the Company contributed $2,900,000 into the Bank's capital in
December 1995.
The Bank maintains two lines of credit with outside financial institutions
for the purpose of purchasing Federal funds. The lines of credit bear interest
at a floating rate and provide for borrowing up to $8,000,000, and $5,000,000
respectively. At December 31, 1996 and 1995, no amounts were outstanding on
these lines of credit.
A-59
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
Under an agreement with the Federal Home Loan Bank, the Bank may obtain an
extension of credit of up to 50% of total assets collateralized by real estate
loans. At December 31, 1996, the Bank had pledged loans amounting to $2,935,000
and had available credit of $1,468,000 based on 50% of the outstanding balance
of pledged loans. No amounts were outstanding on this line of credit at December
31, 1996 and 1995.
8. EMPLOYEE BENEFIT PLANS
The Company had a stock option plan that expired in 1992. Under the plan the
options were granted to directors, officers and employees to purchase shares at
the fair market of the common stock on the date of grant. The outstanding
options become exercisable over a period of ten years.
A summary of stock option transactions for each of the three years in the
period ended December 31 is as follows:
<TABLE>
<CAPTION>
1996
1996 1995 1994 OPTION PRICE
--------- --------- --------- -----------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year......... 133,947 229,446 229,446 $4.67 to $13.00
Options exercised............................ (72,267) (44,249)
Options canceled............................. (18,000) (51,250)
--------- --------- --------- -----------------
Options outstanding, end of year............... 43,680 133,947 229,446 $5.25 to $5.94
--------- --------- --------- -----------------
--------- --------- --------- -----------------
</TABLE>
At December 31, 1996, options for 43,680 shares were exercisable. During the
year ended December 31, 1996, 72,267 options were exercised and paid for with
cash of $276,000 and 11,255 shares of common stock previously outstanding.
During the year ended December 31, 1995, 44,249 options were exercised and paid
for with cash of $12,000 and 19,198 shares of common stock previously
outstanding. No options were exercised in 1994.
The Company also has a stock option plan it uses as a means of compensating
directors in lieu of cash director's fees for services performed. During the
years ended December 31, 1996 and 1995, 3,447 and 12,249 options were exercised,
respectively. No options were granted or canceled during the years ended
December 31, 1996, 1995 and 1994. At December 31, 1996, no options were
outstanding. All activity from this plan is reflected in the table above.
During 1995 the Company adopted a stock award plan that permits the granting
of options to directors, officers and employees to purchase, at the fair market
value of the common stock on the date of grant, up to 750,000 shares of the
Company's common stock. The outstanding options become exercisable over a period
of ten years.
A summary of stock option transactions for the stock award plan for each of
the two years in the period ended December 31, is as follows:
<TABLE>
<CAPTION>
1996
1996 1995 OPTION PRICE
--------- --------- ----------------
<S> <C> <C> <C>
Options outstanding, beginning of year................ 142,000 $5.25 to $6.50
Options granted..................................... 142,000
Options exercised................................... (1,000)
Options canceled.................................... (7,000)
--------- --------- ----------------
Options outstanding, end of year...................... 134,000 142,000 $5.25 to $6.50
--------- --------- ----------------
--------- --------- ----------------
</TABLE>
A-60
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
At December 31, 1996, 47,332 options were exercisable. During the year ended
December 31, 1996, 1,000 options were exercised and paid for with cash of
$5,250.
The Company maintains a stock bonus plan that covers substantially all
Company employees. The plan provides for the issuance to participating employees
of share units in the plan, which entitles participants to distributions
primarily of common stock of the Company. Contributions to the plan are held in
trust and invested in common stock of the Company (which is purchased from third
parties) or other investments under the terms of the plan agreement.
Contributions are determined based on the Bank's discretion. The Company's
contributions for 1996, 1995 and 1994 were $45,000, $45,000 and $5,000,
respectively.
The estimated fair value of options granted during 1995 was $3.71 per share.
The estimated fair value of warrants granted during 1996 (See Note 7) was $10.91
per share. The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plans. Accordingly,
no compensation cost has been recognized for its stock option plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under the plan consistent with the
method of SFAS No. 123, the Company's net income and earnings per share for the
year ended December 31, 1996, and 1995 would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Net Income (Loss) to Common Shareholders
As Reported.............................................................. $ 3,796,000 $ (3,341,000)
Pro forma................................................................ $ 3,607,000 $ (3,505,000)
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Net Income (Loss) per common and common equivalent share
As Reported.............................................................. $ 1.26 $ (1.30)
Pro forma................................................................ $ 1.20 $ (1.37)
</TABLE>
The fair value of warrants and options granted under the Company's fixed
stock option plan during 1996 and 1995, respectively, were estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used: no dividend yield, expected volatility of
approximately 13% for options and 40% for warrants, risk-free interest rate
ranging from 6.0% to 7.9%, and expected lives of 10 years for options and 7
years for warrants.
The Bank has a defined contribution plan, which meets the requirements of
Section 401(k) of the Internal Revenue Code and covers substantially all
employees. The Bank's contributions are determined as a percentage of each
participant's contribution. The amounts contributed to the plan by the Bank were
$121,000, $108,000 and $88,000 for 1996, 1995 and 1994, respectively.
In 1987, the Company purchased cost recovery life insurance with aggregate
death benefits in the amount of $2,473,000 on the lives of the senior management
participants. The Company is the sole owner and beneficiary of such policies,
which were purchased to fund the Company's obligation under separate deferred
compensation arrangements. The cash surrender values and obligation under
deferred compensation agreements at December 31, 1996 and 1995 of $1,296,000 and
$1,231,000, respectively, and $529,000 and $317,000, respectively, have been
included in other assets and in other liabilities, respectively, in the
accompanying consolidated balance sheets.
A-61
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
9. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
directors, executive officers and the businesses with which they are associated.
All such loans and commitments to loans were made under terms that are
consistent with the Bank's normal lending policies.
The following is an analysis of the activity of all such loans for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Outstanding balance, beginning of year.......................... $ 1,848,000 $ 2,623,000
Credit granted, including renewals............................ 1,022,000 1,474,000
Repayments.................................................... (1,120,000) (2,249,000)
------------- -------------
Outstanding Balance, end of year................................ $ 1,750,000 $ 1,848,000
------------- -------------
------------- -------------
</TABLE>
10. INCOME TAXES
Income tax expense (benefit) for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996:
-----------------------------------------
FEDERAL STATE TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
Current.......................................... $ 206,000 $ 48,000 $ 254,000
Deferred......................................... 31,000 (174,000) (143,000)
------------- ----------- -------------
Total.............................................. $ 237,000 $ (126,000) $ 111,000
------------- ----------- -------------
------------- ----------- -------------
<CAPTION>
1995:
-----------------------------------------
FEDERAL STATE TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
Current.......................................... $ (341,000) $ 38,000 $ (303,000)
Deferred......................................... (1,051,000) (576,000) (1,627,000)
------------- ----------- -------------
Total.............................................. $ (1,392,000) $ (538,000) $ (1,930,000)
------------- ----------- -------------
------------- ----------- -------------
<CAPTION>
1994:
-----------------------------------------
FEDERAL STATE TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
Current.......................................... $ (79,000) $ 2,000 $ (77,000)
Deferred......................................... 621,000 621,000
------------- ----------- -------------
Total.............................................. $ 542,000 $ 2,000 $ 544,000
------------- ----------- -------------
------------- ----------- -------------
</TABLE>
A-62
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
Income tax expense (benefit) for the years ended December 31 (in thousands
of dollars) varies from the amounts computed by applying the statutory Federal
income tax rate as a result of the following factors:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes at statutory rate..................... $ 1,367 35.0% $ (1,845) (35.0)% $ 491 35.0%
State franchise taxes--net of Federal income tax benefit... 227 5.8 (355) (6.7) 95 6.8
Unbenefited state net operating losses..................... 20 1.4
(Decrease) Increase in deferred tax asset valuation
allowances--State and Federal............................ (1,714) (43.9) 178 3.4 (49) (3.5)
Federal taxes on state valuation adjustment................ 160 4.1
Other 71 1.8 92 1.7 (13) (0.9)
--------- --------- --------- --------- --------- ---
Income tax expense (benefit)............................... $ 111 2.8% $ (1,930) (36.6)% $ 544 38.8%
--------- --------- --------- --------- --------- ---
--------- --------- --------- --------- --------- ---
</TABLE>
The Company has recorded net deferred tax assets as of December 31
consisting principally of the following:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
1996 1995
------------- -------------
<S> <C> <C>
Deferred Tax Assets:
Loan Loss Reserve............................................... $ 1,319,000 $ 2,465,000
Unrealized Loss on Loans........................................ 265,000 342,000
Unrealized Loss on Investment Securities........................ 82,000
Depreciation.................................................... 180,000 233,000
Nonaccrual Interest Income...................................... 111,000 171,000
Self-Insurance Reserve.......................................... 128,000 106,000
REO Reserves.................................................... 183,000 601,000
Contingencies................................................... 382,000 184,000
Other........................................................... 74,000 262,000
------------- -------------
Deferred Tax Assets............................................. 2,724,000 4,364,000
Valuation Allowance............................................. (1,202,000)
------------- -------------
Deferred Tax Assets,
Net of Allowance................................................ 2,724,000 3,162,000
------------- -------------
Deferred Tax Liabilities:
Unrealized Gain on Investment Securities........................ (67,000)
Financial Accounting Lease Difference........................... (183,000) (846,000)
------------- -------------
Net Deferred Tax Assets......................................... $ 2,541,000 $ 2,249,000
------------- -------------
------------- -------------
</TABLE>
In the event the future consequences of difference between financial
accounting bases and the tax bases of the Company's assets and liabilities
result in a deferred tax asset, SFAS No. 109 requires an evaluation of the
probability of being able to realize the future benefits indicated by such
asset. A valuation allowance related to a deferred tax asset is recorded when it
is more likely than not that some portion or all of the deferred tax asset will
not be recognized.
A-63
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company and the Bank were obligated under various
noncancelable lease agreements, classified as operating leases, primarily for
the rental of office space. Certain leases for office space contain provisions
for renewal options of one or two five-year periods. Minimum future rental
payments under these lease agreements are summarized as follows:
<TABLE>
<S> <C>
1997............................................................ $1,157,000
1998............................................................ 1,139,000
1999............................................................ 1,099,000
2000............................................................ 1,118,000
2001............................................................ 865,000
Thereafter...................................................... 1,478,000
---------
Total........................................................... $6,856,000
---------
---------
</TABLE>
Total rental expense was $1,417,000, $1,136,000 and $1,072,000 in 1996, 1995
and 1994, respectively.
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The Bank's exposure to credit loss in the event of
nonperformance by the other party to commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
At December 31, 1996 and 1995, the Bank had primarily variable rate commitments
to extend credit of $77,740,000, and $55,769,000, respectively, and obligations
under standby letters of credit of $1,669,000 and $2,032,000, respectively.
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. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for extending loan facilities to customers. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the customer. Collateral
held varies but may include accounts receivable, inventory, property, plant and
equipment or real estate.
12. LEGAL PROCEEDINGS
From time to time, the Company or the Bank is a party to claims and legal
proceedings arising in the ordinary course of business. Management of the
Company evaluates the Company's or Bank's exposure to the cases individually and
in the aggregate and provides for potential losses on such litigation if the
amount of the loss is determinable and if the incurrence of the loss is
probable. After taking into consideration information furnished by counsel to
the Company or the Bank as to the current status of various claims
A-64
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
and legal proceedings to which the Company or the Bank is a party, management
has accrued $950,000 as a reserve for various cases pending as of December 31,
1996.
13. RISK-BASED CAPITAL STANDARDS AND OTHER REGULATORY MATTERS
On April 8, 1992, the Bank executed a Formal Agreement (the "Agreement")
with the Office of the Comptroller of the Currency (the "Comptroller"). On
November 15, 1996, the Comptroller as a result of the examination as of
September 30, 1996, determined that the continued existence of the Formal
Agreement was no longer necessary and the Agreement was terminated as of that
date.
On May 27, 1993, the Company executed a Memorandum of Understanding (the
"Memorandum") with the Federal Reserve Bank of San Francisco (the "Fed"). On
March 13, 1997 the Fed as a result of the examinations of December 31, 1996,
determined that the memorandum was no longer necessary and was terminated as of
that date.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components,
risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1996, and
1995 that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1996 and 1995, the most recent notification from the
Comptroller categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risked-based, Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
A-65
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------------ -------------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- --------- ------------- ----- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets)
Consolidated........................... $ 28,185,000 11.62%a $ 19,404,000a 8.0% N/A
Subsidiary Bank........................ $ 29,357,000 12.14%a $ 19,347,000a 8.0%a $ 24,184,000a 10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated........................... $ 25,124,000 10.36%a $ 9,702,000a 4.0% N/A
Subsidiary Bank........................ $ 26,304,000 10.88%a $ 9,674,000a 4.0%a $ 14,510,000a 6.0%
Tier I Capital (to Average Assets)
Consolidated........................... $ 25,124,000 7.25%a $ 13,852,000a 4.0% N/A
Subsidiary Bank........................ $ 26,304,000 7.59%a $ 13,845,000a 4.0%a $ 17,306,000a 5.0%
As of December 31, 1995:
Total Capital (to Risk-Weighted Assets)
Consolidated........................... $ 23,817,000 10.70%a $ 17,766,000a 8.0% N/A
Subsidiary Bank........................ $ 25,252,000 11.36%a $ 17,756,000a 8.0%a $ 22,194,000a 10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated........................... $ 20,995,000 9.45%a $ 8,883,000a 4.0% N/A
Subsidiary Bank........................ $ 22,431,000 10.11%a $ 8,878,000a 4.0%a $ 13,317,000a 6.0%
Tier I Capital (to Average Assets)
Consolidated........................... $ 20,995,000 6.32%a $ 8,883,000a 4.0% N/A
Subsidiary Bank........................ $ 22,431,000 6.76%a $ 8,878,000a 4.0%a $ 15,583,000a 5.0%
</TABLE>
A-66
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
14. CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Balance sheets as of December 31:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash........................................................... $ 664,000 $ 587,000
Other real estate owned........................................ 83,000 83,000
Investments in subsidiaries.................................... 26,324,000 22,686,000
Other assets................................................... 284,000 122,000
------------- -------------
Total...................................................... $ 27,355,000 $ 23,478,000
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable................................................... $ 2,350,000 $ 2,351,000
Other liabilities.............................................. 4,000 8,000
Total shareholders' equity..................................... 25,001,000 21,119,000
------------- -------------
Total...................................................... $ 27,355,000 $ 23,478,000
------------- -------------
------------- -------------
</TABLE>
Statements of operations for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Total interest income.................................................. $ 15,000 $ 21,000 $ 13,000
------------ ------------- ------------
Expenses:
Interest............................................................. 273,000 259,000 241,000
Other expenses....................................................... 44,000 45,000 27,000
------------ ------------- ------------
Total expenses......................................................... 317,000 304,000 268,000
------------ ------------- ------------
Loss before provision (benefit) for income tax and equity income (loss)
of subsidiaries...................................................... (302,000) (283,000) (255,000)
Provision (benefit) for income tax..................................... (214,000) 52,000 (89,000)
------------ ------------- ------------
Loss before equity in income (loss) of subsidiaries.................... (88,000) (335,000) (166,000)
Equity in income (loss) of subsidiaries................................ 3,884,000 (3,006,000) 1,025,000
------------ ------------- ------------
Net income (loss)...................................................... $ 3,796,000 $ (3,341,000) $ 859,000
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
A-67
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
Statements of cash flows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $ 3,796,000 $ (3,341,000) $ 859,000
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Equity in (income) loss of subsidiaries from operations.......... (3,884,000) 3,006,000 (1,025,000)
(Increase) decrease in other assets.............................. (162,000) 35,000 99,000
(Decrease) increase in other liabilities......................... (4,000) 3,000 (5,000)
------------- ------------- -------------
Net cash from operating activities............................... (254,000) (297,000) (72,000)
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of other real estate owned...................... 5,000
-------------
Net cash from investing activities................................. 5,000
-------------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of common stock
options.......................................................... 332,000 3,290,000
Payments on note payable........................................... (1,000)
Increase in Investment in subsidiaries............................... (2,900,000)
------------- -------------
Net cash from financing activities................................. 331,000 390,000
------------- -------------
Net increase (decrease) in cash...................................... 77,000 98,000 (72,000)
Cash at beginning of year............................................ 587,000 489,000 561,000
------------- ------------- -------------
Cash at end of year.................................................. $ 664,000 $ 587,000 $ 489,000
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest............................... $ 273,000 $ 259,000 $ 241,000
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL INFORMATION ON NONCASH INVESTMENT ACTIVITY
Tax benefit for exercise of non-qualified stock options............ $ 51,000 $ 78,000 $
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by management using
available market information and appropriate valuation methodologies. However,
assumptions are necessary to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of
A-68
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
different assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
ESTIMATED
CARRYING VALUE FAIR VALUE
-------------- --------------
<S> <C> <C>
ASSETS:
Cash and due from banks.................................... $ 28,849,000 $ 28,849,000
Federal funds sold......................................... 14,500,000 14,500,000
Investment securities available for sale................... 91,504,000 91,504,000
Loans and investment in leases, net........................ 203,416,000 202,853,000
Loans available for sale, net.............................. 1,234,000 1,234,000
Accrued interest receivable................................ 2,668,000 2,668,000
LIABILITIES:
Savings and demand deposits................................ 265,281,000 265,281,000
Time deposits.............................................. 53,423,000 53,434,000
Accrued interest payable................................... 148,000 148,000
Note payable............................................... 2,350,000 2,350,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------
ESTIMATED
CARRYING VALUE FAIR VALUE
-------------- --------------
<S> <C> <C>
ASSETS:
Cash and due from banks.................................... $ 28,549,000 $ 28,549,000
Federal funds sold......................................... 45,000,000 45,000,000
Investment securities available for sale................... 62,283,000 62,283,000
Loans and investment in leases, net........................ 178,050,000 177,402,000
Loans available for sale, net.............................. 9,620,000 9,620,000
Accrued interest receivable................................ 2,649,000 2,649,000
LIABILITIES:
Savings and demand deposits................................ 241,273,000 241,273,000
Time deposits.............................................. 67,231,000 67,234,000
Accrued Interest payable................................... 221,000 221,000
Note payable............................................... 2,351,000 2,351,000
</TABLE>
The carrying value of cash and due from banks, Federal funds sold, interest
receivable, loans available for sale, savings and demand deposits, time
deposits, interest payable and note payable is a reasonable estimate of the fair
value. The fair value of investment securities is based on quoted market prices.
The fair value of loans and investment in leases is estimated by discounting
the future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. The fair value of classified loans with a carrying value of
approximately $4,659,000 and $16,307,000 as of December 31, 1996 and 1995,
respectively, was not estimated because it is not practical to reasonably assess
the credit adjustment that would be applied in the market place for such loans.
These classified loans, which are primarily real estate or construction loans,
have a weighted average
A-69
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
interest rate ranging from 7% to 11.0% and from 8% to 12.50% as of December 31,
1996 and 1995, respectively, and are due at various dates through the year 2026.
The fair value of savings and demand deposit accounts is the amount payable
on demand at December 31, 1996. The fair value of time deposit accounts is
estimated using the rates currently offered for deposits of similar remaining
maturities.
The fair value of commitments is not deemed material at December 31, 1996
and 1995.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996 and 1995. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these consolidated financial statements since that date and, therefore,
current estimates of fair value may differ significantly from amounts presented
herein.
16. MERGER
On December 18, 1996, California Commercial Bankshares signed a definitive
agreement, subject to regulatory and shareholder approval, whereby Monarch
Bancorp and California Commercial Bankshares will merge.
A-70
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE.
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors and executive officers of the
Registrant is set forth under headings "THE ANNUAL MEETING OF CCB
SHAREHOLDERS--Election of CCB Directors" and "Compensation of Executives of CCB"
in the Joint Proxy Statement/Prospectus of the Company and Monarch Bancorp (the
"Joint Proxy Statement") and incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is set forth under the
heading "THE ANNUAL MEETING OF CCB SHAREHOLDERS--Compensation of Executives of
CCB" in the Joint Proxy Statement and incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management is set forth under the heading "THE ANNUAL MEETING OF CCB
SHAREHOLDERS--Compensation of Executives of CCB" in the Joint Proxy Statement
and incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
is set forth under the heading "THE ANNUAL MEETING OF CCB
SHAREHOLDERS--Compensation of Executives of CCB" in the Joint Proxy Statement
and incorporated by reference herein.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<S> <C>
FINANCIAL STATEMENTS:
Financial statements and schedules of the registrant are listed in the index to
Consolidated Financial Statements contained under Part II Item 8. Financial
Statements and Supplementary Data of this report.
FINANCIAL STATEMENT SCHEDULES:
All Financial statement schedules are omitted either because the conditions under
which they are required are not applicable or because the information is included
in the Financial Statements.
EXHIBITS:
(2) Amended and Restated Agreement and Plan of Merger dated as of December 19, 1996
between the Company and Monarch Bancorp.
(3)(a) Articles of Incorporation of California Commercial Bankshares, as amended.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1990).
(3)(b) By-Laws of California Commercial Bankshares, as amended. (Incorporated by
reference from the Company's Form 10-K filed on March 31, 1989).
</TABLE>
A-72
<PAGE>
<TABLE>
<S> <C>
(10)(A) Office Sublease between First California Associates and the Company. (Incorporated
by reference from the Company's Form 10-K filed on March 31,1983).
(10)(B) First Amendments to Sublease between First California Associates and the Bank.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1984).
(10)(C) The Company's Stock Bonus Plan. (Incorporated by reference from the Company's Form
10-K filed on March 31, 1986).
(10)(D) Amendments to Office Sublease between First California Associates and the Company.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1986).
(10)(E) Executive Salary Continuation Agreement between National Bank of Southern
California and William H. Jacoby. (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1989).
(10)(F) Executive Salary Continuation Agreements between National Bank of Southern
California and Mark H. Stuenkel. (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1987).
(10)(G) Executive Salary Continuation Agreement between National Bank of Southern
California and Abdul S. Memon. (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1987).
(10)(H) 401-K Plan. (Incorporated by reference from the Company's Form 10-K filed on March
31, 1989).
(10)(I) Lease for the premises on branch located at 22831 Lake Forest Drive, El Toro, Ca.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1989).
(10)(J) Lease for the premises on branch located at 625 The City Drive, Orange, Ca.
(Incorporated by reference from Company's Form 10-K filed on March 31, 1990).
(10)(K) Lease for the property on branch located at 17252 Armstrong Ave., Irvine, Ca.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1990).
(10)(L) 1982 Stock Option Plan, as amended. (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1991).
(10)(M) Lease for the property located at 4100 Newport Place, Newport Beach, Ca.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1992).
(10)(N) Support Agreement dated September 27, 1994 with Robert L. McKay. (Incorporated by
reference from the Company's 10-K filed on March 31, 1995).
(10)(O) Holding Company Support Agreement dated October 1, 1994 with Robert L. McKay.
(Incorporated by reference from the Company's Form 10-K filed on March 31, 1995)
(10)(P) Lease for the property located at 17330 Brookhurst Ste. 110, Fountain Valley, Ca.
(Incorporated by reference from the Company's Form 10-K filed on March 31, 1996)
(10)(Q) Stock Award Plan. (Incorporated by reference from the Company's Form 10-K filed on
March 31, 1996)
(10)(R) Form of Stock Option Agreement (Incorporated by reference from the Company's Form
10-K filed on March 31, 1996)
(10)(S) Form of Nonqualified Stock Option Agreement. (Incorporated by reference from the
Company's Form 10-K filed on March 31, 1996)
</TABLE>
A-73
<PAGE>
<TABLE>
<S> <C>
(10)(T) Form of Director's Nonqualified Stock Option Agreement. (Incorporated by reference
from the Company's Form 10-K filed on March 31, 1996)
(10)(U) Stock Option Agreement dated as of December 19, 1996 between the Company and
Monarch Bancorp
(21) Subsidiaries of the Company
(23) Independent Auditors' Consent
</TABLE>
(B) REPORTS ON FORM 8-K.
Current Report on Form 8-K filed December 29, 1996
A-74
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CALIFORNIA COMMERCIAL BANKSHARES
By: WILLIAM H. JACOBY March 21, 1997
---------------------------------
William H. Jacoby
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
PHILLIP L. BUSH
- ------------------------------ Director/Secretary March 21, 1997
Phillip L. Bush
MICHAEL J. GERTNER
- ------------------------------ Director/Treasurer March 21, 1997
Michael J. Gertner
JAMES W. HAMILTON
- ------------------------------ Director March 21, 1997
James W. Hamilton
FARRELL G. HINKLE
- ------------------------------ Director March 21, 1997
Farrell G. Hinkle
WILLIAM H. JACOBY
- ------------------------------ Director/President, C.E.O. March 21, 1997
William H. Jacoby
ROBERT L. MCKAY
- ------------------------------ Director/Chairman of the March 21, 1997
Robert L. McKay Board
MARK H. STUENKEL
- ------------------------------ Executive Vice President March 21, 1997
Mark H. Stuenkel
ABDUL S. MEMON
- ------------------------------ Principal Financial & March 21, 1997
Abdul S. Memon Accounting Officer
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
Four copies of the registrant's proxy statement and the form of proxy which
will be sent to the registrant's security holders with respect to the next
annual meeting of security holders will be furnished to the Securities and
Exchange Commission when sent to the registrant's security holders.
No such reports or proxy materials have yet been sent to the registrant's
security holders. It is anticipated that the Joint Proxy Statement and the
Annual Report on Form 10-K will be sent to the registrant's security holders on
or prior to April 30, 1997.
A-75
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
FOR THE FISCAL YEAR ENDED 12/31/96
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD TO
COMMISSION FILE NUMBER 2-78788
------------------------
CALIFORNIA COMMERCIAL BANKSHARES
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3748495
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
4100 NEWPORT PLACE, NEWPORT BEACH,
CALIFORNIA 92660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 863-2300
------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. Not applicable.
The aggregate market value of voting stock held by non-affiliates of the
registrant was $44,201,000 on April 25, 1997, based on the average bid and asked
price of $25.25 share as reported on the National Daily Quotation Service "Pink
Sheets".
(Number of shares of Common Stock outstanding as of April 25, 1997)
3,043,000
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-76
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The persons named below have been nominated for election to serve as
directors of the Company. Under the terms of the Merger Agreement, each of the
directors of the Company will be required to submit their irrevocable
resignations as directors of the Company, effective upon consummation of the
Merger. In the event that the Merger is not consummated, all directors of the
Company elected at the Annual Meeting will continue to serve as directors of the
Company until the next annual meeting of the Company and until their successors
have been elected and duly qualified.
The following table sets forth information concerning CCB's nominees for
directors:
<TABLE>
<CAPTION>
PRESENT POSITION DIRECTOR OF
NAME AND AGE WITH THE COMPANY THE COMPANY
- ---------------------------------------- -------------------------------------- ---------------
<S> <C> <C>
Phillip L. Bush (60).................... Director 1982
Michael Gertner (57).................... Director 1982
James W. Hamilton (64).................. Director 1982
Farrell G. Hinkle DDS, MSD (54)......... Director 1982
William H. Jacoby (58).................. President, Chief Executive Officer and 1982
Director
Robert L. McKay (66).................... Director 1982
Mark H. Stuenkel (44)................... Executive Vice President and Director 1987
</TABLE>
Phillip L. Bush is a practicing attorney with the firm of Bush, Bush and
Larsen, in Fountain Valley, California. Mr. Bush's practice is primarily
litigation of personal injury matters. He also has practiced in the areas of
real estate development and syndication, and business enterprise organization
and formation. Mr. Bush has been Secretary of the Company since 1982.
Michael Gertner has been an attorney in the law firm of Michael Avey
Gertner, a Professional Corporation, in Newport Beach since 1993. From 1965 to
1993 he was a partner in the law firm of Howser, Gertner and Brown. He is
licensed to practice law in both California and New York and is also a Certified
Public Accountant. Mr. Gertner specializes in the areas of taxation, estate
planning and estate administration.
James W. Hamilton is Senior Counsel to the law firm of Paul, Hastings,
Janofsky & Walker LLP of which he was a partner from 1965 until 1993. His office
is in the firm's Costa Mesa, California facility. He specializes in securities
and corporate law.
Farrell G. Hinkle is an Orthodontist and has been practicing orthodontics in
the Orange County area since 1973. Dr. Hinkle has a degree in Mathematics and
graduated from the UCLA School of Dentistry as a Regent Scholar in 1971. He also
earned a Certificate in Orthodontics and a Masters Degree from the University of
Washington in 1973.
William H. Jacoby is President and Chief Executive Officer of the Company
and also Chairman of the Board and Chief Executive Officer of the Bank. Mr.
Jacoby began his career in banking in 1960 with First Interstate Bank of
California. In 1979, Mr. Jacoby joined Westlands Bank and served in various
positions until joining the Company in June 1982 during its organizational
period.
Robert L. McKay has been a private investor in Orange County, California,
where he oversees his investments in venture capital and real estate since 1981.
From 1966 to 1981 Mr. McKay was President of Taco Bell, Inc.
Mark H. Stuenkel is Executive Vice President of the Company and President of
the Bank. In December 1988, Mr. Stuenkel was appointed to his present position
as President of the Bank and in
A-77
<PAGE>
May 1991, he was promoted from Senior Vice President to Executive Vice President
of the Company. Prior to joining the Company and the Bank in 1982, Mr. Stuenkel
held various positions with Security Pacific National Bank.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information for the
fiscal year ended December 31, 1996 concerning all plan and non-plan
compensation awarded to, earned by, or paid to (a) the Company's Chief Executive
Officer at the end of such fiscal year, regardless of compensation level, and
(b) the Company's four most highly compensated executive officers other than the
Chief Executive Officer who were serving as executive officers of the Company at
the end of such fiscal year and whose compensation exceeded $100,000, if any.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------------
AWARDS
ANNUAL COMPENSATION ---------------------------- PAYOUTS
----------------------------------------- -----------
(E) (F)
(A) OTHER RESTRICTED (H)
NAME AND (B) (C) (D) ANNUAL STOCK (G) LTIP
PRINCIPAL POSITION YEAR SALARY ($) BONUS($) COMP.($)(2) AWARD(S) OPTIONS/ SARS PAYOUTS
- --------------------------------- --------- ----------- ----------- --------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
William H. Jacoby................ 1996 238,000(1) 100,000 5,000 0 0 0
Chief Executive Officer 1995 190,000 0 5,000 0 0 0
1994 190,000 22,000 4,000 0 0 0
--------- ----------- ----------- ----- --- --- ---
Mark H. Stuenkel................. 1996 161,000(1) 76,000 4,000 0 0 0
Executive Vice President 1995 144,000 0 4,000 0 0 0
1994 137,000 16,000 2,000 0 0 0
--------- ----------- ----------- ----- --- --- ---
Dannie M. Hayes.................. 1996 108,000 32,000 3,000 0 0 0
1995 108,000 0 3,000 0 0 0
1994 100,000 5,000 2,000 0 0 0
--------- ----------- ----------- ----- --- --- ---
Abdul S. Memon................... 1996 112,000(1) 32,000 3,000 0 0 0
Chief Financial Officer 1995 90,000 0 2,000 0 0 0
1994 85,000 4,000 2,000 0 0 0
<CAPTION>
(A) (I)
NAME AND ALL OTHER
PRINCIPAL POSITION COMP. ($)(3)
- --------------------------------- ---------------
<S> <C>
William H. Jacoby................ 1,000
Chief Executive Officer 1,000
0
-----
Mark H. Stuenkel................. 1,000
Executive Vice President 1,000
0
-----
Dannie M. Hayes.................. 1,000
1,000
0
-----
Abdul S. Memon................... 1,000
Chief Financial Officer 0
0
</TABLE>
- ------------------------
$-Dollar amounts
(1) Includes vacation pay in the amount of $48,000 for Mr. Jacoby, $16,000 for
Mr. Stuenkel and $22,000 for Mr. Memon.
(2) None of the named officers had other annual compensation in excess of
$50,000 or 10 percent of the total annual salary and bonus reported for any
of the last three years.
(3) Represents executives' portion of amount contributed to the Company's Stock
Bonus Plan. The Plan is 100 percent funded by the Company. The contributions
are made at the discretion of the Board of Directors. The distributions are
made at the earliest of 2 years after termination, retirement, death or
disability.
A-78
<PAGE>
The following table describes the aggregate option/stock appreciation right
("SAR") exercises during the year ended December 31, 1996 and unexercised
options/SARs for each named executive officer at the end of such year:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(E)
(D) VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
(B) OPTIONS/SARS OPTIONS/SARS AT
SHARES (C) AT FY-END(#) FY-END(S)
ACQUIRED VALUE --------------- -----------------
(A) ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------------------- ----------- ----------- --------------- -----------------
<S> <C> <C> <C> <C>
William H. Jacoby.................................... 10,000 40,000 28,333/16,667 265,000/150,000
Mark H. Stuenkel..................................... 7,500 30,000 27,083/16,667 174,000/150,000
Dannie M. Hayes...................................... NONE N/A 3,333/6,667 32,000/63,000
Abdul S. Memon....................................... 7,820 31,000 2,847/3,333 27,000/32,000
</TABLE>
During the fiscal year ended December 31, 1996, the Company did not reprice
any options or SARs held by a named executive officer or otherwise reduce the
terms of exercise. No options or SARs held by any executive officer of the
Company over the last ten years have been repriced or modified.
STOCK OPTION PLANS
The Company had a Stock Option Plan (the "1982 Plan") for its directors,
officers and full time employees which expired on October 27, 1992. The Board
administers the 1982 Plan. The purpose of the 1982 Plan was to compensate
certain of the organizers of the Company and the Bank, and to provide an
incentive to key employees to remain in the employ of the Company and the Bank.
Options are not transferable under the 1982 Plan other than by will or by
the laws of descent and distribution, and during the participant's lifetime,
options are exercisable only by the participant. The option price per share for
options granted under the 1982 Plan was established to be at least 100 percent
of the fair market value of its Common Stock on the date any such options were
granted, except that in the case of a shareholder owning more than ten percent
of the total combined voting power of all classes of outstanding Common Stock,
the option price for incentive stock options was established to be at least 110
percent of the fair market value on the date of grant. While outstanding options
to purchase shares which were granted prior to October 27, 1992 may continue to
be exercised according to their terms, no new options may be granted under the
1982 Plan.
As of December 31, 1996, options to purchase 43,680 shares of Common Stock
were outstanding under the 1982 Plan at prices ranging from $5.25 to $5.94 per
share. During 1996, all employees as a group exercised options for 38,820 shares
of Common Stock which had a net value (market value less exercise price) of
$130,000. Of such options, Mr. Jacoby, Mr. Stuenkel and Mr. Memon exercised
25,320 options and received 10,000 shares, 7,500 shares and 7,820 shares,
respectively, which had a net value of $40,000, $30,000 and $31,000,
respectively.
During 1995, the Company adopted a Stock Award Plan (the "Award Plan") for
its directors, officers and full time employees. The purpose of the Award Plan
is to provide incentives to directors and key employees to remain with the
Company and the Bank.
The Compensation Committee administers the Award Plan and decides to whom
and upon what terms awards will be granted. An aggregate of 750,000 shares of
Common Stock have been reserved for issuance under the Award Plan. No more than
30,000 shares may be granted to any individual during any twelve month period.
Awards may consist of any combination of stock options (incentive or
nonqualified),
A-79
<PAGE>
restricted stock, stock appreciation rights and performance shares. Only stock
options have currently been granted under the Award Plan.
Options are not transferable under the Award Plan other than by will or by
the laws of descent and distribution, and during the participant's lifetime,
such options are exercisable only by the participant. The option price per share
for options granted under the Award Plan are determined by the Compensation
Committee, provided that in the case of stock option grants to a person owning
more than ten percent of the total combined voting power of all classes of
Common Stock, the option price must be at least 110 percent of the fair market
value of the Company Common Stock on the date of grant. Options granted under
the Award Plan may be exercised as determined by the Compensation Committee, but
in no event after ten years from the date of grant, and must be exercised within
certain specified periods after termination of employment. Upon expiration or
termination of any outstanding options, shares remaining unexercised become
available for grant under the Award Plan.
As of December 31, 1996, options to purchase 134,000 shares of Common Stock
were outstanding under the Award Plan at prices ranging from $5.25 to $6.50 per
share. Of these outstanding options, all employees as a group exercised options
for 1,000 shares of Common Stock during 1996 which had a net value (market value
less exercise price) of $4,000.
All options to acquire Common Stock outstanding under the 1982 Plan and the
Award Plan at the Effective Time will be converted into the right to receive
Monarch Common Stock with the same number of shares issuable thereunder. No
change will be made with respect to the vesting of such options.
STOCK BONUS PLAN
Effective January 1, 1986, the Company adopted a Stock Bonus Plan (the
"Stock Bonus Plan") and established a related trust. Subject to certain
eligibility requirements for time of service, all of the Company's employees
participate in the Stock Bonus Plan. The Stock Bonus Plan is a tax-credit
employee stock ownership plan and is administrable by the Board or the Chief
Executive Officer. The amount of the Company's contributions of cash or
securities of the Company to the Stock Bonus Plan may be determined by the Board
(or the Chief Executive Officer). Subject to certain limitations, such
contributions are allocated to each participant's account in proportion to such
participant's compensation earned during the applicable Stock Bonus Plan year.
Allocations to a participant's account vest in accordance with the schedules set
forth in the Stock Bonus Plan. Distributions to participants are made at
participants' death, retirement, disability or termination of employment.
Participants are not permitted to make voluntary contributions to the Stock
Bonus Plan, and the Stock Bonus Plan may not make loans to participants. Any
cash amounts contributed to the Stock Bonus Plan will be used primarily to
purchase securities issued by the Company. The Company contributed $45,000 to
the Stock Bonus Plan for 1996. Of such allocations, Messrs. Jacoby, Stuenkel,
Hayes and Memon received $1,000 each.
401(K) PLAN
Effective February 1, 1989, the Company established a 401(k) plan which
enables employees to defer a portion of their wages tax free, subject to
limitations established by the Internal Revenue Service. All Company employees
at the completion of certain eligibility requirements for time of service can
elect to participate in the plan. Under the 401(k) plan, the Company can make
matching contributions to the 401(k) plan up to stated limits. Such
contributions are determined by the Company Board at the beginning of the year.
The vesting of such contributions to the employees of the Company is based on
time of service since the effective date of the 401(k) plan.
The Company does not have any defined benefit retirement or other retirement
plans.
A-80
<PAGE>
EXECUTIVE SALARY CONTINUATION AGREEMENTS
In 1988, the Bank entered into Executive Salary Continuation Agreements (the
"Salary Continuation Agreements") with Messrs. Jacoby, Stuenkel and Memon (the
"Senior Executives"). Pursuant to the Salary Continuation Agreements, each
Senior Executive is entitled to receive benefits upon his retirement, death or
disability or upon termination of service with the Bank prior thereto unless
such Senior Executive's employment with the Bank is terminated either (i)
voluntarily by the Senior Executive, other than for "good reason" (as defined in
his Salary Continuation Agreement) or (ii) by the Bank for "cause" (as defined
in his Salary Continuation Agreement), in which case no benefits or payments
will be paid pursuant to the Salary Continuation Agreements. Mr. Jacoby's
benefits are fully vested in the Salary Continuation Plan. The benefits of each
of the other Senior Executives vest at the rate of ten percent per year for each
year that he has been employed by the Bank commencing as of January 1, 1988, up
to a maximum of 100 percent. At January 2, 1997, the benefits of such other
Senior Executives were 90 percent vested and will be 100 percent vested as of
January 2, 1998.
Under the terms of the Salary Continuation Agreements, each of the Senior
Executives will be entitled to receive the following sums annually, assuming
full vesting, for a period of fifteen years after either their retirement from
the Bank or upon their death: Mr. Jacoby, $80,000; Mr. Stuenkel, $62,500; and
Mr. Memon, $23,000. If a Senior Executive's employment with NBSC is terminated
because of disability prior to retirement, such Senior Executive (or his estate)
will be entitled to receive his benefits under the Salary Continuation Agreement
upon retirement or death or to elect to receive a disability benefit in an
amount equal to the present value of such Senior Executive's retirement benefits
under his Salary Continuation Agreement.
Each Salary Continuation Agreement also has provisions which become
effective upon the occurrence of a Change in Control (as defined) of the Company
or the Bank. In such event, the Salary Continuation Agreements become employment
agreements with three-year terms for Mr. Jacoby and Mr. Stuenkel and an
employment agreement with an eighteen-month term for Mr. Memon. The Salary
Continuation Agreements also provide for the Senior Executives' salary and bonus
to increase annually during such terms. The Senior Executives are also entitled
to receive all non-cash forms of compensation and benefits which they received
prior to the Change in Control for the term of such employment Agreement. Under
the terms of the Salary Continuation Agreements, a "Change in Control" is deemed
to have occurred if (a) any person (other than the Company's directors as of the
date of the Salary Continuation Agreements) becomes the beneficial owner of more
than 40 percent of the Common Stock (exclusive of shares of the Common Stock
held by subsidiaries) if such Common Stock has been acquired after the date of
the Salary Continuation Agreements pursuant to a tender offer, exchange offer or
series of purchases or other acquisitions, or any combination of such
transactions; (b) there is a change in the Board or the board of directors of
the Bank at any time within two years after any tender offer, exchange offer,
merger, consolidation, sale of assets or contested election or any combination
of the foregoing so that persons who are directors of the Company or the Bank
immediately before the first such transaction cease to constitute a majority of
the Board or the board of directors of the Bank or any corporation which may be
the successor to the Company or the Bank in any such transaction; or (c) the
Company sells, transfers or otherwise disposes of substantially all of its
assets and properties, including the stock of the Bank or the Common Stock or
the Company causes the Bank to sell, transfer or otherwise dispose of
substantially all of the Bank's assets and properties.
If after a Change in Control one of the Senior Executives either terminates
his employment for "good reason" or is terminated by the Bank for any reason
other than "cause," then the Bank is required to pay cash compensation to such
Senior Executive during his remaining term; provided that Messrs. Jacoby and
Stuenkel will receive no less than two times the annual compensation to which
they otherwise would be entitled and Mr. Memon will receive no less than the
annual compensation to which he otherwise would be entitled. Moreover, all
employee benefit plans and programs in which the Senior Executive is entitled to
participate will continue for the remainder of each Senior Executive's term and
the Senior Executive will
A-81
<PAGE>
continue to be entitled to receive his retirement, death and disability benefits
as provided in the Salary Continuation Agreement.
The consummation of the Merger will constitute a Change in Control as
defined in the Salary Continuation Agreements.
Monarch and Messrs. Jacoby and Stuenkel are currently discussing the
possibility of entering into employment agreements upon consummation of the
Merger. If either or both of Messrs. Jacoby and Stuenkel enter into such
employment agreements, the Salary Continuation Agreement for such party or
parties will be terminated.
The Company does not pay its directors for attending meetings. Since
February 1991, non-employee directors of the Bank have been paid $1,000 per
meeting attended and $375 per committee meeting attended. The total amount of
fees paid to non-employee directors of the Bank during 1996, 1995 and 1994 were
$160,000, $140,000 and $130,000, respectively.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
It is the duty of the Compensation Committee to administer the Company's
compensation program and various incentive plans, including its stock option
plan and its annual bonus plan. In addition, the Compensation Committee reviews
compensation levels of members of management, evaluates the performance of
management, considers management succession and related matters. The
Compensation Committee reviews with the Board in detail all aspects of
compensation for senior officers.
The Compensation Committee has reviewed the compensation for each of the
five highest paid officers for 1996 and has reported to the Board that in the
Compensation Committee's opinion, the compensation of all officers is reasonable
in view of the Company's consolidated performance and the contribution of those
officers to that performance. In doing so, the Compensation Committee takes into
account how compensation compares to compensation paid by competing companies as
well as the Company's performance and economic conditions in the Company's
service area. Members of the Compensation Committee also review compensation
surveys provided by the State Banking Department and others.
The Company has an Officer Incentive Program to motivate and compensate
officers for their individual performance as well as to encourage a spirit of
cooperation and teamwork to achieve the maximum performance for the Company as a
whole. The Incentive Program is established prior to the beginning of each year
by the Board after it reviews a recommendation from the Compensation Committee.
The Board establishes a goal for pretax income for the Company at the start of
the year based upon its evaluation of the local economy, a desired performance
goal, and any special circumstances that might affect projected income. Officers
participating in the Incentive Program are those officers who are expected to
have a direct impact upon the net income of the Bank. Additionally, each officer
is assigned a specific goal such as the amount of deposits, loans, or other
requirements of his/her position. A determination is then made by the
Compensation Committee at the end of the year regarding whether the Bank has met
its threshold goal and whether the individuals have met their specific goals. An
incentive award is then granted to officers who have met their goal based upon
their level of performance combined with that of the Bank. For the year ended
December 31, 1996, the Compensation Committee approved an incentive award of
$100,000 for William H. Jacoby, $76,000 for Mark H. Stuenkel, $32,000 for Dannie
M. Hayes and $32,000 for Abdul S. Memon.
No member of the Committee is a former or current officer or employee of the
Company or any of its subsidiaries.
The Compensation Committee report was completed by the Compensation
Committee as of February 24, 1997. The members of the Compensation Committee
filing the report were Phillip L. Bush, Michael J. Gertner, James W. Hamilton
and Robert L. McKay.
A-82
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The shares of the Company's Common Stock constitute the only outstanding
class of voting securities of the Company. As of April 28, 1997, there were
3,043,000 shares of CCB Common Stock outstanding and entitled to vote and
approximately 300 shareholders of record.
The following table sets forth information regarding beneficial ownership of
shares of the Company's Common Stock as of April 28, 1997 by all shareholders
known to the Company to be the beneficial owner of more than five percent of the
outstanding shares of the Company's Common Stock, all directors and executive
officers of the Company and all current officers and directors of the Company as
a group. Information with respect to beneficial ownership is based upon the
Company's Common Stock records and data supplied to the Company by its
shareholders.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNER
NAME AND ADDRESS AND PERCENT OF CLASS
TITLE OF CLASS OF BENEFICIAL OWNER (1)
- ----------------- --------------------------------------------------------------- ---------------------
<S> <C> <C> <C>
Common Stock Phillip L. Bush................................................ 103,050(3) 3.4%(3)
Director
10061 Talbert Ave.
Fountain Valley, CA 92708
Common Stock Michael Gertner................................................ 32,977(3) 1.1(3)
Director
4340 Campus Drive, Suite 100
Newport Beach, CA 92660
Common Stock James W. Hamilton.............................................. 83,472(3) 2.7(3)
695 Town Center Drive
Costa Mesa, CA 92626
Director
Common Stock Farrell G. Hinkle, DDS, MSD.................................... 139,596(3) 4.6(3)
Director
2740 South Bristol
Santa Ana, CA 92704
Common Stock William H. Jacoby.............................................. 231,664(2) 7.6(2)
President, Chief Executive Officer and Director
4100 Newport Place
Newport Beach, CA 92660
Common Stock Robert L. McKay................................................ 721,049(3) 23.7(3)
Director
4100 Newport Place
Newport Beach, CA 92660
Common Stock Mark H. Stuenkel............................................... 52,149(4) 1.7(4)
Executive Vice President and Director
4100 Newport Place
Newport Beach, CA 92660
Common Stock All Directors and Officers as a group.......................... 1,394,702(6) 44.1(6)
(29 persons)
</TABLE>
A-83
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNER
NAME AND ADDRESS AND PERCENT OF CLASS
TITLE OF CLASS OF BENEFICIAL OWNER (1)
- ----------------- --------------------------------------------------------------- ---------------------
<S> <C> <C> <C>
Common Stock Financial Institutions Partners, L.P........................... 342,797(5) 11.3(5)
c/o Hovde Capital Inc.
1110 Lake Cook Rd. #165
Buffalo Grove, IL 60089-1965
Common Stock Basswood Partners.............................................. 158,701 5.2
52 Forest Ave.
Paramus, NJ 07652
</TABLE>
- ------------------------
(1) Except as otherwise indicated and subject to the Shareholder Agreements
executed in connection with the Merger Agreement, each of the persons named
in the table has the sole power to vote and dispose of his/her shares of
Common Stock subject to community property laws where applicable.
(2) Includes 13,333 shares of Common Stock which may be purchased on the
exercise of stock options.
(3) Includes 6,667 shares of Common Stock which may be purchased on the exercise
of stock options.
(4) Includes 24,583 shares of Common Stock which may be purchased on the
exercise of stock options.
(5) Includes 53,909 shares of Common Stock held beneficially by Hovde Financial,
Inc, the corporate general partner of Financial Institutions Partners, L.P.
Does not include the 266,659 additional shares of Common Stock which FIP has
asserted a right to acquire. See "FIP LITIGATION, Item 3 in the Company's
Annual Report on Form 10-K."
(6) Includes 92,914 shares of Common Stock which may be purchased on the
exercise of stock options.
A-84
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Bank has had, and expects to have in the future, banking transactions in
the ordinary course of its business with the directors of the Company, the
Company's shareholders and their affiliates on the same terms, including
interest rates and collateral securing the loans, as those prevailing at the
time for comparable transactions with unaffiliated persons, and which do not
involve more than the normal risk of collectibility, nor present other
unfavorable features.
CCB PERFORMANCE GRAPH
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE
<S> <C> <C> <C>
California Banks
Commercial Bankshares S&P 500 (under $500M)
Index Value
12/31/91 100.00 100.00 100.00
12/31/92 64.00 107.62 132.05
12/31/93 32.00 116.47 172.41
12/31/94 42.00 120.03 185.43
12/31/95 57.00 165.13 253.67
12/31/96 106.00 202.89 326.50
</TABLE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<S> <C>
FINANCIAL STATEMENTS:
Financial statements and schedules of the registrant are listed in the index to
Consolidated Financial Statements contained under Part II Item 8. Financial
Statements and Supplementary Data of this report.
FINANCIAL STATEMENT SCHEDULES:
All Financial statement schedules are omitted either because the conditions under
which they are required are not applicable or because the information is included
in the Financial Statements.
EXHIBITS:
(2) Amended and Restated Agreement and Plan of Merger dated as of December 19, 1996
between the Company and Monarch Bancorp.
(3)(a) Articles of Incorporation of California Commercial Bankshares, as amended.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1990).
</TABLE>
A-85
<PAGE>
<TABLE>
<S> <C>
(3)(b) By-Laws of California Commercial Bankshares, as amended. (Incorporated by
reference from the Company's Form 10-K filed on March 31, 1989).
(10)(A) Office Sublease between First California Associates and the Company. (Incorporated
by reference from the Company's Form 10-K filed on March 31,1983).
(10)(B) First Amendments to Sublease between First California Associates and the Bank.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1984).
(10)(C) The Company's Stock Bonus Plan. (Incorporated by reference from the Company's Form
10-K filed on March 31, 1986).
(10)(D) Amendments to Office Sublease between First California Associates and the Company.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1986).
(10)(E) Executive Salary Continuation Agreement between National Bank of Southern
California and William H. Jacoby. (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1989).
(10)(F) Executive Salary Continuation Agreements between National Bank of Southern
California and Mark H. Stuenkel. (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1987).
(10)(G) Executive Salary Continuation Agreement between National Bank of Southern
California and Abdul S. Memon. (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1987).
(10)(H) 401-K Plan. (Incorporated by reference from the Company's Form 10-K filed on March
31, 1989).
(10)(I) Lease for the premises on branch located at 22831 Lake Forest Drive, El Toro, Ca.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1989).
(10)(J) Lease for the premises on branch located at 625 The City Drive, Orange, Ca.
(Incorporated by reference from Company's Form 10-K filed on March 31, 1990).
(10)(K) Lease for the property on branch located at 17252 Armstrong Ave., Irvine, Ca.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1990).
(10)(L) 1982 Stock Option Plan, as amended. (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1991).
(10)(M) Lease for the property located at 4100 Newport Place, Newport Beach, Ca.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1992).
(10)(N) Support Agreement dated September 27, 1994 with Robert L. McKay. (Incorporated by
reference from the Company's 10-K filed on March 31, 1995).
(10)(O) Holding Company Support Agreement dated October 1, 1994 with Robert L. McKay.
(Incorporated by reference from the Company's Form 10-K filed on March 31, 1995)
(10)(P) Lease for the property located at 17330 Brookhurst Ste. 110, Fountain Valley, Ca.
(Incorporated by reference from the Company's Form 10-K filed on March 31, 1996)
(10)(Q) Stock Award Plan. (Incorporated by reference from the Company's Form 10-K filed on
March 31, 1996)
(10)(R) Form of Stock Option Agreement (Incorporated by reference from the Company's Form
10-K filed on March 31, 1996)
</TABLE>
A-86
<PAGE>
<TABLE>
<S> <C>
(10)(S) Form of Nonqualified Stock Option Agreement. (Incorporated by reference from the
Company's Form 10-K filed on March 31, 1996)
(10)(T) Form of Director's Nonqualified Stock Option Agreement. (Incorporated by reference
from the Company's Form 10-K filed on March 31, 1996)
(10)(U) Stock Option Agreement dated as of December 19, 1996 between the Company and
Monarch Bancorp
(21) Subsidiaries of the Company
(23) Independent Auditors' Consent
</TABLE>
(B) REPORTS ON FORM 8-K.
Current Report on Form 8-K filed December 29, 1996
A-87
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CALIFORNIA COMMERCIAL BANKSHARES
By: WILLIAM H. JACOBY April 26, 1997
---------------------------------
William H. Jacoby
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
PHILLIP L. BUSH
- ------------------------------ Director/Secretary April 26, 1997
Phillip L. Bush
MICHAEL J. GERTNER
- ------------------------------ Director/Treasurer April 26, 1997
Michael J. Gertner
JAMES W. HAMILTON
- ------------------------------ Director April 26, 1997
James W. Hamilton
FARRELL G. HINKLE
- ------------------------------ Director April 26, 1997
Farrell G. Hinkle
WILLIAM H. JACOBY
- ------------------------------ Director/President, C.E.O. April 26, 1997
William H. Jacoby
ROBERT L. MCKAY
- ------------------------------ Director/Chairman of the April 26, 1997
Robert L. McKay Board
MARK H. STUENKEL
- ------------------------------ Executive Vice President April 26, 1997
Mark H. Stuenkel
ABDUL S. MEMON
- ------------------------------ Principal Financial & April 26, 1997
Abdul S. Memon Accounting Officer
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
A-88
<PAGE>
APPENDIX B
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSBA
<TABLE>
<C> <S>
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1996
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
........................
</TABLE>
COMMISSION FILE NO. 0-13551
MONARCH BANCORP
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-3863296
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
30000 TOWN CENTER DRIVE LAGUNA NIGUEL 92677
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number (714) 495-3300
SECURITIES REGISTERED UNDER SECTION 12(B) OF EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF EXCHANGE ACT:
Common Stock, no par value
(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__ No _____
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form 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-KSBA or any
amendment to this Form 10-KSBA. [ ]
The issuer's net revenues for its most recent fiscal year was $13,872,000
The aggregate market value of the voting stock held by non-affiliates of the
issuer as of March 14, 1996 was $85,379,840
Number of registrant's shares of Common Stock outstanding as of April 21,
1997 was 34,373,021
Documents incorporated by reference: None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
B-1
<PAGE>
PART I
ITEM 1. 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 ("Monarch"), a
California state-chartered bank. The Company commenced operations on June 18,
1984. It is registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended ("BHC Act"), and is subject to the supervision and
regulation of the Board of Governors of the Federal Reserve System ("the
Board"). On September 30, 1996, the Company acquired Western Bank ("Western").
Because Monarch and Western (collectively "the Banks") comprise substantially
all of the business of the Company, references to the "Company" mean the Company
and the Banks together, unless the context otherwise requires.
The Company's principal business is to serve as a holding company for the
Banks and other possible banking or banking-related subsidiaries the Company may
acquire in the future. Since inception, the Company has not been active except
through its subsidiaries, and the Company has no industry segments other than
banking.
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 Monarch; and
$53,500 to retire Company debt; and approximately $2,065,000 in cash was being
held by the Company for future operating needs or investment. The increase in
Monarch's capital met or exceeded Monarch's regulatory commitments to the
Federal Deposit Insurance Corporation ("the FDIC") and Superintendent (as
defined herein) 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 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 approximately 2,887,000 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%.
As part of the September 30, 1996 Western acquisition, the Company sold
approximately 26,147,000 shares of common stock in a private placement (the
"1996 Private Placement") for net proceeds of approximately $42,213,000.
Pursuant to this equity transaction, the Company issued to parties related to
Belle Plaine Financial, LLC, 784,391 warrants to acquire common stock at $1.98
per share. The warrants expire on September 30, 2006.
As of December 31, 1996, the Company had total consolidated assets of
approximately $512 million, total consolidated net loans of approximately $255
million, total goodwill of approximately $29 million, total consolidated
deposits of approximately $443 million, and total consolidated shareholders'
equity of approximately $54 million.
ACQUISITION OF WESTERN BANK
On September 30, 1996, the Company acquired all of the issued and
outstanding shares of Western, a state chartered bank located in west Los
Angeles. Western has five offices, including its head office in Westwood.
Western is operated as a wholly-owned subsidiary of the Company. The Company
paid $17.25 per share, or approximately $61.1 million in cash, for the 3,543,156
issued and outstanding shares of Western,
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<PAGE>
and an additional $5.5 million representing the difference between $17.25 and
the exercise price of the 425,724 outstanding stock options of Western. The
aggregate net consideration for the acquisition of Western was approximately
$66.6 million. The acquisition was accounted for under the purchase method of
accounting.
The Company funded the purchase price with the issuance of approximately
$42.2 million of common stock, net of approximately $1 million in issuance
costs, in the 1996 Private Placement, and from the proceeds of a three year loan
of $26.5 million from The Northern Trust Company (the "Lender"). A $15.5 million
dividend was declared by Western concurrently with the completion of the
acquisition and paid to the Company, which was used to reduce the $26.5 million
note to $11 million. For further information on the Western acquisition, see
note 2 of notes to consolidated financial statements.
PROPOSED ACQUISITIONS
CALIFORNIA COMMERCIAL BANKSHARES
On December 19, 1996, the Company executed an Agreement and Plan of Merger
(the "CCB Merger") with California Commercial Bankshares ("CCB") in which CCB
will merge with and into the Company, and National Bank of Southern California
("NBSC"), the wholly-owned subsidiary of CCB, will become a wholly-owned
subsidiary of the Company. This Agreement provides for the shareholders of CCB
to receive shares of the Company having a year-end adjusted book value equal to
1.6 times the year-end adjusted book value of CCB. The adjustments to book value
included certain expenses related to the merger. Based on this formula, it has
been determined that holders of CCB common stock will receive 8.5 shares (1
share assuming the Reverse Stock Split (as defined herein) is effected) of
Company common stock for each share of CCB common stock. The Agreement is
subject to several conditions, including approval of the shareholders of the
Company and CCB, which is intended to be sought at the annual shareholders
meetings for both the Company and CCB in May 1997, and regulatory approvals. It
is expected that the CCB Merger will be accounted for as a pooling of interests.
SC BANCORP
On April 29, 1997, the Company executed an Agreement and Plan of
Reorganization with SC Bancorp ("SCB") in which SCB will merge with and into the
Company (the "SCB Merger"). This Agreement provides for the shareholders of SCB
to receive shares of the Company based on a purchase price of $14.25 per share
of SCB Common Stock using a floating exchange ratio for the Company Common Stock
within a price range of $2.75 to $3.75 per share. The Agreement is subject to
several conditions, including approval of the shareholders of the Company and
SCB, which is intended to be sought at a special shareholder meeting held by
each of the Company and SCB in the third quarter of 1997, and certain regulatory
approvals. It is expected that the SCB Merger will be accounted for as a pooling
of interests.
PROPOSED AMENDMENTS TO THE AMENDED ARTICLES OF INCORPORATION
At the Annual Meeting of the Company to be held in May 1997, the Company
intends to seek approval of its shareholders to amend the Company's Amended
Articles of Incorporation in order to: (i) change the Company's name to "Western
Bancorp" and (ii) effect a one for 8.5 reverse stock split (the "Reverse Stock
Split") immediately prior to the consummation of the Merger.
MANAGEMENT CHANGES
In conjunction with the acquisition of Western, the Company has restructured
its management team. Hugh S. Smith, Jr., former Chairman and Chief Executive
Officer of Western, has become Chairman and Chief Executive Officer of the
Company. Matthew P. Wagner, formerly an Executive Vice President of First Bank
System in Minneapolis, Minnesota, was recruited to become President and Chief
Executive
B-3
<PAGE>
Officer of Western and became President of the Company in February 1997. Arnold
C. Hahn, formerly a Senior Vice President of First Bank System in Minneapolis,
Minnesota, was recruited to become an Executive Vice President and Chief
Financial Officer of the Company and its subsidiary banks.
REGULATORY ORDERS
Following the conclusion of a FDIC examination of Monarch in 1994, for the
purpose of cooperating with the FDIC and without admitting or denying any
allegations, Monarch entered into a Section 8(b) Order (the "8(b) Order") with
the FDIC. The 8(b) Order became effective on December 23, 1994, and it required
Monarch to perform several actions within certain time frames. In addition, as a
result of a 1994 examination by the California State Banking Department, Monarch
agreed to a final order under California Financial Code Section 1913 (the "1913
Order," and collectively with the 8(b) Order, the "Orders") with the Department
that became effective December 14, 1994. The 1913 Order provided that Monarch
take certain actions. Monarch also was notified in late 1994 that the FDIC had
determined that the Bank fell within the undercapitalized capital category under
Section 38 of the FDIC Act.
Management and the Board of Directors made every possible effort in 1995 to
insure full compliance with two such Orders including specific activities to
increase capital, rewriting or drafting new policies and procedures, 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 Monarch, confirmed
that Monarch was in substantial compliance with its Section 1913 Order and
removed that Order in December 1995. The FDIC also completed an inspection and
off-site review of Monarch in November 1995. Based on its review process, the
FDIC terminated its Section 8(b) Order in March 1996 while requesting Monarch to
agree to an informal Memorandum of Understanding which the Board of Directors
signed in March 1996. In signing the Memorandum, Monarch undertook to further
the corrective actions outlined in the Section 8(b) Order.
On April 24, 1996 Monarch became a member of the Federal Reserve Bank of San
Francisco. As a member bank, Monarch's primary federal regulator is now the
Federal Reserve Bank rather than the FDIC, although Monarch's deposits continue
to be insured by the FDIC. On July 3, 1996, as a result of both Federal Reserve
Bank membership and significant improvement in the financial condition and
operations of Monarch, the Memorandum of Understanding was terminated by the
FDIC. There are no remaining regulatory restrictions on the Company or Monarch
nor are there any regulatory restrictions on Western at December 31, 1996.
BACKGROUND
The Company's primary market areas are the western part of Los Angeles,
served by Western, and south Orange County, California, served by Monarch. The
principal business of the Banks is to accept time and demand deposits, originate
commercial loans, consumer loans and real estate loans, and make other
investments. The Banks offer 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 Banks originate 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 Banks' loans are primarily short-term and adjustable
rate. Special services or requests beyond the lending limits of the Banks are
arranged through correspondent banks. The Banks currently offer access to ATM
networks through other major banks. Monarch issues MasterCard and VISA credit
cards through a correspondent bank and is also a merchant depository for
cardholder drafts under Visa and Master Card credit cards. Similar to other
state-chartered banks of their size, the Banks can provide investment and
international banking services through its major correspondent banks.
Monarch was incorporated as a California corporation in October 1979, and
commenced operation as a California state-chartered bank on April 21, 1980.
Monarch is insured under the Federal Deposit
B-4
<PAGE>
Insurance Act up to applicable limits thereof, and effective in April 1996,
Monarch became a member of the Federal Reserve System. Monarch's head office is
located at 30000 Town Center Drive, Laguna Niguel, California 92677. Monarch
opened a new branch in Laguna Beach in June of 1996. On September 30, 1996, the
Company acquired Western, a state chartered bank with five branches in the
western part of Los Angeles. Western's head office is at 1251 Westwood
Boulevard, Los Angeles, California 90024. Western is not a member of the Federal
Reserve System, but its deposits are insured under the Federal Deposit Insurance
Act up to applicable limits thereof.
Since 1987, the Company's Strategic Plan has emphasized serving the banking
needs of individuals, professionals, and small to medium-sized businesses in the
local market areas served by the Banks and in the contiguous communities. The
Banks maintain courier services which operate throughout mid- and
southern-Orange County and the western part of Los Angeles, serving
professionals and small businesses, and this has greatly expanded the service
areas of the Banks without the need for additional physical facilities. The
Banks' major lending emphasis has been directed at short term owner-occupied
luxury home construction projects, commercial lending to professionals and
personal loans to individuals, with the objective of building a balanced
community loan and investment portfolio mix. The Banks rely on a foundation of
locally generated deposits and management believes the Banks have a relatively
low cost of funds due to a high percentage of low cost and non-interest bearing
deposits.
The primary goal for the Company is to continue to increase profitability
by, among other things, expanding prudently on the foundation provided by the
additional equity capital received in March 1995, September 1995 and September
1996, the acquisition of Western in September 1996, the earnings improvement
program that is ongoing and the improvements made in credit administration and
loan quality that began in 1995.
As part of its efforts to achieve long-term stable profitability and to
respond to a changing economic environment in Southern California, western Los
Angeles and south Orange County, the Company and the Banks are investigating all
possible options to augment its traditional focus by broadening its customer
services. The Company and the Banks believe that its strong capital base will
permit an acceleration of efforts at a greater diversification of both the
Banks' loan portfolios and deposit bases and new sources of fee income. Areas of
possible future diversification include additional days and expanded hours of
operation, new types of lending, brokerage, annuity and mutual funds products,
as well as the acquisition of additional financial institutions or branches of
other financial institutions in cities and areas adjoining the Company's current
market areas. The pending acquisition of California Commercial Bankshares is a
natural result of this strategy.
The Company believes that small institutions are available at attractive
prices and that branches of other financial institutions may be available at
substantially below their investment cost. Although the Company continues to
have preliminary discussions with a number of financial institutions regarding
possible acquisitions, other than the previously discussed acquisition of CCB,
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.
SUPERVISION AND REGULATION
MONARCH BANCORP
Upon the reorganization of Monarch as a wholly-owned subsidiary, the Company
became a bank holding company within the meaning of the BHC Act and is subject
to the supervision and regulation of the Federal Reserve Bank of San Francisco.
The Company functions primarily as the sole stockholder of Monarch, Western and
its non-bank subsidiary, and establishes general policies and activities of the
operating subsidiaries.
B-5
<PAGE>
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, 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
BHC Act, and is registered with and subject to the supervision of the Board. The
Company is required to obtain the prior approval of the 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 BHC 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 BHC 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 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 Board considers whether the performance of such activities
by the 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 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
non-affiliated 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.
The Company's primary sources of income are the receipt of dividends and
management fees from its subsidiaries, and interest income on its investments.
Monarch's and Western's ability to make such payments to the Company are 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,
Monarch or Western 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
Board and to provide such additional information as the Board may require. The
Board also has the authority to examine the Company and each of its subsidiaries
with the cost thereof to be borne by the Company.
B-6
<PAGE>
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 make a 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 such subsidiary does not exceed 10% of such
subsidiary's capital stock and surplus on a per affiliate basis or 20% of such
subsidiary's capital stock and surplus on an aggregate affiliate basis. Such
transactions 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. The 1995 Act (as defined below) 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 Board also impose certain constraints on
the redemption or purchase by a bank holding company of its own shares of stock.
The 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 Board has the authority to regulate debt obligations
(other than commercial paper) issued by bank 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 AND WESTERN BANK
Banks are extensively regulated under both federal and state law. Monarch
and Western as California state-chartered banks are subject to primary
supervision, periodic examination and regulation by the Federal Reserve Bank
("FRB") and the FDIC.
Monarch and Western are insured by the FDIC, which currently insures
deposits of each member bank to a maximum of $100,000 per depositor. For this
protection, Monarch and Western, as is the case with all insured banks, pay a
semi-annual statutory assessment and are subject to the rules and regulations of
the FDIC. Monarch is a member of the Federal Reserve System and is subject to
certain regulations of the Board. Western is not a member of the Federal Reserve
System, but is nevertheless subject to certain regulations of the Board.
B-7
<PAGE>
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of Monarch and Western.
State and federal statutes and regulations relate to many aspects of Monarch's
and Western's operations, including reserves against deposits, interest rates
payable on deposits, loans, investments, mergers and acquisitions, borrowings,
dividends and locations of branch offices. Further, Monarch and Western are
required to maintain certain levels of capital.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to the Company by Monarch and Western. 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 shareholders 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 in the case of Western, and the Board and the FDIC in the case of
Monarch, also have authority to prohibit Western or Monarch, as appropriate,
from engaging in what, in the Board's and/or 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
Board and/or the FDIC could assert 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 Monarch and/or Western unless the loans are secured by
marketable obligations of designated amounts. Further, such secured loans and
investments by Monarch and/or Western in any other affiliate is limited to 10
percent of such subsidiary bank's capital and surplus (as defined by federal
regulations) and such secured loans and investments are limited, in the
aggregate, to 20% of such subsidiary 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 Monarch and
Western. Additional restrictions on transactions with affiliates may be imposed
on Monarch and/or Western under the prompt corrective action provisions of the
FDIC Improvement Act ("FDICIA").
POTENTIAL ACTIONS
Commercial banking organizations, such as Monarch and Western, may be
subject to potential enforcement actions by the Board, 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 FDICIA.
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 a bank on its deposits and its
other borrowings and the interest rate received by a bank on loans extended to
its customers and securities held in a bank's portfolio comprise the major
portion of a bank's earnings. These rates are highly sensitive to many factors
that are beyond the control of a bank. Accordingly, the earnings and growth of a
bank are subject to the influence of local, domestic and foreign economic
conditions, including recession, unemployment and inflation.
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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
Board. The 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 varying
the discount rates applicable to borrowings by depository institutions. The
actions of the 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. The
likelihood of any major changes and the impact such changes might have on the
Company are impossible to predict. Certain of the potentially significant
changes which have been enacted and proposals which have been made recently are
discussed below.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, FDICIA was enacted into law. Set forth below is a
brief discussion of certain portions of this law and implementing regulations
that have been adopted or proposed by the Board, the Comptroller of the Currency
("Comptroller"), the Office of Thrift Supervision ("OTS") and the FDIC
(collectively, the "federal banking agencies").
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the federal banking
agencies to prescribe, by regulation, standards for all insured depository
institutions and depository institution holding companies relating to internal
controls, loan documentation, credit underwriting, interest rate exposure and
asset growth. Standards must also be prescribed for classified loans, earnings
and the ratio of market value to book value for publicly traded shares. The
FDICIA also requires the federal banking agencies to issue uniform regulations
prescribing standards for real estate lending that are to consider such factors
as the risk to the deposit insurance fund, the need for safe and sound operation
of insured depository institutions and the availability of credit. Further,
FDICIA requires the federal banking agencies to establish standards prohibiting
compensation, fees and benefit arrangements that are excessive or could lead to
financial loss.
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA requires each federal banking
agency to take prompt corrective action to resolve the problems of insured
depository institutions that fall below one or more prescribed minimum capital
ratios. The purpose of this law is to resolve the problems of insured depository
institutions at the least possible long-term cost to the appropriate deposit
insurance fund.
The law requires each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized (significantly exceeding the required minimum capital requirements),
adequately capitalized (meeting the required capital requirements),
undercapitalized (failing to meet any one of the capital requirements),
significantly undercapitalized (significantly below any one capital requirement)
and critically undercapitalized (failing to meet all capital requirements).
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of FDICIA.
Under the regulations, an insured depository institution will be deemed to be:
- "well capitalized" if it (i) has total risk-based capital of 10 percent or
greater, Tier 1 risk-based capital of 6 percent or greater and a leverage
capital ratio of 5 percent or greater and (ii) is not
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subject to an order, written agreement, capital directive or prompt
corrective action directive to meet and maintain a specific capital level
for any capital measure;
- "adequately capitalized" if it has total risk-based capital of 8 percent
or greater, Tier 1 risk-based capital of 4 percent or greater and a
leverage capital ratio of 4 percent or greater (or a leverage capital
ratio of 3 percent or greater if the institution is rated composite 1
under the applicable regulatory rating system in its most recent report of
examination);
- "undercapitalized" if it has total risk-based capital that is less than 8
percent, Tier 1 risk-based capital that is less than 4 percent or a
leverage capital ratio that is less than 4 percent (or a leverage capital
ratio that is less than 3 percent if the institution is rated composite 1
under the applicable regulatory rating system in its most recent report of
examination);
- "significantly undercapitalized" if it has total risk-based capital that
is less than 6 percent, Tier 1 risk-based capital that is less than 3
percent or a leverage capital ratio that is less than 3 percent; and
- "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2 percent.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized," may be
reclassified to the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, (i) determines that
the institution is in an unsafe or unsound condition or (ii) deems the
institution to be engaging in an unsafe or unsound practice and not to have
corrected the deficiency. At each successive lower capital category, an insured
depository institution is subject to more restrictions and federal banking
agencies are given less flexibility in deciding how to address the problems
associated with such category.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions, and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time the institution became undercapitalized or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate federal banking
agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect to implement,
an acceptable capital restoration plan, is subject to additional restrictions
and sanctions. These include, among other things: (i) a forced sale of voting
shares to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with affiliates;
(iii) further limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or termination of
specified
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activities; (vi) replacement of directors or senior executive officers, subject
to certain grandfather provisions for those elected prior to enactment of
FDICIA; (vii) prohibitions on the receipt of deposits from correspondent
institutions; (viii) restrictions on capital distributions by the holding
companies of such institutions; (ix) required divestiture of subsidiaries by the
institution; or (x) other restrictions as determined by the appropriate federal
banking agency. Although the appropriate federal banking agency has discretion
to determine which of the foregoing restrictions or sanctions it will seek to
impose, it is required to force a sale of voting shares or merger, impose
restrictions on affiliate transactions and impose restrictions on rates paid on
deposits unless it determines that such actions would not further the purpose of
the prompt corrective action provisions. In addition, without the prior written
approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to its senior executive
officers or provide compensation to any of them at a rate that exceeds such
officer's average rate of base compensation during the 12 calendar months
preceding the month in which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
The FDIC has adopted risk-based minimum 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 percent for assets with low credit risk, such as
certain U.S. Treasury securities, to 100 percent for assets with relatively high
credit risk, such as business loans.
In addition to the risk-based guidelines, the FDIC requires banks to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a bank rated in the highest of the five categories used by
the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to total
assets is 3 percent. For all banks not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3
percent minimum, or 4 percent to 5 percent. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the FDIC has the discretion to set individual minimum capital
requirements for specific institutions at rates significantly above the minimum
guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates on
the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed would
be determined on a case-by-case basis by the examiner and the appropriate
federal banking agency.
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In January 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 allowances 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.
OTHER ITEMS. FDICIA also, among other things, (i) limits the percentage of
interest paid on brokered deposits and limits the unrestricted use of such
deposits to only those institutions that are well capitalized; (ii) requires the
FDIC to charge insurance premiums based on the risk profile of each institution;
(iii) eliminates "pass through" deposit insurance for certain employee benefit
accounts unless the depository institution is well capitalized or, under certain
circumstances, adequately capitalized; (iv) prohibits insured state chartered
banks from engaging as principal in any type of activity that is not permissible
for a national bank unless the FDIC permits such activity and the bank meets all
of its regulatory capital requirements; (v) directs the appropriate federal
banking agency to determine the amount of readily marketable purchased mortgage
servicing rights that may be included in calculating such institution's
tangible, core and risk-based capital; and (vi) provides that, subject to
certain limitations, any federal savings association may acquire or be acquired
by any insured depository institution.
In addition, the FDIC has issued final and proposed regulations implementing
provisions of FDICIA relating to powers of insured state banks. Final
regulations issued in October 1992 prohibit insured state banks from making
equity investments of a type, or in an amount, that are not permissible for
national banks. In general, equity investments include equity securities,
partnership interests and equity interests in real estate. Under the final
regulations, non-permissible investments were to be divested by no later than
December 19, 1996. The Banks have no such non-permissible investments.
Regulations issued in December 1993 prohibit insured state banks from
engaging as principal in any activity not permissible for a national bank,
without FDIC approval. The proposal also provides that subsidiaries of insured
state banks may not engage as principal in any activity that is not permissible
for a subsidiary of a national bank, without FDIC approval.
CAPITAL ADEQUACY GUIDELINES. The FDIC has issued guidelines to implement
the risk-based capital requirements. The guidelines are intended to establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations, takes
off-balance sheet items into account in assessing capital adequacy and minimizes
disincentives to holding liquid, low-risk assets. Under these guidelines, assets
and credit equivalent amounts of off-balance sheet items, such as letters of
credit and outstanding loan commitments, are assigned to one of several risk
categories, which range from 0 percent for risk-free assets, such as cash and
certain U.S. Government securities, to 100 percent for relatively high-risk
assets, such as loans and investments in fixed assets, premises and other real
estate owned. The aggregated dollar amount of each category is then multiplied
by the risk-weight associated with that category. The resulting weighted values
from each of the risk categories are then added together to determine the total
risk-weighted assets.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus and
retained earnings, qualifying non-cumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchase credit card
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relationships may be included, subject to certain limitations. At least 50
percent of the banking organization's total regulatory capital must consist of
Tier 1 capital.
Tier 2 capital may consist of (i) the allowance for possible loan and lease
losses in an amount up to 1.25 percent of risk-weighted assets; (ii) perpetual
preferred stock, cumulative perpetual preferred stock and long-term preferred
stock and related surplus; (iii) hybrid capital instruments (instruments with
characteristics of both debt and equity), perpetual debt and mandatory
convertible debt securities; and (iv) eligible term subordinated debt and
intermediate-term preferred stock with an original maturity of five years or
more, including related surplus, in an amount up to 50 percent of Tier 1
capital. The inclusion of the foregoing elements of Tier 2 capital are subject
to certain requirements and limitations of the federal banking agencies.
The FDIC has also adopted a minimum leverage capital ratio of Tier 1 capital
to average total assets of 3 percent for the highest rated banks. This leverage
capital ratio is only a minimum. Institutions experiencing or anticipating
significant growth or those with other than minimum risk profiles are expected
to maintain capital well above the minimum level. Furthermore, higher leverage
capital ratios are required to be considered well capitalized or adequately
capitalized under the prompt corrective action provisions of FDICIA.
The Regulatory Capital Guidelines as well as the actual capitalization for
Monarch, Western and the Company as of December 31, 1996 follow:
<TABLE>
<CAPTION>
ADEQUATELY WELL COMPANY
CAPITALIZED CAPITALIZED MONARCH WESTERN CONSOLIDATED
----------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Detailed computations of
Tier 1 leverage capital ratio..................... a4.00% a5.00% 8.07% 6.05% 5.07%
Tier 1 risk-based capital ratio................... a4.00% a6.00% 13.64% 10.93% 9.05%
Total risk-based capital.......................... a8.00% a10.00% 14.89% 12.19% 10.30%
</TABLE>
SAFETY AND SOUNDNESS STANDARDS. In February 1995, the federal banking
agencies adopted final guidelines establishing standards for safety and
soundness, as required by FDICIA. The guidelines set forth operational and
managerial standards relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. Guidelines for asset
quality and earnings standards will be adopted in the future. The guidelines
establish the safety and soundness standards that the agencies will use to
identify and address problems at insured depository institutions before capital
becomes impaired. If an institution fails to comply with a safety and soundness
standard, the appropriate federal banking agency may require the institution to
submit a compliance plan. Failure to submit a compliance plan or to implement an
accepted plan may result in enforcement action.
In December 1992, the federal banking agency issued final regulations
prescribing uniform guidelines for real estate lending. The regulations 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 federal banking agencies' appraisal standards. Federally
related transactions include the sale, lease, purchase, investment in, or
exchange of, real property or interests in real property, the financing of real
property, and the use of real
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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 percent 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 implemented a final risk-based assessment system, as required by
FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," or 1.25
percent, the total amount raised from BIF members by the risk-based assessment
system may not be less than the amount that would be raised if the assessment
rate for all BIF members were .023 percent of deposits. The FDIC, effective
September 15, 1995, lowered assessments from their rates of $.23 to $.31 per
$100 of insured deposits to rates of $.04 to $.31, depending on the condition of
the bank, as a result of the recapitalization of the BIF. On November 15, 1995,
the FDIC voted to drop its premiums for well capitalized banks to zero effective
January 1, 1996. Other banks will be charged risk-based premiums of up to $.27
per $100 of deposits.
Governor Pete Wilson recently signed Assembly Bill 3351 (the "Banking
Consolidation Bill"), authored by Assemblyman Ted Weggeland and sponsored by the
California State Banking Department (the "Department"), effective July 1, 1997,
which creates the California Department of Financial Institutions ("DFI") to be
headed by a Commissioner of Financial Institutions out of the existing
Department which regulates state chartered commercial banks and trust companies
in California.
The Banking Consolidation Bill, among other provisions, also (i) transfers
regulatory jurisdiction over state chartered savings and loan associations from
the Department of Savings and Loans ("DSL") to the newly created DFI and
abolishes the DSL; (ii) transfers regulatory jurisdiction over state chartered
industrial loan companies and credit unions from the Department of Corporations
to the newly-created DFI; and (iii) establishes within the DFI separate
divisions for credit unions, commercial banks, industrial loan companies and
savings and loans. As the Banking Consolidation Bill has only recently been
enacted, it is impossible to predict with any degree of certainty what impact it
will have on the banking industry in general and the Banks in particular.
Congress has recently passed, and President Clinton has signed into law,
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 1980's
and early 1990's. The new law required savings and loan associations to bear the
cost of recapitalizing the SAIF and, after January 1, 1997, banks must
contribute towards paying off the financing bonds, including interest. In 2000,
the banking industry will assume the bulk of the payments. The new law also aims
to merge the Bank Insurance Fund and SAIF by 1999 but not until the bank and
savings and loan charters are combined. The Treasury Department has until March
31, 1997 to deliver to Congress comments and recommendations on combining the
charters. Additionally, the new law provides "regulatory relief" for the banking
industry by eliminating approximately 30 laws and regulations. The costs and
benefits of the new law to the Banks can not currently be accurately predicted.
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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. Effective October 2, 1995, California adopted legislation which
"opts California into" the Interstate Act. However, the California Legislation
restricts out-of-state banks from purchasing branches or starting a de novo
branch to enter the California banking market. Such banks may proceed only by
way of purchases of whole banks.
The Interstate Act is likely to increase competition in the Banks' market
areas especially from larger financial institutions and their holding companies.
It is difficult to assess the impact such increased competition will likely have
on the Banks' operations.
On September 28, 1995, Governor Wilson signed Assembly Bill 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 California Statutes of 1995, became operative on
October 2, 1995.
The 1995 Acts 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 (California Financial Code Section 682), and (iii) repeal of
the aggregate limit on real estate loans (California Financial Code Section
1230).
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COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS. The Banks are
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 institutions' 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.
HAZARDOUS WASTE CLEAN-UP COSTS. Management is aware of recent legislation
and cases relating to hazardous waste clean-up costs and potential liability.
Based on a general survey of the loan portfolios of both Monarch and Western,
conversations with local authorities and appraisers, and the type of lending
currently and historically done by Monarch and Western (Monarch and Western have
generally 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. Various requirements and restrictions under
the laws of the United States and the State of California affect the operations
of the Banks. 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 Superintendent
approves the number and locations of the branch offices of a bank. California
law exempts banks from the usury laws.
MARKET AREA
Western's market area is the western side of Los Angeles with one office in
the San Fernando Valley. These communities are generally very affluent, and the
Company believes that the communities represent a strong base of small to medium
sized businesses and law firms which provide services to the entertainment
industry. This market area includes new construction lending, retail banking
opportunities and commercial banking for small businesses, professionals and
some light industry.
Monarch's main market area, Laguna Niguel, is located in southern Orange
County. It is a typical Southern California "bedroom" community with over 50,000
residents. Monarch also provides services to similar neighboring communities
including Mission Viejo, Dana Point, San Juan Capistrano, Laguna Beach, San
Clemente, Laguna Hills, and Aliso Viejo. There is no one dominant business
segment and a majority of the residents work outside of the immediate service
areas. This market area includes both retail banking opportunities and
commercial banking for small businesses, professionals and some light industry.
The Company's market areas in the past five years have felt the full impact
of the recession that continued in some areas of California through 1996. The
impact of the recession has been felt through the progressive loss of jobs as
defense contractors cut back and restructure; in declines in construction
activity; cutbacks in the aerospace industry and in the closing of more than the
normal number of small businesses. Real estate values have substantially
declined with some properties dropping by 20% to 30% depending on location and
price range and in correlation to increases in unemployment statistics. Most
recent economic reports in 1996, however, point to decreases in unemployment and
some increases in both sales volume and prices of real estate.
B-16
<PAGE>
BUSINESS CONCENTRATIONS
As of December 31, 1996, Monarch had approximately $80 million in assets and
$73 million in deposits, and Western had approximately $431 million in assets
and $375 million in deposits. No individual or single group of related accounts
is considered material in relation to Monarch's, Western's or the Company's
totals, or in relation to its overall business.
COMPETITION
The banking business in California generally, and in Monarch's and Western's
primary service areas specifically, is highly competitive with respect to both
loans and deposits, and is dominated by a relatively small number of major banks
with many offices and operations over a wide geographic area. Among the
advantages such major banks have over Monarch and Western are their ability to
finance and engage in 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 Monarch or Western (but which can be offered indirectly by
Monarch and Western through correspondent institutions). In addition, by virtue
of their greater total capitalization, such banks have substantially higher
lending limits than Monarch and Western. (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 Monarch and Western 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,
Monarch and Western attempt to use to the fullest extent possible the
flexibility which the Company's 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.
EMPLOYEES
As of January 31, 1997, Monarch had 48 full time equivalent employees,
Western had 109 full time equivalent employees and the Company had 3 full time
equivalent employees.
M. B. MORTGAGE COMPANY, INC.
M.B. Mortgage Company, Inc. was incorporated under California law on
November 8, 1983, and is wholly-owned by Monarch 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 Consolidated Financial Statements (Item
7) included elsewhere herein. Data provided includes the accounts and results of
Western as of dates, and for periods, subsequent to the September 30, 1996
acquisition only.
B-17
<PAGE>
The following summary should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1996(1) 1995 1994 1993 1992
------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONDENSED STATEMENT OF OPERATIONS DATA:
Interest income................................... $ 12,497 $ 4,491 $ 3,938 $ 4,348 $ 5,028
Interest expense.................................. 3,952 1,148 947 1,148 1,632
------------ ---------- ---------- ---------- ---------
Net interest income............................... 8,545 3,343 2,991 3,200 3,396
Provision for loan losses......................... 228 425 995 1,280 67
Non-interest income (other than gains or losses on
securities transactions)........................ 1,108 933 696 920 999
Gains (losses) on securities transactions......... 267 -- (47) 40 --
Non-interest expense other than OREO expense...... 8,753 3,602 4,251 4,134 4,037
OREO expense (income)............................. (151) 62 243 86 82
------------ ---------- ---------- ---------- ---------
Income (loss) before taxes...................... 1,090 187 (1,849) (1,340) 209
Income tax expense (benefit)...................... 352 (496) 2 2 34
------------ ---------- ---------- ---------- ---------
Net income (loss)............................... $ 738 $ 683 $ (1,851) $ (1,342) $ 175
------------ ---------- ---------- ---------- ---------
------------ ---------- ---------- ---------- ---------
PER SHARE DATA:
Net income (loss) per share....................... $ 0.05 $ 0.13 $ (2.33) $ (1.71) $ 0.25
Cash dividends declared........................... -- -- -- -- --
Book value per share.............................. $ 1.57 $ 1.34 $ 0.88 $ 3.68 $ 5.27
Shares used to compute net income (loss) per
share........................................... 14,974,918 5,071,000 794,300 786,000 712,000
------------ ---------- ---------- ---------- ---------
------------ ---------- ---------- ---------- ---------
BALANCE SHEET DATA:
Assets............................................ $ 512,361 $ 70,101 $ 59,974 $ 67,119 $ 68,499
Loans............................................. 261,055 32,650 31,040 35,369 46,233
Securities........................................ 164,724 28,665 16,138 18,198 7,284
Interest-earning assets........................... 429,996 64,451 54,452 62,303 56,102
Goodwill.......................................... 29,342 -- -- -- --
Deposits.......................................... 442,984 58,742 58,643 63,715 63,963
Notes payable and other borrowings................ 11,000 132 173 211 250
Shareholders' equity.............................. 54,128 10,997 702 2,923 3,888
------------ ---------- ---------- ---------- ---------
------------ ---------- ---------- ---------- ---------
ASSET QUALITY:
Nonaccrual loans.................................. $ 9,315 $ 345 $ 431 $ 2,847 $ 737
OREO.............................................. 3,889 150 617 1,293 699
------------ ---------- ---------- ---------- ---------
Total nonaccrual loans and OREO................. $ 13,204 $ 495 $ 1,048 $ 4,140 $ 1,436
------------ ---------- ---------- ---------- ---------
------------ ---------- ---------- ---------- ---------
PERFORMANCE RATIOS:
Return on average assets.......................... 0.40% 1.08% (2.92%) (1.96%) 0.28%
Return on average shareholders' equity............ 3.37% 9.91% (74.55%) (33.22%) 4.41%
Net interest spread............................... 4.43% 4.98% 5.02% 4.83% 5.05%
Net interest margin............................... 5.43% 5.84% 5.34% 5.20% 5.87%
Average shareholders' equity to average assets.... 11.85% 10.92% 3.92% 5.90% 6.24%
ASSET QUALITY RATIOS:
Nonaccrual loans to gross loans................... 3.57% 1.06% 1.39% 8.05% 1.59%
Nonaccrual loans and OREO to total assets......... 2.58% 0.71% 1.75% 6.17% 2.10%
Allowance for loan losses to total loans.......... 2.07% 2.62% 3.66% 2.99% 1.24%
Allowance for loan losses to nonaccrual loans..... 58% 248% 264% 37% 78%
Net charge-offs to average loans.................. 0.99% 2.46% 2.82% 1.96% 0.47%
</TABLE>
- ------------------------
(1) Includes the accounts and operating results of Western since the September
30, 1996 acquisition date.
B-18
<PAGE>
INTEREST RATES AND INTEREST RATE DIFFERENTIALS
The Company's consolidated earnings depend primarily upon the difference
between the income the Banks receive from their loan portfolios and investment
securities, and their cost of funds, including principally interest paid on
savings and time deposits. Interest rates charged on the Banks' 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 Banks' control, such
as federal economic and tax policies, the general supply of money in the
economy, governmental budgetary actions, and the actions of the Board.
The following table provides information on net interest income for the past
three fiscal years, setting forth average balances of interest-earnings assets
and interest-bearing liabilities, the income earned and expense recorded thereon
and the resulting average yield-cost ratios (dollars in thousands):
<TABLE>
<CAPTION>
INTEREST RATES AND INTEREST RATE DIFFERENTIALS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1996
------------------------------------ 1995
AVERAGE --------------------------------------
BALANCE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
(1) EXPENSE YIELD/ COST BALANCE (1) EXPENSE YIELD/ COST
--------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks..... $ 53 $ 3 5.66% $ 1,016 $ 43 4.23%
Securities held to maturity.............. 8,011 516 6.44% 6,538 429 6.56%
Securities available for sale............ 51,588 3,167 6.14% 14,227 589 4.14%
Federal funds sold....................... 11,659 604 5.18% 6,676 376 5.63%
Loans (net)(2)........................... 86,190 8,207 9.52% 28,808 3,054 10.60%
--------- ----------- ----------- -----------
INTEREST EARNING ASSETS................ 157,501 12,497 7.93% 57,265 4,491 7.84%
----------- --- ----------- -----
NON INTEREST-EARNING ASSETS:
Cash and due from banks.................. 11,616 3,725
Premises and equipment (net)............. 1,894 630
Other real estate owned.................. 1,366 490
Goodwill................................. 7,419 --
Other assets............................. 4,910 970
--------- -----------
TOTAL ASSETS........................... $ 184,706 $ 63,080
--------- -----------
--------- -----------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits......... $ 71,920 $ 2,068 2.88% $ 25,106 $ 533 2.12%
Savings deposits......................... 8,469 194 2.29% 5,312 110 2.07%
Time deposits............................ 29,863 1,499 5.02% 9,655 504 5.22%
Federal funds purchased.................. 5 -- -- -- -- --
Other borrowings......................... 2,750 191 6.95% 9 1 11.11%
--------- ----------- ----------- -----------
INTEREST BEARING LIABILITIES........... $ 113,007 3,952 3.50% 40,082 1,148 2.86%
----------- --- ----------- -----
NON INTEREST-BEARING LIABILITIES AND
EQUITY:
Non-interest bearing demand.............. 47,724 15,545
Non-interest bearing liabilities......... 2,089 564
Shareholders' equity..................... 21,886 6,889
--------- -----------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY............................... $ 184,706 $ 63,080
--------- -----------
--------- -----------
Net interest income...................... $ 8,545 $ 3,343
----------- -----------
----------- -----------
Net interest margin on interest-bearing
assets(3).............................. 5.43% 5.84%
--- -----
--- -----
Net interest spread...................... 4.43% 4.98%
--- -----
--- -----
<CAPTION>
1994
--------------------------------------
AVERAGE INCOME/ AVERAGE
BALANCE (1) EXPENSE YIELD/ COST
----------- ----------- ------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks..... $ 2,712 $ 111 4.09%
Securities held to maturity.............. 5,508 258 4.68%
Securities available for sale............ 11,537 536 4.65%
Federal funds sold....................... 3,817 155 4.06%
Loans (net)(2)........................... 32,397 2,878 8.88%
----------- -----------
INTEREST EARNING ASSETS................ 55,971 3,938 7.04%
----------- ---
NON INTEREST-EARNING ASSETS:
Cash and due from banks.................. 3,993
Premises and equipment (net)............. 730
Other real estate owned.................. 1,313
Goodwill................................. --
Other assets............................. 1,302
-----------
TOTAL ASSETS........................... $ 63,309
-----------
-----------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits......... $ 32,590 $ 568 1.74%
Savings deposits......................... 7,369 153 2.08%
Time deposits............................ 6,872 224 3.26%
Federal funds purchased.................. -- -- --
Other borrowings......................... 54 2 3.70%
----------- -----------
INTEREST BEARING LIABILITIES........... 46,885 947 2.02%
----------- ---
NON INTEREST-BEARING LIABILITIES AND
EQUITY:
Non-interest bearing demand.............. 13,558
Non-interest bearing liabilities......... 383
Shareholders' equity..................... 2,483
-----------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY............................... $ 63,309
-----------
-----------
Net interest income...................... $ 2,991
-----------
-----------
Net interest margin on interest-bearing
assets(3).............................. 5.34%
---
---
Net interest spread...................... 5.02%
---
---
</TABLE>
- ------------------------------
(1) Average balances are primarily computed on daily balances during the period.
When such balances are not available, averages are computed on a monthly
basis. Average balances include the effect of discounts and premiums on
loans, investment securities, deposits and borrowings acquired in
acquisitions, as well as deferred loan fees.
(2) Non accrual loans are included in the average balances for the periods;
however, interest on such loans has been excluded in computing the average
yields for the periods.
(3) The net interest margin on interest-bearing assets for a period is net
interest income divided by average interest-earning assets.
B-19
<PAGE>
The following table sets forth changes in interest income and interest
expense, and the amount of change attributable to variances in volume, rates and
the combination of volume and rates. The Company has no tax-exempt assets.
<TABLE>
<CAPTION>
INTEREST RATES AND INTEREST RATE DIFFERENTIALS
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 COMPARED TO 1995 1995 COMPARED TO 1994
---------------------------------------------- --------------------------
CHANGE DUE
CHANGE DUE TO TO
TOTAL --------------------------------- TOTAL -----------
INCREASE VOLUME & INCREASE
(DECREASE) VOLUME RATE RATE (DECREASE) VOLUME
----------- --------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans....................... $ 5,153 $ 6,083 $ (311) $ (619) $ 176 $ (319)
Interest bearing deposits with banks............. (40) (41) 15 (14) (68) (69)
Securities held to maturity...................... 87 97 (8) (2) 171 48
Securities available for sale.................... 2,578 1,547 284 747 53 125
Federal funds sold............................... 228 281 (30) (23) 221 116
----------- --------- --------- ----------- ------ -----------
Total interest income...................... 8,006 7,967 (47) 86 553 (99)
INTEREST EXPENSE:
Interest bearing demand deposits................. 1,535 994 189 352 (35) (131)
Savings deposits................................. 84 65 12 7 (43) (43)
Time deposits.................................... 995 1,055 (19) (41) 280 91
Federal funds purchased.......................... -- -- -- -- -- --
Other borrowings................................. 190 305 0 (115) (1) (2)
----------- --------- --------- ----------- ------ -----------
Total interest expense....................... 2,804 2,419 182 203 201 (85)
----------- --------- --------- ----------- ------ -----------
Net interest income........................ $ 5,202 $ 5,548 $ (229) $ (117) $ 352 $ (15)
----------- --------- --------- ----------- ------ -----------
----------- --------- --------- ----------- ------ -----------
<CAPTION>
VOLUME &
RATE RATE
--------- -----------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans....................... $ 556 $ (61)
Interest bearing deposits with banks............. 4 (3)
Securities held to maturity...................... 103 20
Securities available for sale.................... (58) (14)
Federal funds sold............................... 60 45
--------- -----
Total interest income...................... 665 (13)
INTEREST EXPENSE:
Interest bearing demand deposits................. 125 (29)
Savings deposits................................. 0 --
Time deposits.................................... 135 54
Federal funds purchased.......................... -- --
Other borrowings................................. 4 (3)
--------- -----
Total interest expense....................... 264 22
--------- -----
Net interest income........................ $ 401 $ (35)
--------- -----
--------- -----
</TABLE>
SECURITIES
The fair value of securities available for sale at the dates indicated are
summarized in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
US Government Securities..................................................... $ 132,192 $ 4,871 $ --
US Agency Securities......................................................... 7,709 5,578 997
Mortgage-backed Securities................................................... 5,554 2,131 5,593
US Government Mutual Fund.................................................... 4,468 9,240 5,191
Other securities............................................................. 7,531 184 --
---------- ---------- ----------
$ 157,454 $ 22,004 $ 11,781
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The US Government Mutual Fund represents shares held in the Monarch Fund, a
mutual fund wholly comprised of US Government obligations. The Monarch Fund is
not a related entity to Monarch Bancorp or any of its subsidiaries.
The acquisition of Western added $141 million to securities available for
sale at December 31, 1996. The increase of $10 million from December 31, 1994 to
December 31, 1995 primarily resulted from the proceeds of the two common stock
offerings in 1995.
B-20
<PAGE>
The following table shows the maturities of debt securities available for
sale at December 31, 1996 (Dollars in thousands):
<TABLE>
<CAPTION>
1 YEAR 5 YEARS
TOTAL 1 YEAR OR LESS THRU 5 YEARS THRU 10 YEARS
--------------------- ----------------------- ----------------------- -----------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US Government Securities.......... $ 132,190 5.80% $ 44,051 5.60% $ 87,615 5.90% $ -- --
US Agency Securities.............. 7,709 6.52% 1,000 6.78% 5,466 6.39% 573 7.03%
Mortgage-backed Securities........ 5,554 6.61% -- -- -- -- 984 6.42%
Other securities.................. 6,028 5.74% 6,028 5.74% -- -- -- --
--------- ----------- ----------- -----------
Total......................... $ 151,481 5.86% $ 51,079 5.64% $ 93,081 5.93% $ 1,557 6.64%
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Amortized Cost................ $ 151,453 $ 50,977 $ 93,184 $ 1,570
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
<CAPTION>
OVER 10 YEARS
-----------------------
AMOUNT YIELD
----------- ----------
<S> <C> <C>
US Government Securities.......... $ 524 5.40%
US Agency Securities.............. 670 6.80%
Mortgage-backed Securities........ 4,570 6.65%
Other securities.................. -- --
-----------
Total......................... $ 5,764 6.55%
-----------
-----------
Amortized Cost................ $ 5,722
-----------
-----------
</TABLE>
The carrying amounts of the debt securities held to maturity at the dates
indicated are summarized in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
US Government Securities............................................................. $ 1,147 $ 485 $ 2,849
US Agency Securities................................................................. 4,202 4,500 1,508
Mortgage-backed Securities........................................................... 1,921 1,676 --
--------- --------- ---------
$ 7,270 $ 6,661 $ 4,357
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table shows the maturities of debt securities held to maturity
at December 31, 1996 (Dollars in thousands):
<TABLE>
<CAPTION>
5 YEARS
1 YEAR THRU 10
TOTAL 1 YEAR OR LESS THRU 5 YEARS YEARS
----------------------- ----------------------- ----------------------- -----------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
----------- ---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
US Government Securities.......... $ 1,147 5.78% $ 250 6.98% $ 607 5.54% $ 290
US Agency Securities.............. 3,989 6.31% -- -- 3,989 6.31% --
Mortgage-backed Securities........ 1,921 7.02% -- -- 931 6.30% --
----------- ----- ----------- -----
Total......................... $ 7,057 6.42% $ 250 6.98% $ 5,527 6.23% $ 290
----------- ----- ----------- -----
----------- ----- ----------- -----
Fair Value.................... $ 7,034 $ 250 $ 5,519 $ 298
----------- ----- ----------- -----
----------- ----- ----------- -----
<CAPTION>
OVER 10 YEARS
-----------------------
YIELD AMOUNT YIELD
---------- ----------- ----------
<S> <C> <C> <C>
US Government Securities.......... 5.26% $ -- --
US Agency Securities.............. -- -- --
Mortgage-backed Securities........ -- 990 7.69%
-----
Total......................... 5.26% $ 990 7.69%
-----
-----
Fair Value.................... $ 967
-----
-----
</TABLE>
At December 31, 1996, the Company did not have investments in securities
issued by any one non-federal issuer which exceeded 10% of shareholders' equity.
As part of its investment portfolios, the Banks may hold derivative
securities. Three Collateralized Mortgage Obligations (CMO's) were held in the
held to maturity portfolio at Monarch as of December 31, 1996. These FNMA and
FHLMC securities have a carrying value of $1.921 million and a current market
value of $1.883 million as of December 31, 1996. The weighted average yield of
these investments was 7.02% and the weighted average life was 1.69 years as of
December 31, 1996. 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's
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.
Western holds $3 million in FNMA Multi Step securities with a weighted
average yield of 6.38% as of December 31, 1996. The securities do not have a
call date or repricing date in the remainder of 1997 and all will mature in
October 1998.
B-21
<PAGE>
LOAN PORTFOLIO
The following table sets forth the amount of loans outstanding at the end of
the following periods, according to type of loan. The Company's lending
activities are predominantly in Southern California. The Company has no
agricultural or foreign loans.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Real estate construction.................................. $ 24,666 $ 2,033 $ 4,032 $ 5,061 $ 12,097
Real estate mortgage...................................... 128,026 11,675 12,226 12,138 13,765
Commercial................................................ 101,177 16,758 12,089 14,036 15,033
Installment............................................... 7,186 2,184 2,693 4,134 5,338
---------- --------- --------- --------- ---------
GROSS LOANS........................................... 261,055 32,650 31,040 35,369 46,233
Less:
Deferred loan fees...................................... (939) (130) (52) (118) (195)
Allowance for loan losses............................... (5,393) (854) (1,137) (1,056) (575)
---------- --------- --------- --------- ---------
NET LOANS........................................... $ 254,723 $ 31,666 $ 29,851 $ 34,195 $ 45,463
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
The acquisition of Western added $216 million to gross loans, $785 thousand
to deferred loan fees and $4.3 million to the allowance for loan losses at
December 31, 1996.
With certain exceptions, a bank is permitted under California law to make
loans to a single borrower in aggregate amounts up to 25 percent of the sum of
shareholders' equity (excluding goodwill and effect of adjustments for FAS 115),
allowance for loan losses, capital reserves, if any, and debentures, if any, for
"secured loans" (as defined for regulatory purposes), and up to 15 percent of
such sum for the aggregate of "unsecured loans" (as defined for regulatory
purposes). As of December 31, 1996 these lending limits for the Company were
approximately $7.5 million for secured loans, and approximately $4.5 million for
unsecured loans. The Company sells participations in loans where necessary to
stay within lending limits or to otherwise limit the Company's exposure in
particular credits. Where deemed appropriate to better utilize available funds,
the Company may purchase participations in loans.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The loan maturities shown in the table below are based on contractual
maturities. As is customary in the banking industry, loans that meet sound
underwriting criteria can be renewed by mutual agreement between the Company and
the borrower. Because the Company is unable to estimate the extent to which its
borrowers will renew their loans, the table below is based on contractual
maturities at December 31, 1996:
<TABLE>
<CAPTION>
ONE YEAR
ONE YEAR THROUGH 5 OVER
OR LESS YEARS 5 YEARS TOTAL
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Real estate construction........................................... $ 22,832 $ 559 $ 1,275 $ 24,666
Real estate mortgage............................................... 37,702 56,373 33,951 128,026
Commercial......................................................... 45,507 31,426 24,244 101,177
Installment........................................................ 3,790 2,898 498 7,186
---------- --------- --------- ----------
$ 109,831 $ 91,256 $ 59,968 $ 261,055
---------- --------- --------- ----------
---------- --------- --------- ----------
Loans maturing after one year with:
Fixed interest rates............................................. $ 26,253 $ 21,319
Variable interest rates.......................................... 65,003 38,649
--------- ---------
$ 91,256 $ 59,968
--------- ---------
--------- ---------
</TABLE>
B-22
<PAGE>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table shows the Company's nonaccrual, past due and
restructured loans.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992 (1)
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Nonaccrual loans:
Real Estate Construction....................................... $ 164 $ 172 $ -- $ 1,650
Real Estate Mortgage........................................... 8,323 160 162 991
Commercial..................................................... 755 12 223 206
Installment.................................................... 73 1 46 --
--------- --------- --------- --------- -----------
Total...................................................... $ 9,315 $ 345 $ 431 $ 2,847 $ 737
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Total nonaccrual loans as a percentage of total loans............ 3.57% 1.06% 1.39% 8.05% 1.59%
Allowance for loan losses to nonaccrual loans.................... 58% 248% 264% 37% 78%
Loans past due 90 days or more on accrual status:
Real Estate Mortgage........................................... $ -- $ -- $ 199 $ 124
Commercial..................................................... -- -- 163 375
Installment.................................................... -- -- -- 6
--------- --------- --------- --------- -----------
Total...................................................... $ -- $ -- $ 362 $ 505 $ 132
RESTRUCTURED LOANS (2):
On accrual status.............................................. $ -- $ -- $ -- $ -- $ --
On nonaccrual status........................................... 3,870 168 -- -- --
--------- --------- --------- --------- -----------
Total...................................................... $ 3,870 $ 168 $ -- $ -- $ --
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
- ------------------------
(1) Detailed information is not available
(2) Included in nonaccrual loans above
The large increase in nonaccrual loans occurred at Western due to three
large real estate mortgage loans totaling $7.6 million that were added to the
nonaccrual list in the fourth quarter of 1996. These three loans were all
internally classified by Management prior to being put on nonaccrual. All three
of the loans are secured by first trust deeds on real estate properties.
Although Western's percentage of the allowance for loan losses to nonaccrual
loans decreased from 135 percent at December 31, 1995 to 47 percent at December
31, 1996, Western's percentage of the allowance for loan losses to internally
classified loans at December 31, 1996 was comparable to December 31, 1995.
Monarch's nonaccrual loans decreased by $178 thousand from December 31, 1995 to
December 31, 1996. The table below summarizes the changes in nonaccrual loans
for the years ended December 31, 1996 and 1995.
B-23
<PAGE>
CHANGES IN NONACCRUAL LOANS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
NONACCRUAL LOANS
Balance, beginning of the year................................................................ $ 345 $ 431
Acquisition of Western........................................................................ 2,487
Loans placed on nonaccrual.................................................................... 8,476 919
Charge-offs................................................................................... (456) (625)
Loans returned to accrual status.............................................................. (363) (25)
Repayments (including interest applied to principal).......................................... (349) (83)
Transfers to OREO............................................................................. (825) (272)
--------- ---------
Balance, end of year........................................................................ $ 9,315 $ 345
--------- ---------
--------- ---------
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
INTEREST ON NONACCRUAL LOANS
Interest that would have been collected on nonaccrual loans................................. $ 279 $ 17
--------- ---------
--------- ---------
Interest collected on nonaccrual loans...................................................... $ 1 $ 24
--------- ---------
--------- ---------
</TABLE>
There are no commitments to lend additional funds to borrowers listed as
nonaccrual or past due 90 days or more.
The Company'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.
The Company has not been active in areas that involve hazardous waste, and
based on portfolio reviews by the Company and during credit reviews during
regulatory examinations, no loans have been identified that would appear to be
of concern because of hazardous material.
POTENTIAL PROBLEM LOANS
Except as noted above, as of March 15, 1997 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 Banks monitor
all loans and complete 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 Banks' loan portfolios are 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.
B-24
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE AND ALLOWANCE FOR LOAN LOSSES
The following table summarizes loan balances, loans charged off, the
provision for loan losses charged to expense, the allowance, and loan
recoveries.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Allowance for loan losses:
Balance at the beginning of the year...................... $ 854 $ 1,137 $ 1,056 $ 575 $ 715
---------- --------- --------- --------- ---------
Loans charged off:
Real estate mortgage.................................. 427 278 796 60 90
Real estate construction.............................. -- -- -- 75 70
Commercial............................................ 396 401 167 599 46
Installment........................................... 45 38 29 81 33
---------- --------- --------- --------- ---------
Total loans charged off........................... 868 717 992 815 239
---------- --------- --------- --------- ---------
Recoveries on loans charged off:
Real estate mortgage.................................... -- 5 40 8 --
Commercial.............................................. 18 3 33 5 14
Installment............................................. -- 1 5 3 18
---------- --------- --------- --------- ---------
Total recoveries on loans charged off................. 18 9 78 16 32
---------- --------- --------- --------- ---------
Net loans charged off................................. 850 708 914 799 207
Provision charged to operating expense.................... 228 425 995 1,280 67
Addition to allowance due to:
Acquisition of Western................................ 5,041 -- -- -- --
Loan portfolio purchases.............................. 120 -- -- -- --
---------- --------- --------- --------- ---------
Balance at the end of the year............................ $ 5,393 $ 854 $ 1,137 $ 1,056 $ 575
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Loans:
Average loans outstanding during year................... $ 86,190 $ 28,808 $ 32,397 $ 40,774 $ 44,452
Total loans at end of year.............................. $ 261,055 $ 32,650 $ 31,040 $ 35,370 $ 46,233
Ratios:
Net loans charged off to average loans.................. 0.99% 2.46% 2.82% 1.96% 0.47%
Allowance as a percent of end of year loans............. 2.07% 2.62% 3.66% 2.99% 1.24%
</TABLE>
The Banks' local markets were very severely affected by the recession in
1993 and 1994 and, in several instances borrowers who had never reported
financial difficulties or were past due declared bankruptcy.
Although the allowance as a percent of end of year loans has declined since
1994, loans charged off to average loans has also decreased significantly. Loans
charged off in 1996 primarily were Western charge-offs in the fourth quarter of
1996. These charge-offs represent Western loans that had specific valuation
allowance allocated at September 30, 1996 but were charged off by management of
the Company subsequent to the acquisition of Western.
From 1994 to 1995 for Monarch and from 1996 for Western, the level of
classified loans as a result of Regulatory examinations dropped significantly.
There was no Regulatory examination at Monarch in 1996.
B-25
<PAGE>
The following table reflects management's allocation of the allowance for
loan losses by loan category and the ratio of loans in each category to total
loans at December 31 for each of the last five years:
<TABLE>
<CAPTION>
ALLOWANCE AS OF DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Real estate construction.......................................... $ 371 $ 25 $ 50 $ 63 $ 151
Real estate mortgage.............................................. 2,708 145 257 678 102
Commercial........................................................ 1,694 587 635 175 225
Installment....................................................... 82 27 34 52 66
Not Allocated..................................................... 538 70 161 88 31
--------- --------- --------- --------- ---------
Total allowance for loan losses............................. $ 5,393 $ 854 $ 1,137 $ 1,056 $ 575
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
PERCENT OF LOANS TO TOTAL LOANS
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Real estate construction.......................................... 9% 6% 13% 14% 25%
Real estate mortgage.............................................. 49% 36% 39% 34% 30%
Commercial........................................................ 39% 51% 39% 40% 33%
Installment....................................................... 3% 7% 9% 12% 12%
--------- --------- --------- --------- ---------
Total Loans................................................. 100% 100% 100% 100% 100%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The allowance allocated to the loan categories shown above is based on
previous loan loss experience, the level of nonaccrual loans, management's
review of classified loans and evaluation of the current loan portfolio, and
anticipated economic conditions. While the allowance is allocated to specific
loans and to portfolio segments, the allowance is general in nature and is
available for the portfolio in its entirety.
At December 31, 1996, the Company had identified impaired loans with a
recorded investment of $9,574 thousand. An allowance of $541 thousand,
representing the difference between the value of collateral supporting the loans
and their outstanding balance is included in the allowance for loan losses. The
Company's policy is to record cash receipts received on nonaccrual loans first
as reductions to principal and then to interest income. For further information
see note 5 of notes to consolidated financial statements.
Monarch has established a monitoring system for its loans in order to
identify impaired loans and potential problem loans and to permit periodic
evaluation of impairment and the adequacy of the allowance for loan losses in a
timely manner. The monitoring system and allowance methodology have evolved over
a period of years and, while management has disagreed on occasion with certain
regulatory examination classifications, such classifications have been
incorporated into the determination of the allowance for loan losses. Although
the same basic monitoring system and allowance methodology have been in place
since the beginning of 1994, it was reviewed and enhanced in late 1994 and early
1995 to be responsive to the regulatory orders issued in December 1994 and other
regulatory suggestions from time to time. This monitoring system and allowance
methodology include a loan-by-loan analysis for all classified loans as well as
loss factors for the balance of the portfolio that are based on migration
analysis relative to the unclassified portfolio. This analysis includes such
factors as historical loss experience, current portfolio delinquency and trends,
recent regulatory information, and other inherent risk factors such as economic
conditions, and risk levels of classified loans and particular loan categories.
Western also has established a monitoring system for its loans in order to
identify impaired loans, and potential problem loans and to permit periodic
evaluation of impairment and the adequacy of the allowance for loan losses. The
system, established in early 1996, includes a loan-by-loan analysis for all
classified loans as well as loss factors for the balance of the unclassified
portfolio. Western also takes into consideration all of the factors described
for Monarch.
B-26
<PAGE>
Based on the foregoing discussion and all of the factors analyzed by
management in determining the adequacy of the allowance for loan losses,
management believes that the allowance is adequate at December 31, 1996.
Beginning in 1997, both Monarch and Western will engage an independent
credit review function by an outside party.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") represent properties acquired by
foreclosure or by a deed in lieu of foreclosure, and is recorded at the lower of
the unpaid balance of the loan or the fair value of the property at the date of
acquisition. Any valuation reductions required at the date of acquisition are
charged to the allowance for loan losses. Subsequent to acquisition, other real
estate owned is carried at the lower of recorded cost or net realizable value.
Subsequent operating expenses or income, reduction in estimated values, and
gains or losses on disposition of such properties are recognized in current
operations.
The Company's OREO totaled $3.9 million at December 31, 1996 ($3.7 million
from the acquisition of Western), compared with $0.2 million at December 31,
1995 and $0.6 million at December 31 ,1994. The 1995 and 1994 amounts are those
of Monarch which was prior to the acquisition of Western.
BORROWED FUNDS
On September 30, 1996, the Company borrowed $26.5 million from the Northern
Trust Company of Chicago under a three year revolving loan agreement.
Concurrently, the Company reduced the loan by $15.5 million as a result of a
dividend in the same amount from Western. The balance at December 31, 1996 was
$11 million. The highest amount outstanding during 1996 was $26.5 million; the
average balance outstanding during the year was $2.75 million and the average
rate paid was 6.95 percent for the year. The interest rate at year end was 6.75
percent. The revolving loan agreement expires on September 30, 1999 and there
were no amounts borrowed against this loan agreement in 1995 or 1994.
During 1996 and 1995 there were amounts outstanding from a loan that the
Company obtained in 1992 to fund the Company's ESOP. The balance outstanding at
December 31, 1996 and December, 31 1995 was $99,000 and $132,000 respectively.
The maximum balance outstanding was $132,000 and $173,000 in 1996 and 1995,
respectively. The average balance outstanding was $111,000 and $152,000 in each
year. The average annual rate was 8 percent for each year. The loan was
reclassified as other liabilities at the end of 1996 and was repaid in January
1997.
LIQUIDITY AND INTEREST RATE RISK
On a stand-alone basis, the Company's sources of liquidity include dividends
from the Banks and outside borrowings. The amount of dividends that the Banks
can pay to the Company is restricted by regulatory guidelines. For further
information on dividend restrictions, see "Business--Supervision and
Regulation."
Major sources of liquidity for the Company and the Banks include deposits,
maturities and sales of securities, and loan repayments. Deposits are a volatile
source of funds because of changing conditions in the interest rate markets and
competition. The ability to sell securities without significant loss is subject
to changing market conditions. Loan repayments are dependent on the financial
wherewithal of the Company's borrowers. For further information on deposits,
securities, and loans, see "Statistical Disclosure-- Securities," "--Loan
Portfolio," "--Maturities and Sensitivities of Loans to Changes in Interest
Rates," "--Deposits and Liability Management," and notes to consolidated
financial statements.
During 1996, the Company consistently maintained high cash liquidity
consisting of cash and cash equivalents, securities available for sale, and
Federal Funds Sold divided by total deposits ("Cash Liquidity"). At December 31,
1996, Cash Liquidity was 44.9 percent versus 50.5 percent at December 31, 1995.
This high liquidity was a product of low demand for loans and very high
underwriting standards established during the latter part of a major recession.
The Company 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
B-27
<PAGE>
anticipation of increased funding needs as the loan portfolio grows. Management
believes that current levels and sources of liquidity are sufficient to meet the
Company's and the Banks' commitments. For further information on commitments,
see notes 11 and 14 of notes to consolidated financial statements.
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 required nonexempt banks to report
data in several new schedules that were to be added to the FDIC Call Report
effective March 31, 1996. However, the agencies decided that any new FDIC Call
Report interest rate risk schedules would 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
Company believes 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 Company breaks down rate sensitive earning
assets ("RSA") and rate sensitive liabilities ("RSL") at December 31, 1996 based
on the earliest possible repricing dates for variable rate instruments, or for
fixed rate assets and liabilities, on scheduled maturities. 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 historical 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 such as 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
tiered 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:
<TABLE>
<CAPTION>
1 DAY 2-90 DAYS 91-365 DAYS 1-5 YEARS 5+ YEARS TOTAL
--------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Federal Funds Sold.......................... $ 4,217 $ -- $ -- $ -- $ -- $ 4,217
Securities:
Fixed rate................................ 1,000 17,272 40,296 93,103 2,046 153,717
Floating rate............................. 8,212 1,896 637 -- 262 11,007
Loans:
Fixed rate................................ 1,487 8,572 9,030 26,051 22,324 67,464
Floating rate............................. 21,855 28,081 46,498 60,233 27,609 184,276
Nonaccrual................................ 4,463 3,644 658 177 373 9,315
--------- ----------- ----------- ---------- ---------- ----------
Total RSA............................. 41,234 59,465 97,119 179,564 52,614 429,996
Demand deposits............................. -- 16,595 73,818 60,281 -- 150,694
Savings..................................... -- -- 9,728 9,729 -- 19,457
Interest-bearing demand deposits............ -- -- 76,590 76,588 -- 153,178
NOW accounts................................ -- -- 24,578 24,579 -- 49,157
Time Certificates of Deposit over
$100,000................................... 1,518 23,704 11,557 2,443 112 39,334
Time Certificates of Deposit less than
$100,000................................... 408 16,124 10,326 4,240 66 31,164
Notes payable............................... 11,000 -- -- -- -- 11,000
--------- ----------- ----------- ---------- ---------- ----------
Total RSL............................. 12,926 56,423 206,597 177,860 178 453,984
--------- ----------- ----------- ---------- ---------- ----------
Net RSA-RSL................................. $ 28,308 $ 3,042 $(109,478) $ 1,704 $ 52,436 $ (23,988)
--------- ----------- ----------- ---------- ---------- ----------
--------- ----------- ----------- ---------- ---------- ----------
Cumulative RSA-RSL.......................... $ 31,350 $ (78,128) $ (76,424) $ (23,988)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Cumulative as a % of Total Assets........... 5.5% 6.1% (15.2%) (14.9%) (4.7%) (4.7%)
--------- ----------- ----------- ---------- ---------- ----------
--------- ----------- ----------- ---------- ---------- ----------
</TABLE>
B-28
<PAGE>
In a rising interest rate environment, when rate sensitive assets exceed
rate sensitive liabilities, assets reprice to higher interest rates faster than
liabilities reprice, resulting in a net interest margin that tends to rise. When
rate sensitive liabilities exceed rate sensitive assets, net interest margin
will tend to fall. The opposite occurs in a decreasing interest rate
environment. As a rule, the Company 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 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.
DEPOSITS AND LIABILITY MANAGEMENT
The Company provides a range of deposit types to meet the needs of the local
communities. 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 Company does
not accept or solicit brokered deposits.
The following table shows the average amount of interest bearing and
non-interest bearing deposits and rates as of December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 AVERAGE 1995 AVERAGE 1994 AVERAGE
----------------------- ---------------------- ----------------------
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits...................... $ 47,724 0.00% $ 15,545 0.00% $ 13,558 0.00%
Interest bearing demand deposits................... 71,920 2.88% 25,106 2.12% 32,590 1.74%
Savings deposits................................... 8,469 2.29% 5,312 2.07% 7,369 2.08%
Time deposits...................................... 29,863 5.02% 9,655 5.22% 6,872 3.26%
---------- --------- ---------
Total(1)......................................... $ 157,976 2.38% $ 55,618 2.06% $ 60,389 1.56%
---------- --- --------- --- --------- ---
---------- --- --------- --- --------- ---
</TABLE>
- ------------------------
(1) Includes non-interest bearing deposits for both amount and rates. Rates
represent weighted averages.
The following table shows the maturity schedule of time certificates of
deposit of $100,000 or more as of December 31, 1996. All dollar amounts are in
thousands:
<TABLE>
<S> <C>
3 months or less................................................... $ 25,222
Over 3 months through 6 months..................................... 7,931
Over 6 months through 12 months.................................... 3,626
Over 1 year........................................................ 2,555
---------
Total............................................................ $ 39,334
---------
---------
</TABLE>
B-29
<PAGE>
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 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Return on average assets................................................. 0.40% 1.08%
Return on average equity................................................. 3.37% 9.91%
Equity to assets......................................................... 11.85% 10.92%
<CAPTION>
Tangible ratios:(1) 1996
-----------
<S> <C> <C>
Return on average tangible assets........................................ 0.70%
Return on average equity................................................. 5.65%
Tangible equity to tangible assets....................................... 5.13%
</TABLE>
- ------------------------
(1) Goodwill amortization is added back to net income.
ITEM 2. PROPERTIES
Monarch's main 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 1996, 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.
The Laguna Beach facility is 4,960 square feet and it is located at 401
Glenneyre Street, Laguna Beach, California. The facility includes both a branch
and the administrative and operations functions for Monarch. It has a five year
lease which expires on March of 2001. There are two five year renewal options.
Western has five locations:
- The main office of Western is located at 1251 Westwood Boulevard in Los
Angeles. The land was originally leased in September 1973 for a thirty
year term. The lease will expire in August of 2003. Total square footage
of the land is 11,975 square feet.
- Western's Century City Branch leases two suites at 1888 Century Park East
in Los Angeles. This ten year lease is for a total of 5,044 square feet
and terminates in April, 2005.
- The Beverly Hills Branch is located at 9444 Wilshire Boulevard. The
original lease term was for ten years and expires in December 2002. Total
square feet leased is 7,735. Notice has been given to terminate this lease
by the end of 1997. There is no penalty to this termination.
- The Encino branch is located at 15910 Ventura Boulevard. The lease was
originally for ten years and expires in October 2003. The total square
feet leased is 7,547.
- The Santa Monica branch of Western is owned and is located at 1401
Wilshire Boulevard in Santa Monica. The land is 21,250 square feet and the
building is 13,727 square feet. Book value of the land and building is
$2.294 million at December 31, 1996.
- Management believes that existing properties and facilities are adequate
for the conduct of the Company's and the Banks' business.
B-30
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company 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 Company, the Board of Directors and management
do not believe that to the best of their knowledge the Company has any material
known legal liability or potential liability. However, no assurance can be given
that future litigation involving the Company will not result or that liability
may not be incurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Trading in the Company's Common Stock, occurring solely "over the counter,"
heretofore has not been extensive. 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 which 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 number of holders as of April 21, 1997 is approximately 750.
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 1994:
<TABLE>
<CAPTION>
APPROXIMATE SALES
PRICES
QUARTER ENDED --------------------
(LAST TRADING DAY) HIGH LOW
- -------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
March 31, 1995.................................................................. 1.50 1.20
June 30, 1995................................................................... * *
September 30, 1995.............................................................. 1.35 1.20
December 31, 1995............................................................... 1.35 1.20
March 31, 1996.................................................................. 1.30 1.05
June 30, 1996................................................................... 2.00 1.00
September 30, 1996.............................................................. 1.75 1.00
December 31, 1996............................................................... 3.50 1.63
</TABLE>
- ------------------------
* None reported
Prices represent quotations by dealers making a market in the Common Stock
and reflect inter-dealer prices, without adjustments for mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions. Trading is
limited and may not be a reliable indicator of 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. The private placement completed in
September 1996 was at $1.65 per share.
B-31
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is the holding company for Monarch formed in 1983 and Western
which was acquired by the Company on September 30, 1996. The acquisition of
Western was treated as a purchase for accounting purposes and thus all financial
information presented only includes Western for the three months ended December
31, 1996 or as of December 31, 1996. The following paragraphs discuss various
material events or activities that occurred in 1996 and 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 Monarch; and
$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 Monarch was sufficient to comply fully 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 Monarch in June 1995,
and Monarch 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 sale of up to 3,177,296 shares of Company
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 Company Common
Stock were sold. The Company increased its capital by an additional $3,464,000
in net proceeds from the rights and public offering.
The increased capital allowed the Company and Monarch 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.
On September 30, 1996, the Company acquired all of the issued and
outstanding shares of Western. The Company funded the purchase price with the
issuance of approximately $42.2 million of common stock, net of approximately $1
million in issuance costs, in the 1996 Private Placement, and from the proceeds
of a three year loan of $26.5 million from The Northern Trust Company (the
"Lender"). A $15.5 million dividend was declared by Western concurrently with
the completion of the acquisition and paid to the Company, which was used to
reduce the $26.5 million note to $11 million. For further information on the
Western acquisition, see note 2 of notes to consolidated financial statements.
LIQUIDITY
During 1996, the Banks consistently maintained very high cash liquidity
(Cash and cash equivalents and securities available for sale divided by total
deposits) of approximately 45% or greater. This high liquidity was a product of
low demand for loans and very high underwriting standards established during 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.
EARNINGS IMPROVEMENT PROGRAM
In addition to income generated from the capital funds, in 1995 the Company,
as a natural extension of its activities to raise capital and improve earnings,
engaged the services of a consultant to provide
B-32
<PAGE>
assistance in reviewing all aspects of Monarch's operations. The goal of this
review was to identify strengths and weaknesses of Monarch's operations and to
implement an earnings improvement program to increase profitability. As part of
the acquisition of Western, additional work was begun to also improve the
earnings at Western. A majority of the recommendations from this review were
implemented during the third quarter of 1995 at Monarch and during the fourth
quarter of 1996 at Western. Measurable results were seen in October 1995 for
Monarch and beginning in October 1996 for Western.
It is Management's belief and expectation that a majority of the earnings
improvement program has been implemented at Monarch and that a majority of the
planned expense savings or increases in income at Western will be realized by
the middle of 1997. Major areas of expense reduction came from reductions in
staff and employee benefit 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 Banks' schedule of
charges.
Upon consumation of the acquisition of California Commercial Bankshares,
which is expected to take place in the second quarter of 1997, there will be
additional opportunities for centralization and cost reductions. Plans are
already in place pursuant to which the Company believes it can begin realizing
these benefits soon after the transaction closes.
INVESTMENT PORTFOLIO
Debt and equity securities have been classified in accordance with
management's intent. The carrying amounts of securities and their approximate
fair values at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Securities Held to Maturity...................................... $ 7,270 $ 15 $ (40) $ 7,245
---------- ----- ----- ----------
---------- ----- ----- ----------
Securities Available for Sale.................................... $ 157,265 $ 293 $ (104) $ 157,454
---------- ----- ----- ----------
---------- ----- ----- ----------
DECEMBER 31, 1995
Securities Held to Maturity...................................... $ 6,661 $ 46 $ (14) $ 6,693
---------- ----- ----- ----------
---------- ----- ----- ----------
Securities Available for Sale.................................... $ 21,864 $ 150 $ (10) $ 22,004
---------- ----- ----- ----------
---------- ----- ----- ----------
</TABLE>
The increase from 1995 to 1996 of approximately $135 million in securities
available for sale is due to the acquisition of Western which had $141 million
of such securities at December 31, 1996. This increase was offset by a $6
million reduction in such securities at Monarch from December 31, 1995 to
December 31, 1996. The reduction was primarily caused by an increase in loan
demand as the loan to deposit ratio increased from 54% at December 31, 1995 to
60% at December 31, 1996.
As part of its investment portfolios, the Banks may hold derivative
securities. Three Collateralized Mortgage Obligations (CMO's) were in the held
to maturity portfolio at Monarch as of December 31, 1996. These FNMA and FHLMC
securities are carried at book value of $1.921 million and had a current market
value of $1.883 million as of December 31, 1996. The weighted average yield of
these investments was 7.02% and the weighted average life was 1.69 years as of
December 31, 1996. 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's
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.
Western holds $3 million in FNMA Multi Step securities with a weighted
average yield of 6.38% as of December 31, 1996. The securities do not have a
call date or repricing date in the remainder of 1997 and all will mature in
October 1998.
B-33
<PAGE>
The Banks do not have securities Trading Accounts and do not intend to trade
securities.
The Banks' Investment Committees make 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 Banks can purchase at the most basic
levels which include step-up notes and CMO's.
Neither the Company nor the Banks are involved in any off balance sheet
hedging-type activities.
LOANS
The following table sets forth the amount of loans outstanding at December
31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Real estate construction......................................................... $ 24,666 $ 2,033
Real estate mortgage............................................................. 128,026 11,675
Commercial....................................................................... 101,177 16,758
Installment...................................................................... 7,186 2,184
---------- ---------
GROSS LOANS.................................................................. 261,055 32,650
Less:
Deferred loan fees............................................................. (939) (130)
Allowance for loan losses...................................................... (5,393) (854)
---------- ---------
NET LOANS.................................................................... $ 254,723 $ 31,666
---------- ---------
---------- ---------
</TABLE>
Of the $228 million increase in gross loans from December 31, 1995 to
December 31, 1996, approximately $204 million resulted from the acquisition of
Western on September 30, 1996. The approximate $13 million increase in gross
loans at Monarch primarily resulted from a $7 million increase in real estate
mortgage loans. The $7 million increase resulted from a $5 million purchase of a
pool of commercial real estate loans and a general increase in demand for this
type of loan in 1996. All other loan categories also increased in 1996 due to a
general increase in loan demand at Monarch.
Deferred loan fees and the allowance for loans losses increased primarily as
a result of the acquisition of Western. Monarch's allowance for loan losses
increased primarily due to the provision for loan losses being increased to
cover increased loan outstandings and the allowance allocated to the purchases
of the pool of commercial real estate mortgages.
Monarch's local market was very severely affected by the recession in 1993
and 1994 and its continuation into 1995. During 1996 the economy started a slow
recovery which was evidenced by the large decrease in net charge-offs for 1996.
B-34
<PAGE>
CREDIT RISK
NET CHARGE-OFFS: The following table illustrates the net results of loan
charge-offs for the year ended December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996
---------------------------------
COMBINED WESTERN MONARCH 1995
----------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate mortgage................................................. $ 427 $ 427 $ -- $ 273
Real estate construction............................................. -- -- -- --
Commercial........................................................... 378 386 (8) 398
Installment.......................................................... 45 -- 45 37
----------- --------- --------- ---------
Total............................................................ $ 850 $ 813 $ 37 $ 708
----------- --------- --------- ---------
----------- --------- --------- ---------
Average loans........................................................ $ 86,190 $ 50,450 $ 35,740 $ 28,808
----------- --------- --------- ---------
----------- --------- --------- ---------
Net charge-offs to average loans..................................... 0.99% 1.61% 0.10% 2.46%
</TABLE>
The Western net charge-offs during the fourth quarter of 1996 resulted
primarily from Western loans that were identified as problem loans and reserved
for at September 30, 1996 but were not charged off by management of the Company
until the fourth quarter of 1996. The Western allowance for loan losses at
December 31, 1996 was equal to 1.98% of loans outstanding. Although annualized
net charge-offs to average loans outstanding would be approximately 1.61% based
on fourth quarter numbers, the actual Western percentage of net charge-offs to
average loans outstanding during 1996 was 0.36%.
DEPOSITS
The following table summarizes deposits at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------
COMBINED WESTERN MONARCH DECEMBER 31, 1995
---------- ---------- --------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-interest bearing....................................... $ 150,694 $ 129,132 $ 21,562 $ 19,931
Interest bearing demand.................................... 202,335 176,314 26,021 22,527
Savings.................................................... 19,457 14,596 4,861 4,633
Time certificates of deposit over $100,000................. 39,334 33,366 5,968 3,502
Time certificates of deposit under $100,000................ 31,164 21,309 9,855 8,149
---------- ---------- --------- -------
Total deposits......................................... $ 442,984 $ 374,717 $ 68,267 $ 58,742
---------- ---------- --------- -------
---------- ---------- --------- -------
</TABLE>
The increase in deposits from December 31, 1995 to December 31, 1996 of
approximately $384 million is primarily a result of the acquisition of Western
by the Company on September 30, 1996. Monarch's deposits increased from $59
million to $68 million which was largely attributable to the opening of the
Laguna Beach branch in the fourth quarter of 1996.
CASH FLOW--PARENT COMPANY ONLY
The Company as of December 31, 1996 had approximately $4.7 million in cash
liquidity.
ECONOMY AND INFLATION
The majority of the published economic forecasts for 1997 suggest that the
opposing forces affecting interest rates and the economy will moderately favor
lower interest rates with the greatest drop coming in
B-35
<PAGE>
the short end of the yield curve. Inflation currently appears to be well within
the target ranges used by the Federal Reserve Board. The Company believes that
unless conditions significantly change as a result of the November 1996
election, it appears that the economy will continue to show modest growth for
1997.
RESULTS OF OPERATIONS
INTEREST INCOME
Interest Income increased for the year 1996 versus 1995 by $8.0 million with
average earning assets increasing by approximately $89 million due to the
acquisition of Western. Without the acquisition of Western, interest income
increased approximately $925 thousand, due almost completely to an increase in
average earning assets of $11.3 million as the yield on interest earning assets
increased by 6 basis points.
Average loans at Monarch increased from $28.8 million to $35.7 million,
while the yield on loans decreased from 10.60% to 9.62%. The entire increase in
loans was in the real estate mortgage category, thus reducing the overall yield
on loans.
The investment portfolio at Monarch 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 1995 was 4.90% versus 6.30% in 1996.
Since Western is only included in the Company's results for the last quarter
of 1996, the acquisition of Western increased average earning assets by only $89
million in 1996 (Western's average earning assets for the fourth quarter were
approximately $356 million). Yields on Western's earning assets are comparable
to the yields at Monarch with only a 2 basis point difference. The yield on
loans at Western was 9.45%, or 17 basis points below the loan yield of 9.62% at
Monarch. Western's yield on investment securities was 5.88%, versus 6.30% for
Monarch. Western has approximately 4.6% more of its earning assets in loans than
Monarch.
INTEREST EXPENSE
Interest Expense increased by $2.8 million while the average total for all
interest-bearing deposits increased by approximately $70 million. Without the
acquisition of Western, interest-bearing deposits increased from $40.1 million
to $49.4 million, or 23% while the weighted average rate paid on these deposits
increased from 2.86% to 3.33%. The increase in the rate paid on deposits was
mostly in the category of NOW and money market accounts as Monarch competes for
deposits in the Laguna Niguel and Laguna Beach areas.
Since Western is only included in the Company's results for the last quarter
of 1996, the acquisition of Western only increased average interest-bearing
deposits by approximately $66 million, although Western's average for the fourth
quarter was approximately $264 million. The average rate paid on
interest-bearing deposits was 3.43% at Western versus 3.33% for Monarch. Western
pays higher rates on interest-bearing demand deposits of 3.06% versus 2.59% for
Monarch, a higher rate on savings deposits: 2.57% versus 2.08% for Monarch, but
a lower rate on certificates of deposit of 4.86% versus 5.17% for Monarch. Both
Banks have a comparable ratio of non-interest bearing deposits to
interest-bearing deposits of approximately 43%.
As part of the acquisition of Western, the Company borrowed a net $11
million on a revolving line of credit. This debt added an average of $2.7
million of other borrowings and $191 thousand of interest expense for the year.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to operations reflects management's
judgment of the adequacy of the allowance for loan losses and is determined
through periodic analysis of the loan portfolio. This
B-36
<PAGE>
analysis includes a detailed review of the classification and categorization of
problem and potential problem loans and loans to be charged off; an assessment
of the overall quality and collectibility of the portfolio; and consideration of
the loan loss experience, trends in problem loans and concentrations of credit
risk, as well as current and expected future economic conditions (particularly
in Southern California).
Monarch's provision for loan losses for the year ended December 31, 1996 was
$195,000 compared to $425,000 for the year ended December 31, 1995. This
decrease was due to improved economic conditions in Monarch's area of business
and a significant decrease in the percentage of net charge-offs to average loans
outstanding. This percentage decreased to .10% in 1996 compared to 2.5% in 1995.
The 1996 provision did take into consideration the increase in loans outstanding
at the end of the year compared to 1995. The percentage of the allowance for
loan losses to outstanding loans at December 31, 1996 was 2.5% compared to 2.6%
at December 31, 1995.
Western recorded a provision for loan losses of $33,000 in the fourth
quarter of 1996 and recorded a provision for the year ended December 31, 1996 of
$836,000 compared to a provision of $710,000 for the year ended December 31,
1995. This increase in the provision was consistent with a similar increase in
charge-offs for 1996 as compared to 1995 and Management's overall assessment of
the adequacy of the allowance for loan losses. The percentage of the allowance
for loan losses to outstanding loans at December 31, 1996 and 1995 was 1.98% and
1.93%, respectively.
Based on the foregoing discussion and all of the factors analyzed by
Management in determining the adequacy of the allowance, Management believes
that the Bank's allowance for loan losses is adequate at December 31, 1996.
For additional information on the loan portfolio, the allowance for loan
losses and nonaccrual, past due and restructured loans, see "Loan Portfolio"
under "Part I, Item 1 Business."
NON-INTEREST INCOME
Non-interest Income increased in 1996 compared to 1995 by $442 thousand or
47%. However, without the acquisition of Western in the fourth quarter of 1996,
non-interest income declined $163 thousand, or 17%.
MONARCH BEFORE WESTERN ACQUISITION. In 1995, non-interest income included
income received related to the settlement of a $171 thousand claim against
Monarch's blanket bond carrier for a loss sustained in 1994 and approximately
$50 thousand from legal and other recoveries from losses sustained in 1994.
Without this non-recurring income in 1995, non-interest income at Monarch would
have increased by $58 thousand or 8%. Service charges on deposits increased by
$55 thousand or 26%. This growth is comparable to the 24% growth in average
deposits at Monarch. Since Monarch's lease, and therefore sublease, on a
property terminated in June, rental income declined by 50% from $66 thousand to
$34 thousand. Data processing income increased $30 thousand, or 43%, from $70
thousand to $100 thousand as Monarch began performing additional back office
functions for another bank and the ACH origination and payment processing for
local homeowners associations and other organizations continues to grow.
ACQUISITION OF WESTERN. The acquisition of Western added $605 thousand of
non-interest income in 1996 (all in the fourth quarter). Of the $605 thousand in
non-interest income added by Western, $267 thousand, or 44%, is a gain on the
sale of various securities which did not meet the asset/liability management
strategy of the Company. All non-interest income amounts at Western are
consistent with prior results and are at expected levels.
B-37
<PAGE>
The table below details the various non-interest income categories:
<TABLE>
<CAPTION>
1996
-----------------------------------
TOTAL WESTERN MONARCH 1995
--------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges on deposits................................................. $ 358 $ 90 $ 268 $ 213
Deposit overdraft charges................................................... 365 99 266 293
Rental income............................................................... 34 -- 34 66
Data processing income...................................................... 100 -- 100 70
Loan servicing and late fees................................................ 89 68 21 19
Service charges commissions and other fees.................................. 91 58 33 20
Gains on securities......................................................... 267 267 -- --
Legal settlement and their income........................................... 71 23 48 252
--------- ----- ----- ---------
TOTAL NON INTEREST INCOME............................................... $ 1,375 $ 605 $ 770 $ 933
--------- ----- ----- ---------
--------- ----- ----- ---------
</TABLE>
NON-INTEREST EXPENSE
Non-interest expense increased by $4.9 million, or 135% from 1995 to 1996.
Of this increase, however, $3.8 million relates to the acquisition of Western
Bank. Without this acquisition, expenses increased $1.1 million, or 33%.
MONARCH BEFORE THE WESTERN ACQUISITION. Monarch expenses (including
expenses of the Company) increased by $1.13 million, or 31% from 1995 to 1996.
$1.06 million of this expense increase relates to acquisition activities and
restructuring charges in the fourth quarter: $550 thousand of the increase in
salary and benefits are due directly to the buy out of the former CEO's
employment contract and the termination of the employee ESOP. Salary and
benefits expense was also reduced by $143 thousand from the capitalization of
expenses related to the Western acquisition. $300 thousand of the increase in
professional services are directly related to due diligence and other
acquisition related activities. In addition, $210 thousand was spent on
professional services for consolidation of operations and staff functions
related to both the acquisition of Western and ongoing profit improvement
programs.
Salary and benefits increased from $1.7 million in 1995 to $2.3 million in
1996, or 39%. Adjusting for the $550 thousand and $143 thousand amounts
mentioned above, salary and benefits increased $234 thousand, or 14%. This
increase relates to a general increase in business (39% growth in loans and 24%
growth in average deposits), the opening of a new branch in Laguna Beach in June
of 1996, beginning back office processing for another bank, and reductions due
to profit improvement work. Average full-time employee's ("FTE's") were 39 in
1995 and were up to 49 at the end of 1996. Of the 49 FTE's at the end of the
year, five are no longer with Monarch at this time.
Furniture, fixtures and equipment expense increased by $56 thousand or 20%,
and telephone, stationery and supplies increased by $51 thousand or 27% from
1995 to 1996. This expense growth relates to the increase in business at
Monarch, the new Laguna Beach branch and the increase in back office services
provided to other banks.
Of the $560 thousand increase in professional services at Monarch from 1995
to 1996, $510 thousand relates to acquisition activity and the profit
improvement work discussed above. Without these expenses, professional services
at Monarch increased $50 thousand, or 13% from 1995 to 1996. This expense
increase is due to a general increase in activity at the holding company.
Net OREO expense declined from $62 thousand for 1995 to $7 thousand for 1996
which was a result of decreased OREO activity. Miscellaneous employee expense
decreased from $170 thousand for 1995 to $98 thousand for 1996, or a 42%
decrease. This reduction was mostly due to the reduction of various award
programs at Monarch.
B-38
<PAGE>
Other expense increased 21% from $273 thousand to $329 thousand from 1995 to
1996. Most of this increase is a result of recruiting expense as the management
team at the Company was strengthened.
WESTERN BANK. Western added approximately $3.8 million of expenses to the
Company for fourth quarter of the year ended December 31, 1996. Of this $3.8
million, $499 thousand is the amortization of goodwill associated with the
acquisition of Western by Monarch Bancorp. Without this amortization, Western
added approximately $3.3 million of expenses to the Company. This amount of
additional expense was at the expected level and is lower than the expense
levels Western had prior to the acquisition.
The table below details the various non-interest expense categories:
<TABLE>
<CAPTION>
1995
---------
1996
-----------------------------------
COMPANY
TOTAL WESTERN & MONARCH
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salary and benefits..................................................... $ 4,323 $ 2,025 $ 2,298 $ 1,657
Occupancy............................................................... 542 217 325 345
Furniture, fixtures and equipment....................................... 489 156 333 277
Advertising & business development...................................... 152 27 125 116
Data processing......................................................... 186 186 -- --
Professional services................................................... 1,469 511 958 398
OREO.................................................................... (151) (158) 7 62
FDIC & state assessments................................................ 86 1 85 180
Miscellaneous employee expense.......................................... 137 39 98 170
Telephone, stationery & supplies........................................ 380 143 237 186
Goodwill amortization................................................... 499 499 -- --
Other expense........................................................... 490 161 329 273
--------- ----------- ----------- ---------
TOTAL NON-INTEREST EXPENSE.......................................... $ 8,602 $ 3,807 $ 4,795 $ 3,664
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
One time items:
Employment contract buyout.............................................. $ 360 $ -- $ 360 $ --
Due diligence/merger related expenses................................... 300 -- 300 --
Profit improvement consulting........................................... 210 -- 210 --
KSOP termination........................................................ 190 -- 190 --
--------- ----------- ----------- ---------
TOTAL ONE TIME ITEMS................................................ $ 1,060 $ -- $ 1,060 $ --
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
PROVISION FOR INCOME TAXES
The provision for income taxes represents an effective tax rate of 32% of
income before taxes in 1996, compared to an effective tax benefit rate of 264%
in 1995. The difference from the expected rate of 34% in 1995 is the result of
the adjustment to the deferred tax asset valuation allowance. The difference
from the expected rate of 34% in 1996 relates to state taxes and the
non-deductibility of goodwill for tax purposes which is primarily offset by a
deferred tax asset valuation allowance adjustment. At December 31, 1996, the
Company had a deferred tax asset of approximately $4.0 million. Management has
determined that the deferred tax asset is more likely than not to be realized
based on current and expected taxable income. For further information on income
taxes, see note 10 to consolidated financial statements.
B-39
<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, 1996, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the year 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 audit 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 statements. 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 audit provides 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, 1996, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
February 24, 1997
Los Angeles, California
B-40
<PAGE>
MONARCH BANCORP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ -------------
<S> <C> <C>
ASSETS
Cash and due from banks............................................................ $ 37,385 $ 4,747
Federal funds sold................................................................. 4,217 2,938
------------ -------------
Total cash and cash equivalents.................................................. 41,602 7,685
Interest bearing deposits with other banks......................................... -- 198
Securities held to maturity (fair value of $7,245 and $6,693)...................... 7,270 6,661
Securities available for sale (amortized cost of $157,265 and $21,864)............. 157,454 22,004
Loans:
Real estate mortgage............................................................. 128,026 11,675
Real estate construction......................................................... 24,666 2,033
Commercial....................................................................... 101,177 16,758
Installment and other............................................................ 7,186 2,184
------------ -------------
Gross loans.................................................................... 261,055 32,650
Less: Deferred loan fees........................................................ (939) (130)
Allowance for loan losses.................................................. (5,393) (854)
------------ -------------
Net loans...................................................................... 254,723 31,666
Premises and equipment............................................................. 5,780 610
Other real estate owned............................................................ 3,889 150
Deferred tax assets, net........................................................... 3,983 440
Taxes receivable................................................................... 3,553 --
Goodwill........................................................................... 29,342 --
Other assets....................................................................... 4,765 687
------------ -------------
Total assets................................................................... $ 512,361 $ 70,101
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing.............................................................. $ 150,694 $ 19,931
Interest bearing demand.......................................................... 202,335 22,527
Savings.......................................................................... 19,457 4,633
Time certificates of deposit of $100,000 or more................................. 39,334 3,502
Time certificates of deposit less than $100,000.................................. 31,164 8,149
------------ -------------
Total deposits................................................................. 442,984 58,742
Notes payable...................................................................... 11,000 132
Accrued interest payable and other liabilities..................................... 4,249 230
------------ -------------
Total liabilities................................................................ 458,233 59,104
------------ -------------
Shareholders' equity:
Preferred stock, no par value, 5 million shares authorized, none issued
Common stock, no par value, 100 million shares authorized 34,373,021 and
8,228,436 issued and outstanding in 1996 and 1995.............................. 58,709 16,500
Accumulated deficit.............................................................. (4,716) (5,454)
Unrealized gain on investment securities available for sale, net of taxes........ 135 83
Deferred charge related to KSOP.................................................. -- (132)
------------ -------------
Total shareholders' equity..................................................... 54,128 10,997
------------ -------------
Total liabilities and shareholders' equity..................................... $ 512,361 $ 70,101
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements
B-41
<PAGE>
MONARCH BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- ------------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans......................................................... $ 8,207 $ 3,054
Interest on interest bearing deposits in other banks............................... 3 43
Securities available for sale...................................................... 3,167 589
Securities held to maturity........................................................ 516 429
Federal funds sold................................................................. 604 376
------------- ------------
Total interest income............................................................ 12,497 4,491
Interest expense:
Deposits........................................................................... 3,761 1,147
Notes payable...................................................................... 191 1
------------- ------------
Total interest expense........................................................... 3,952 1,148
------------- ------------
Net interest income.................................................................. 8,545 3,343
Provision for loan losses............................................................ 228 425
------------- ------------
Net interest income after provision for loan losses.................................. 8,317 2,918
Non-interest income
Service charges and fees on loans and deposits..................................... 903 545
Rental income...................................................................... 34 66
Data processing income............................................................. 100 70
Gains on sales of securities available for sale.................................... 267 --
Legal settlement and other......................................................... 71 252
------------- ------------
Total non-interest income........................................................ 1,375 933
Non-interest expense.................................................................
Salaries and benefits.............................................................. 4,323 1,657
Occupancy.......................................................................... 1,031 622
Advertising and business development............................................... 152 116
Other real estate owned............................................................ (151) 62
Professional services.............................................................. 1,469 398
Telephone, stationery and supplies................................................. 380 186
Goodwill amortization.............................................................. 499 --
Data processing.................................................................... 186 --
Other.............................................................................. 713 623
------------- ------------
Total non-interest expense....................................................... 8,602 3,664
------------- ------------
Income before income taxes........................................................... 1,090 187
Income taxes......................................................................... 352 (496)
------------- ------------
Net income....................................................................... $ 738 $ 683
------------- ------------
------------- ------------
Per share information................................................................
Weighted-average number of common and common equivalent shares outstanding......... 14,974,918 5,071,000
Net income per share............................................................... $ .05 $ .13
</TABLE>
See accompanying notes to consolidated financial statements
B-42
<PAGE>
MONARCH BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION
(DEPRECIATION) DEFERRED
COMMON STOCK ON SECURITIES CHARGE
---------------- ACCUMULATED AVAILABLE FOR RELATED TO SHAREHOLDERS'
SHARES AMOUNT DEFICIT SALE KSOP EQUITY
------- ------- ----------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994................. 794 $ 7,368 $(6,137) $(356) $(173) $ 702
Repayment on KSOP debt.................. -- -- -- -- 41 41
Net change in unrealized appreciation on
investment securities available for
sale.................................. -- -- -- 439 -- 439
Issuance of common stock................ 7,434 9,132 -- -- -- 9,132
Net income.............................. -- -- 683 -- -- 683
------- ------- ----------- ------ ---------- ------------
Balance December 31, 1995................. 8,228 16,500 (5,454) 83 (132) 10,997
Repayment on KSOP debt.................. -- -- -- -- 132 132
Net change in unrealized appreciation on
investment securities available for
sale.................................. -- -- -- 52 -- 52
Issuance of common stock................ 26,147 42,213 -- -- -- 42,213
Repurchase of shares.................... (2) (4) -- -- -- (4)
Net income.............................. -- -- 738 -- -- 738
------- ------- ----------- ------ ---------- ------------
Balance December 31, 1996................. 34,373 $58,709 $(4,716) $ 135 $-- $54,128
------- ------- ----------- ------ ---------- ------------
------- ------- ----------- ------ ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements
B-43
<PAGE>
MONARCH BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash flow from operating activities
Net income............................................................................. $ 738 $ 683
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Provision for loan losses............................................................ 228 425
Deferred income taxes................................................................ 56 (495)
Provision for losses on other real estate owned...................................... 243 30
Depreciation......................................................................... 294 165
Amortization of bond discounts, net.................................................. (97) (53)
Deferred loan fees................................................................... (79) (80)
Termination of KSOP.................................................................. 132 --
Goodwill amortization................................................................ 499 --
Net increase (decrease) in accrued interest payable and other liabilities............ 87 (172)
Net (increase) decrease in accrued interest receivable and other assets.............. (973) 482
----------- ----------
Net cash provided (used) by operating activities................................... 1,128 985
Cash flow from investing activities:
Net decrease in interest-bearing deposits at other banks............................... 198 1,184
Securities held to maturity:
Proceeds from maturities............................................................. 5,267 3,394
Purchases............................................................................ (4,880) (5,704)
Securities available for sale:
Proceeds from maturities............................................................. 10,242 1,351
Gains on sales....................................................................... 267 --
Sales................................................................................ 24,766 --
Purchases............................................................................ (36,126) (12,000)
Net (increase) decrease in loans....................................................... (25,473)
Additions to other real estate owned................................................... (284) --
Sales of other real estate owned....................................................... 2,058 617
Additions to premises and equipment.................................................... (365) (125)
Increase in assets and liabilities due to the acquisition of Western Bank:
Securities available for sale........................................................ (134,394) --
Securities held to maturity.......................................................... (988) --
Loans................................................................................ (198,418) --
Deferred taxes....................................................................... (3,663) --
Other assets......................................................................... (11,729) --
Premises and equipment............................................................... (5,099) --
Deposits............................................................................. 353,111 --
Other liabilities.................................................................... 3,932 --
Goodwill............................................................................. (29,841) --
----------- ----------
Net cash used by investing activities.............................................. (51,419) (13,131)
</TABLE>
See accompanying notes to consolidated financial statements
B-44
<PAGE>
MONARCH BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flow from financing activities:
Net increase in deposits.................................................................. $ 31,131 $ 99
Issuance of debt.......................................................................... 11,000 --
Repayment of debt......................................................................... (132) (53)
Purchase of treasury shares............................................................... (4) --
Net proceeds from issuance of common stock, net of issuance costs......................... 42,213 9,132
--------- ---------
Net cash provided by financing activities............................................... 84,208 9,178
Net increase in cash and cash equivalents................................................... 33,917 (2,968)
Cash and cash equivalents at the beginning of the year...................................... 7,685 10,653
--------- ---------
Cash and cash equivalents at the end of year............................................ $ 41,602 $ 7,685
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information
Property acquired through foreclosure..................................................... $ 825 $ 272
--------- ---------
--------- ---------
Loans to facilitate sales of other real estate owned...................................... $ 343 $ 800
--------- ---------
--------- ---------
Cash paid for
Interest................................................................................ $ 4,061 $ 1,217
--------- ---------
--------- ---------
Taxes................................................................................... $ 282 $ --
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
B-45
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounting and reporting policies of Monarch Bancorp (the "Company") and
its wholly-owned subsidiaries, Monarch Bank ("Monarch") and Western Bank
("Western"), (collectively "the Banks"), are in accordance with generally
accepted accounting principles and conform to general practices within the
banking industry. Western was acquired by the Company on September 30, 1996. The
acquisition was accounted for as a purchase. Accordingly, results of operations
include Western only from the date of acquisition.
The consolidated financial statements include the Company, Monarch, Western
and M. B. Mortgage Company, an inactive subsidiary of Monarch. All significant
inter-company balances and transactions have been eliminated.
NATURE OF OPERATION
The Company conducts business only through its bank subsidiaries. Monarch, a
full service bank with two banking offices, and Western, a full service bank
with five banking offices, are state-chartered banks subject to the laws of the
State of California and the regulations of the Federal Deposit Insurance
Corporation. The Company is a regulated bank holding company under the Bank
Holding Company Act of 1956, and is also subject to regulation and supervision
by the Federal Reserve Board. The areas served by the Banks are the southern
area of Orange County and the western area of Los Angeles.
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. Material
estimates subject to change include the allowance for loan losses, the carrying
value of other real estate owned, and the deferred tax asset.
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."
SECURITIES
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and carried at amortized cost.
Investments that are purchased and held principally for the purpose of selling
them in the near term are classified as "trading" and carried at fair value,
with unrealized gains and losses included in earnings. Investments not
classified as either "held to maturity" or "trading" are classified as
"available for sale" and carried at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of shareholders'
equity. When a debt security is transferred into the "held to maturity" category
from the "available for sale" category, the unrealized gain or loss at the
transfer date continues to be reported as a separate component of shareholders'
equity and is amortized over the remaining life of the related security as a
yield adjustment. If a decline in fair value below amortized cost basis of an
investment is judged by management to be other
B-46
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
than temporary, the cost basis of the investment is written down to fair value
and the amount of the writedown is included in earnings.
Premiums and discounts on investment and mortgage-backed securities are
recognized in the statements of income using a method that approximates the
level-yield method over the lives of the securities. Gains and losses on
securities are recognized when realized with the cost basis of investments sold
determined on a specific identification basis.
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 allowance for loan losses is maintained at a level believed by
management to be adequate to meet reasonably foreseeable loan losses on the
basis of many factors including the risk characteristics of the portfolio,
underlying collateral, current and anticipated economic conditions that may
affect the borrower's ability to pay, specific problem loans and trends in loan
delinquencies and charge-offs. Losses on loans are provided for under the
allowance method of accounting. The allowance is increased by provisions charged
to income and reduced by loan charge-offs, net of recoveries. Loans, including
impaired loans, are charged off in whole or in part when, in management's
opinion, collectibility is not probable.
While management uses available information to establish the allowance for
loan losses, future additions to the allowance may be necessary if economic
developments differ substantially from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Banks' allowances for loan
losses. Such agencies may require the Banks to recognize additions to the
allowance based on judgments different from those of management.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to contractual
terms of the loan agreement. The definition of "impaired loans" is not the same
as the definition of "nonaccrual loans," although the two categories overlap.
Nonaccrual loans include impaired loans and are those on which the accrual of
interest is discontinued when collectibility of principal or interest is
uncertain or payments of principal or interest have become contractually past
due 90 days. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the loan
impaired, if (i) it is probable that the Company will collect all amounts due in
accordance with the contractual terms of the loan or (ii) the loan is not a
B-47
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
commercial, commercial real estate or an individually significant mortgage or
consumer loan. Factors considered by management in determining impairment
include payment status and collateral value. The amount of impairment for these
types of impaired loans is determined by the difference between the present
value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Mortgage and consumer loans which are not individually significant are measured
for impairment collectively. Loans that experience insignificant payment delays
and insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is comprised of real estate acquired
through foreclosure. These assets are recorded at the lower of the carrying
value of the receivable or the fair value less selling costs of the related real
estate. The excess carrying value, if any, over the fair value of the asset
received is charged to the allowance for loan losses at the time of acquisition.
Any subsequent decline in the fair value of OREO is recognized as a charge to
operations and in a corresponding increase to the valuation allowance. Gains and
losses from sales and net operating expense of OREO are also charged to
operations and are included in OREO expense in the accompanying consolidated
statements of operations.
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 or the terms of the leases if shorter.
GOODWILL
Goodwill is amortized to expense using the straight-line method over fifteen
years. On an ongoing basis, management reviews the valuation and amortization of
goodwill. During this review, management estimates the value of the Company's
goodwill, taking into consideration any events and circumstances that might have
diminished its value.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return.
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax
B-48
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
NET INCOME PER SHARE
Net income per share of common stock is based on the weighted-average number
of shares of common and common equivalent shares outstanding during the year.
EFFECT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR STOCK-BASED COMPENSATION
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, which
establishes 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 elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net income and
earnings per share, as if this statement had been adopted. The Company elected
to continue accounting for stock options under the intrinsic value method and
has provided the pro forma disclosure.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES
In June 1996, the FASB issued the Statement of Financial Accounting
Standards No. 125 ("SFAS 125"), Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Management of the Company does not expect
that adoption of SFAS 125 will have a material impact on the Company's financial
condition and results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform to the 1996 presentation. Such reclassifications had no
effect on net income or shareholders' equity as previously reported.
NOTE 2--ACQUISITIONS
WESTERN BANK
On September 30, 1996 the Company completed the acquisition of Western in
which Western became a wholly owned subsidiary of the Company.
B-49
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
The Company paid $17.25 per share, or approximately $61.1 million, for the
3,543,156 outstanding shares of Western, and an additional $5.5 million related
to the outstanding stock options of Western. The net consideration for the
acquisition of Western was thus approximately $66.6 million. The acquisition was
accounted for under the purchase method of accounting which resulted in
approximately $30 million of goodwill being recorded.
The Company funded the purchase price with the issuance of approximately
$42.2 million of common stock, net of approximately $1 million in issuance
costs, in the 1996 Private Placement, and from the proceeds of a three year loan
of $26.5 million from The Northern Trust Company (the "Lender"). A $15.5 million
dividend was declared by Western concurrently with the completion of the
acquisition and paid to the Company, which was used to reduce the $26.5 million
note to $11 million.
The following table presents unaudited pro forma results of operations of
the Company for the years ended December 31, 1996 and 1995 as if the acquisition
of Western had been effective at the beginning of each year presented. The
unaudited pro forma combined summary of operations is intended for informational
purposes only and is not necessarily indicative of the future operating results
of the Company or of the operating results of the Company that would have
occurred had the Western acquisition been in effect for the years presented.
UNAUDITED PRO FORMA COMBINED SUMMARY OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Interest income....................................................................... $ 33,847 $ 31,349
Interest expense...................................................................... 11,041 8,433
------------ ------------
NET INTEREST INCOME............................................................... 22,806 22,916
Provision for loan losses............................................................. 1,031 1,135
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............................... 21,775 21,781
Non interest income................................................................... 2,499 4,438
Non interest expense.................................................................. 21,217 21,039
------------ ------------
INCOME BEFORE TAXES............................................................... 3,057 5,180
Income tax expense.................................................................... 1,791 2,446
------------ ------------
NET INCOME (LOSS)................................................................. $ 1,266 $ 2,734
------------ ------------
------------ ------------
NET INCOME PER SHARE.............................................................. $ 0.04 $ 0.08
------------ ------------
------------ ------------
Weighted average shares outstanding................................................... 34,374,800 34,374,800
</TABLE>
The unaudited pro forma combined net income per share were calculated based
on the pro forma combined net income and the average common shares that would
have been outstanding during the years presented (including shares issued under
the September 30, 1996 private placement).
B-50
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
CALIFORNIA COMMERCIAL BANKSHARES
On December 19, 1996, the Company entered into an agreement to acquire
California Commercial Bankshares ("CCB"), the holding company for National Bank
of Southern California, in a business combination intended to be accounted for
as a pooling-of-interests. The terms of the merger provide that each common
share of CCB be exchanged for 8.5 shares of the Company (1 share if a proposed 1
for 8.5 reverse stock split is effected). The merger is subject to both
shareholder and regulatory approval. At December 31, 1996, CCB had total assets,
deposits, debt, stockholders' equity, and number of common shares outstanding of
$351 million, $319 million, $2.4 million, $25 million, and 2,984 thousand,
respectively; these amounts are unaudited. For the year ended December 31, 1996,
CCB reported net income and net income per share of approximately $3.8 million
and $1.26, respectively; these amounts are unaudited.
NOTE 3--RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company is required to maintain average reserve balances with the
Federal Reserve Bank based on a percentage of deposits. The total average amount
of those reserve balances for the year ended December 31, 1996 was approximately
$9.0 million.
B-51
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SECURITIES
SECURITIES
Investment securities at December 31 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996
Securities Held to Maturity:
US Government Securities....................................... $ 1,147 $ 13 $ -- $ 1,160
US Agency Securities........................................... 4,202 2 (1) 4,203
Mortgage-backed Securities..................................... 1,921 -- (39) 1,882
---------- ----- ----- ----------
$ 7,270 $ 15 $ (40) $ 7,245
---------- ----- ----- ----------
---------- ----- ----- ----------
Securities Available for Sale:
US Government Securities....................................... $ 132,287 $ 9 $ (104) $ 132,192
US Agency Securities........................................... 7,709 -- -- 7,709
Mortgage-backed Securities..................................... 5,534 20 -- 5,554
US Government Mutual Fund...................................... 4,468 -- -- 4,468
Other securities............................................... 7,267 264 -- 7,531
---------- ----- ----- ----------
$ 157,265 $ 293 $ (104) $ 157,454
---------- ----- ----- ----------
---------- ----- ----- ----------
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 Mutual Fund...................................... 9,240 -- -- 9,240
Other securities............................................... 104 80 -- 184
---------- ----- ----- ----------
$ 21,864 $ 150 $ (10) $ 22,004
---------- ----- ----- ----------
---------- ----- ----- ----------
</TABLE>
The amortized cost and estimated fair value of securities at December 31,
1996, by contractual maturity, are shown below. Mortgage-backed securities
included in the held to maturity and available for sale portfolios which are not
due at a single maturity date are allocated over several maturity groupings
based on anticipated maturities of the underlying assets. Expected maturities
may differ from contractual
B-52
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SECURITIES (CONTINUED)
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
HELD TO MATURITY
Due in one year or less............................................... $ 462 $ 462
Due after one year through five years................................. 5,528 5,519
Due after five years through ten years................................ 290 298
Due after ten years................................................... 990 966
---------- ----------
$ 7,270 $ 7,245
---------- ----------
---------- ----------
AVAILABLE FOR SALE
Due in one year or less............................................... $ 56,790 $ 57,052
Due after one year through five years................................. 93,183 93,081
Due after five years through ten years................................ 1,570 1,557
Due after ten years................................................... 5,722 5,764
---------- ----------
$ 157,265 $ 157,454
---------- ----------
---------- ----------
</TABLE>
Gross gains and losses on sale of available for sale securities were $267
thousand and $0, respectively, for 1996. There were no sales of securities in
1995.
At December 31, 1996 investment securities available for sale with a
carrying amount of approximately $26 million were pledged as collateral to
secure public deposits.
Securities held to maturity at December 31, 1996 include approximately
$1,243 thousand in Federal Home Loan Bank stock, $212 thousand in Federal
Reserve Bank stock and $1 thousand in Federal National Mortgage Association
stock. The stock is recorded at cost based on the purchase price.
The Banks may hold derivative securities as part of their investment
portfolios. Three Collateralized Mortgage Obligations (CMO's) were in the held
to maturity portfolio at Monarch as of December 31, 1996. These FNMA and FHLMC
securities are carried at book value of approximately $1.92 million and had a
current market value of approximately $1.88 million as of December 31, 1996. The
weighted average yield of these investments was 7.02% and the weighted average
life was 1.69 years as of December 31, 1996. 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 the relative risks of investments in CMOs. A security that passes this
test 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.
Western holds $3 million in FNMA Multi Step securities with a weighted
average yield of 6.38% as of December 31, 1996. The securities do not have a
call date or repricing date in the remainder of 1997 and all will mature in
October 1998.
B-53
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- LOANS
LOANS
Most of the loans made by the Banks are to customers located in Orange
County and the western part of Los Angeles, California. Mortgage and
construction loans are collateralized by real estate trust deeds. The Banks
generally require security in the form of assets, including real estate, on
commercial and installment loans. The ability of the Banks' customers to honor
their loan agreements is dependent upon the general economy of the Banks' market
areas. The distribution of the Company's loan portfolio is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Real estate construction............................................... $ 24,666 $ 2,033
Real estate mortgage................................................... 128,026 11,675
Commercial............................................................. 101,177 16,758
Installment............................................................ 7,186 2,184
---------- ---------
GROSS LOANS........................................................ 261,055 32,650
Less:
Deferred loan fees................................................... (939) (130)
Allowance for loan losses............................................ (5,393) (854)
---------- ---------
NET LOANS.......................................................... $ 254,723 $ 31,666
---------- ---------
---------- ---------
</TABLE>
The amount of fixed-rate and variable rate loans and the maturities for each
classification of loans as of December 31, 1996, is as follows:
<TABLE>
<CAPTION>
ONE YEAR
ONE YEAR THROUGH 5 OVER 5
OR LESS YEARS YEARS TOTAL
---------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate construction....................... $ 22,832 $ 559 $ 1,275 $ 24,666
Real estate mortgage........................... 37,702 56,373 33,951 128,026
Commercial..................................... 45,507 31,426 24,244 101,177
Installment.................................... 3,790 2,898 498 7,186
---------- --------- --------- ----------
$ 109,831 $ 91,256 $ 59,968 $ 261,055
---------- --------- --------- ----------
---------- --------- --------- ----------
Loans maturing after one year with:
Fixed interest rates......................... $ 26,253 $ 21,319
Variable interest rates...................... 65,003 38,649
--------- ---------
$ 91,256 $ 59,968
--------- ---------
--------- ---------
</TABLE>
B-54
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- LOANS (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the two years ended December
31, 1996 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Allowance for loan losses:
Balance at the beginning of the period..................................... $ 854 $ 1,137
--------- ---------
Loans charged off:
Real estate mortgage................................................... 427 278
Commercial............................................................. 396 401
Installment............................................................ 45 38
--------- ---------
Total loans charged off.............................................. 868 717
--------- ---------
Recoveries on loans charged off
Real estate mortgage................................................... -- 5
Commercial............................................................. 18 3
Installment............................................................ -- 1
--------- ---------
Total recoveries on loans charged off................................ 18 9
--------- ---------
Net loans charged off................................................ 850 708
Provision charged to operating expense..................................... 228 425
Other additions due to:
Acquisition of Western................................................... 5,041 --
Loan portfolio purchases................................................. 120 --
--------- ---------
Balance at the end of the period........................................... $ 5,393 $ 854
--------- ---------
--------- ---------
</TABLE>
A summary of loans on which the accrual of interest has been discontinued as
of December 31 for the years indicated follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans:
Real Estate Construction................................................... $ 164 $ 172
Real Estate Mortgage....................................................... 8,323 160
Commercial................................................................. 755 12
Installment................................................................ 73 1
--------- ---------
Total.................................................................... $ 9,315 $ 345
--------- ---------
--------- ---------
</TABLE>
If interest on nonaccrual loans had been recognized at the original interest
rates, interest income would have increased approximately $279 thousand and $17
thousand for the years ended December 31, 1996 and 1995, respectively.
B-55
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- LOANS (CONTINUED)
If the measurement of an impaired loan is less than the recorded amount of
the loan, impairment is recognized through a valuation allowance with a
corresponding charge to the provision for loan losses. At December 31, 1996 and
1995, impaired loans identified in accordance with SFAS No. 114 and the related
specific loan loss allowances were as follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------
RECORDED ALLOWANCE FOR NET
INVESTMENT LOAN LOSSES INVESTMENT
----------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances.............................. $ 2,799 $ 541 $ 2,258
Without specific allowances........................... 6,775 -- 6,775
----------- ----- -----------
Total impaired loans................................ $ 9,574 $ 541 $ 9,033
----------- ----- -----------
----------- ----- -----------
<CAPTION>
1995
-----------------------------------------
RECORDED ALLOWANCE FOR NET
INVESTMENT LOAN LOSSES INVESTMENT
----------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances.............................. $ 1,041 $ 134 $ 907
Without specific allowances........................... 11 -- 11
----------- ----- -----------
Total impaired loans................................ $ 1,052 $ 134 $ 918
----------- ----- -----------
----------- ----- -----------
</TABLE>
The average recorded investment in impaired loans for the years ended
December 31, 1996 and 1995 was approximately $2,511 thousand and $1,298
thousand, respectively. Interest income on impaired loans of approximately $33
thousand and $97 thousand was recognized for cash payments in 1996 and 1995,
respectively.
NOTE 6 -- PROPERTY AND EQUIPMENT
The components of premises and equipment at December 31, were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land and building.......................................................... $ 3,892 $ --
Furniture, fixtures and equipment.......................................... 2,230 1,111
Leasehold improvements..................................................... 415 17
--------- ---------
6,537 1,128
Less accumulated depreciation and amortization............................. 757 518
--------- ---------
$ 5,780 $ 610
--------- ---------
--------- ---------
</TABLE>
B-56
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- DEPOSITS
At December 31, 1996, the scheduled contractual maturities of certificates
of deposits are as follows (In thousands):
<TABLE>
<S> <C>
1997............................................................... $ 63,637
1998............................................................... 2,506
1999............................................................... 2,119
2000............................................................... 1,864
2001 and thereafter................................................ 372
---------
$ 70,498
---------
---------
</TABLE>
NOTE 8 -- NOTES PAYABLE
On September 30, 1996, the Company borrowed $26.5 million from the Northern
Trust Company of Chicago under a three year revolving loan agreement.
Concurrently with the acquisition of Western, the Company reduced the loan by
$15.5 million as a result of a dividend in the same amount from Western. The
balance at December 31, 1996 was $11 million, and the interest rate was 6.75%.
The highest amount outstanding during 1996 was $26.5 million; the average
balance outstanding during the year was $2.75 million; and the average rate paid
was 6.95% for the year. The revolving loan agreement expires on September 25,
1999. The loan agreement contains covenants which impose certain restrictions on
activities of the Company and its financial position. Such covenants include
minimum net worth ratios, maximum debt ratios, a minimum return on average
assets, and minimum and maximum credit quality ratios. As of December 31, 1996,
the Company, and where applicable, its subsidiaries, were in compliance with
each of such covenants.
NOTE 9 -- SHAREHOLDERS' EQUITY
EQUITY TRANSACTIONS
During 1995, the Company completed two capital raising transactions. Under a
private placement which closed in March, 1995, the Company issued approximately
4,547 thousand shares of common stock for net proceeds of approximately
$5,668,000. In September, 1995, pursuant to a shareholders' rights and public
offering, the Company issued approximately 2,887,000 shares of common stock for
net proceeds of approximately $3,464,000. Pursuant to the September, 1995 equity
transaction, the Company issued to parties related to Belle Plaine Financial,
LLC, 411,421 warrants to acquire common stock at $1.62 per share. The warrants
expire on September 30, 2005.
As part of the September 30, 1996 Western acquisition, the Company sold
approximately 26,147,000 shares of common stock in a private placement for net
proceeds of approximately $42,213,000. Pursuant to this equity transaction, the
Company issued to parties related to Belle Plaine Financial, LLC, 784,391
warrants to acquire common stock at $1.98 per share. The warrants expire on
September 30, 2006.
RESTRICTIONS ON PAYMENTS OF DIVIDENDS
As of December 31, 1996, the Company was not eligible to pay dividends
because of the accumulated deficit.
B-57
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- SHAREHOLDERS' EQUITY (CONTINUED)
The Banks are subject to certain restrictions under regulations governing
state banks which limit their ability to transfer funds to the Company through
inter-company loans, advances, or cash dividends. As of December 31, 1996,
Monarch may not pay dividends without the prior approval of the FDIC and State
Superintendent of Banks.
NOTE 10 -- INCOME TAXES
The components of the consolidated income tax expense (benefit) for the
years ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current expense:
Federal..................................................................... $ 232 $ --
State....................................................................... 182 1
--------- ---------
414 1
Deferred expense (benefit):
Federal..................................................................... (64) (90)
State....................................................................... 2 (407)
--------- ---------
(62) (497)
--------- ---------
Total income taxes............................................................ $ 352 $ (496)
--------- ---------
--------- ---------
</TABLE>
The provision for income taxes differs from that which would result from
applying the U.S. statutory rate of 34% as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Federal income tax expense at statutory rate................................. $ 371 $ 64
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefits................................ 121 11
Amortization of goodwill................................................... 170 --
Valuation allowance........................................................ (374) (591)
Other, net................................................................. 64 20
--------- ---------
Total income taxes........................................................... $ 352 $ (496)
--------- ---------
--------- ---------
</TABLE>
B-58
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1996 and 1995
are presented below. December 31,1995 information does not reflect deferred tax
assets of Western which was acquired on September 30,1996.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for losses............................ $ 1,431 $ 202
Other real estate owned................................................... 605 13
Interest on nonaccrual loans.............................................. 128 --
Net operating loss carryovers............................................. 392 615
Purchase accounting adjustments........................................... 1,022 --
Loss on mortgage division................................................. 163 --
Depreciation.............................................................. 293 --
Other..................................................................... 307 83
--------- ---------
Deferred tax assets......................................................... 4,341 913
Valuation allowance....................................................... -- (374)
--------- ---------
Deferred tax assets......................................................... 4,341 539
Deferred tax liabilities:
Securities................................................................ (23) --
FHLB stock dividends...................................................... (131) --
Other..................................................................... (153) (99)
--------- ---------
Deferred tax liabilities.................................................... (307) (99)
--------- ---------
Net deferred tax asset...................................................... 4,034 440
Tax on unrealized gains on investment securities............................ (51) --
--------- ---------
Net deferred tax assets..................................................... $ 3,983 $ 440
--------- ---------
--------- ---------
</TABLE>
Realization of the net deferred tax assets may be based on utilization of
carrybacks to prior taxable periods, anticipation of future taxable income and
the utilization of tax planning strategies. At December 31, 1995, the Company
established a valuation allowance on deferred tax assets which management
believed was more likely than not would not be realized. With the acquisition of
Western, and the current period earnings of Monarch, management now believes the
future income of the Company is sufficient to conclude that it is more likely
than not that all deferred tax assets will be realized. As a result, no
valuation allowance is recorded at December 31, 1996 and the valuation allowance
existing at December 31, 1995 was recognized in 1996 earnings.
On December 31, 1996 the Company had $2,694,348 and $1,079,823 of federal
and California net operating loss carryovers, respectively, and $333,480 in tax
credit carryforwards. During 1995, the Company entered into a recapitalization
plan which resulted in a change in ownership for purposes of Internal Revenue
Code ("IRC") Section 382. IRC section 382 imposes restrictions on the
utilizations of certain tax loss and credit carryforwards which resulted in
$1,741,155 and $126,628 of the federal and California net operating loss
carryovers and $333,486 of tax credit carryovers no longer being available for
utilization.
Management believes that the remaining $953,193 and $953,195 of the federal
and California net operating losses will be realized. The net operating loss
carryovers have various expiration dates through
B-59
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- INCOME TAXES (CONTINUED)
the year 2010. In 1996, the 1995 deferred tax assets, which are unrealizable
pursuant to IRC Section 382, have been reclassified to eliminate those deferred
tax assets and their corresponding valuation allowance.
NOTE 11 -- COMMITMENTS AND CONTINGENT LIABILITIES
The Company and the Banks conduct operations from leased facilities under
operating leases which expire on various dates through 2001 and which contain
certain renewal options.
Future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------
(IN THOUSANDS)
<S> <C>
Year ended December 31:
1997........................................................................ $ 711
1998........................................................................ 711
1999........................................................................ 711
2000........................................................................ 601
2001........................................................................ 544
Thereafter.................................................................. 932
------
$ 4,210
------
------
</TABLE>
Rental expense was $400,000 in 1996, and $267,000 in 1995. Rental expense
for 1996 includes that for Western since the date of its acquisition.
Sublease rental income for the years ended December 31, 1996 and 1995
totaled approximately $54,000 and $66,000, respectively. The lease and sublease
related to $34,000 of the sublease income expired without renewal in June 1996.
Of the remaining amount, $5,000 relates to a sublease on a month to month basis
and $15,000 relates to a sublease that expires in October, 1999.
The Company and the Banks are parties 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 statements.
NOTE 12--RELATED PARTY TRANSACTIONS
The Banks had loans outstanding to principal officers and directors and
their affiliated companies which 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.
B-60
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--RELATED PARTY TRANSACTIONS (CONTINUED)
An analysis of the activity with respect to such loans to related parties is
as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Balance, January 1......................................................... $ 248 $ 141
Additions due to acquisitions.............................................. 184 --
New loans.................................................................. 791 176
Repayments................................................................. (413) (69)
--------- ---------
Balance, December 31....................................................... $ 810 $ 248
--------- ---------
--------- ---------
</TABLE>
The 1996 balance does not include $136,000 in overdraft arrangements on
deposit account, consumer credit cards and lines of credit. New loans in 1996
include an existing loan for $470,000 which became a related party loan when the
person joined the Company as an officer in 1996.
Monarch's health and life insurance programs have been contracted based on
competitive bids through Rice Brown Financial. The principal of Rice Brown
Financial is an insurance broker and a director of the Company and Monarch.
On January 1, 1996 the Company engaged one of its directors as a financial
advisor. 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 the director upon 30 days written notice.
Belle Plaine Partners, Inc. and Belle Plaine Financial, L.L.C. are entities
related to a director of the Company. Belle Plaine Partners, Inc. serves as
financial advisor to the Company under an engagement letter dated May, 1995. In
that capacity, Belle Plaine Partners, Inc. was paid fees of approximately $1.4
million for evaluating and identifying potential acquisitions including the
acquisition of Western which closed September 30, 1996. It is also anticipated
that Belle Plaine Partners, Inc. will be paid fees of approximately $1.35
million in connection with the acquisition of California Commercial Bankshares
("CCB") by the Company. Belle Plaine Financial, LLC was engaged by the Company
to raise capital to consummate the acquisition of Western. Belle Plaine
Financial, LLC was paid $863 thousand for its services and was reimbursed for
expenses incurred in the course of that engagement. The agreement may be
terminated by either party upon 30 days written notice.
NOTE 13--BENEFITS PLANS
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 ownership and salary
deferral plan ("KSOP"). In 1992, the KSOP obtained a $250,000 loan from another
financial institution, which was 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 Company. The loan had a term of five years and an
interest rate of 8%. The Company's contributions to the KSOP totaled
approximately $46,000 in 1995. No contributions were made in 1996. In September
of 1996 the Company terminated the KSOP plan and recorded a related expense of
B-61
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--BENEFITS PLANS (CONTINUED)
approximately $189,000 for repayment of the loan and other termination expenses.
The loan was classified in other liabilities as of December 31, 1996 and was
paid off in January of 1997.
Western has a 401(k) plan which is intended to qualify under section 401(k)
of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan covers
substantially all employees from the first day of the month following the date
of hire. Employees may elect to make both pre-tax and after-tax contributions.
The 401(k) Plan also provides for discretionary Company matching contributions.
The Company contributions to the 401 (k) Plan, plus any earnings they generate,
are fully and immediately vested. The 401(k) Plan will be made available to
Monarch employees. No contributions were made by the Company in 1996.
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company and its banking subsidiaries are parties to financial
instruments with off-balance-sheet risk in its normal course of business in
meeting the financial needs of their 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 Company has in particular
classes of financial instruments.
The 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 same
credit policies are used in making commitments and conditional obligations as
those used for on-balance-sheet instruments.
At December 31, the Company had the following commitments to extend credit:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Loan commitments...................................................... $ 52,925 $ 6,557
Standby letters of credit............................................. 7,336 10
--------- ---------
$ 60,261 $ 6,567
--------- ---------
--------- ---------
</TABLE>
In addition to the amounts above, approximately $1,768 thousand in consumer
credit card and overdraft commitments were outstanding as of December 31, 1996
and 1995. Loan commitment arrangements represent commercial lines of credit with
variable interest rates determined at the time funds are drawn by adding an
interest spread to an agreed upon index. 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. However, many commitments
expire without being used. Standby letters of credit are conditional commitments
issued by the Banks to guarantee performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
B-62
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and due from banks, federal funds sold, and
interest bearing deposits are considered to approximate fair value. The fair
value of investment securities is generally based on quoted market prices. The
fair value of loans is estimated using a combination of techniques, including
discounting estimated future cash flows and quoted market prices of similar
instruments, where available, taking into consideration the varying degrees of
credit risk.
FINANCIAL LIABILITIES
The carrying amounts of deposit liabilities payable on demand is 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 notes payable is
based on rates currently available to the Company 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.
B-63
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of financial instruments at December 31, 1996 and
1995 is summarized as follows:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
DECEMBER 31, 1996
Financial Assets:
Cash and due from banks........................................... $ 37,385 $ 37,385
Federal Funds Sold................................................ 4,217 4,217
Investment Securities............................................. 164,724 164,699
Loans............................................................. 254,723 254,184
Financial Liabilities:
Deposits.......................................................... $ 442,984 $ 443,190
Notes payable..................................................... 11,000 11,000
DECEMBER 31, 1995
Financial Assets:
Cash and due from banks........................................... $ 4,747 $ 4,747
Federal Funds Sold................................................ 2,938 2,938
Investment Securities............................................. 28,863 28,895
Loans............................................................. 31,666 31,531
Financial Liabilities:
Deposits.......................................................... 58,742 58,740
</TABLE>
NOTE 16--REGULATORY MATTERS
EXAMINATIONS OF MONARCH
Following the conclusion of a joint, second quarter 1994 FDIC and California
State Banking Department (Superintendent) examination of Monarch, Monarch
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
required Monarch to perform several actions within certain time frames.
The California State Banking Department completed an examination of Monarch
in 1995 and informed Monarch that it had been rated satisfactory and the State
removed its 1913 Order on December 29, 1995.
The FDIC removed their Order on March 6, 1996 when Monarch signed a
Memorandum of Understanding ("MOU"). On July 3, 1996, the MOU was terminated by
the FDIC.
RISK-BASED CAPITAL STANDARDS
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the
B-64
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--REGULATORY MATTERS (CONTINUED)
regulatory framework for prompt corrective action, specific capital guidelines
that involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items, as calculated under regulatory accounting practices,
must be met. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. The banking regulators have advised the Company and the Banks
that they are considered well capitalized at December 31, 1996.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum ratios based on average
and risk weighted assets as set forth below. Actual capital ratios for the
Company and the Banks as of December 31, 1996 are also shown in the table:
<TABLE>
<CAPTION>
ADEQUATELY WELL COMPANY
CAPITALIZED CAPITALIZED MONARCH WESTERN CONSOLIDATED
----------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Detailed computations of
Tier 1 leverage capital
ratio....................... a4.00% a5.00% 8.07% 6.05% 5.07%
Tier 1 risk-based capital
ratio....................... a4.00% a6.00% 13.64% 10.93% 9.05%
Total risk-based capital...... a8.00% a10.00% 14.89% 12.19% 10.30%
</TABLE>
NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
CONDENSED BALANCE SHEETS
Assets:
Cash and due from banks............................................ $ 4,696 $ 194
Investments in bank subsidiaries................................... 60,344 5,749
Securities available for sale...................................... 262 5,186
Other assets....................................................... 673 --
---------- ---------
Total Assets..................................................... $ 65,975 $ 11,129
---------- ---------
---------- ---------
Liabilities:
Notes payable...................................................... $ 11,000 $ 132
Other liabilities.................................................. 847 --
---------- ---------
11,847 132
Shareholders' equity................................................. 54,128 10,997
---------- ---------
Total Liabilities and shareholders' equity....................... $ 65,975 $ 11,129
---------- ---------
---------- ---------
</TABLE>
B-65
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1996 1995
---------- ---------
CONDENSED STATEMENT OF OPERATIONS
<S> <C> <C>
Interest income...................................................... $ 223 $ 107
Management fees...................................................... 58 --
---------- ---------
Total income....................................................... 281 107
Interest expense..................................................... 191 1
Other expense........................................................ 1,167 69
---------- ---------
Total expense...................................................... 1,358 70
---------- ---------
Income (loss) before taxes and equity in undistributed subsidiary
earnings....................................................... (1,077) 37
Income tax expense (benefit)......................................... (431) --
---------- ---------
Income (loss) before equity in undistributed earnings of bank
subsidiaries....................................................... (646) 37
Equity in undistributed income (loss) of bank subsidiaries........... 1,384 646
---------- ---------
Net income......................................................... $ 738 $ 683
---------- ---------
---------- ---------
CONDENSED STATEMENTS OF CASH FLOWS
Net income (loss).................................................... $ 738 $ 683
Change in other assets............................................... (673) --
Change in other liabilities.......................................... 847 --
Equity in undistributed subsidiary (earnings) losses................. (1,384) (646)
---------- ---------
Cash flows from operating activities............................... (472) 37
Acquisition of Western Bank, including acquisition costs............. (53,154) --
Net change in securities available for sale.......................... 4,924 --
Other investing activities........................................... 127 (8,944)
---------- ---------
Cash flows from investing activities............................... (48,103) (8,944)
Net proceeds from issuance of common stock net of issuance costs..... 42,213 9,668
Issuance of debt..................................................... 11,000 --
Other financing activities........................................... (136) (589)
---------- ---------
Cash flows from financing activities............................... 53,077 9,079
Net increase (decrease) in cash...................................... 4,502 172
Cash beginning of year............................................... 194 22
---------- ---------
Cash end of year..................................................... $ 4,696 $ 194
---------- ---------
---------- ---------
</TABLE>
NOTE 18--STOCK OPTION PLAN AND WARRANTS
In 1993, the Company adopted a stock option plan (the "Plan") pursuant to
which the Company's Board of Directors may grant stock options to officers,
directors and key employees. The Plan authorizes grants of options to purchase
up to 3,437,482 shares of authorized but unissued common stock. Stock options
are granted with an exercise price greater than or equal to the stock's fair
market value at the date of grant. Qualified stock options have 5-year terms and
vest over a three year period from the date of grant. Non-qualified stock
options have 10-year terms and vest over a three year period from the date of
grant
B-66
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--STOCK OPTION PLAN AND WARRANTS (CONTINUED)
At December 31, 1996, there were 2,189,899 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock options
granted during 1996 was $0.64 using the Black Scholes option-pricing model with
the following weighted-average assumptions: (i) no dividends are expected to be
paid; (ii) risk-free interest rate of 5.20% to 6.27%; (iii) an expected life of
2 1/2 to 5 years; and (iv) an estimated volatility of 40%. There were no options
granted in 1995.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS 123, the
Company's net income and earnings per share, net of tax effect, would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996
---------
<S> <C> <C>
Net income As reported.................................................. $ 738
Pro forma.................................................... 656
Earnings per share As reported.................................................. $ 0.05
Pro forma.................................................... 0.04
</TABLE>
The pro forma earnings per share for December 31, 1996 was based on 14,879
thousand of weighted average common shares. The pro forma amounts shown above
may not be representative of the effects on reported net income for future
periods.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Balance at December 31, 1994................................... 109,016 $ 4.25
Granted...................................................... --
Exercised.................................................... --
Canceled..................................................... (109,016) 4.25
Expired...................................................... --
----------
Balance at December 31, 1995................................... --
Granted...................................................... 1,262,022 1.65
Exercised.................................................... --
Forfeited.................................................... (14,439) 1.62
Expired...................................................... --
----------
Balance at December 31, 1996................................... 1,247,583 $ 1.65
----------
----------
</TABLE>
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was between $1.62 and $1.65
and 8 1/2 years, respectively.
At December 31, 1996 and 1995, the number of options exercisable was 127,583
and 0, respectively, and the weighted average exercise price of those options
exercisable at December 31, 1996 was $1.62.
At December 31, 1996 and 1995, there were also exercisable warrants
outstanding of 1,195,812 and 411,421, respectively, and the weighted average
exercise price of those warrants exercisable was $1.86 and $1.62, respectively.
Of the warrants outstanding on December 31, 1996, 411,421 expire on September
30, 2000 and 784,391 expire on September 30, 2001.
B-67
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Board of Directors of Monarch Bancorp appointed KPMG Peat Marwick LLP as
its auditors on September 18, 1996 and replaced Dayton & Associates, which is
now Vavrinek, Trine, Day & Co.
Dayton & Associates' report dated February 7, 1996, except for Note 16 as to
which the date is March 31, 1996 and Note 17 as to which the date is April 25,
1996, on the Company's financial statements for the year ended December 31, 1995
did not include an adverse opinion or disclaimer opinion nor was it qualified as
to audit scope or accounting principles.
During the Company's fiscal years ended December 31, 1994 and December 31,
1995, and subsequent interim period, there were no disagreements with Dayton &
Associates on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which if not resolved to
Dayton & Associates' satisfaction, would have caused them to make reference to
the subject matter of the disagreement in connection with their Report.
During the Company's fiscal years ended December 31, 1994 and December 31,
1995, and subsequent interim period:
(a) Dayton & Associates has not advised the Company that there do not
exist the internal controls necessary for the Company to develop reliable
financial statements;
(b) Dayton & Associates has not advised the Company that information had
come to their attention that has led them to no longer be able to rely on
management's representations, or that has made Dayton & Associates unwilling
to be associated with the financial statements prepared by management;
(c) Dayton & Associates has not advised the Company that they needed to
expand significantly the scope of their audit, or that information has come
to their attention during such time period that if further investigated may
(i) materially impact the fairness or reliability of either the previously
issued audit report or the underlying financial statements, or the financial
statements to be issued covering the fiscal period subsequent to the date of
the most recent financial statements covered by an audit report or (ii)
cause Dayton & Associates to be unwilling to rely on management's
representations or be associated with the Company's financial statements;
and
(d) Dayton & Associates has not advised the Company that information has
come to their attention of the type described in subparagraph (c) above, the
issue not being resolved to their satisfaction prior to its dismissal.
The Company has not, during its fiscal years ending December 31, 1994 and
December 31, 1995, and the subsequent interim periods, consulted with KPMG Peat
Marwick LLP regarding the application of accounting principles to a specifc
transaction or the type of audit opinion that might be rendered on the Company's
financial statements.
B-68
<PAGE>
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 to each of the persons who currently
serves as a director of the Company, such person's age, such person's present
position, and the period during which such person has served as a director of
the Company.
<TABLE>
<CAPTION>
DIRECTOR OF
NAME AGE PRESENT POSITION THE COMPANY SINCE
- ------------------------------ --- -------------------------------------------------------- -----------------
<S> <C> <C> <C>
Rice E. Brown................. 59 Director, the Company 1988
Joseph J. Digange............. 69 Director, the Company; Chairman, Western Bank 1996
John M. Eggemeyer............. 51 Director, the Company 1997
John W. Rose.................. 47 Director, the Company 1995
Hugh S. Smith, Jr............. 66 Director, Chairman and Chief Executive Officer, the 1996
Company
Matthew P. Wagner............. 40 President, the Company; President and Chief Executive 1996
Officer, Western Bank
Dale E. Walter................ 62 Director, the Company 1996
</TABLE>
RICE BROWN, MSFS is a registered investment advisor, registered principal
and President of the firm Rice Brown Financial Services Inc. Mr. Brown's primary
focus is in the area of money management using a fee asset basis and estate
planning. Mr. Brown's firm has been in business for 35 years. Mr. Brown is the
former President of the National Association of Life Underwriters, a Washington,
D.C.-based professional money management group.
JOSEPH J. DIGANGE has been Chairman of Western Bank, since October 1, 1996.
In October 1987, Mr. Digange joined Western Bank, as President and Chief
Operating Officer. From 1973 to 1982 he was President and Chief Executive
Officer of First Los Angeles Bank and from 1982 to 1987 was Vice Chairman of the
Board. Mr. Digange has been in banking since 1950.
JOHN M. EGGEMEYER is an investor and advisor to financial institutions. From
1992 to 1994, Mr. Eggemeyer was a principal of Maybon Securities Corp., an
investment bank, and from 1990 to the present, he has served as President of
Belle Plaine Financial LLC as well as Belle Plaine Partners, Inc. ("BPI"). Mr.
Eggemeyer also serves as the President of Castle Creek Capital LLC, a registered
bank holding company, and as a director of DLJ Mortgage Capital Corp., DLJ
Mortgage Acceptance Corp., The Enterprise Fund, Rancho Santa Fe National Bank,
TCF Bank--Illinois, and TCF Financial Corporation.
JOHN W. ROSE is currently an Executive Vice President of FNB Corporation, a
Pennsylvania multi-bank holding company and is responsible for community banks.
He has held this position since March 1995. Since January 1992 he has also been
President of McAllen Capital Partners, Inc. a financial advisor to banks and
thrifts. From 1988 to 1992, Mr. Rose was President of Livingston Financial
Group, a venture capital firm specializing in troubled banking opportunities.
HUGH S. SMITH, JR. is Chairman of the Board and Chief Executive Officer of
the Company. He also serves on the Board of Western Bank and Monarch Bank. Prior
to September 30, 1996, he was Chairman of the Board and Chief Executive Officer
of Western Bank, a position he held for 23 years.
MATTHEW P. WAGNER is President of the Company and President and Chief
Executive Officer of Western. In October 1996, Mr. Wagner was elected President
and Chief Executive Officer of Western Bank and in February 1997, was appointed
to the post of President of the Company. Prior to joining the Company in
B-69
<PAGE>
1996, Mr. Wagner was Executive Vice President with First Bank System in
Minneapolis, Minnesota since 1991 and a Senior Vice President since 1985.
DALE E. WALTER has over 35 years of banking experience having served as
Chief Executive Officer of several Southern California independent banks
including serving as President and Chief Executive Officer of the Bank of
Industry from 1980 to June 1992, as Chairman and Chief Executive Officer of
Commerce Bancorp from January 1993 to July 1994 and President and Chief
Executive Officer of Guardian Bank from October 1994 to February 1995. From
February 1996 to the present, he has operated a wholesale golf travel company
and currently serves as a director of First Community Bank of the Desert.
COMMITTEES OF THE BOARD OF DIRECTORS
During 1996, the Company Board held 13 meetings. Five of these meetings
occurred since September 30, 1996 when the Company Board was restructured. All
Directors attended at least 75 percent of the Board meetings of the Company
during the time they were directors.
The Audit Committee of the Board of Directors held four meetings in 1996, to
review the auditing findings, financial reports, and other matters with the
outside auditors. The four Audit Committee meetings were joint meetings of the
Audit Committee of the Company and Monarch Bank. The current members of the
Audit Committee are Rice E. Brown, John W. Rose and Dale E. Walter.
The Compensation Committee of the Board of Directors consists of Rice E.
Brown, John W. Rose and Dale E. Walter. There were no Compensation Committee
meetings during 1996.
The Executive Committee of the Board of Directors consists of Hugh S. Smith,
Jr., Matthew P. Wagner and Joseph J. Digange. There were no meetings of the
Executive Committee in 1996.
The Company has adopted a director compensation policy pursuant to which its
non-employee directors are to be paid an annual retainer of $5,000, $750 per
regular meeting attended and $300 per special meeting and committee meeting
attended. In addition, the Company Board may grant to non-employee directors
options to purchase that number of shares of the Company Common Stock equal to
$15,000 divided by the Market Price at the time of grant at specified times. Mr.
Rose has agreed to forego the compensation he would otherwise receive as a
non-employee director (as described in this paragraph) in consideration of his
engagement as a financial advisor to the Company. See Part III, Item 12, Certain
Relationships and Related Transactions. The Company did not pay director fees in
1996.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and the beneficial owners of more than ten percent of the
Company's Common Stock to file with the SEC initial reports of ownership and
reports of changes in ownership of the Company Common Stock and other equity
securities of the Company. Because of the complexity of the reporting rules, the
Company has assumed responsibility for preparing and filing all reports required
to be filed under Section 16(a) by the directors and executive officers. The
Company believes that during the last fiscal year all Section 16(a) filing
requirements applicable to its directors and executive officers were complied
with, except for the failure to (a) file a Form 3 for each of the following new
executive officers of the Company: Hugh S. Smith, Jr., Joseph J. Digange, B.
Scott Hardt and Arnold C. Hahn and (b) file a Form 4 for each director and
executive officer who received stock options in February 1996, in each case
within 10 days of the receipt thereof. Once the omission was discovered,
amendments were promptly filed.
B-70
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth as to each of the persons who currently
serves as an executive officer of the Company, such person's age, such person's
present position and the period during which the person has served in such
position:
<TABLE>
<CAPTION>
YEAR APPOINTED
NAME AGE PRESENT POSITION TO POSITION
- ------------------------------ --- -------------------------------------------------------- -----------------
<S> <C> <C> <C>
Joseph J. Digange 69 Chairman, Western 1996
Arnold C. Hahn 45 Executive Vice President, 1996
Chief Financial Officer and Secretary, the Company
B. Scott Hardt 47 Executive Vice President 1996
and Chief Credit Officer,
Western
Hugh S. Smith, Jr. 66 Chairman and Chief 1996
Executive Officer, the Company
Matthew P. Wagner 40 President, the Company; President and Chief Executive 1996
Officer, Western
</TABLE>
JOSEPH J. DIGANGE has been Chairman of Western, since October 1, 1996. In
October 1987, Mr. Digange joined Western, as President and Chief Operating
Officer. From 1973 to 1982 he was President and Chief Executive Officer of First
Los Angeles Bank and from 1982 to 1987 was Vice Chairman of the Board. Mr.
Digange has been in banking since 1950.
ARNOLD C. HAHN has been Executive Vice President and Chief Financial Officer
of the Company since November 1996. Prior to joining the Company, Mr. Hahn spent
six years as a Senior Vice President of Finance for First Bank System in
Minneapolis, Minnesota. Prior to joining First Bank, Mr. Hahn was a partner with
Ernst & Young.
SCOTT HARDT is Executive Vice President and Chief Credit Officer of Western.
Mr. Hardt joined Western in March 1988 as Senior Vice President and Chief Credit
Officer and was promoted to his current position in August 1994. Over the past
22 years and prior to joining Western, Mr. Hardt has held various credit and
marketing positions in banking. Mr. Hardt began his career with First Interstate
Bank in multi-national lending.
HUGH S. SMITH, JR. is Chairman of the Board and Chief Executive Officer of
the Company. He also serves on the Board of Western and Monarch. Prior to
September 30, 1996, he was Chairman of the Board and Chief Executive Officer of
Western, a position he held for 23 years.
MATTHEW P. WAGNER is President of the Company and President and Chief
Executive Officer of Western Bank. In October 1996, Mr. Wagner was appointed
President and Chief Executive Officer of Western, and in February 1997, he was
appointed to the post of President of the Company. Prior to joining the Company
in 1996, Mr. Wagner served as Executive Vice President of Trust with First Bank
System in Minneapolis, Minnesota.
ITEM 10. EXECUTIVE COMPENSATION
The Company's executive officers are Hugh S. Smith, Jr., Chief Executive
Officer and Chairman of the Board; Arnold C. Hahn, Executive Vice President,
Chief Financial Officer and Secretary; and Matt Wagner, President. E. Lynn
Caswell served as Chief Executive Officer of the Company from July 23, 1987 to
September 30, 1996. The following table reflects all compensation paid to Mr.
Smith, Mr. Digange, Mr. Hahn, Mr. Hardt, Mr. Wagner and Mr. Caswell. No other
officer of the Company received a total annual salary and bonus of $100,000 or
more.
B-71
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION
----------------------------------- AWARDS
(E) -------------
OTHER
(A) (B) (C) (D) ANNUAL (F)
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS COMP.(5) OPTIONS/ SARS
- --------------------------------------------------------- --------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
E. Lynn Caswell (2) ..................................... 1996 138,028 10,800 --
Former Chief Executive Officer, the Company 1995 128,182 11,530 63,614
1995 128,182 10,555 --
Hugh S. Smith, Jr. ...................................... 1996 188,260 50,000 8,533 200,000
Chairman and Chief Executive Officer, the Company
(1)(3)
Joseph J. Digange ....................................... 1996 178,454 50,000 13,396 200,000
Chairman, Western (1)(3)
Arnold C. Hahn .......................................... 1996 25,029 100,000 2,000 135,000
Executive Vice President and Chief Financial Officer,
the Company (3)
B. Scott Hardt .......................................... 1996 126,524 50,000 10,800 85,000
Executive Vice President and Chief Credit Officer,
Western (1)(3)
Matthew P. Wagner (4) ................................... 1996 43,750 100,000 3,608 500,000
President, the Company; President and Chief Executive
Officer, Western
</TABLE>
- ------------------------
(1) Compensation includes amounts received in 1996 from Western Bank.
(2) 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
Monarch. The Agreement was effective for a three year period with automatic,
subsequent three year renewals, unless notice was given 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 completed its capital raising
activities conducted through private placements of its Common Stock. In
December 1995, the Board appointed a special committee to review Mr.
Caswell's Agreement and to recommend a new agreement. In February 1997, the
Company and Mr. Caswell agreed pursuant to a General Release of Claims and
Agreement, dated as of February 1, 1997 (the "Release"), among Mr. Caswell,
the Company and Monarch to terminate his Employment Agreement in early 1997
and to a payment by the Company to Mr. Caswell of $347,600. This amount was
accrued in the Company's 1996 financial statements.
(3) Includes incentive payments accrued in the Company's 1996 financial
statements and paid in February 1997.
(4) Mr. Wagner received an additional $47,265 in consulting fees prior to his
becoming an executive officer.
(5) Consists primarily of company cars, car allowances and club dues paid by the
Company.
B-72
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN FISCAL BASE EXPIRATION
NAME GRANTED (#) YEAR PRICE ($/SHARE) DATE
- -------------------------------------------- ------------- ----------------------- --------------- -----------
<S> <C> <C> <C> <C>
Hugh S. Smith, Jr........................... 200,000 17.4% $ 1.65 2001-2006
Joseph J. Digange........................... 200,000 17.4% $ 1.65 2001-2006
Arnold C. Hahn.............................. 135,000 11.8% $ 1.65 2001-2006
B. Scott Hardt.............................. 85,000 7.4% $ 1.65 2001-2006
Matthew P. Wagner........................... 500,000 43.6% $ 1.65 2001-2006
</TABLE>
Certain stock options issued prior to 1996 to E. Lynn Caswell, the former
CEO of Monarch, were replaced in January 1996 with options to purchase 63,614
shares of Company Common Stock at an exercise price of $1.62 per share
(representing approximately 120 percent of the then-current market price). The
Board of Directors at that time determined that the options so replaced carried
exercise prices that were too high to provide Mr. Caswell with any meaningful
opportunity to realize economic value; accordingly, the Board determined that
the issuance of replacement options (which maintained an above-market
exercise-price) was appropriate. Pursuant to the Release, Mr. Caswell has waived
all rights to such options without any additional consideration.
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
OPTIONS/SARS AT FY- OPTIONS/SARS AT FY-END
SHARES ACQUIRED VALUE END (#) EXERCISABLE/ ($) EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------------- ----------------- ------------- --------------------- -----------------------
<S> <C> <C> <C> <C>
0/ $ 0/
Hugh S. Smith, Jr. ................ None None 200,000 $ 270,000
0/ $ 0/
Joseph J. Digange.................. None None 200,000 $ 270,000
0/ $ 0/
Arnold C. Hahn..................... None None 135,000 $ 182,250
0/ $ 0/
B. Scott Hardt..................... None None 85,000 $ 135,000
0/ $ 0/
Matthew P. Wagner.................. None None 500,000 $ 675,000
</TABLE>
There were no options exercised during the fiscal year ended December 31,
1996.
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND COMPANY MANAGEMENT
The following table reflects as of April 21, 1997 the beneficial ownership
of Company Common Stock, including stock options which will become exercisable
within 60 days, by the Company's directors, executive officers and shareholders
known to the Company to be holding more than five percent of such stock, and by
the Company's directors and officers as a group.
B-73
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) OF CLASS
- ----------------------------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
Castle Creek Capital Partner's Fund-I (2)................................................ 12,785,325 36.89%
4370 LaJolla Village, Suite 400,
San Diego, CA 92122
Launch & Co. Mutual Discovery Fund....................................................... 3,400,000 9.89%
51 John F. Kennedy Parkway,
Short Hills, NJ 07078
Keefe Managers, Inc. (3)................................................................. 2,500,000 7.27%
325 Park Avenue,
New York, NY 10152
Wellington Management (4)................................................................ 2,500,000 7.27%
75 State Street,
Boston, MA 02109
John M. Eggemeyer (2).................................................................... 13,436,723 38.23%
4370 LaJolla Village, Suite 400,
San Diego, CA 92122
Hugh S. Smith, Jr. (5)................................................................... 0 0.0%
1251 Westwood Blvd.
Los Angeles, CA 90024
Rice E. Brown (6)........................................................................ 12,600(7) 0.04%
27127 Calle Arroyo
Suite 1907
San Juan Capistrano, CA 92675
John W. Rose (6)......................................................................... 251,990(8) 0.73%
c/o FNB Corporation
Hermitage Square
Hermitage, PA 16148
Joseph J. Digange (5).................................................................... 0 0.0%
1251 Westwood Blvd.
Los Angeles, CA 90024
B. Scott Hardt (9)....................................................................... 50,000 0.15%
1251 Westwood Blvd.
Los Angeles, CA 90024
Dale E. Walter (6)....................................................................... 60,000 0.17%
50855 Washington Square
Suite C-211
La Quinta, CA 92253
Matthew P. Wagner (5).................................................................... 90,000 0.26%
1251 Westwood Blvd.
Los Angeles, CA 90024
E. Lynn Caswell (10)..................................................................... 94,536 .28%
------------- -----
Directors and Executive Officers as a group (9 persons) (11)............................. 13,901,313 39.44%
------------- -----
------------- -----
</TABLE>
- ------------------------
(1) The term "beneficial owner" includes any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship, or otherwise
has or shares: (a) voting power, which includes
B-74
<PAGE>
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. The term "beneficial owner" also includes any
person who has the right to acquire beneficial ownership of such security as
defined above within 60 days. Ownership includes vested stock options and
warrants exercisable within 60 days.
(2) Mr. Eggemeyer has direct beneficial ownership of 160,470 shares of Company
Common Stock and warrants to purchase 490,928 shares of Company Common Stock
and has or shares voting power and/ or investment power, through Castle
Creek Capital Partner's Fund (the "Fund"), of which he is a principal, with
respect to 12,500,000 shares of Company Common Stock and warrants to
purchase 285,325 shares of Monarch Common Stock. Mr. Eggemeyer disclaims any
beneficial ownership of the shares held by the Fund except to the extent of
his interest in the Fund. See Part III, Item 12 Certain Relationships and
Related Transactions.
(3) Shares of Company Common Stock beneficially owned by Keefe Managers, Inc.
are held in affiliated entities as follows: 782,000 shares beneficially
owned by Keefe Off Shore Fund, LTD; 918,000 shares beneficially owned by
Keefe Partners L.P. and 800,000 shares beneficially owned by Rainbow
Partners.
(4) Shares of Company Common Stock beneficially owned by Wellington Management,
Inc. are held in affiliated entities as follows: 1,703,000 shares
beneficially owned by Bay Pond Partners LP; 605,500 shares beneficially
owned by Bay Pond Investors Bermuda LP and 191,500 shares beneficially owned
by Barlow Partners.
(5) Executive Officer and Director.
(6) Director.
(7) Mr. Brown beneficially owns 7,600 shares of Company Common Stock and options
to purchase
5,000 shares of Company Common Stock.
(8) Mr. Rose beneficially owns 160,531 shares of Company Common Stock and
warrants to purchase
91,459 shares of Company Common Stock.
(9) Executive Officer.
(10) E. Lynn Caswell is a former Chief Executive Officer and director of the
Company.
(11) Does not include 94,536 shares beneficially owned by E. Lynn Caswell.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain 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, the Banks. All banking transactions
have taken place in the ordinary course of the Banks' business, and the Banks
expect to have banking transactions with such persons in the future.
In the Company'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 Monarch,
together with their associates, amounted to $116,000 on December 31, 1996,
constituting a negligible percentage of the Company's equity capital accounts on
that date.
The Company'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.
B-75
<PAGE>
On January 1, 1996 the Company engaged Mr. Rose, who is a director of the
Company, 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.
John M. Eggemeyer is a principal of Belle Plaine Financial LLC and BPI. BPI
has served as financial advisor to the Company under an engagement letter dated
May 17, 1995. In that capacity, BPI was paid fees of $1,414,632 for evaluation
and identifying potential acquisitions including the acquisition of Western Bank
which closed September 30, 1996. It is also anticipated that fees of
approximately $1.35 million will be paid under the BPI engagement letter in
connection with the acquisition of CCB by Monarch. Belle Plaine Financial LLC,
of which Mr. Eggemeyer owns 52 percent, was engaged by the Company to raise
capital to consummate the acquisition of Western Bank. Belle Plaine Financial
LLC was paid $862,831 for its services and was reimbursed for expenses incurred
in the course of that engagement. The engagement letter may be terminated by
either the Company or BPI upon 30 days' written notice. See Part III, Item 11
Security Ownership of Certain Beneficial Owners and Monarch Management.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBITS NUMBER
- ---------------
<C> <S>
2.1 Plan of Reorganization and Merger Agreement. (Exhibit A of Registration Statement No. 2-84426
incorporated by reference)
2.2 Amended and Restated Agreement and Plan of Merger, dated as of December 19, 1996, by and between
Monarch Bancorp and California Commercial Bankshares*
2.3 Agreement and Plan of Merger, dated as of March 15, 1997, by and between Monarch Bank and National
Bank of Southern California*
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)
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)
4.6 Stock Option Agreement, dated December 19, 1996, between CCB and the Company*
4.7 Warrant Certificate No. 1, dated November 5, 1996, in favor of John M. Eggemeyer*
4.8 Warrant Certificate No. 2, dated November 5, 1996, in favor of William J. Ruh*
4.9 Warrant Certificate No. 3, dated November 5, 1996, in favor of John W. Rose*
</TABLE>
B-76
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS NUMBER
- ---------------
<C> <S>
4.10 Warrant Certificate No. 4, dated November 5, 1996, in favor of Mark G. Merlo*
4.11 Warrant Certificate No. 1, dated November 5, 1996, in favor of Castle Creek Capital Partners Fund-I*
4.12 Warrant Certificate No. 2, dated November 5, 1996, in favor of John M. Eggemeyer, III*
4.13 Warrant Certificate No. 3, dated November 5, 1996, in favor of William Ruh*
4.14 Warrant Certificate No. 4, dated November 5, 1996, in favor of Dan Davis*
4.15 Warrant Certificate No. 5, dated November 5, 1996, in favor of Mark Merlo*
4.16 Warrant Certificate No. 6, dated November 5, 1996, in favor of William Moody*
4.17 Warrant Certificate No. 7, dated November 5, 1996, in favor of HCM Castle Creek, Inc.*
4.18 Warrant Certificate No. 8, dated November 5, 1996, in favor of Castle Creek Financial Investors,
Inc.*
4.19 Warrant Certificate No. 9, dated November 5, 1996, in favor of Whitecap Capital, L.L.C.*
4.20 Warrant Certificate No. 10, dated November 5, 1996, in favor of Cook-Castle Creek, Inc.*
4.21 Warrant Certificate No. 11, dated November 5, 1996, in favor of Castle Creek Investors, L.L.C.*
9.1 Shareholder Agreement, dated as of December 19, 1996, by and between Farrell G. Hinkle and Monarch
Bancorp*
9.2 Shareholder Agreement, dated as of December 19, 1996, by and between Phillip L. Bush and Monarch
Bancorp*
9.3 Shareholder Agreement, dated as of December 19, 1996, by and between Michael Gertner and Monarch
Bancorp*
9.4 Shareholder Agreement, dated as of December 19, 1996, by and between James W. Hamilton and Monarch
Bancorp*
9.5 Shareholder Agreement, dated as of December 19, 1996, by and between William H. Jacoby and Monarch
Bancorp*
9.6 Shareholder Agreement, dated as of December 19, 1996, by and between Robert L. McKay and Monarch
Bancorp*
9.7 Shareholder Agreement, dated as of December 19, 1996, by and between Mark H. Stuenkel and Monarch
Bancorp*
10.0 Monarch Bancorp 1983 Stock Option Plan; Form Incentive Stock Option Agreement and Form Nonstatutory
Stock Option Agreement (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)
</TABLE>
B-77
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<TABLE>
<CAPTION>
EXHIBITS NUMBER
- ---------------
<C> <S>
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-KSB incorporated by reference)
10.8 General Release of Claims and Agreement, dated February 1, 1997, among E. Lynn Caswell, the Company
and Monarch Bank*
10.9 1993 Stock Option Plan as Amended May 15, 1996*
10.10 Form of Stock Option Agreement*
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)
16.0 Letter of Dayton & Associates on change in Certifying Accountant*
21.0 Subsidiaries of Monarch Bancorp*
27.0 Financial Data Schedule*
28.1 February 15, 1988 California Offering Circular (Exhibit 28.1 of 12/31/87 Form 10-K incorporated by
reference)
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 shares of common stock (Original filing
7/19/95)
</TABLE>
- ------------------------
* Previously filed with the Company's original Annual Report on Form 10-KSB
for the year ended December 31, 1996.
(b) REPORTS ON FORM 8-K
On October 4, 1996, the Company filed a Form 8-K discussing a change in
control of the company, the acquisition of Western Bank, a change in the
Company's certifying accounts and the resignation of directors.
On December 2, 1996, the Company filed a Form 8-K containing the pro forma
combined financial statements with Western Bank.
On December 20, 1996, the Company filed a Form 8-K announcing the merger
agreement reached with California Commercial Bankshares.
On February 28, 1997, the Company filed a Form 8-K announcing its Fourth
Quarter Earnings and the number of shares of common stock to be exchanged in
connection with the merger with California Commercial Bankshares.
On April 14, 1997, the Company filed a Form 8-K announcing its First Quarter
Earnings.
B-78
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MONARCH BANCORP
By: /s/ HUGH S. SMITH, JR.
-----------------------------------------
Hugh S. Smith, Jr.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Date: April 30, 1997
In accordance with the Securities Exchange Act, this 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/ ARNOLD C. HAHN Executive Vice President
- ------------------------------ and Chief Financial April 30, 1997
Arnold C. Hahn Officer
/s/ RICE E. BROWN
- ------------------------------ Director April 30, 1997
Rice E. Brown
/s/ JOSEPH J. DIGANGE
- ------------------------------ Director April 30, 1997
Joseph J. Digange
/s/ JOHN W. ROSE
- ------------------------------ Director April 30, 1997
John W. Rose
/s/ MATTHEW P. WAGNER
- ------------------------------ Director April 30, 1997
Matthew P. Wagner
/s/ DALE E. WALTER
- ------------------------------ Director April 30, 1997
Dale E. Walter
/s/ JOHN M. EGGEMEYER
- ------------------------------ Director April 30, 1997
John M. Eggemeyer
B-79
<PAGE>
APPENDIX C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
DATED AS OF THE 19TH DAY OF DECEMBER, 1996
BY AND BETWEEN
MONARCH BANCORP
AND
CALIFORNIA COMMERCIAL BANKSHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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TABLE OF CONTENTS
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RECITALS
ARTICLE I. THE MERGER
SECTION 1.1. Structure of the Merger.................................................................. C-7
SECTION 1.2. Effect on Outstanding Shares............................................................. C-7
SECTION 1.3. Exchange Procedures...................................................................... C-8
SECTION 1.4. Dissenters' Rights....................................................................... C-9
SECTION 1.5. Options.................................................................................. C-9
SECTION 1.6. Determinations of December 31, 1996 Shareholders' Equity................................. C-10
ARTICLE II. CONDUCT PENDING THE MERGER
SECTION 2.1. Conduct of Business Prior to the Effective Time.......................................... C-10
SECTION 2.2. Forbearance.............................................................................. C-11
SECTION 2.3. Cooperation.............................................................................. C-12
ARTICLE III. REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties of the Company............................................ C-12
SECTION 3.2. Representations and Warranties of Monarch................................................ C-22
ARTICLE IV. COVENANTS
SECTION 4.1. Acquisition Proposals.................................................................... C-30
SECTION 4.2. Certain Policies of the Company.......................................................... C-30
SECTION 4.3. Employee Benefits........................................................................ C-30
SECTION 4.4. Access and Information................................................................... C-31
SECTION 4.5. Certain Filings, Consents and Arrangements............................................... C-31
SECTION 4.6. Indemnification; Directors' and Officers' Insurance...................................... C-32
SECTION 4.7. Additional Agreements.................................................................... C-33
SECTION 4.8. Publicity................................................................................ C-33
SECTION 4.9. Registration Statement................................................................... C-33
SECTION 4.10. Shareholders' Meetings.................................................................. C-33
SECTION 4.11. Notification of Certain Matters......................................................... C-33
SECTION 4.12. No Acquisitions of Company Common Stock................................................. C-34
SECTION 4.13. Securities Act.......................................................................... C-34
SECTION 4.14. Quotation on NASDAQ..................................................................... C-34
SECTION 4.15. Tax-Free Reorganization Treatment; Pooling.............................................. C-34
SECTION 4.16. Shareholder Agreements.................................................................. C-34
SECTION 4.17. Director and Officer Resignations....................................................... C-34
SECTION 4.18. Consummation of Company Bank and Monarch Bank Merger.................................... C-34
ARTICLE V. CONDITIONS TO CONSUMMATION
SECTION 5.1. Conditions to All Parties' Obligations................................................... C-35
SECTION 5.2. Conditions to the Obligations of Monarch................................................. C-36
SECTION 5.3. Conditions to the Obligation of the Company.............................................. C-37
ARTICLE VI. TERMINATION
SECTION 6.1. Termination.............................................................................. C-37
SECTION 6.2. Effect of Termination.................................................................... C-38
ARTICLE VII. EFFECTIVE DATE AND EFFECTIVE TIME
SECTION 7.1. Effective Date and Effective Time........................................................ C-39
</TABLE>
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ARTICLE VIII. OTHER MATTERS
SECTION 8.1. Certain Definitions; Interpretation...................................................... C-39
SECTION 8.2. Survival................................................................................. C-40
SECTION 8.3. Waiver................................................................................... C-40
SECTION 8.4. Counterparts............................................................................. C-40
SECTION 8.5. Governing Law............................................................................ C-41
SECTION 8.6. WAIVER OF JURY TRIAL..................................................................... C-41
SECTION 8.7. Expenses................................................................................. C-41
SECTION 8.8. Notices.................................................................................. C-41
SECTION 8.9. Entire Agreement; Etc.................................................................... C-42
SECTION 8.10. Assignment.............................................................................. C-42
Schedule 2.2(b)*
Schedule 4.16*
LIST OF ANNEXES*
Annex 1 - Monarch Rights (Recital C)
Annex 2 - Company Rights (Recital E)
Annex 3 - Form of Shareholder Agreement (Section 4.16)
Annex 3A - Form of Shareholder Agreement to be signed (Section 4.16)
Annex 4 - Form of Opinion of Company Counsel (Section 5.2(c))
Annex 5 - Form of Opinion of Monarch Counsel (Section 5.3(b))
Annex 6 - Calculation of Company Per Share Book Value (Section 8.1)
Annex 7 - Certificate of Merger and Related Document
</TABLE>
- ------------------------
*Omitted from this Joint Proxy Statement--Prospectus
C-3
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
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<S> <C>
Acquisition Proposal....................................................................................... 43
Affiliates................................................................................................. 50
BHC Act.................................................................................................... 1
BIF........................................................................................................ 13
Certificate................................................................................................ 4
Code....................................................................................................... 2
Company.................................................................................................... 1
Company Bank............................................................................................... 2
Company Book Value......................................................................................... 59
Company Common Stock....................................................................................... 2
Company Counsel............................................................................................ 54
Company Disclosure Letter.................................................................................. 13
Company Employee Plans..................................................................................... 20
Company ERISA Affiliate.................................................................................... 20
Company ERISA Affiliate Plan............................................................................... 20
Company Option............................................................................................. 7
Company Pension Employee................................................................................... 20
Company Per Share Book Value............................................................................... 59
Company Pooling Condition.................................................................................. 55
Company Properties......................................................................................... 24
Company Reports............................................................................................ 15
Company Rights............................................................................................. 2
Confidentiality Agreement.................................................................................. 45
Continued Employee......................................................................................... 44
Conversion Number.......................................................................................... 3
Costs...................................................................................................... 46
Covered Person............................................................................................. 27
Deal Expenses.............................................................................................. 59
Dissenters' Shares......................................................................................... 3
Dissenters' Rights Condition............................................................................... 54
Effective Date............................................................................................. 59
Effective Time............................................................................................. 59
Environmental Law.......................................................................................... 25
ERISA...................................................................................................... 20
ERISA Affiliate............................................................................................ 20
Exchange Agent............................................................................................. 4
FDIC....................................................................................................... 13
Federal Reserve Board...................................................................................... 1
GAAP....................................................................................................... 60
Government Regulators...................................................................................... 18
Hazardous Substance........................................................................................ 25
Indemnified Parties........................................................................................ 46
IRS........................................................................................................ 22
Material................................................................................................... 60
Material Adverse Effect.................................................................................... 60
Maximum Amount............................................................................................. 47
Meeting.................................................................................................... 49
Merger..................................................................................................... 3
</TABLE>
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Merger Consideration....................................................................................... 3
Monarch.................................................................................................... 1
Monarch Book Value......................................................................................... 60
Monarch Common Stock....................................................................................... 1
Monarch Disclosure Letter.................................................................................. 28
Monarch Employee Plans..................................................................................... 35
Monarch ERISA Affiliate.................................................................................... 35
Monarch ERISA Affiliate Plan............................................................................... 35
Monarch Pension Plan....................................................................................... 35
Monarch Per Share Book Value............................................................................... 60
Monarch Pooling Condition.................................................................................. 53
Monarch Properties......................................................................................... 39
Monarch Reports............................................................................................ 30
Monarch Rights............................................................................................. 1
Monarch's Benefit Plans.................................................................................... 44
NASDAQ..................................................................................................... 4
OCC........................................................................................................ 16
OREO....................................................................................................... 25
PBGC....................................................................................................... 20
Person..................................................................................................... 61
Plan....................................................................................................... 1
Registration Statement..................................................................................... 48
Regulatory Agencies........................................................................................ 16
Retention Bonuses.......................................................................................... 61
SEC........................................................................................................ 15
Securities Act............................................................................................. 27
Securities Exchange Act.................................................................................... 15
Shareholder Agreements..................................................................................... 51
Significant Subsidiaries................................................................................... 16
SRO........................................................................................................ 16
State Corporation Law...................................................................................... 3
State Regulator............................................................................................ 16
Subsidiary................................................................................................. 61
Surviving Corporation...................................................................................... 3
</TABLE>
C-5
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of the 19th day
of December, 1996 (this "Plan"), by and between Monarch Bancorp, a California
corporation ("Monarch"), and California Commercial Bankshares, a California
corporation (the "Company").
RECITALS:
A. AMENDMENT AND RESTATEMENT. Monarch and the Company desire to amend and
restate the provisions of that certain Agreement and Plan of Merger, dated as of
December 19, 1996, by and between Monarch and the Company in order to clarify
the understandings of the parties with respect to certain of the terms set forth
therein, and, subject to Section 8.9 hereof, Monarch and the Company intend that
this Plan, as so amended and restated hereby, shall hereafter constitute the
entire agreement of the parties with respect to the matters set forth herein.
B. MONARCH. Monarch is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of California, with its
principal executive offices located in Laguna Niguel, California. As of the date
hereof, Monarch has (i) 100 million authorized shares of common stock, no par
value ("Monarch Common Stock"), of which no more than 36,818,216 shares were
outstanding as of the date hereof (including 2,443,395 shares to be issued upon
the completion of the exercise of certain options and warrants), (ii) 5 million
authorized shares of preferred stock, none of which were outstanding, and (iii)
no other class of capital stock authorized. Monarch is a bank holding company
duly registered with the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended
(the "BHC Act").
C. MONARCH RIGHTS, ETC. Monarch does not have any shares of its capital
stock reserved for issuance, any outstanding option, call or commitment relating
to shares of its capital stock or any outstanding securities, obligations or
agreements convertible into or exchangeable for, or giving any person any right
(including, without limitation, preemptive rights) to subscribe for or acquire
from it, any shares of its capital stock (collectively, "Monarch Rights"),
except pursuant to the options, warrants, awards and other rights described on
Annex 1 (which includes details on the terms and conditions of any such Monarch
Rights, including the grantee, vesting periods and exercise prices of any
options and the exercise price of any warrants).
D. THE COMPANY. The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of California, with
its principal executive offices located in Newport Beach, California. As of the
date hereof, the Company has (i) 10,000,000 authorized shares of common stock,
no par value ("Company Common Stock"), of which no more than 3,193,822 shares
were outstanding as of the date hereof (including 236,750 shares to be issued
upon the completion of the exercise of certain options, warrants and awards),
(ii) 1,000,000 authorized shares of preferred stock, none of which were
outstanding, and (iii) no other class of capital stock authorized. The Company
is a bank holding company duly registered with the Federal Reserve Board under
the BHC Act.
E. COMPANY RIGHTS, ETC. The Company does not have any shares of its
capital stock reserved for issuance, any outstanding option, call or commitment
relating to shares of its capital stock or any outstanding securities,
obligations or agreements convertible into or exchangeable for, or giving any
person any right (including, without limitation, preemptive rights) to subscribe
for or acquire from it, any shares of its capital stock (collectively, "Company
Rights"), except pursuant to the options, warrants, awards, and other rights
described on Annex 2 (which includes details on the terms and conditions of any
Company Rights, including the grantee, vesting periods and exercise prices of
any options).
F. BOARD APPROVALS. The respective Boards of Directors of Monarch and the
Company have duly approved this Plan and have duly authorized its execution and
delivery.
G. INTENTION OF THE PARTIES. It is the intention of the parties to this
Plan that (a) the Merger (as hereinafter defined) for federal income tax
purposes shall qualify as a "reorganization" within the meaning
C-6
<PAGE>
of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"),
(b) the Merger for accounting purposes shall qualify as a "pooling of
interests," unless the Monarch Pooling Condition (as defined herein) and the
Company Pooling Condition (as defined herein) are waived by the parties hereto
and (c) immediately following the Merger, Monarch Bank, a wholly-owned
Subsidiary of Monarch, shall be merged into National Bank of Southern California
(the "Company Bank"), a wholly-owned Subsidiary of the Company, with the Company
Bank as the survivor (the "Bank Merger").
H. STOCK OPTION AGREEMENT. Concurrently herewith, the Company and Monarch
are entering into a Stock Option Agreement, to be dated the date hereof, whereby
the Company will grant to Monarch the option to purchase up to 19.9% of the
outstanding shares of the Company Common Stock upon the occurrence of certain
events.
In consideration of their mutual promises and obligations hereunder, the
parties hereto adopt and make this Plan and prescribe the terms and conditions
hereof and the manner and basis of carrying it into effect, which shall be as
follows:
ARTICLE I. THE MERGER
SECTION 1.1. STRUCTURE OF THE MERGER. On the Effective Date (as defined in
Section 7.1 hereof), the Company will merge (the "Merger") with and into
Monarch, with Monarch being the surviving corporation (the "Surviving
Corporation"), pursuant to the provisions of, and with the effect provided in,
the California General Corporation Law (the "State Corporation Law"). The
separate corporate existence of the Company shall thereupon cease. The Surviving
Corporation shall continue to be governed by the State Corporation Law and its
separate corporate existence with all of its rights, privileges, immunities,
powers and franchises shall continue unaffected by the Merger. At the Effective
Time (as defined in Section 7.1 hereof), the articles of incorporation and
by-laws of the Surviving Corporation shall be the articles of incorporation and
by-laws of Monarch immediately prior to the Effective Time.
SECTION 1.2. EFFECT ON OUTSTANDING SHARES. (a) By virtue of the Merger,
each share of Company Common Stock issued and outstanding at the Effective Time
(other than (i) shares which have not been voted in favor of the approval of the
principal terms of this Plan and with respect to which dissenters' rights shall
have been perfected in accordance with State Corporation Law (the "Dissenters'
Shares") and (ii) shares held directly or indirectly by Monarch, other than
shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted) shall become and be converted, automatically and without any action
on the part of the holder thereof, into that number of shares of Monarch Common
Stock (the "Conversion Number") equal to the quotient obtained by dividing (i)
1.6 times the Company's Per Share Book Value (as defined in Section 8.1 hereof)
by (ii) Monarch's Per Share Book Value (as defined in Section 8.1 hereof) (the
aggregate of all such shares of Monarch Common Stock is hereinafter called the
"Merger Consideration"). To the extent permitted by applicable law, preemptive
rights with respect to the purchase of CCB Common Stock, if any shall exist,
shall terminate and cease to exist at the Effective Time.
(b) At the Effective Time, the issued and outstanding shares of Monarch
Common Stock, including shares issued pursuant to Section 1.2(a) hereof, shall
constitute all of the issued and outstanding shares of capital stock of the
Surviving Corporation.
(c) If Monarch effects a stock dividend, reclassification, recapitalization,
split-up, combination, exchange of shares or similar transaction after the date
hereof and before the Effective Time, the Conversion Number shall, if necessary,
be adjusted. As of the Effective Time, each share of Company Common Stock held
directly or indirectly by Monarch, other than shares held in a fiduciary
capacity or in satisfaction of a debt previously contracted, shall be cancelled,
retired and cease to exist, and no exchange or payment shall be made in respect
thereof.
(d) No fractional shares of Monarch Common Stock shall be issued pursuant
hereto. In lieu of the issuance of any fractional share of Monarch Common Stock
pursuant to Section 1.2(a) hereof, cash
C-7
<PAGE>
adjustments will be paid to holders in respect of any fractional share of
Monarch Common Stock that would otherwise be issuable; the amount of such cash
adjustment shall be equal to such fractional proportion of the average closing
price of a share of Monarch Common Stock as quoted on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") for the five trading
days immediately prior to and including the trading day next preceding the
Effective Time or, if the Monarch Common Stock is not then quoted on NASDAQ,
such fractional proportion of an amount equal to the Monarch Per Share Book
Value multiplied by 1.6.
(e) Dissenters' Shares shall be purchased and paid for in accordance with
Section 1300 et. seq. of the State Corporation Law.
SECTION 1.3. EXCHANGE PROCEDURES. (a) At and after the Effective Time,
each certificate theretofore representing shares of Company Common Stock (each,
a "Certificate") shall represent only the right to receive the applicable
portion of the Merger Consideration without interest.
(b) As of the Effective Time, Monarch shall deposit, or shall cause to be
deposited, with such bank or trust company as Monarch shall elect (which may be
a Subsidiary of Monarch) (the "Exchange Agent"), for the benefit of the holders
of shares of Company Common Stock, for exchange in accordance with this Section
1.3, certificates representing the shares of Monarch Common Stock and cash in
lieu of fractional shares to be exchanged pursuant to Section 1.2 hereof for
outstanding shares of Company Common Stock.
(c) As soon as practicable after the Effective Time, Monarch shall cause the
Exchange Agent to mail to each holder of record of a Certificate or Certificates
the following: (i) a letter of transmittal specifying that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates and, in the case of holders of more than 5% of the
Company Common Stock at the Effective Time, the letter referred to in Section
4.13(b) hereof, to the Exchange Agent, which transmittal letter shall be in a
form and contain any other customary provisions as Monarch may determine; and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for the applicable portion of the Merger Consideration. Upon the proper
surrender of a Certificate to the Exchange Agent, together with a properly
completed and duly executed letter of transmittal, the holder of such
Certificate shall be entitled to receive in exchange therefor (1) a certificate
representing the number of whole shares of Monarch Common Stock and (2) a check
representing the amount of cash in lieu of any fractional shares and unpaid
dividends and distributions, if any, which such holder has the right to receive
in respect of the Certificate surrendered pursuant to the provisions hereof, and
the Certificate so surrendered shall forthwith be cancelled. No interest will be
paid or accrued on the Merger Consideration. In the event of a transfer of
ownership of any shares of Company Common Stock not registered in the transfer
records of the Company, the exchange described in this Section 1.3(c) may
nonetheless be effected if the Certificate representing such Company Common
Stock is presented to the Exchange Agent, accompanied by documents sufficient,
in the discretion of Monarch and the Exchange Agent, (i) to evidence and effect
such transfer but for the provisions of Section 1.3(e) hereof and (ii) to
evidence that all applicable stock transfer taxes have been paid.
(d) Whenever a dividend or other distribution is declared by Monarch on
Monarch Common Stock, the record date for which is at or after the Effective
Time, the declaration shall include dividends or other distributions on all
shares issuable pursuant to this Plan; PROVIDED, HOWEVER, that no dividend or
other distribution declared or made on Monarch Common Stock shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of Monarch
Common Stock represented thereby until the holder of such Certificate shall duly
surrender such Certificate in accordance with this Section 1.3. Following such
surrender of any such Certificate, there shall be paid to the holder of the
certificates representing whole shares of Monarch Common Stock issued in
exchange therefor, without interest, (i) at the time of such surrender, the
amount of dividends or other distributions having a record date after the
Effective Time theretofore payable with respect to such whole shares of Monarch
Common Stock and not yet paid and (ii) at the appropriate payment date, the
amount of dividends or other distributions having
C-8
<PAGE>
(x) a record date after the Effective Time but prior to surrender and (y) a
payment date subsequent to surrender with respect to such whole shares of
Monarch Common Stock.
(e) From and after the Effective Time, there shall be no transfers on the
stock transfer records of the Company of any shares of Company Common Stock that
were outstanding immediately prior to the Effective Time. If Certificates are
presented to the Surviving Corporation after the Effective Time, they shall be
cancelled and exchanged for the Merger Consideration deliverable in respect
thereof pursuant to this Plan in accordance with the procedures set forth in
this Section 1.3.
(f) Any portion of the aggregate Merger Consideration that remains unclaimed
by the shareholders of the Company for six months after the Effective Time shall
be returned by the Exchange Agent to the Surviving Corporation. Any shareholder
of the Company who has not theretofore complied with this Section 1.3 shall
thereafter be entitled to look only to the Surviving Corporation for payment of
the Merger Consideration deliverable in respect of each share of Company Common
Stock held by such shareholder without any interest thereon. If Certificates are
not surrendered or the consideration therefor is not claimed prior to the date
on which such consideration would otherwise escheat to or become the property of
any governmental unit or agency, the unclaimed consideration shall, to the
extent permitted by abandoned property and any other applicable law, become the
property of Monarch (and to the extent not in its possession shall be paid over
to Monarch), free and clear of all claims or interest of any person previously
entitled to such claims. Notwithstanding the foregoing, none of Monarch, the
Surviving Corporation, the Exchange Agent or any other person shall be liable to
any former holder of Company Common Stock for any amount delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
(g) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by the Exchange
Agent, the posting by such person of a bond in such amount as the Exchange Agent
may direct as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will effect the exchange of such
lost, stolen or destroyed Certificate for the portion of the Merger
Consideration deliverable in exchange therefor.
SECTION 1.4. DISSENTERS' RIGHTS. Any Dissenting Shareholder who shall be
entitled to be paid the "fair market value" of his or her Dissenters' Shares, as
provided in Section 1300 of the State Corporation Law, shall not be entitled to
the Merger Consideration in respect thereof unless and until such Dissenting
Shareholder shall have failed to perfect or shall have effectively withdrawn or
lost such Dissenting Shareholder's right to dissent from the Merger under the
State Corporation Law, and shall be entitled to receive only the payment
provided for by Section 1300 of the State Corporation Law with respect to such
Dissenters' Shares. If any Dissenting Shareholder shall fail to perfect or shall
have effectively withdrawn or lost such right to dissent, the Dissenters' Shares
held by such Dissenting Shareholder shall thereupon be treated as though such
Dissenters' Shares had been converted into the right to receive the Merger
Consideration pursuant to Section 1.2 hereof.
SECTION 1.5. OPTIONS. At the Effective Time, each option granted by the
Company to directors, officers and employees of the Company and the Company Bank
to purchase shares of Company Common Stock which, at the Effective Time, is
outstanding and has not been exercised (a "Company Option"), shall be converted
into an option to purchase shares of Monarch Common Stock in accordance with the
terms of the applicable Company stock option plan and the stock option agreement
by which it is evidenced. From and after the Effective Time, (i) each Company
Option may be exercised solely for shares of Monarch Common Stock, (ii) the
number of shares of Monarch Common Stock subject to such Company Option shall be
equal to the product (rounded down to the nearest whole share) of multiplying
the number of shares of Company Common Stock subject to such Company Option
immediately prior to the Effective Time by the Conversion Number and (iii) the
per share exercise price under each such Company Option
C-9
<PAGE>
shall be equal to the quotient (rounded down to the nearest cent) of dividing
the per share exercise price under each such Company Option by the Conversion
Number.
SECTION 1.6. DETERMINATIONS OF DECEMBER 31, 1996 SHAREHOLDERS' EQUITY. (a)
As promptly as practicable, but no less than seven business days prior to the
release of its 1996 earnings, each party hereto shall deliver to the other its
proposed consolidated statement of income and consolidated balance sheet, and
shall cause its independent accountants to make available to the other party
their work papers.
(b) If either party disagrees with the other's calculation of shareholders'
equity, it shall not later than the day prior to the seventh business day
following such delivery, deliver a notice specifying those items or amounts on
the financial statements as to which it disagrees, including the reasons for its
disagreement and its calculation of the relevant shareholders' equity.
(c) If a notice of disagreement shall be delivered pursuant to subsection
1.6(b) hereof, the parties shall, during the 10 days following such delivery,
use their best efforts to reach agreement on the disputed items or amounts, as
may be required, in order to determine the amount of the relevant shareholders'
equity, which amount shall not be more than the amount thereof shown in the
calculation delivered pursuant to subsection 1.6(a) hereof nor less than the
amount thereof shown in the calculation delivered pursuant to subsection 1.6(b)
hereof. If during such period the parties are unable to reach such agreement,
they shall promptly thereafter cause Price Waterhouse LLP or other firm of
independent accountants of nationally recognized standing reasonably
satisfactory to the parties (who shall not have any material relationship with
either of the parties, other than personal banking relationships that may be
maintained by partners of such firms in their individual capacity), promptly to
review the disputed items or amounts for the purpose of calculating the relevant
shareholders' equity. In making such calculation, such independent accountants
shall consider only those items or amounts as to which a party has disagreed.
Such independent accountants shall deliver to the parties, as promptly as
practicable, a report setting forth such calculation. Such report shall be final
and binding upon the parties. The cost of such review and report shall be borne
(i) by Monarch, if its consolidated shareholders' equity as determined pursuant
hereto shall be less than 97.5% of that delivered pursuant to subsection 1.6(a)
hereof, (ii) by the Company if its consolidated shareholders' equity as
determined pursuant hereto shall be less than 97.5% of that delivered pursuant
to subsection 1.6(a) hereof, (iii) by the challenging party if the consolidated
shareholder's equity of the other party as determined pursuant hereto shall be
not less than 99.5% of that delivered pursuant to subsection (a) hereof and (iv)
otherwise, 50% by each of the parties.
(d) The parties agree that they will, and agree to cause their respective
independent accountants to, cooperate and assist in the preparation of the
financial statements and in the conduct of the audits and reviews referred to in
this Section 1.6, including without limitation the making available to the
extent necessary of books, records, work papers and personnel.
ARTICLE II. CONDUCT PENDING THE MERGER
SECTION 2.1. CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME. Except as
expressly provided in this Plan, during the period from the date of this Plan to
the Effective Time, each of Monarch and the Company shall, and shall cause each
of its respective Subsidiaries to, (i) conduct its business in the usual,
regular and ordinary course of business consistent with past practice, (ii) use
its reasonable best efforts to maintain and preserve intact its business
organization, properties, leases, employees and advantageous business
relationships and retain the services of its officers and key employees, (iii)
take no action which would adversely affect or delay the ability of the Company
or Monarch to obtain any necessary approvals, consents or waivers of any
governmental authority required for the transactions contemplated hereby or to
perform its covenants and agreements on a timely basis under this Plan and (iv)
take no action that is reasonably likely to have a Material Adverse Effect (as
defined in Section 8.1 hereof) on either Monarch or the Company.
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SECTION 2.2. FORBEARANCE. During the period from the date of this Plan to
the Effective Time, neither Monarch nor the Company shall, nor shall either
permit any of its respective Subsidiaries to, without in any such case the prior
consent of the other (it being understood that, except as otherwise specified
herein, for purposes of this Section 2.2, a consent shall be deemed given if,
within 3 business days after a request for any such consent is made by one
party, the other party does not object to the action for which the consent is
requested):
(a) incur any indebtedness for borrowed money (other than Federal Funds
borrowings) or assume, guarantee, endorse or otherwise as an accommodation
become responsible for the obligations of any other person;
(b) except as contemplated in Recital H and Schedule 2.2(b) hereto,
adjust, split, combine or reclassify any capital stock; make, declare or pay
any dividend or make any other distribution on, or directly or indirectly
redeem, purchase or otherwise acquire, any shares of its capital stock or
any securities or obligations convertible into or exchangeable for any
shares of its capital stock, or grant any stock appreciation rights or
grant, sell or issue to any individual, corporation or other person any
right or option to acquire, or securities evidencing a right to convert into
or acquire, any shares of its capital stock, or issue any additional shares
of capital stock except pursuant to the exercise of stock options, warrants,
awards and other rights outstanding as of the date hereof as set forth on
Annexes 1 and 2 and on the terms in effect on the date hereof;
(c) other than in the ordinary course of business consistent with past
practice and pursuant to policies currently in effect, sell, transfer,
mortgage, encumber or otherwise dispose of any of its properties, leases or
assets to any person, or cancel, release or assign any indebtedness of any
such person, except (i) pursuant to contracts or agreements in force as of
the date of this Plan or (ii) any such action or series of related actions
which result in a pre-tax loss of not more than $100,000;
(d) make any capital expenditures, other than capital expenditures made
in the ordinary course of business consistent with past practice in amounts
not exceeding $25,000 individually or $100,000 in the aggregate;
(e) increase in any manner the compensation or fringe benefits of any of
its employees or directors, or create or institute, or make any payments
pursuant to, any severance plan or package, or pay any pension or retirement
allowance not required by any existing plan or agreement to any such
employees or directors, or become a party to, amend or commit itself to or
fund or otherwise establish any trust or account related to any Employee
Plan (as defined in Section 3.1(p) hereof), with or for the benefit of any
employee, other than (i) general increases in compensation for employees in
the ordinary course of business consistent with past practices, (ii) bonuses
which have been accrued on the 1996 financial statements of the relevant
party in the ordinary course of business consistent with past practices or
(iii) any amendment required by applicable law (provided that any such
amendment shall provide the least increase to cost permitted under such
applicable law), or voluntarily accelerate the vesting of any stock options
or other compensation or benefit;
(f) (i) other than in the ordinary course of business consistent with
past practice in individual amounts not to exceed $100,000 or in securities
transactions as provided in (f)(ii) below, make any investment either by
contributions to capital, property transfers, or purchase of any property or
assets of any person, PROVIDED that neither party shall make any acquisition
of business operations without the other party's prior consent, or
(ii) other than purchases of direct obligations of the United States
of America or obligations of U.S. government agencies which are entitled
to the full faith and credit of the United States of America, in any case
with a remaining maturity at the time of purchase of three years or less,
purchase or acquire securities of any type; PROVIDED, HOWEVER, that, in
the case of investment securities, either party hereto may purchase (or
permit a Subsidiary to purchase) investment
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securities if, within one business day after such party requests in
writing (which notice shall describe in detail the investment securities
to be purchased and the price thereof) that the other consent to the
making of any such purchase, the other has approved such request in
writing or has not responded in writing to such request;
(g) enter into or terminate any contract or agreement, or make any
change in any of its leases or contracts, other than with respect to those
involving aggregate payments of less than, or the provision of goods or
services with a market value of less than, $25,000;
(h) settle any claim, action or proceeding involving any liability of it
or any of its Subsidiaries for money damages in excess of $25,000 or
material restrictions upon the operations of the party or any of its
Subsidiaries;
(i) except in the ordinary course of business and in amounts less than
$100,000, waive or release any material right or collateral or cancel or
compromise any extension of credit or other debt or claim; PROVIDED,
HOWEVER, that either party hereto may take (or permit a Subsidiary to take)
any such action if, within two business days after such party requests in
writing (which request shall include information and analyses sufficient for
the other party to assess the proposed action) that the other party consent
to the taking of such action, the other party has approved such request in
writing or has not responded in writing to such request;
(j) make, renegotiate, renew, increase, extend or purchase any loan,
lease (credit equivalent), advance, credit enhancement or other extension of
credit, or make any commitment in respect of any of the foregoing, except
(i) in the ordinary course of business consistent with past practice and in
conformity with all applicable policies and procedures (ii) any loans or
advances as to which such party (or a Subsidiary thereof) has a legally
binding obligation to make such loan or advance as of the date hereof and a
description of which has been provided by such party in writing to the other
party prior to the execution of this Plan;
(k) except as contemplated by Section 4.2 hereof, change its method of
accounting as in effect at December 31, 1995, except as required by changes
in generally accepted accounting principles as concurred in by the party's
independent auditors;
(l) engage in any merger, consolidation or other similar transaction
with, or acquire a significant portion of the capital stock or assets of,
any other corporate or other entity except in the ordinary course of
business or in connection with foreclosures and collection on secured
interests;
(m) amend its articles of incorporation or its by-laws; or
(n) agree to, or make any commitment to, take any of the actions
prohibited by this Section 2.2.
SECTION 2.3. COOPERATION. (a) Each of Monarch and the Company shall
cooperate with each other in completing the transactions contemplated hereby and
shall not take, cause to be taken or agree or make any commitment to take any
action: (i) that would cause any of the representations or warranties of it that
are set forth in Article III hereof not to be true and correct, or (ii) that is
inconsistent with or prohibited by Sections 2.1 or 2.2.
(b) Without limiting the generality of the foregoing, each of Monarch and
the Company shall have the right to have one of its representatives present at
all loan committee meetings or meetings of similar purpose of the other party or
the other party's Subsidiaries, and each party shall give notice to the other
party of any such meeting one business day prior to such meeting.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
SECTION 3.1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to Monarch that, except as to the matters disclosed in a
letter of the Company delivered to
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Monarch on or prior to the date hereof, which disclosures shall be deemed to be
made with respect to any applicable representation notwithstanding the specific
section references therein (the "Company Disclosure Letter"):
(a) RECITALS TRUE. The facts set forth in the Recitals of this Plan
with respect to the Company are true and correct.
(b) CAPITAL STOCK. All outstanding shares of capital stock of the
Company and the Company Bank have been duly authorized and validly issued,
are fully paid and (subject to 12 U.S.C. 55 with respect to the Company
Bank) non-assessable and are not subject to any preemptive rights.
(c) DUE ORGANIZATION AND QUALIFICATION. The Company Bank is a national
banking association duly organized, validly existing and in good standing
under the laws of the United States of America. The Company Bank is a member
of the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation (the "FDIC") and all of its deposits are subject to assessment
by the BIF.
(d) CORPORATE AUTHORITY. Each of the Company and Company Bank has the
corporate power and authority, and is duly qualified in all jurisdictions
(except for such qualifications the absence of which, in the aggregate,
would not have a Material Adverse Effect on the Company) where such
qualification is required, to carry on its business as it is now being
conducted and to own all its properties and assets, and it has all federal,
state, local and foreign governmental authorizations necessary for it to own
or lease its properties and assets and to carry on its business as it is now
being conducted.
(e) SUBSIDIARIES; SIGNIFICANT INVESTMENTS. The only Subsidiaries of
the Company are the Company Bank and Venture Partners, Inc., a California
corporation ("Venture"). All of the shares of capital stock of each such
Subsidiary are owned directly and of record by the Company, free and clear
of all liens, claims, encumbrances and restrictions on transfer, and there
is no outstanding option, call or commitment with respect to any such
capital stock, nor any obligations or agreements convertible into or
exchangeable for, or giving any person any right (including, without
limitation, preemptive rights) to subscribe for or acquire from either
Subsidiary, any shares of its capital stock. Neither the Company nor either
of its Subsidiaries owns any equity securities, any security convertible or
exchangeable into an equity security or any rights to acquire any equity
security, except for shares of the Company Bank and Venture held by the
Company.
(f) SHAREHOLDER APPROVALS.
(i) Subject to the receipt of required shareholder approval of the
principal terms of this Plan, this Plan and the transactions contemplated
herein have been duly authorized by all necessary corporate action of the
Company. In addition, the Company has received the written opinion of The
Findley Group to the effect that the Merger Consideration to be received
by the shareholders of the Company is fair to such shareholders from a
financial point of view and has provided true and complete copies of such
opinions to Monarch. Subject to receipt of such shareholder approval,
this Plan is a valid and binding agreement of the Company enforceable
against it in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
(ii) The affirmative vote approving the principal terms of this Plan
by a majority of the outstanding shares of Company Common Stock entitled
to vote on this Plan is the only shareholder vote required by the Company
for approval of the Plan and consummation of the Merger and the other
transactions contemplated hereby.
(g) NO VIOLATIONS. The execution, delivery and performance of this
Plan by the Company do not, and the consummation of the transactions
contemplated hereby by the Company will not,
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constitute (i) a breach or violation of, or a default under, any law, rule
or regulation or any judgment, decree, order, governmental permit or license
to which the Company or either of its Subsidiaries (or any of their
respective properties) is subject, or enable any person to enjoin the Merger
or the other transactions contemplated hereby, (ii) a breach or violation
of, or a default under, the articles of incorporation or by-laws or similar
organizational documents of the Company or either of its Subsidiaries or
(iii) a breach or violation of, or a default under (or an event which with
due notice or lapse of time or both would constitute a default under), or
result in the termination of, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or
other encumbrance upon any of the properties or assets of the Company or
either of its Subsidiaries under, any of the terms, conditions or provisions
of any note, bond, indenture, deed of trust, loan agreement or other
agreement, instrument or obligation to which the Company or either of its
Subsidiaries is a party, or to which any of their respective properties or
assets may be bound or affected; PROVIDED, HOWEVER, that this clause (iii)
shall not apply to any breach, violation or default of any such agreement,
instrument or obligation which involves payments to or by the Company or
either of its Subsidiaries of an amount not exceeding $25,000 per year; and
the consummation of the transactions contemplated hereby will not require
any approval, consent or waiver under any such law, rule, regulation,
judgment, decree, order, governmental permit or license or the approval,
consent or waiver of any other party to any such agreement, indenture or
instrument, other than (i) the required approvals, consents and waivers of
governmental authorities referred to in Section 5.1(b) hereof, (ii) any such
approval, consent or waiver that already has been obtained, and (iii) any
other approvals, consents or waivers the absence of which, individually or
in the aggregate, would not result in a Material Adverse Effect on the
Company or enable any person to enjoin the Merger or the Bank Merger.
(h) COMPANY REPORTS.
(i) As of their respective dates, neither the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, nor any
other document filed by the Company subsequent to December 31, 1995 under
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Securities Exchange Act"), each in the form (including
exhibits) filed with the Securities and Exchange Commission (the "SEC")
(collectively, the "Company Reports"), contained or will contain any
untrue statement of a Material fact or omitted or will omit to state a
Material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they
were made, not misleading. Each of the consolidated balance sheets
contained or incorporated by reference in the Company Reports (including
in each case any related notes and schedules) fairly presented in all
Material respects the financial position of the entity or entities to
which it relates as of its date and each of the consolidated statements
of income, consolidated statements of shareholders' equity and
consolidated statement of cash flows contained or incorporated by
reference in the Company Reports (including in each case any related
notes and schedules) fairly presented in all Material respects the
results of operations, shareholders' equity and cash flows, as the case
may be, of the entity or entities to which it relates for the periods set
forth therein (subject, in the case of unaudited interim statements, to
normal year-end audit adjustments that are not Material in amount or
effect), in each case in accordance with GAAP during the periods
involved, except as may be noted therein.
(ii) The Company and the Company Bank have each timely filed all
reports, registrations and statements, together with any amendments
required to be made with respect thereto, if any, that they were required
to file since December 31, 1993 with (i) the SEC, (ii) the Federal
Reserve Board, (iii) the FDIC, (iv) the BIF, (v) the Office of the
Comptroller of the Currency (the "OCC"), (vi) any state banking
commission or other regulatory authority (each, a "State Regulator")
(such entities collectively, the "Regulatory Agencies"), and (vii) the
National Association of Securities Dealers, Inc. and any other
self-regulatory organization (an "SRO"),
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and all other Material reports and statements required to be filed by
them since December 31, 1993, including, without limitation, any report
or statement required to be filed pursuant to the laws, rules or
regulations of the United States, the Federal Reserve Board, the FDIC,
the BIF, the OCC, any State Regulator or any SRO, and have paid all fees
and assessments due and payable in connection therewith.
(i) ABSENCE OF UNDISCLOSED LIABILITIES AND CERTAIN CHANGES OR
EVENTS. Except as disclosed in the Company Reports, since December 31,
1995, neither the Company nor the Company Bank (as defined herein) has
incurred any Material liability, except in the ordinary course of their
business consistent with past practice. Since September 30, 1996, there has
not been any change in the business, assets, financial condition,
properties, results of operations or prospects of the Company or the Company
Bank which, individually or in the aggregate, has had, or is reasonably
likely to have, a Material Adverse Effect on the Company (other than changes
in (i) banking laws or regulations, or interpretations thereof, that affect
the banking industry generally, (ii) the general level of interest rates or
(iii) GAAP).
(j) GUARANTEES; SURETYSHIPS; CONTINGENT LIABILITIES. The Company
Disclosure Letter lists and briefly describes all guarantees, matters of
suretyship and similar contingent liabilities, other than loan commitments
and letters of credit issued in the ordinary course of business, of the
Company and its Subsidiaries.
(k) TAXES. All federal, state, local and foreign tax returns
(including information returns) required to be filed by or on behalf of the
Company or its Subsidiaries have been timely filed or requests for
extensions have been timely filed and any such extension shall have been
granted and not have expired, and all such filed returns are complete and
accurate in all Material respects. All taxes shown on such returns have been
paid in full and adequate provision has been made for any such taxes (in
accordance with GAAP) on the Company's balance sheets set forth in the
Company Reports. There is no pending audit examination, assessment or
proposed assessment of a deficiency, or refund litigation with respect to
any taxes of the Company or its Subsidiaries. All taxes, interest,
additions, and penalties due with respect to completed and settled
examinations or concluded litigation relating to it have been paid in full
or adequate provision has been made for any such taxes (in accordance with
generally accepted accounting principles) on the Company's balance sheet as
set forth in the Company Reports. Neither the Company nor either of its
Subsidiaries has executed an extension or waiver of any statute of
limitations on the assessment or collection of any tax due that is currently
in effect.
No liens or other security interests have been imposed on any assets of
the Company or its Subsidiaries in connection with any failure (or alleged
failure) to pay any tax. The Company and its Subsidiaries have timely
withheld, and paid over to the relevant governmental authority or other
appropriate payee, all taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder, or other person. Neither the Company nor
either of its Subsidiaries is a party to any tax allocation or sharing
agreement, is or has been a member of an affiliated group filing
consolidated or combined tax returns (other than a group the common parent
of which is or was the Company) or otherwise has any liability for the taxes
of any person (other than the Company or its Subsidiaries). For purposes of
this paragraph (k), "taxes" includes all federal, state, local or foreign
income, gross receipts, windfall profits, severance, property, production,
sales, use, license, excise, franchise, employment, withholding or similar
taxes imposed on the income, properties or operations of the Company or its
Subsidiaries, together with any interest additions or penalties with respect
thereto and any interest in respect of such additions or penalties.
(l) ABSENCE OF CLAIMS. As of the date hereof, there is no pending
litigation, controversy, claim, action or proceeding against the Company or
its Subsidiaries before any court or governmental agency, and, to the best
of the Company's knowledge after reasonable inquiry, no such litigation,
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proceeding, controversy, claim or action has been threatened or is
contemplated. As of the Effective Time and except as disclosed in the
Company Disclosure Letter, there is no pending litigation, controversy,
claim, action or proceeding against the Company or its Subsidiaries before
any court or governmental agency, which is reasonably likely, individually
or in the aggregate, to have a Material Adverse Effect on the Company or to
hinder or delay consummation of the transactions contemplated hereby and, to
the best of the Company's knowledge after reasonable inquiry, no such
litigation, proceeding, controversy, claim or action has been threatened or
is contemplated.
(m) ABSENCE OF REGULATORY ACTIONS. Neither the Company nor either of
its Subsidiaries is a party to any cease and desist order, written agreement
or memorandum of understanding with, or a party to any commitment letter or
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any
board resolutions at the request of, federal or state governmental
authorities charged with the supervision or regulation of depository
institutions or depositary institution holding companies or engaged in the
insurance of bank and/or savings and loan deposits ("Government Regulators")
nor has it been advised by any Government Regulator that it is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar undertaking.
(n) AGREEMENTS.
(i) Except for this Plan and arrangements made in the ordinary
course of business, the Company and its Subsidiaries are not bound by any
material contract (as defined in Item 601(b)(10) of Regulation S-K) to be
performed after the date hereof that has not been filed with or
incorporated by reference in the Company Reports. Except as disclosed in
the Company Reports filed prior to the date of this Plan, neither the
Company nor either of its Subsidiaries is a party to an oral or written
(A) consulting agreement (other than data processing, software
programming and licensing contracts entered into in the ordinary course
of business) not terminable on 30 days' or less notice involving the
payment of more than $25,000 per annum, in the case of any such agreement
with an individual, or $50,000 per annum, in the case of any other such
agreement, (B) agreement with any executive officer or other key employee
of the Company or either of its Subsidiaries the benefits of which are
contingent, or the terms of which are materially altered, upon the
occurrence of a transaction involving the Company or the Company Bank of
the nature contemplated by this Plan and which provides for the payment
of in excess of $50,000, (C) agreement with respect to any executive
officer of the Company or either of its Subsidiaries providing any term
of employment or compensation guarantee extending for a period longer
than six months and for the payment of in excess of $50,000 per annum,
(D) agreement or plan, including any stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan,
any of the benefits of which will be increased, or the vesting of the
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Plan or the value of any of the
benefits of which will be calculated on the basis of any of the
transactions contemplated by this Plan or (E) agreement containing
covenants that limit the ability of the Company or the Company Bank to
compete in any line of business or with any person, or that involve any
restriction on the geographic area in which, or method by which, the
Company (including any successor thereof) or the Company Bank (including
any successor thereof) may carry on its business (other than as may be
required by law or any regulatory agency).
(ii) Neither the Company nor either of its Subsidiaries is in
default under or in violation of any provision of any note, bond,
indenture, mortgage, deed of trust, loan agreement or other agreement to
which it is a party or by which it is bound or to which any of its
respective properties or assets is subject.
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(o) LABOR MATTERS. Neither the Company nor either of its Subsidiaries is a
party to, or is bound by, any collective bargaining agreement, contract, or
other agreement or understanding with a labor union or labor organization, nor
is the Company or either of its Subsidiaries the subject of any proceeding
asserting that it has committed an unfair labor practice or seeking to compel it
to bargain with any labor organization as to wages and conditions of employment,
nor is there any strike, other labor dispute or organizational effort involving
the Company or either of its Subsidiaries pending or threatened.
(p) EMPLOYEE BENEFIT PLANS. The Company Disclosure Letter contains a
complete list of all pension, retirement, stock option, stock purchase, stock
ownership, savings, stock appreciation right, profit sharing, deferred
compensation, consulting, bonus, group insurance, severance and other benefit
plans, contracts, agreements, policies and arrangements, including, but not
limited to, "employee benefit plans", as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") and all trust
agreements related thereto in respect to any present or former directors,
officers, or other employees of the Company or its Subsidiaries (hereinafter
referred to collectively as the "Company Employee Plans"). (i) All of the
Company Employee Plans comply in all material respects with all applicable
requirements of ERISA, the Code and other applicable laws; neither the Company
nor the Company Bank has engaged in a "prohibited transaction" (as defined in
Section 406 of ERISA or Section 4975 of the Code) with respect to any Company
Employee Plan which could subject the Company or the Company Bank to a material
tax or penalty under Section 4975 of the Code or Section 502(i) of ERISA; and
all contributions required to be made under the terms of any Company Employee
Plan have been timely made or have been reflected on the Company's balance
sheet; (ii) no liability to the Pension Benefit Guaranty Corporation (the
"PBGC") has been or is expected by the Company or the Company Bank to be
incurred with respect to any Company Employee Plan which is subject to Title IV
of ERISA (a "Company Pension Plan"), or with respect to any "single-employer
plan" (as defined in Section 4001(a)(15) of ERISA) currently or formerly
maintained by the Company or any entity (a "Company ERISA Affiliate") which is
considered one employer with the Company under Section 4001 of ERISA or Section
414 of the Code (a "Company ERISA Affiliate Plan"); and no proceedings have been
instituted to terminate any Company Pension Plan or Company ERISA Affiliate Plan
and no condition exists that presents a material risk of the institution of such
proceedings; (iii) no Company Pension Plan or Company ERISA Affiliate Plan had
an "accumulated funding deficiency" (as defined in Section 302 of ERISA (whether
or not waived)) as of the last day of the end of the most recent plan year
ending prior to the date hereof; the fair market value of the assets of each
Company Pension Plan and Company ERISA Affiliate Plan exceeds the present value
of the "benefit liabilities" (as defined in Section 4001(a)(16) of ERISA) under
such Company Pension Plan or Company ERISA Affiliate Plan as of the end of the
most recent plan year with respect to the respective Company Pension Plan or
Company ERISA Affiliate Plan ending prior to the date hereof, calculated on the
basis of the actuarial assumptions used in the most recent actuarial valuation
for such Company Pension Plan or Company ERISA Affiliate Plan prior to the date
hereof, and there has been no material change in the financial condition of any
such Company Pension Plan or Company ERISA Affiliate Plan since the last day of
the most recent plan year; and no notice of a "reportable event" (as defined in
Section 4043 of ERISA) for which the 30-day reporting requirement has not been
waived has been required to be filed for any Company Pension Plan or Company
ERISA Affiliate Plan within the 12-month period ending on the date hereof; (iv)
neither the Company nor either of its Subsidiaries has provided or is required
to provide, security to any Company Pension Plan or to any Company ERISA
Affiliate Plan pursuant to Section 401(a)(29) of the Code; (v) neither the
Company, either of its Subsidiaries, nor any Company ERISA Affiliate has
contributed to any "multiemployer plan", as defined in Section 3(37) of ERISA,
on or after September 26, 1980; (vi) each Company Employee Plan of the Company
or either of its Subsidiaries which is an "employee pension benefit plan" (as
defined in Section 3(2) of ERISA) has received a favorable determination letter
from the Internal Revenue Service deeming such plan to be qualified (a
"Qualified Plan"), under Section 401(a) of the Code, or has requested such a
determination letter within the applicable remedial amendment period under
Section 401(b) of the Code; and neither the Company nor the Company Bank is
aware of any circumstances
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likely to result in revocation of any such favorable determination letter; (vii)
each Qualified Plan which is an "employee stock ownership plan" (as defined in
Section 4975(e)(7) of the Code) has satisfied all of the applicable requirements
of Sections 409 and 4975(e)(7) of the Code and the regulations thereunder; all
Company Employee Plans covering foreign participants comply in all material
respects with applicable local law, and there are no material unfunded
liabilities with respect to any Company Employee Plan which covers foreign
employees; (viii) there is no pending or, to the Company's knowledge, threatened
litigation, administrative action or proceeding relating to any Company Employee
Plan; (ix) there has been no announcement or commitment by the Company or the
Company Bank to create an additional Company Employee Plan, or to amend an
Company Employee Plan except for amendments required by applicable law which do
not increase the cost of such Company Employee Plan; and the Company and its
Subsidiaries do not have any obligations for retiree health and life benefits
under any Company Employee Plan except as set forth in the Company Disclosure
Letter, and there are no such Company Employee Plans that cannot be amended or
terminated without incurring any liability thereunder; (x) with respect to the
Company or its Subsidiaries, except as specifically identified in the Company
Disclosure Letter, the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not result in any
payment or series of payments by the Company or its Subsidiaries to any person
which is an "excess parachute payment" (as defined in Section 280G of the Code)
under any Company Employee Plan, increase or secure (by way of a trust or other
vehicle) any benefits payable under any Company Employee Plan, or accelerate the
time of payment or vesting of any such benefit, and (xi) with respect to each
Company Employee Plan, the Company has supplied to Monarch a true and correct
copy, if applicable, of (A) the two most recent annual reports on the applicable
form of the Form 5500 series filed with the Internal Revenue Service (the
"IRS"), (B) such Company Employee Plan, including amendments thereto, (C) each
trust agreement and insurance contract relating to such Company Employee Plan,
including amendments thereto, (D) the most recent summary plan description for
such Company Employee Plan, including amendments thereto, if the Company
Employee Plan is subject to Title I of ERISA, (E) the most recent actuarial
report or valuation if such Company Employee Plan is a Company Pension Plan, (F)
the most recent determination letter issued by the IRS if such Company Employee
Plan is a Qualified Plan and (G) the most recent financial statements and
auditor's report.
(q) REAL PROPERTY. (i) The Company Disclosure Letter contains a complete
and correct list of (A) all real property or premises owned on the date hereof,
in whole or in part by the Company or its Subsidiaries and all indebtedness
secured by any encumbrance thereon, and (B) all real property or premises leased
in whole or in part by the Company or its Subsidiaries and together with a list
of all applicable leases and the name of the lessor. None of such premises or
properties have been condemned or otherwise taken by any public authority and no
condemnation or taking is threatened or contemplated and none thereof is subject
to any claim, contract or law which might affect its use or value for the
purposes now made of it. None of the premises or properties of the Company or
its Subsidiaries is subject to any current or potential interests of third
parties or other restrictions or limitations that would impair or be
inconsistent with the current use of such property by the Company or its
Subsidiaries.
(ii) Each of the leases referred to in the Company Disclosure Letter is
valid and existing and in full force and effect, and no party thereto is in
default and no notice of a claim of default by any party has been delivered
to the Company or its Subsidiaries or is now pending, and there does not
exist any event that with notice or the passing of time, or both, would
constitute a default or excuse performance by any party thereto, provided
that with respect to matters relating to any party other than the Company
the foregoing representation is based on the knowledge of the Company.
(r) TITLE. The Company and the Company Bank have good title to its
properties and assets (other than (i) property as to which it is lessee and (ii)
real estate owned as a result of foreclosure, transfer in lieu of foreclosure or
other transfer in satisfaction of a debtor's obligation previously contracted).
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(s) KNOWLEDGE AS TO CONDITIONS. As of the date hereof, the Company knows
of no reason why the approvals, consents and waivers of governmental authorities
referred to in Section 5.1(b) should not be obtained without the imposition of
any condition of the type referred to in the provisos thereto.
(t) COMPLIANCE WITH LAWS. Since December 31, 1993, the Company and its
Subsidiaries have complied in all Material respects with all applicable laws
except for any noncompliance with any such laws which, individually or in the
aggregate, would not have a Material Adverse Effect on the Company or enable any
Person to enjoin the Merger or the Bank Merger. Except as would not have a
Material Adverse Effect on the Company, the Company and the Company Bank have
all permits, licenses, certificates of authority, orders and approvals of, and
has made all filings, applications and registrations with, federal, state, local
and foreign governmental or regulatory bodies that are required in order to
permit it to carry on its business as it is presently conducted. All such
permits, licenses, certificates of authority, orders and approvals are in full
force and effect, and, to the knowledge of the Company, no suspension or
cancellation of any of them is threatened.
(u) FEES. Other than in respect of financial advisory services performed
for the Company by The Findley Group, in amounts and pursuant to an agreement
previously disclosed to Monarch, none of the Company, its Subsidiaries or any of
their respective officers, directors, employees or agents, has employed any
broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions, or finder's fees, and no broker or finder has acted
directly or indirectly for the Company or its Subsidiaries, in connection with
the Plan or the transactions contemplated hereby.
(v) ENVIRONMENTAL MATTERS. (i) the Company and its Subsidiaries have
complied at all times with all applicable Environmental Laws; (ii) none of the
properties (including buildings or any other structures) currently owned or
operated by the Company or its Subsidiaries ("Company Properties") have been
contaminated with, or have had any release of, any Hazardous Substance (as
defined below); (iii) to the Company's knowledge, none of the properties
formerly owned or operated by the Company or either of its Subsidiaries have
been contaminated with Hazardous Substances during such period of ownership or
operation; (iv) to the Company's knowledge, neither the Company nor either of
its Subsidiaries is subject to liability for any Hazardous Substance disposal or
contamination on any third party property; (v) neither the Company nor either of
its Subsidiaries has received any notice, demand letter, claim or request for
information alleging that the Company or either of its Subsidiaries may be in
violation of or subject to liability under any Environmental Law (as defined
below); (vi) neither the Company nor either of its Subsidiaries is subject to
any orders, decrees, injunctions or other agreements with any governmental
authority or any third party relating to Hazardous Substances or any
Environmental Law; (vii) there are no circumstances or conditions involving the
Company or either of its Subsidiaries that could reasonably be expected to
result in any claims, liability, investigations, suits or costs or result in
restrictions on the ownership, use, or transfer of any Property pursuant to any
Environmental Law; (viii) none of the Properties contain any underground storage
tanks, asbestos-containing material, lead products, or polychlorinated
biphenyls; (ix) to the knowledge of the Company none of the Properties have ever
been operated in the past as a gas station, automotive repair or supply
business, metalworking operation, industrial facility or as a drycleaner; (x)
neither the Company nor either of its Subsidiaries has engaged in any activity
involving the generation, use, handling or disposal of any Hazardous Substances
other than ordinary and routine office operations and maintenance; (xi) neither
the Company nor either of its Subsidiaries has participated in the management of
any borrower or other third party, including entities in which it may hold a
security, fiduciary or other interest, that, to the Company's knowledge, engage
in activities involving Hazardous Substances to an extent that it could be
deemed an "owner" or "operator" of such entity under any Environmental Law; and
(xii) to the Company's knowledge, the Company has delivered to Monarch copies of
all environmental reports, studies, sampling data, permits, government filings
and other environmental information in its possession relating to Company or its
Subsidiaries or any of their current or former properties or operations.
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As used herein, the term "ENVIRONMENTAL LAW" means any federal, state or
local law, regulation, order, decree, permit, authorization, opinion, common law
or agency requirement relating to: (A) the protection or restoration of the
environment, health, safety, or natural resources, (B) the handling, use,
presence, disposal, release or threatened release of any Hazardous Substance or
(C) noise, odor, wetlands, pollution, contamination or any injury or threat of
injury to persons or property.
As used herein, the term "HAZARDOUS SUBSTANCE" means any substance in any
concentration that is: (A) listed, classified or regulated pursuant to any
Environmental Law; (B) any petroleum product or by-product, asbestos-containing
material, lead-containing paint or plumbing, polychlorinated biphenyls,
radioactive materials or radon; or (C) any other substance which is or may be
the subject of regulatory action by any government authority pursuant to any
Environmental Law.
(w) ALLOWANCE. The allowance for possible loan and lease losses shown on
the Company's unaudited balance sheet as of September 30, 1996 was, and the
allowance for possible loan losses shown on the balance sheets in Company
Reports for periods ending after the date of this Plan will be, adequate, as of
the date thereof, under generally accepted accounting principles applicable to
banks and bank holding companies. The Company has disclosed to Monarch in
writing prior to the date hereof the amounts of all loans, leases, advances,
credit enhancements, other extensions of credit, commitments and
interest-bearing assets of the Company and the Company Bank that have been
classified as "Other Assets Specially Mentioned," "Substandard," "Doubtful,"
"Loss," "Classified," "Criticized," "Credit Risk Assets" or words of similar
import. The Other Real Estate Owned ("OREO") included in any non-performing
assets of the Company or the Company Bank is carried net of reserves at the
lower of cost or market value, less applicable selling costs, based on
independent appraisals consistent with applicable regulatory requirements.
(x) MATERIAL INTERESTS OF CERTAIN PERSONS. Except as disclosed in the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, no officer or director of the Company, or any "associate" (as such term is
defined in Rule 12b-2 under the Securities Exchange Act) of any such officer or
director, has any Material interest in any Material contract or property (real
or personal), tangible or intangible, used in or pertaining to the business of
the Company or the Company Bank.
(y) INSURANCE. The Company and its Subsidiaries are currently insured, and
since December 31, 1993, have been insured, for reasonable amounts with
financially sound and reputable insurance companies, against such risks as
companies engaged in a similar business would, in accordance with good business
practice, customarily be insured. All of the insurance policies and bonds
maintained by the Company and its Subsidiaries are in full force and effect, the
Company and its Subsidiaries are not in default thereunder and all Material
claims thereunder have been filed in due and timely fashion. Since December 31,
1993, no claim by the Company or its Subsidiaries on or in respect of an
insurance policy or bond has been declined or refused by the relevant insurer or
insurers. In the best judgment of the Company's management, such insurance
coverage is adequate and will be available in the future under terms and
conditions substantially similar to those in effect on the date hereof. Between
the date hereof and the Effective Time, the Company and its Subsidiaries will
maintain the levels of insurance coverage in effect on the date hereof and will
submit all potential claims existing prior to the Effective Time to its
insurance carrier on or before the Effective Time. The Company Disclosure Letter
lists all insurance policies maintained by or for the benefit of the Company,
the Company Bank or their directors, officers, employees or agents, specifying
the (i) type of policy, (ii) policy limits and (iii) self insurance amounts.
(z) INVESTMENT SECURITIES. Except for pledges to secure public and trust
deposits and reverse repurchase agreements entered into in arm's-length
transactions pursuant to normal commercial terms and conditions and other
pledges required by law, none of the investments reflected in the consolidated
balance sheet of the Company included in the Company's Report on Form 10-Q for
the quarter ended
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<PAGE>
September 30, 1996, and none of the Material investments made by it or its
Subsidiaries since December 31, 1995, is subject to any restriction
(contractual, statutory or otherwise) that would materially impair the ability
of the entity holding such investment freely to dispose of such investment at
any time.
(aa) DERIVATIVES. Neither the Company nor either of its Subsidiaries is
currently a party to any interest rate swap, cap, floor, option agreement, other
interest rate risk management arrangement or agreement or derivative-type
security or derivative arrangement or agreement.
(bb) REGISTRATION OBLIGATIONS. Neither the Company nor either of its
Subsidiaries is under any obligation, contingent or otherwise, to register any
of its securities under the Securities Act of 1933, as amended (the "Securities
Act").
(cc) BOOKS AND RECORDS. The books and records of the Company and its
Subsidiaries have been, and are being, maintained in accordance with applicable
legal and accounting requirements and reflect in all Material respects the
substance of events and transactions that should be included therein.
(dd) CORPORATE DOCUMENTS. The Company has delivered to Monarch true and
complete copies of (i) its amended articles of incorporation and amended by-laws
and (ii) the articles of association and by-laws of the Company Bank.
(ee) COMPANY ACTION. The Board of Directors of the Company has adopted
resolutions recommending that the principal terms of this Plan be approved by
the shareholders of the Company and directing that this Plan be submitted for
consideration by the Company's shareholders at the Company's Meeting (as defined
below).
(ff) INDEMNIFICATION. Neither the Company nor either of its Subsidiaries
is a party to any indemnification agreement with any of its present or future
directors, officers, employees, individual agents or other individuals who serve
or served in any other capacity with any other enterprise at the request of the
Company or either of its Subsidiaries (a "Covered Person"), and to the knowledge
of the Company, there are no claims for which any Covered Person would be
entitled to indemnification under Section 4.6 hereof if such provisions were
deemed to be in effect.
(gg) LOANS. Each loan reflected as an asset on the Company's consolidated
balance sheet as of September 30, 1996 and each balance sheet date subsequent
thereto (i) is evidenced by notes, agreements or other evidences of indebtedness
which are true, genuine and what they purport to be, (ii) is the legal, valid
and binding obligation of the obligor named therein, enforceable in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles, and (iii) to the knowledge of the Company,
will not be subject to any defenses which may be asserted against Company Bank.
All loans and extensions of credit that have been made by Company Bank and that
are subject to Sections 22(h), 23A and 23B of the Federal Reserve Act comply
therewith.
(hh) FAIR LENDING; COMMUNITY REINVESTMENT ACT. As of the date hereof, with
the exception of routine investigation of consumer complaints, neither the
Company nor the Company Bank has been advised that it is or may be in violation
of the Equal Credit Opportunity Act or the Fair Housing Act or any similar
federal or state statute. The Company Bank received a CRA rating of
"outstanding" in its most recent CRA examination.
(ii) NO OMISSION OF MATERIAL FACT. No representation or warranty by the
Company in this Plan, including the Annexes hereto, the disclosure letters and
schedules to be delivered herewith or the Proxy Statement filed in connection
with the Meeting, contains any untrue statement of Material fact, or omits to
state a Material fact necessary to make the statements or facts contained herein
or therein not misleading. None of the information regarding the Company or the
Company Bank or the transactions contemplated hereby supplied or to be supplied
by the Company or the Company Bank for inclusion in any documents or filings to
be filed with any regulatory authority in connection with the transactions
contemplated hereby
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will contain any untrue statement of Material fact, or omit to state a Material
fact necessary to make the statements or facts contained therein not misleading.
SECTION 3.2. REPRESENTATIONS AND WARRANTIES OF MONARCH. Monarch represents
and warrants to the Company that, except as to the matters disclosed in a letter
of Monarch delivered to the Company on or prior to the date hereof, which
disclosures shall be deemed to be made with respect to any applicable
representation notwithstanding the specific section references therein (the
"Monarch Disclosure Letter"):
(a) RECITALS TRUE. The facts set forth in the Recitals of this Plan with
respect to Monarch are true and correct.
(b) CAPITAL STOCK. All outstanding shares of capital stock of Monarch and
its Significant Subsidiaries (as defined in Rule 1-02 of Regulation S-X) have
been duly authorized and validly issued, are fully paid and (subject to 12
U.S.C. Section 55 in the case of a national bank Subsidiary and any similar
state statute in the case of a Subsidiary that is a state-chartered bank)
non-assessable and are not subject to any preemptive rights.
(c) DUE ORGANIZATION AND QUALIFICATION. Each of Monarch Bank and Western
Bank is a banking corporation duly organized, validly existing and in good
standing under the laws of the State of California.
(d) CORPORATE AUTHORITY. Each of Monarch and its Significant Subsidiaries
has the corporate power and authority, and is duly qualified in all
jurisdictions (except for such qualifications the absence of which, in the
aggregate, would not have a Material Adverse Effect on Monarch) where such
qualification is required, to carry on its business as it is now being conducted
and to own all its properties and assets, and it has all federal, state, local
and foreign governmental authorizations necessary for it to own or lease its
properties and assets and to carry on its business as it is now being conducted.
(e) SHAREHOLDER APPROVALS.
(i) Subject to the receipt of required shareholder approval of the
principal terms of this Plan, this Plan and the transactions contemplated
herein have been duly authorized by all necessary corporate action of
Monarch. Subject to receipt of such shareholder approval, this Plan is and
will be, a valid and binding agreement of Monarch enforceable against it in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles.
(ii) The affirmative vote approving the principal terms of this Plan by
a majority of the outstanding shares of Monarch Common Stock entitled to
vote on this Plan is the only shareholder vote required by Monarch for
approval of this Plan and consummation of the Merger and the other
transactions contemplated hereby.
(f) NO VIOLATIONS. The execution, delivery and performance of this Plan by
Monarch do not, and the consummation of the transactions contemplated hereby by
Monarch will not, constitute (i) a breach or violation of, or a default under,
any law, rule or regulation or any judgment, decree, order, governmental permit
or license to which Monarch or any of its Subsidiaries (or any of their
respective properties) is subject, which breach, violation or default would have
a Material Adverse Effect on Monarch, or enable any person to enjoin the Merger
or the other transactions contemplated hereby, (ii) a breach or violation of, or
a default under, the articles of incorporation or by-laws or similar
organizational documents of Monarch or any of its Subsidiaries or (iii) a breach
or violation of, or a default under (or an event which with due notice or lapse
of time or both would constitute a default under), or result in the termination
of, accelerate the performance required by, or result in the creation of any
lien, pledge, security interest, charge or other encumbrance upon any of the
properties or assets of Monarch or any of its Subsidiaries under, any of the
terms, conditions or provisions of any note, bond, indenture, deed of trust,
loan agreement or other agreement, instrument or obligation to which Monarch or
any of its Subsidiaries is a party, or to which any of their respective
properties or assets may be bound or affected, except for any of
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the foregoing that, individually or in the aggregate, would not have a Material
Adverse Effect on Monarch; and the consummation of the transactions contemplated
hereby will not require any approval, consent or waiver under any such law,
rule, regulation, judgment, decree, order, governmental permit or license or the
approval, consent or waiver of any other party to any such agreement, indenture
or instrument, other than (i) the required approvals, consents and waivers of
governmental authorities referred to in Section 5.1(b) hereof, (ii) any such
approval, consent or waiver that already has been obtained, and (iii) any other
approvals, consents or waivers the absence of which, individually or in the
aggregate, would not result in a Material Adverse Effect on Monarch or enable
any person to enjoin the Merger or the Bank Merger.
(g) MONARCH REPORTS.
(i) As of their respective dates, neither Monarch's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995, nor any other
document filed by Monarch subsequent to December 31, 1995 under Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act, each in the form
(including exhibits) filed with the SEC (collectively, the "Monarch
Reports"), contained or will contain any untrue statement of a Material fact
or omitted or will omit to state a Material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading. Each of the
consolidated balance sheets or statements of condition contained or
incorporated by reference in Monarch Reports (including in each case any
related notes and schedules) fairly presented in all Material respects the
financial position of the entity or entities to which it relates as of its
date and each of the consolidated statements of income, consolidated
statements of changes in shareholders' equity and consolidated statements of
cash flows contained or incorporated by reference in Monarch Reports
(including in each case any related notes and schedules) fairly presented in
all Material respects the results of operations, shareholders' equity and
cash flows, as the case may be, of the entity or entities to which it
relates for the periods set forth therein (subject, in the case of unaudited
interim statements, to normal year-end audit adjustments that are not
Material in amount or effect), in each case in accordance with GAAP during
the periods involved, except as may be noted therein.
(ii) Monarch and each of its Subsidiaries have each timely filed all
reports, registrations and statements, together with any amendments required
to be made with respect thereto, if any, that they were required to file
since December 31, 1993 with the Regulatory Agencies, the National
Association of Securities Dealers, Inc. and any other SRO, and all other
Material reports and statements required to be filed by them since December
31, 1993, including, without limitation, any report or statement required to
be filed pursuant to the laws, rules or regulations of the United States,
the Federal Reserve Board, the FDIC, the BIF, the OCC, any State Regulator
or any SRO, and have paid all fees and assessments due and payable in
connection therewith.
(h) ABSENCE OF CERTAIN UNDISCLOSED LIABILITIES AND CERTAIN CHANGES OR
EVENTS. Except as disclosed in the Monarch Reports, since December 31, 1995,
neither Monarch nor any of its Significant Subsidiaries has incurred any
Material liability, except in the ordinary course of their business consistent
with past practice. Since September 30, 1996, there has not been any change in
the business, assets, financial condition, properties, results of operations or
prospects of Monarch or any of its Significant Subsidiaries which, individually
or in the aggregate, has had, or is reasonably like to have, a Material Adverse
Effect on Monarch (other than changes in (i) banking laws or regulations, or
interpretations thereof, that affect the banking industry generally, (ii) the
general level of interest rates or (iii) GAAP).
(i) GUARANTEES; SURETYSHIPS; CONTINGENT LIABILITIES. The Monarch
Disclosure Letter lists and briefly describes all guarantees, matters of
suretyship and similar contingent liabilities, other than loan commitments and
letters of credit issued in the ordinary course of business, of Monarch and its
Subsidiaries.
(j) TAXES. All federal, state, local, and foreign tax returns (including
information returns) required to be filed by or on behalf of Monarch or any of
its Subsidiaries have been timely filed or requests for
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extensions have been timely filed and any such extension shall have been granted
and not have expired, and all such filed returns are complete and accurate in
all Material respects. All taxes shown on such returns have been paid in full
and adequate provision has been made for any such taxes (in accordance with
GAAP) on Monarch's balance sheets set forth in Monarch Reports. There is no
pending audit examination, assessment or proposed assessment of a deficiency, or
refund litigation with respect to any taxes of Monarch or any of its
Subsidiaries. All taxes, interest, additions, and penalties due with respect to
completed and settled examinations or concluded litigation relating to it have
been paid in full or adequate provision has been made for any such taxes (in
accordance with generally accepted accounting principles) on Monarch's balance
sheet as set forth in the Monarch Reports. Neither Monarch nor any of its
Subsidiaries has executed an extension or waiver of any statute of limitations
on the assessment or collection of any tax due that is currently in effect.
No liens or other security interests have been imposed on any assets of
Monarch or any of its Subsidiaries in connection with any failure (or alleged
failure) to pay any tax. Monarch and each of its Subsidiaries have timely
withheld, and paid over to the relevant governmental authority or other
appropriate payee, all taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, stockholder, or other person. Neither Monarch nor any Subsidiary is a
party to any tax allocation or sharing agreement, is or has been a member of an
affiliated group filing consolidated or combined tax returns (other than a group
the common parent of which is or was Monarch) or otherwise has any liability for
the taxes of any person (other than Monarch or any of its Subsidiaries). For
purposes of this paragraph (j), "taxes" includes all federal, state, local or
foreign income, gross receipts, windfall profits, severance, property,
production, sales, use, license, excise, franchise, employment, withholding or
similar taxes imposed on the income, properties or operations of Monarch or any
of its Subsidiaries, together with any interest additions or penalties with
respect thereto and any interest in respect of such additions or penalties.
(k) ABSENCE OF CLAIMS. As of the date hereof, there is no pending
litigation, controversy, claim, action or proceeding against Monarch or any of
its Subsidiaries before any court or governmental agency, and, to the best of
Monarch's knowledge after reasonable inquiry, no such litigation, proceeding,
controversy, claim or action has been threatened or is contemplated. As of the
Effective Time and except as disclosed in the Monarch Disclosure Letter, there
is no pending litigation, controversy, claim, action or proceeding against
Monarch or any of its Subsidiaries before any court or governmental agency,
which is reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on Monarch or to hinder or delay consummation of the transactions
contemplated hereby and, to the best of Monarch's knowledge after reasonable
inquiry, no such litigation, proceeding, controversy, claim or action has been
threatened or is contemplated.
(l) ABSENCE OF REGULATORY ACTIONS. Neither Monarch nor any of its
Subsidiaries is a party to any cease and desist order, written agreement or
memorandum of understanding with, or a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a recipient of
any extraordinary supervisory letter from, or has adopted any board resolutions
at the request of, Government Regulators nor has it been advised by any
Government Regulator that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
directive, written agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter, board resolutions or similar undertaking.
(m) AGREEMENTS.
(i) Except for this Plan and arrangements made in the ordinary course of
business, Monarch and its Subsidiaries are not bound by any Material
contract (as defined in Item 601(b)(10) of Regulation S-K) to be performed
after the date hereof that has not been filed with or incorporated by
reference in the Reports. Except as disclosed in the Monarch Reports filed
prior to the date of this Plan, neither Monarch nor any of its Subsidiaries
is a party to an oral or written (A) consulting
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agreement (other than data processing, software programming and licensing
contracts entered into in the ordinary course of business) not terminable on
30 days' or less notice involving the payment of more than $25,000 per
annum, in the case of any such agreement with an individual, or $50,000 per
annum, in the case of any other such agreement, (B) agreement with any
executive officer or other key employee of Monarch or any of its
Subsidiaries the benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving Monarch
or any of its Subsidiaries of the nature contemplated by this Plan and which
provides for the payment of in excess of $50,000, (C) agreement with respect
to any executive officer of Monarch or any of its Subsidiaries providing any
term of employment or compensation guarantee extending for a period longer
than six months and for the payment of in excess of $50,000 per annum, (D)
agreement or plan, including any stock option plan, stock appreciation
rights plan, restricted stock plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of the benefits of which
will be accelerated, by the occurrence of any of the transactions
contemplated by this Plan or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Plan or (E) agreement containing covenants that limit the ability of Monarch
or any of its Subsidiaries to compete in any line of business or with any
person, or that involve any restriction on the geographic area in which, or
method by which, Monarch (including any successor thereof) or any of its
Subsidiaries may carry on its business (other than as may be required by law
or any regulatory agency).
(ii) Neither Monarch nor any of its Subsidiaries is in default under or
in violation of any provision of any note, bond, indenture, mortgage, deed
of trust, loan agreement or other agreement to which it is a party or by
which it is bound or to which any of its respective properties or assets is
subject.
(n) LABOR MATTERS. Neither Monarch nor any of its Subsidiaries is a party
to, or is bound by, any collective bargaining agreement, contract, or other
agreement or understanding with a labor union or labor organization, nor is
Monarch or any of its Subsidiaries the subject of any proceeding asserting that
it has committed an unfair labor practice or seeking to compel it or any such
Subsidiary to bargain with any labor organization as to wages and conditions of
employment, nor is there any strike, other labor dispute or organizational
effort involving Monarch or any of its Subsidiaries pending or threatened.
(o) EMPLOYEE BENEFIT PLANS. The Monarch Disclosure Letter contains a
complete list of all pension, retirement, stock option, stock purchase, stock
ownership, savings, stock appreciation right, profit sharing, deferred
compensation, consulting, bonus, group insurance, severance and other benefit
plans, contracts, agreements, policies and arrangements, including, but not
limited to, "employee benefit plans", as defined in Section 3(3) of ERISA and
all trust agreements related thereto in respect to any present or former
directors, officers, or other employees of Monarch or any of its Subsidiaries
(hereinafter referred to collectively as the "Monarch Employee Plans"). (i) All
of the Monarch Employee Plans comply in all material respects with all
applicable requirements of ERISA, the Code and other applicable laws; neither
Monarch nor any of its Subsidiaries has engaged in a "prohibited transaction"
(as defined in Section 406 of ERISA or Section 4975 of the Code) with respect to
any Monarch Employee Plan which could subject Monarch or any Subsidiary to a
material tax or penalty under Section 4975 of the Code or Section 502(i) of
ERISA; and all contributions required to be made under the terms of any Monarch
Employee Plan have been timely made or have been reflected on Monarch's balance
sheet; (ii) no liability to the PBGC has been or is expected by Monarch or any
of its Subsidiaries to be incurred with respect to any Monarch Employee Plan
which is subject to Title IV of ERISA (a "Monarch Pension Plan"), or with
respect to any "single-employer plan" (as defined in Section 4001(a)(15) of
ERISA) currently or formerly maintained by Monarch or any entity (a "Monarch
ERISA Affiliate") which is considered one employer with Monarch under Section
4001 of ERISA or Section 414 of the Code (an "Monarch ERISA Affiliate Plan");
and no proceedings have been instituted to terminate any Monarch Pension Plan or
Monarch ERISA Affiliate Plan and no condition exists that presents a material
risk of the institution of such proceedings; (iii) no Monarch Pension Plan or
Monarch ERISA Affiliate Plan had an "accumulated funding deficiency" (as
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defined in Section 302 of ERISA (whether or not waived)) as of the last day of
the end of the most recent plan year ending prior to the date hereof; the fair
market value of the assets of each Monarch Pension Plan and Monarch ERISA
Affiliate Plan exceeds the present value of the "benefit liabilities" (as
defined in Section 4001(a)(16) of ERISA) under such Monarch Pension Plan or
Monarch ERISA Affiliate Plan as of the end of the most recent plan year with
respect to the respective Monarch Pension Plan or Monarch ERISA Affiliate Plan
ending prior to the date hereof, calculated on the basis of the actuarial
assumptions used in the most recent actuarial valuation for such Monarch Pension
Plan or Monarch ERISA Affiliate Plan prior to the date hereof, and there has
been no material change in the financial condition of any such Monarch Pension
Plan or Monarch ERISA Affiliate Plan since the last day of the most recent plan
year; and no notice of a "reportable event" (as defined in Section 4043 of
ERISA) for which the 30-day reporting requirement has not been waived has been
required to be filed for any Monarch Pension Plan or Monarch ERISA Affiliate
Plan within the 12-month period ending on the date hereof; (iv) neither Monarch
nor any Subsidiary of Monarch has provided or is required to provide, security
to any Monarch Pension Plan or to any Monarch ERISA Affiliate Plan pursuant to
Section 401(a)(29) of the Code; (v) neither Monarch, its Subsidiaries, nor any
Monarch ERISA Affiliate has contributed to any "multiemployer plan", as defined
in Section 3(37) of ERISA, on or after September 26, 1980; (vi) each Employee
Plan of Monarch or any of its Subsidiaries which is an "employee pension benefit
plan" (as defined in Section 3(2) of ERISA) or has received a favorable
determination letter from the Internal Revenue Service deeming such plan to be a
Qualified Plan or has requested such a determination letter within the
applicable remedial amendment period under Section 401(b) of the Code; and
neither Monarch nor its Subsidiaries are aware of any circumstances likely to
result in revocation of any such favorable determination letter; (vii) each
Qualified Plan which is an "employee stock ownership plan" (as defined in
Section 4975(e)(7) of the Code) has satisfied all of the applicable requirements
of Sections 409 and 4975(e)(7) of the Code and the regulations thereunder; all
Monarch Employee Plans covering foreign participants comply in all material
respects with applicable local law, and there are no material unfunded
liabilities with respect to any Monarch Employee Plan which covers foreign
employees; (viii) there is no pending or, to Monarch's knowledge, threatened
litigation, administrative action or proceeding relating to any Monarch Employee
Plan; (ix) there has been no announcement or commitment by Monarch or any
Subsidiary of Monarch to create an additional Monarch Employee Plan, or to amend
a Monarch Employee Plan except for amendments required by applicable law which
do not increase the cost of such Monarch Employee Plan; and Monarch and its
Subsidiaries do not have any obligations for retiree health and life benefits
under any Monarch Employee Plan except as set forth in the Monarch Disclosure
Letter, and there are no such Monarch Employee Plans that cannot be amended or
terminated without incurring any liability thereunder; (x) with respect to
Monarch or any of its Subsidiaries, except as specifically identified in the
Monarch Disclosure Letter, the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not result in any
payment or series of payments by Monarch or any Subsidiary of Monarch to any
person which is an "excess parachute payment" (as defined in Section 280G of the
Code) under any Monarch Employee Plan, increase or secure (by way of a trust or
other vehicle) any benefits payable under any Monarch Employee Plan, or
accelerate the time of payment or vesting of any such benefit, and (xi) with
respect to each Monarch Employee Plan, Monarch has supplied to the Company a
true and correct copy, if applicable, of (A) the two most recent annual reports
on the applicable form of the Form 5500 series filed with the Internal Revenue
Service (the "IRS"), (B) such Monarch Employee Plan, including amendments
thereto, (C) each trust agreement and insurance contract relating to such
Monarch Employee Plan, including amendments thereto, (D) the most recent summary
plan description for such Monarch Employee Plan, including amendments thereto,
if the Monarch Employee Plan is subject to Title I of ERISA, (E) the most recent
actuarial report or valuation if such Monarch Employee Plan is a Monarch Pension
Plan, (F) the most recent determination letter issued by the IRS if such Monarch
Employee Plan is a Qualified Plan and (G) the most recent financial statements
and auditor's report.
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(p) REAL PROPERTY.
(i) The Monarch Disclosure Letter contains a complete and correct list
of (A) all real property or premises owned on the date hereof, in whole or
in part by Monarch or any of its Subsidiaries and all indebtedness secured
by any encumbrance thereon, and (B) all real property or premises leased in
whole or in part by Monarch or any of its Subsidiaries, together with a list
of all applicable leases and the name of the lessor. None of such premises
or properties have been condemned or otherwise taken by any public authority
and no condemnation or taking is threatened or contemplated and none thereof
is subject to any claim, contract or law which might affect its use or value
for the purposes now made of it. None of the premises or properties of
Monarch or any of its Subsidiaries is subject to any current or potential
interests of third parties or other restrictions or limitations that would
impair or be inconsistent with the current use of such property by Monarch
or any of its Subsidiaries.
(ii) Each of the leases referred to in the Monarch Disclosure Letter is
valid and existing and in full force and effect, and no party thereto is in
default and no notice of a claim of default by any party has been delivered
to Monarch or any of its Subsidiaries or is now pending, and there does not
exist any event that with notice or the passing of time, or both, would
constitute a default or excuse performance by any party thereto, provided
that with respect to matters relating to any party other than Monarch the
foregoing representation is based on the knowledge of Monarch.
(q) TITLE. Monarch and each of its Subsidiaries has good title to its
properties and assets (other than (i) property as to which it is lessee and (ii)
real estate owned as a result of foreclosure, transfer in lieu of foreclosure or
other transfer in satisfaction of a debtor's obligation previously contracted).
(r) KNOWLEDGE AS TO CONDITIONS. As of the date hereof, Monarch knows of no
reason why the approvals, consents and waivers of governmental authorities
referred to in Section 5.1(b) should not be obtained without the imposition of
any condition of the type referred to in the provisos thereto.
(s) COMPLIANCE WITH LAWS. Since December 31, 1993, Monarch and each of its
Subsidiaries have complied in all Material respects with all applicable laws,
except for any noncompliance with any such laws which, individually or in the
aggregate, would not have a Material Adverse Effect on Monarch or enable any
Person to enjoin the Merger or the Bank Merger. Except as would not have a
Material Adverse Effect on Monarch, Monarch and each of its Subsidiaries has all
permits, licenses, certificates of authority, orders and approvals of, and has
made all filings, applications and registrations with, federal, state, local and
foreign governmental or regulatory bodies that are required in order to permit
it to carry on its business as it is presently conducted. All such permits,
licenses, certificates of authority, orders and approvals are in full force and
effect, and, to the knowledge of Monarch, no suspension or cancellation of any
of them is threatened.
(t) FEES. Other than in respect of financial advisory services performed
for Monarch by Belle Plaine Financial Partners, Inc. and/or other qualified
financial advisors, in amounts and pursuant to arrangements previously disclosed
to the Company, neither Monarch nor any of its Subsidiaries, nor any of their
respective officers, directors, employees or agents, has employed any broker or
finder or incurred any liability for any financial advisory fees, brokerage
fees, commissions, or finder's fees, and no broker or finder has acted directly
or indirectly for Monarch or any Subsidiary of Monarch, in connection with the
Plan or the transactions contemplated hereby.
(u) ENVIRONMENTAL MATTERS. (i) Monarch and each Subsidiary has complied at
all times with all applicable Environmental Laws; (ii) none of the properties
(including buildings or any other structures) currently owned or operated by
Monarch or any Subsidiary ("Monarch Properties") has been contaminated with, or
has had any release of, any Hazardous Substance; (iii) to Monarch's knowledge,
none of the properties formerly owned or operated by it or any Subsidiary has
been contaminated with Hazardous Substances during such period of ownership or
operation; (iv) to Monarch's knowledge, neither it nor any Subsidiary is subject
to liability for any Hazardous Substance disposal or contamination on any third
party
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property; (v) neither Monarch nor any Subsidiary has received any notice, demand
latter, claim or request for information alleging that Monarch or any Subsidiary
may be in violation of or subject to liability under any Environmental Law; (vi)
neither Monarch nor any of its Subsidiaries is subject to any orders, decrees,
injunctions or other agreements with any governmental authority or any third
party relating to Hazardous Substances or any Environmental Law; (vii) there are
no circumstances or conditions involving Monarch or any of its Subsidiaries that
could reasonably be expected to result in any claims, liability, investigations,
suits or costs or result in restrictions on the ownership, use, or transfer of
any Property pursuant to any Environmental Law, (viii) none of the Properties
contain any underground storage tanks, asbestos-containing material, lead
products, or polychlorinated biphenyls; (ix) to the knowledge of Monarch none of
the Properties have ever been operated in the past as a gas station, automotive
repair or supply business, metalworking operation, industrial facility or as a
drycleaner; (x) neither Monarch nor any Subsidiary has engaged in any activity
involving the generation, use, handling or disposal of any Hazardous Substances
other than ordinary and routine office operations and maintenance, (xi) neither
Monarch nor any Subsidiary has participated in the management of any borrower or
other third party, including entities in which it may hold a security, fiduciary
or other interest, that, to Monarch's knowledge, engage in activities involving
Hazardous Substances to an extent that it could be deemed an "owner" or
"operator" of such entity under any Environmental Law, and (xii) to Monarch's
knowledge, it has delivered to the Company copies of all environmental reports,
studies, sampling data, permits, government filings and other environmental
information in its possession relating to Monarch or its Subsidiaries or any of
their current or former properties or operations.
(v) ALLOWANCE. The allowance for possible loan and lease losses shown on
Monarch's unaudited balance sheet as of September 30, 1996 was, and the
allowance for possible loan losses shown on the balance sheets in Monarch
Reports for periods ending after the date of this Plan will be, adequate, as of
the date thereof, under generally accepted accounting principles applicable to
banks and bank holding companies. Monarch has disclosed to the Company in
writing prior to the date hereof the amounts of all loans, leases, advances,
credit enhancements, other extensions of credit, commitments and
interest-bearing assets of Monarch and its Subsidiaries that have been
classified as "Other Assets Specially Mentioned," "Substandard," "Doubtful,"
"Loss," "Classified," "Criticized," "Credit Risk Assets" or words of similar
import. The OREO included in any non-performing assets of Monarch or any of its
Subsidiaries is carried net of reserves at the lower of cost or market value;
less applicable selling costs, based on independent appraisals consistent with
applicable regulatory requirements.
(w) MATERIAL INTERESTS OF CERTAIN PERSONS. Except as disclosed in
Monarch's Quarterly Report on Form 10-QSB for the quarter ended September 30,
1996, no officer or director of Monarch, or any "associate" (as such term is
defined in Rule 12b-2 under the Securities Exchange Act) of any such officer or
director, has any Material interest in any Material contract or property (real
or personal), tangible or intangible, used in or pertaining to the business of
Monarch or any of its Subsidiaries.
(x) INSURANCE. Monarch and its Subsidiaries are currently insured, and
since December 31, 1993, have been insured, for reasonable amounts with
financially sound and reputable insurance companies, against such risks as
companies engaged in a similar business would, in accordance with good business
practice, customarily be insured. All of the insurance policies and bonds
maintained by Monarch and its Subsidiaries are in full force and effect, Monarch
and its Subsidiaries are not in default thereunder and all Material claims
thereunder have been filed in due and timely fashion. Since December 31, 1993,
no claim by Monarch or any of its Subsidiaries on or in respect of an insurance
policy or bond has been declined or refused by the relevant insurer or insurers.
In the best judgment of Monarch's management, such insurance coverage is
adequate and will be available in the future under terms and conditions
substantially similar to those in effect on the date hereof. Between the date
hereof and the Effective Time, Monarch and its Subsidiaries will maintain the
levels of insurance coverage in effect on the date hereof and will submit all
potential claims existing prior to the Effective Time to its insurance carrier
on or before the Effective Time. The Monarch Disclosure Letter lists all
insurance policies maintained by or for the benefit
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of Monarch, its Subsidiaries or its directors, officers, employees or agents,
specifying the (i) type of policy, (ii) policy limits and (iii) self insurance
amounts.
(y) INVESTMENT SECURITIES. Except for pledges to secure public and trust
deposits and reverse repurchase agreements entered into in arm's-length
transactions pursuant to normal commercial terms and conditions and other
pledges required by law, none of the investments reflected in the consolidated
balance sheet of Monarch included in Monarch's Report on Form 10-Q for the
quarter ended September 30, 1996, and none of the Material investments made by
it or any of its Subsidiaries since December 31, 1995, is subject to any
restriction (contractual, statutory or otherwise) that would materially impair
the ability of the entity holding such investment freely to dispose of such
investment at any time.
(z) DERIVATIVES. Neither Monarch nor any of its Subsidiaries is currently
a party to any interest rate swap, cap, floor, option agreement, other interest
rate risk management arrangement or agreement or derivative-type security or
derivative arrangement or agreement.
(aa) REGISTRATION OBLIGATIONS. Neither Monarch nor any of its Subsidiaries
is under any obligation, contingent or otherwise, to register any of its
securities under the Securities Act except as contemplated by this Plan.
(bb) BOOKS AND RECORDS. The books and records of Monarch and its
Subsidiaries have been, and are being, maintained in accordance with applicable
legal and accounting requirements and reflect in all Material respects the
substance of events and transactions that should be included therein.
(cc) CORPORATE DOCUMENTS. Monarch has delivered to the Company true and
complete copies of (i) its amended articles of incorporation and amended by-laws
and (ii) the articles of incorporation and by-laws of Monarch Bank.
(dd) COMPANY ACTION. The Board of Directors of Monarch has adopted
resolutions recommending that the principal terms of this Plan be approved by
the shareholders of Monarch and directing that this Plan be submitted for
consideration by Monarch's shareholders at Monarch's Meeting.
(ee) LOANS. Each loan reflected as an asset on Monarch's consolidated
balance sheet as of September 30, 1996 and each balance sheet date subsequent
thereto (i) is evidenced by notes, agreements or other evidences of indebtedness
which are true, genuine and what they purport to be, (ii) is the legal, valid
and binding obligation of the obligor named therein, enforceable in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles, and (iii) to the knowledge of Monarch, will
not be subject to any defenses which may be asserted against Monarch Bank or
Western Bank. All loans and extensions of credit that have been made by Monarch
Bank or Western Bank and that are subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act comply therewith.
(ff) FAIR LENDING; COMMUNITY REINVESTMENT ACT. As of the date hereof, with
the exception of routine investigation of consumer complaints, neither Monarch
nor any of its Subsidiaries has been advised that it is or may be in violation
of the Equal Credit Opportunity Act or the Fair Housing Act or any similar
federal or state statute. Monarch Bank received a CRA rating of "outstanding" in
its most recent CRA examination. Western Bank received a CRA rating of
"satisfactory" in its most recent CRA examination.
(gg) NO OMISSION OF MATERIAL FACT. No representation or warranty by
Monarch in this Plan, including the Annexes hereto, the disclosure letters and
the schedules to be delivered herewith or the Proxy Statement filed in
connection with the Meeting, contains any untrue statement of Material fact, or
omits to state a Material fact necessary to make the statements or facts
contained herein or therein not misleading. None of the information regarding
Monarch or any of its Subsidiaries or the transactions contemplated hereby
supplied or to be supplied by Monarch or any of its Subsidiaries for inclusion
in any documents or filings to be filed with any regulatory authority in
connection with the transactions
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contemplated hereby will contain any untrue statement of Material fact, or omit
to state a Material fact necessary to make the statements or facts contained
therein not misleading.
(hh) MONARCH COMMON STOCK. The shares of Monarch Common Stock to be issued
pursuant to this Plan, when issued in accordance with the terms of this Plan,
will be duly authorized, validly issued, fully paid and non-assessable.
ARTICLE IV. COVENANTS
SECTION 4.1. ACQUISITION PROPOSALS. The Company agrees that none of it,
the Company Bank or any of their respective officers and directors shall, and
the Company shall direct and use its reasonable best efforts to cause its
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it or the Company Bank)
not to, initiate, solicit or encourage, directly or indirectly, any inquiries or
the making of any proposal or offer (including, without limitation, any proposal
or offer to shareholders of the Company) with respect to a merger, consolidation
or similar transaction, other than pursuant to this Plan, involving, or any
purchase of all or any significant portion of the assets or any equity
securities of, the Company or the Company Bank (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal") or, except to the extent
legally required for the discharge by the board of directors of its fiduciary
duties as advised in writing by such board's counsel, engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal.
The Company will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing and shall make all reasonable efforts to
enforce any confidentiality agreements to which it or the Company Bank is a
party. The Company will take the necessary steps to inform the appropriate
individuals or entities referred to in the first sentence hereof of the
obligations undertaken in this Section 4.1. The Company will notify Monarch
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with the Company.
SECTION 4.2. CERTAIN POLICIES OF THE COMPANY. At or before the Effective
Time, the Company shall make such accounting entries or adjustments as Monarch
shall request in order to implement its plans for the Company Bank following the
Merger or to reflect merger-related expenses and costs; PROVIDED, HOWEVER, that
(a) the Company shall not be required to take such action more than two days
prior to the Effective Time, (b) no such adjustment shall require, based upon
consultation with counsel and accountants for the Company, any filing with any
governmental agency, or violate any law, rule or regulation applicable to the
Company, (c) no such adjustment shall require any changes in net income or
shareholders' equity that will be required to be contained in any financial
statement required to be filed by the Company under the rules of the SEC if the
Company reasonably believes that all of the conditions to closing set forth in
Article V will not be either satisfied or waived; and FURTHER PROVIDED, that in
any event no accrual or reserve made by the Company or the Company Bank pursuant
to this Section 4.2 shall constitute or be deemed to be a breach or violation of
or failure to satisfy any representation, warranty, covenant, condition or other
provision of this Plan or otherwise be considered in determining whether any
such breach, violation or failure to satisfy shall have occurred. The recording
of such adjustments shall not be deemed to imply any misstatement of previously
furnished financial statements or information and shall not be construed as
concurrence of the Company's management with any such adjustments.
SECTION 4.3. EMPLOYEE BENEFITS. (a) Monarch and the Company agree that,
unless otherwise mutually determined or as set forth in subsection (c) below,
the Employee Plans of the Company and the Company Bank in effect at the date of
this Plan (except stock plans (other than the stock bonus plan, which will
remain in effect for a period to be agreed upon by the parties), including
without limitation the Company's stock option plans and the stock award plan)
will remain in effect for a period of at least six
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months after the Effective Time with respect to employees of the Company and the
Company Bank covered by such plans at the Effective Time. Monarch will take such
steps as are required so that each person employed by the Company or the Company
Bank prior to the Effective Time who remains an employee of the Surviving
Corporation or its Subsidiaries following the Effective Time (each a "Continued
Employee") shall be entitled to participate in the employee benefit plans that
are in effect generally for employees of Monarch's Subsidiaries from time to
time (all such plans collectively, "Monarch's Benefit Plans"), if such Continued
Employee shall be eligible (or, with respect to discretionary Monarch's Benefit
Plans, selected) for participation therein and otherwise shall not be
participating in a similar plan which continues to be maintained by the
Surviving Corporation and its Subsidiaries. Continued Employees will be eligible
to participate on the same basis as similarly situated employees of Monarch or
Monarch's Subsidiaries. All such participation shall be subject to the terms of
Monarch's Benefit Plans as may be in effect from time to time. Monarch or
Monarch's Subsidiaries shall, solely for purposes of vesting and eligibility to
participate in Monarch's Benefit Plans, recognize credit for each Continued
Employee's term of service with the Company and the Company's Subsidiaries.
(b) Monarch will honor, to the extent set forth in the Company Disclosure
Letter, all employment and severance agreements of the Company and the Company
Bank, in accordance with their terms.
SECTION 4.4. ACCESS AND INFORMATION. Upon reasonable notice, each party
hereto shall (and shall cause its Subsidiaries to) afford to the other party and
its representatives (including, without limitation, directors, officers and
employees of such party and its affiliates, and counsel, accountants and other
advisors retained by such party and its affiliates) such access (including,
without limitation, for the purpose of conducting supplemental due diligence
reviews) during normal business hours throughout the period prior to the
Effective Time to the books, records (including, without limitation, loan and
credit files, tax returns and work papers of independent auditors), properties,
personnel and to such other information as the requesting party may reasonably
request; PROVIDED, HOWEVER, that no investigation pursuant to this Section 4.4
shall affect or be deemed to modify any representation or warranty made herein.
Each party agrees that it will not, and will cause its representatives not to,
use any information obtained pursuant to this Section 4.4 for any purpose
unrelated to the consummation of the transactions contemplated by this Plan.
Subject to the requirements of law, each party will keep confidential, and will
cause its representatives to keep confidential, all information and documents
obtained pursuant to this Section 4.4 unless such information (i) was already
known to such party or an affiliate of such party prior to the date of the
confidentiality agreement (the "Confidentiality Agreement") between the Company
and Monarch in effect prior to the date hereof, (ii) becomes available to such
party or an affiliate of such party from other sources not known by such party
to be bound by a confidentiality agreement, (iii) is disclosed with the prior
written approval of the relevant party or (iv) is or becomes readily
ascertainable from published information or trade sources. In the event that
this Plan is terminated or the transactions contemplated by this Plan shall
otherwise fail to be consummated, each party shall promptly cause all copies of
documents or extracts thereof containing information and data as to another
party hereto (or an affiliate of any party hereto) to be returned to the party
which furnished the same. Except as otherwise specifically provided herein, the
terms of the Confidentiality Agreement shall remain in full force effect.
SECTION 4.5. CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS. Monarch and the
Company shall (a) as soon as practicable make any filings and applications
required to be filed in order to obtain all approvals, consents and waivers of
governmental authorities necessary or appropriate for the consummation of the
transactions contemplated hereby and use their reasonable best efforts to cause
the applications for the approvals described in Section 5.1(b) hereof to be
initially filed on or before March 31, 1997; (b) cooperate with one another (i)
in promptly determining what filings are required to be made or approvals,
consents or waivers are required to be obtained under any relevant federal,
state or foreign law or regulation and (ii) in promptly making any such filings,
furnishing information required in connection therewith and seeking timely to
obtain any such approvals, consents or waivers; and (c) deliver to the other
copies of the publicly available portions of all such filings and applications
promptly after they are filed.
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SECTION 4.6. INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. (a) From
and after the Effective Time, Monarch agrees to indemnify and hold harmless each
director and officer of the Company or the Company Bank, determined as of the
Effective Time (the "Indemnified Parties"), against any costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities (collectively, "Costs") incurred in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of matters existing or occurring at
or prior to the Effective Time (including with respect to this Plan or any of
the transactions contemplated hereby), whether asserted, claimed or arising
prior to, at or after the Effective Time, to the extent to which such
Indemnified Parties were entitled under California law and the Company's
articles of incorporation or by-laws in effect on the date hereof, and Monarch
shall also advance expenses as incurred to the extent permitted under California
law and the Company's articles of incorporation and by-laws.
(b) Any Indemnified Party wishing to claim indemnification under Section
4.6(a) hereof, upon learning of any such claim, action, suit, proceeding or
investigation, shall as promptly as possible notify Monarch thereof, but the
failure to so notify shall not relieve Monarch of any liability it may have to
such Indemnified Party if such failure does not materially prejudice Monarch. In
the event of any such claim, action, suit, proceeding or investigation (whether
arising before or after the Effective Time), (i) Monarch shall have the right to
assume the defense thereof and Monarch shall not be liable to such Indemnified
Parties for any legal expenses of other counsel or any other expenses
subsequently incurred by such Indemnified Parties in connection with the defense
thereof, except that if Monarch elects not to assume such defense or counsel for
the Indemnified Parties advises that there are issues which raise conflicts of
interest between Monarch and the Indemnified Parties, the Indemnified Parties
may retain counsel satisfactory to them, and Monarch shall pay the reasonable
fees and expenses of one such counsel for the Indemnified Parties in any
jurisdiction promptly as statements thereof are received unless the use of one
counsel for such Indemnified Parties would present such counsel with a conflict
of interest, (ii) the Indemnified Parties will cooperate in the defense of any
such matter and (iii) Monarch shall not be liable for any settlement effected
without its prior written consent. Notwithstanding the foregoing, Monarch shall
not have any obligation hereunder to any Indemnified Party when and if a court
of competent jurisdiction shall ultimately determine, and such determination
shall have become final and nonappealable, that the indemnification of such
Indemnified Party in the manner contemplated hereby is not permitted or is
prohibited by applicable law.
(c) For a period of six years after the Effective Time, Monarch shall use
its reasonable best efforts to cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by the
Company (provided that Monarch may substitute therefor policies of comparable
coverage with respect to claims arising from facts or events which occurred
before the Effective Time); PROVIDED, HOWEVER, that in no event shall Monarch be
obligated to expend, in order to maintain or provide insurance coverage pursuant
to this Subsection 4.6(c), any amount per annum in excess of 200% of the amount
of the annual premiums paid as of the date hereof by the Company for such
insurance (the "Maximum Amount"). If the amount of the annual premiums necessary
to maintain or procure such insurance coverage exceeds the Maximum Amount,
Monarch shall use all reasonable efforts to maintain the most advantageous
policies of directors' and officers' insurance obtainable for an annual premium
equal to the Maximum Amount. Notwithstanding the foregoing, prior to the
Effective Time, Monarch may request the Company to, and the Company shall,
purchase insurance coverage, on such terms and conditions as shall be acceptable
to Monarch, extending for a period of six years the Company's directors' and
officers' liability insurance coverage in effect as of the date hereof (covering
past or future claims with respect to periods before the Effective Time) and
such coverage shall satisfy Monarch's obligations under this Subsection (c).
(d) If Monarch or any of its successors or assigns (i) shall consolidate
with or merge into any other corporation or entity and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) shall transfer all or substantially all of its properties and assets to any
individual,
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corporation or other entity, then and in each such case, proper provision shall
be made so that the successors and assigns of Monarch shall assume the
obligations set forth in this Section 4.6.
(e) The provisions of this Section 4.6 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
SECTION 4.7. ADDITIONAL AGREEMENTS. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use its reasonable best
efforts to take promptly, or cause to be taken promptly, all actions and to do
promptly, or cause to be done promptly, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Plan as soon as practicable, including
using efforts to obtain all necessary actions or non-actions, extensions,
waivers, consents and approvals from all applicable governmental entities,
effecting all necessary registrations, applications and filings (including,
without limitation, filings under any applicable state securities laws) and
obtaining any required contractual consents and regulatory approvals.
SECTION 4.8. PUBLICITY. The initial press release announcing this Plan
shall be a joint press release and thereafter the Company and Monarch shall
consult with each other in issuing any press releases or otherwise making public
statements with respect to the other or the transactions contemplated hereby and
in making any filings with any governmental entity or with any national
securities exchange with respect thereto.
SECTION 4.9. REGISTRATION STATEMENT. As soon as reasonably practicable
after the date hereof, Monarch and the Company shall jointly prepare a
registration statement, including a joint proxy statement in respect of the
Meetings (as defined herein) (the "Registration Statement"), for the purpose of
registering the Monarch Common Stock to be issued pursuant hereto, file the
Registration Statement with the SEC, respond to comments of the staff of the SEC
and promptly thereafter mail the Registration Statement to all holders of record
(as of the applicable record date) of shares of Company Common Stock and Monarch
Common Stock. The Company covenants that (a) all information supplied by it in
writing to Monarch expressly for use in the Registration Statement will be
accurate and complete in all Material respects and (b) none of the information
to be supplied by the Company will, in the case of the proxy statement to be
used by Monarch to solicit the approval of its shareholders as contemplated by
this Plan, when it is first mailed to the Monarch's shareholders, contain any
untrue statement of a Material fact or omit to state any Material fact necessary
in order to make the statement made therein, in light of the circumstances under
which such statements are made, not misleading. Monarch covenants that (a) all
information supplied by it in writing to the Company expressly for use in the
Registration Statement will be accurate and complete in all Material respects
and (b) none of the information to be supplied by Monarch will, in the case of
the proxy statement to be used by the Company to solicit the approval of its
shareholders as contemplated by this Plan, when it is first mailed to the
Company's shareholders, contain any untrue statement of a Material fact or omit
to state any Material fact necessary in order to make the statement made
therein, in light of the circumstances under which such statements are made, not
misleading.
SECTION 4.10. SHAREHOLDERS' MEETINGS. Each party hereto shall take all
action necessary, in accordance with applicable law and its articles of
incorporation and by-laws, to convene a meeting of the holders of its common
stock (each, a "Meeting") as promptly as practicable for the purpose of
approving the principal terms of this Plan. Except to the extent legally
required for the discharge by such party's board of directors of its fiduciary
duties as advised in writing by such board's counsel, such party's board of
directors shall recommend at its Meeting that the principal terms of this Plan
be approved by its shareholders.
SECTION 4.11. NOTIFICATION OF CERTAIN MATTERS. Each party shall give
prompt notice to the other of: (a) any notice of, or other communication
relating to, a default or event that, with notice or lapse of time or both,
would become a default, received by it or any of its Subsidiaries subsequent to
the date of this Plan and prior to the Effective Time, under any contract
Material to the financial condition, properties,
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businesses or results of operations of such party taken as a whole to which such
party or any Subsidiary is a party or is subject; and (b) any Material adverse
change in the condition (financial or other), properties, assets, business,
results of operations or prospects of it and its Subsidiaries taken as a whole
or the occurrence of any event which, so far as reasonably can be foreseen at
the time of its occurrence, is reasonably likely to result in any such change.
Each of the Company and Monarch shall give prompt notice to the other party of
any notice or other communication from any third party alleging that the consent
of such third party is or may be required in connection with the transactions
contemplated by this Plan.
SECTION 4.12. NO ACQUISITIONS OF COMPANY COMMON STOCK. Prior to the
earlier of (i) immediately prior to the Effective Time and (ii) the termination
of this Plan in accordance with Article VI hereof, Monarch shall not and shall
cause its affiliates not to, directly or indirectly, acquire any shares of
Company Common Stock, other than (i) up to 5% of such shares acquired during the
period commencing on the third business day after the release of the press
release announcing this Plan and (ii) shares acquired in a fiduciary or agency
capacity or in satisfaction of a debt or debts previously contracted.
SECTION 4.13. SECURITIES ACT. (a) As soon as practicable after the date of
the Company's Meeting, the Company shall identify to Monarch all persons who the
Company believes to be affiliates of the Company as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act ("Affiliates").
(b) The Company shall use its best efforts to obtain a written agreement
from each person identified as an Affiliate pursuant to clause 4.13(a) above who
is an officer or director of the Company providing that each such person will
agree not to sell, pledge, transfer or otherwise dispose of the shares of
Monarch Common Stock to be received by such person in the Merger except in
compliance with the applicable provisions of the Securities Act and until such
time as financial results covering at least 30 days of combined operations of
Monarch and the Company shall have been published. The Company shall cause forms
of such written agreement to be delivered to each other person who the Company
believes may be or become an Affiliate of Monarch for purposes of enabling such
persons to comply with the exchange procedures set forth in Section 1.3(c).
SECTION 4.14. QUOTATION ON NASDAQ. Monarch shall use its best efforts to
list on the NASDAQ National Market System, upon official notice of issuance, the
Monarch Common Stock to be issued in the Merger.
SECTION 4.15. TAX-FREE REORGANIZATION TREATMENT; POOLING. Neither Monarch
nor the Company shall take or cause to be taken any action, whether before or
after the Effective Time, which would disqualify (a) either the Merger or the
Bank Merger as a "reorganization" within the meaning of Section 368 of the Code
or (b) the Merger as a "pooling of interests" for accounting purposes, unless
the Monarch Pooling Condition and the Company Pooling Condition are waived by
the parties hereto.
SECTION 4.16. SHAREHOLDER AGREEMENTS. Certain directors of the Company, in
their capacities as shareholders, in exchange for good and valuable
consideration, have executed and delivered to Monarch shareholder agreements
substantially in the form of Annex 3 hereto (the "Shareholder Agreements"),
committing such persons, among other things, (i) to vote their shares of Company
Common Stock in favor of the Plan at the Company's Meeting, (ii) not to compete
with Monarch for a period of time, and (iii) to certain representations
concerning the ownership of Company Common Stock and Monarch Common Stock to be
received in the Merger. The Company agrees to cause its remaining directors
(except as otherwise set forth in Schedule 4.16) to execute agreements
substantially in the form of Annex 3A and deliver such agreements to the Company
on or prior to January 10, 1997.
SECTION 4.17. DIRECTOR AND OFFICER RESIGNATIONS. The Company shall cause
to be delivered to Monarch at the Effective Time the resignations of the members
of the board of directors of the Company and of such officers as are specified
by Monarch to the Company in advance of the Effective Time.
SECTION 4.18. CONSUMMATION OF COMPANY BANK AND MONARCH BANK
MERGER. Monarch and the Company shall take promptly, or cause to be taken
promptly, all actions necessary to consummate and
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make effective the Bank Merger immediately following the Effective Time on the
Effective Date. The merger agreement with respect to the Bank Merger will
provide, among other things, that the existing directors of the Company Bank
shall continue as directors following the Bank Merger.
ARTICLE V. CONDITIONS TO CONSUMMATION
SECTION 5.1. CONDITIONS TO ALL PARTIES' OBLIGATIONS. The respective
obligations of Monarch and the Company to effect the Merger shall be subject to
the satisfaction or waiver prior to the Effective Time of the following
conditions:
(a) The principal terms of this Plan shall have been approved by the
requisite vote of the respective shareholders of the Company, Company Bank,
Monarch and Monarch Bank.
(b) Monarch and the Company shall have procured the approvals, consents
or waivers with respect to the Plan, the Merger, the Bank Merger and the
other transactions contemplated hereby by the Federal Reserve Board, and all
applicable statutory waiting periods shall have expired; and the parties
shall have procured all other regulatory approvals, consents or waivers of
governmental authorities or other persons that, in the opinion of counsel
for Monarch and the Company, are necessary or appropriate for the
consummation of the Merger, the Bank Merger and the other transactions
contemplated hereby; PROVIDED, HOWEVER, that no approval, consent or waiver
referred to in this Section 5.1(b) shall be deemed to have been received if
it shall include any condition or requirement (other than conditions or
requirements that have been imposed on Monarch in connection with previous
acquisitions announced since 1995) that, individually or in the aggregate,
(i) would result in a Material Adverse Effect on Monarch or the Company or
(ii) would reduce the economic and business benefits of the transactions
contemplated by the Plan to Monarch or the Company in so significant and
adverse a manner that the party or parties so affected, in its or their
judgment, would not have entered into this Plan had such condition or
requirement been known at the date hereof.
(c) All other requirements prescribed by law which are necessary to the
consummation of the Merger and the Bank Merger and any transactions
necessary to consummate the Merger and the Bank Merger shall have been
satisfied.
(d) No party hereto shall be subject to any order, decree or injunction
of a court or agency of competent jurisdiction which enjoins or prohibits
the consummation of the Merger or the Bank Merger or any transaction
necessary to consummate the Merger or the Bank Merger, and no litigation or
proceeding shall be pending against Monarch or the Company or any of their
Subsidiaries brought by any governmental agency seeking to prevent
consummation of the Merger or the Bank Merger or any transaction necessary
to consummate the Merger or the Bank Merger.
(e) No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated, interpreted, applied or enforced by any
governmental authority which prohibits, restricts or makes illegal
consummation of the Merger, the Bank Merger or any other transaction
contemplated by this Plan.
(f) The Registration Statement shall have become effective and no stop
order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been initiated or
threatened by the SEC.
(g) Monarch shall have received an opinion of Sullivan & Cromwell and
the Company shall have received an opinion of Company Counsel, no later than
thirty (30) days from the date hereof, and confirmed immediately prior to
the Effective Time, substantially to the effect that the Merger will be a
reorganization within the meaning of Section 368(a) of the Code, and that
Monarch and the Company will each be a party to that reorganization. Each
such opinion may be based on, in addition to the review of such matters of
law and fact as counsel rendering the opinion considers appropriate,
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(i) representations made at counsel's request by Monarch, the Company,
shareholders of Monarch or the Company, or any combination of such persons,
(ii) Certificates provided at counsel's request by officers of Monarch or of
the Company and other appropriate persons and (iii) assumptions set forth in
the opinion with the consent of Monarch (in the case of the opinion to be
delivered by Sullivan & Cromwell) or with the consent of the Company (in the
case of the opinion to be delivered by Company Counsel).
SECTION 5.2. CONDITIONS TO THE OBLIGATIONS OF MONARCH. The obligations of
Monarch to effect the Merger shall be subject to the satisfaction or waiver
prior to the Effective Time of the following additional conditions:
(a) Monarch shall have received (i) from the Company's independent
certified public accountants a "cold comfort" letter or "specified
procedures" letter, dated (A) the date of the mailing of the Registration
Statement, and (B) shortly prior to the Effective Date, with respect to
certain financial information regarding Monarch and the Company,
respectively, and (ii) from KPMG Peat Marwick LLP a letter confirming that
the Merger is entitled to "pooling of interests" treatment for accounting
purposes, each of such letters to be in the form customarily issued by "Big
Six" independent auditors in transactions of this type (the condition set
forth in this clause (ii) being referred to herein as the "Monarch Pooling
Condition"); PROVIDED, HOWEVER, that Monarch may, in its sole discretion, at
any time, either before or after shareholder approval of the principal terms
of this Plan, waive the Monarch Pooling Condition.
(b) Each of the representations and warranties of the Company contained
in this Plan shall have been true and correct on the date hereof and shall
be true and correct at the Effective Time (or on the date when made in the
case of any representation or warranty which specifically relates to an
earlier date or period); provided, however, that for purposes of this
Section 5.2(b) a representation or warranty shall only fail to be true and
correct at the Effective Time if the failure of any such brepresentation or
warranty to be true and correct has or constitutes, or is likely to have or
constitute or relates to, either individually or in the aggregate with other
such representations or warranties, a Material Adverse Effect on the Company
or the Company Bank; the Company shall have performed, or shall have caused
to be performed, in all Material respects, each of its covenants and
agreements contained in this Plan required to be performed at or prior to
the Effective Time; and Monarch shall have received a certificate signed by
the Chief Executive Officer and the Chief Financial Officer of the Company,
dated the Effective Date, as to the foregoing.
(c) Monarch shall have received an opinion, dated the Effective Date,
from O'Melveny & Myers, LLP, counsel to the Company ("Company Counsel"),
covering the matters set forth in Annex 4, in form and substance
satisfactory to Monarch.
(d) Monarch shall have received the written resignation of each director
(in his/her capacity as director) of the Company, effective as of the
Effective Time and such resignations of officers as may be specified by
Monarch pursuant to Section 4.17 hereof.
(e) The Company or Monarch shareholders voting against the principal
terms of this Plan or giving notice in writing to the Company or Monarch, as
the case may be, at or before the applicable Meeting that such shareholder
dissents from the principal terms of this Plan, in the aggregate, shall not
hold more than five percent of the Company Common Stock or Monarch Common
Stock, as the case may be (the condition set forth in this paragraph (e)
being referred to herein as the "Dissenters' Rights Condition"); PROVIDED,
HOWEVER, that Monarch may, in its sole discretion, at anytime, either before
or after shareholder approval of the principal terms of this Plan, waive the
Dissenters' Rights Condition, either in whole or in part.
(f) Prior to solicitation of shareholder approval, Monarch shall have
received an opinion confirming the fairness of the terms of the Merger to
its shareholders from a financial point of view.
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(g) Monarch shall have received a conformed copy of a certificate of
satisfaction of the Franchise Tax Board of the State of California that all
taxes imposed by law on the Company have been paid or secured, as filed with
the Secretary of State for the State of California pursuant to Section 1103
of the California Corporations Code.
SECTION 5.3. CONDITIONS TO THE OBLIGATION OF THE COMPANY. The obligation
of the Company to effect the Merger shall be subject to the satisfaction or
waiver prior to the Effective Time of the following additional conditions:
(a) The Company shall have received (i) from Monarch's independent
certified public accountants a "cold comfort" letter or letters or
"specified procedures" letter or letters, dated (A) the date of the mailing
of the Registration Statement, and (B) shortly prior to the Effective Date,
with respect to certain financial information regarding Monarch and the
Company, respectively and (ii) from Deloitte & Touche LLP a letter
confirming that the Merger is entitled to "pooling of interests" treatment
for accounting purposes, each of such letters to be in the form customarily
issued by "Big Six" independent auditors in transactions of this type (the
condition set forth in this clause (ii) being referred to as the "Company
Pooling Condition"); PROVIDED, HOWEVER, that the Company may, in its sole
discretion, at any time, either before or after shareholder approval of the
principal terms of this Plan, waive the Company Pooling Condition.
(b) Each of the representations, warranties and covenants of Monarch
contained in this Plan shall have been true on the date hereof and shall be
true in all Material respects on the Effective Date as if made on such date
(or on the date when made in the case of any representation or warranty
which specifically relates to an earlier date or period), PROVIDED, HOWEVER,
that for purposes of this Section 5.3(a) a representation or warranty shall
only fail to be true and correct at the Effective Time if the failure of any
such representation or warranty to be true and correct has or constitutes or
relates to, or is likely to have or constitute or relate to, either
individually or in the aggregate with other such representations or
warranties, a Material Adverse Effect on Monarch; Monarch shall have
performed, or shall have caused to be performed, in all Material respects,
each of its covenants and agreements contained in this Plan required to be
performed at or prior to the Effective Time; and the Company shall have
received certificates signed by the Chief Executive Officer and the Chief
Financial Officer of Monarch, dated the Effective Date, as to the foregoing.
(c) The Company shall have received an opinion, dated the Effective
Date, from Sullivan & Cromwell, covering the matters set forth in Annex 5,
in form and substance satisfactory to the Company.
(d) Each of William H. Jacoby, Robert L. McKay and Mark H. Stuenkel
shall have been elected to the board of directors of Monarch.
(e) Prior to the solicitation of shareholder approval, the Company shall
have received an opinion confirming the fairness of the terms of the Merger
to its shareholders from a financial point of view.
(f) As of the Effective Date or upon consummation of the Merger, the
Monarch Common Stock shall be included for quotation on the NASDAQ National
Market.
ARTICLE VI. TERMINATION
SECTION 6.1. TERMINATION. This Plan may be terminated, and the Merger
abandoned, prior to the Effective Date, either before or after its approval by
the shareholders of the Company and Monarch:
(a) by the mutual consent of Monarch and the Company, if the board of
directors of each so determines by vote of a majority of the members of its
entire board;
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(b) by Monarch or the Company, by written notice to the other party, if
its board of directors so determines by vote of a majority of the members of
its entire board, in the event of (i) the failure of the shareholders of the
Company to approve the principal terms of this Plan at its Meeting, (ii) the
failure of the shareholders of Monarch to approve the principal terms of
this Plan at its Meeting (iii) a Material breach by the other party hereto
of any representation, warranty, covenant or agreement contained herein
which is not cured or not curable within 30 days after written notice of
such breach is given to the party committing such breach by the other party;
(c) by Monarch or the Company, by written notice to the other party, if
either (i) any approval, consent or waiver of a governmental authority
required to permit consummation of the Merger or any transaction necessary
to consummate the Merger shall have been denied or (ii) any governmental
authority of competent jurisdiction shall have issued a final, unappealable
order enjoining or otherwise prohibiting consummation of the Merger or any
transaction necessary to consummate the Merger;
(d) by Monarch or the Company, by written notice to the other party, if
its board of directors so determines by vote of a majority of the members of
its entire board, in the event that the Merger is not consummated by
September 30, 1997, unless the failure so to consummate by such time is due
to the breach of any representation, warranty or covenant contained in this
Plan by the party seeking to terminate;
(e) by Monarch, by written notice to the Company, if the Company takes,
causes to be taken or allows to be taken any action that, without giving
effect to the exception contained in Section 4.1 hereof regarding the
exercise by the Company's board of directors of its fiduciary duties, would
otherwise be prohibited under Section 4.1 hereof; or
(f) by the Company, by written notice to Monarch prior to the approval
by the shareholders of the Company of the principal terms of this Plan, if
the Company receives an Acquisition Proposal on terms and conditions which
the board of directors determines, after receiving the written advice of its
outside counsel, (i) that to proceed with the Merger will violate the
fiduciary duties of the board of directors to the Company's shareholders and
(ii) to accept such proposal; PROVIDED, HOWEVER, that the Company shall not
be entitled to terminate this Plan pursuant to this clause (f) unless it
shall have provided Monarch with written notice of such a possible
determination (which written notice will inform Monarch of the Material
terms and conditions of the proposal, including the identity of the
proponent) two business days prior to such determination.
SECTION 6.2. EFFECT OF TERMINATION. (a) In the event of the termination of
this Plan by either Monarch or the Company, as provided above, this Plan shall
thereafter become void and, subject to the provisions of Section 6.2(b) and (c)
and Section 8.2 hereof, there shall be no liability on the part of any party
hereto or their respective officers or directors, except that any such
termination shall be without prejudice to the rights of any party hereto arising
out of the willful breach by any other party of any covenant or willful
misrepresentation contained in this Plan.
(b) The parties agree and acknowledge that it is impractical to
ascertain the precise amount of damage to the Company as a result of a
failure to consummate the Merger and the other transactions contemplated
hereby due to a termination of this Plan by the Company pursuant to clause
(iii) of Section 6.1(b) hereof. Accordingly, in the event of such
termination, Monarch shall pay to the Company $1.25 million plus all costs
and expenses incurred by the Company in connection with this Plan, up to
$500,000, the parties agreeing that such amount will represent a reasonable
estimate of the minimum damage to the Company and not a penalty. The fee
payable pursuant to the foregoing sentence shall be payable by Monarch to
the Company by wire transfer to an account designated by the Company in
writing, on or before the seventh day after it becomes due. Payment of such
amount shall be in full satisfaction of damages to the Company arising from
any breach by Monarch of any of its representations, warranties, covenants
or agreements contained herein.
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(c) The parties agree and acknowledge that it is impractical to
ascertain the precise amount of damage to the Monarch as a result of a
failure to consummate the Merger and the other transactions contemplated
hereby due to a termination of this Plan by Monarch pursuant to clause (iii)
of Section 6.1(b) or Section 6.1(e) hereof or by the Company pursuant to
Section 6.1(f) hereof. Accordingly, in the event of such termination, the
Company shall pay to Monarch $1.25 million plus all costs and expenses
incurred by Monarch in connection with this Plan, up to $500,000, the
parties agreeing that such amount will represent a reasonable estimate of
the minimum damage to Monarch and not a penalty. The fee payable pursuant to
the foregoing sentence shall be payable by the Company to Monarch by wire
transfer to an account designated by Monarch in writing, on or before the
seventh day after it becomes due. Payment of such amount shall be in full
satisfaction of damages to Monarch arising from any breach by the Company of
any of its representations, warranties, covenants or agreements contained
herein.
ARTICLE VII. EFFECTIVE DATE AND EFFECTIVE TIME
SECTION 7.1. EFFECTIVE DATE AND EFFECTIVE TIME. On such date as Monarch
selects, which shall be within 30 days after the last to occur of the expiration
of all applicable waiting periods in connection with approvals of governmental
authorities, the receipt of all approvals of governmental authorities and the
satisfaction or waiver of all other conditions to the consummation of the
Merger, or on such earlier or later date as may be agreed in writing by the
parties, an agreement of merger, a certificate of merger and related documents,
substantially in the forms attached hereto as Annex 7, shall be executed in
accordance with all appropriate legal requirements and shall be filed as
required by law, and the Merger provided for herein shall become effective upon
such filing or on such date and such time as may be specified in such articles
of merger. The date of such filing or such later effective date is herein called
the "Effective Date". The "Effective Time" of the Merger shall be the time of
such filing or as set forth in such articles of merger.
ARTICLE VIII. OTHER MATTERS
SECTION 8.1. CERTAIN DEFINITIONS; INTERPRETATION. As used in this Plan,
the following terms shall have the meanings indicated:
"Company Book Value" means the consolidated shareholders' equity of the
Company and the Company Bank, determined in accordance with GAAP, as
reflected on the audited balance sheet as of December 31, 1996, as adjusted
(if at all) in accordance with Section 1.6 hereof, LESS (i) the Company's
Deal Expenses, and (ii) 50% of the Retention Bonuses; PROVIDED, HOWEVER,
that, except as otherwise agreed by the parties, if the allowance for loan
and lease losses is less than $5,360,000 as shown on such balance sheet,
then the Company Book Value shall be reduced by an amount equal to the
after-tax effect of the difference between $5,360,000 and such lesser sum.
"Company's Per Share Book Value" means the QUOTIENT obtained by dividing
the Company Book Value by the aggregate number of fully-diluted shares of
Company Common Stock outstanding immediately prior to the Effective Time,
calculated in the manner set forth in the example provided in Annex 6
hereto.
"Deal Expenses" means the sum of the after tax-effect of (i) all fees
and expenses paid or accrued to a party's financial advisors and consultants
arising out of or relating to this Plan, (ii) the fees and expenses of such
party's independent accountants and attorneys paid or accrued in connection
with the preparation and negotiation of this Plan and (iii) all costs paid
pursuant to the last sentence of Section 1.6(c) hereof; PROVIDED, HOWEVER,
that "Deal Expenses" shall not include any such expenses booked as an
expense or otherwise deducted from consolidated shareholders' equity in the
preparation of financial statements contemplated by Section 1.6.
"GAAP" means generally accepted accounting principles applicable to bank
holding companies, consistently applied.
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"Material" means material to Monarch or the Company (as the case may be)
and its respective Subsidiaries, taken as a whole.
"Material Adverse Effect", with respect to a person, means any
condition, event, change or occurrence that is reasonably likely to have a
Material adverse effect upon (A) the condition (financial or other),
properties, assets, business, results of operations or prospects of such
person and its Subsidiaries, taken as a whole, or (B) the ability of such
person to perform its obligations under, and to consummate the transactions
contemplated by, this Plan; PROVIDED, HOWEVER, that in determining whether
there has been a Material Adverse Effect with respect to the Company, the
after-tax effect of any outcome of the litigation referred to by name in the
Company's Report on Form 10-Q for the quarter ended September 30, 1996 shall
be excluded.
"Monarch Book Value" means the consolidated shareholders' equity of
Monarch and its Subsidiaries, determined in accordance with GAAP, as
reflected on the audited balance sheet as of December 31, 1996, as adjusted
(if at all) in accordance with Section 1.6 hereof, LESS (i) Monarch's Deal
Expenses, and (ii) 50% of the Retention Bonuses; PROVIDED, HOWEVER, that if
the allowance for loan and lease losses is less than $5,393,000 as shown on
such balance sheet, then the Monarch Book Value shall be reduced by an
amount equal to the after-tax effect of the difference between $5,393,000
and such lesser sum.
"Monarch's Per Share Book Value" means the QUOTIENT obtained by dividing
the Monarch Book Value by the aggregate number of fully-diluted shares of
Monarch Common Stock outstanding immediately prior to the Effective Time,
calculated in the manner set forth in the example provided in Annex 6
hereto.
"Person" includes an individual, corporation, partnership, association,
trust or unincorporated organization.
"Retention Bonuses" means payments to key employees of the Company and
the Company Bank for the purpose of assuring the services of such employees
through the Effective Time, which payments shall be approved by Monarch and
shall not in the aggregate exceed $200,000.
"Subsidiary", with respect to a person, means any other person
controlled by such person.
When a reference is made in this Plan to Sections or Annexes, such reference
shall be to a Section of, or Annex to, this Plan unless otherwise indicated. For
all calculations of the "after-tax effect" pursuant to this Plan, a combined
Federal and California rate of 41.5% shall be used. The table of contents, tie
sheet and headings contained in this Plan are for ease of reference only and
shall not affect the meaning or interpretation of this Plan. Whenever the words
"include", "includes", or "including" are used in this Plan, they shall be
deemed followed by the words "without limitation". Any singular term in this
Plan shall be deemed to include the plural, and any plural term the singular.
SECTION 8.2. SURVIVAL. Only those agreements and covenants of the parties
that are by their terms applicable in whole or in part after the Effective Time
shall survive the Effective Time. All other representations, warranties,
agreements and covenants shall be deemed to be conditions of the Plan and shall
not survive the Effective Time. If the Plan shall be terminated, the agreements
of the parties in Section 6.2, this Section 8.2, Section 8.6, Section 8.7 and
the last four sentences of Section 4.4 hereof shall survive such termination.
SECTION 8.3. WAIVER. Prior to the Effective Time, any provision of this
Plan may be: (i) waived by the party benefitted by the provision; or (ii)
amended or modified at any time (including the structure of the transaction) by
an agreement in writing between the parties hereto approved by their respective
boards of directors.
SECTION 8.4. COUNTERPARTS. This Plan may be executed in counterparts, each
of which shall be deemed to constitute an original, but all of which together
shall constitute one and the same instrument.
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SECTION 8.5. GOVERNING LAW. This Plan shall be governed by, and
interpreted in accordance with, the laws of the State of California.
SECTION 8.6. WAIVER EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATED TO THIS PLAN OR THE TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 8.7. EXPENSES. Each party hereto will bear all expenses incurred
by it in connection with this Plan and the transactions contemplated hereby.
SECTION 8.8. NOTICES. All notices, requests, acknowledgments and other
communications hereunder to a party shall be in writing and shall be deemed to
have been duly given when delivered by hand, telecopy, telegram or telex
(confirmed in writing) to such party at its address set forth below or such
other address as such party may specify by notice to the other party hereto.
If to the Company, to:
California Commercial Bankshares
4100 Newport Place
Newport Beach, CA 92660
Telecopier: (714) 863-2336
Attention: Mark H. Stuenkel
With copies to:
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, CA 90071
Telecopier: (213) 669-6407
Attention: Frances E. Lossing
And
The Findley Group
1470 North Hundley Street
Anaheim, CA 92806-1322
Telecopier: (714) 630-7910
Attention: Gary Steven Findley
If to Monarch, to:
Monarch Bancorp
1251 Westwood Blvd.
Los Angeles, CA 90024
Telecopier: (310) 477-8611
Attention: Matt Wagner
With copies to:
Sullivan & Cromwell
444 South Flower Street
Los Angeles, California 90071
Telecopier: (212) 683-0458
Attention: Stanley F. Farrar
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<PAGE>
SECTION 8.9. ENTIRE AGREEMENT; ETC. This Plan, together with the
Confidentiality Agreement, the Shareholders Agreements and the Option Agreement
of even date herewith being executed simultaneously herewith by the Company and
Monarch, represents the entire understanding of the parties hereto with
reference to the transactions contemplated hereby and supersedes any and all
other oral or written agreements heretofore made. All terms and provisions of
the Plan shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Except as to Section 4.6
hereof, nothing in this Plan is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this Plan.
SECTION 8.10. ASSIGNMENT. This Plan may not be assigned by any party
hereto without the written consent of the other parties.
IN WITNESS WHEREOF, the parties hereto have caused this Plan to be executed
by their duly authorized officers as of the day and year first above written.
MONARCH BANCORP
By: /s/ Hugh S. Smith, Jr.
---------------------------------------------------------------------
Name: Hugh S. Smith, Jr.
Title: Chairman
CALIFORNIA COMMERCIAL BANKSHARES
By: /s/ Mark H. Stuenkel
---------------------------------------------------------------------
Name: Mark H. Stuenkel
Title: Executive Vice President
C-42
<PAGE>
APPENDIX D
[OPINION OF RP FINANCIAL, LC.]
May 12, 1997
Board of Directors
Monarch Bancorp
30000 Town Center Drive
Laguna Niguel, California 92677
Gentlemen:
You have requested RP Financial, LC. ("RP Financial") to provide you with
our opinion as to the fairness from a financial point of view to the existing
stockholders of Monarch Bancorp, Laguna Niguel, California, a California
corporation ("Monarch" or the "Company") of the Conversion Number described in
the Agreement and Plan of Merger (the "Merger Agreement"), dated December 19,
1996, by and between the Company and California Commercial Bankshares, Newport
Beach, California ("CCB"), a California corporation.
SUMMARY DESCRIPTION OF THE MERGER
The Merger Agreement is incorporated herein by reference. Unless otherwise
defined, all capitalized terms incorporated herein have the meanings ascribed to
them in the Merger Agreement. At the Effective Time of the Merger, (a) CCB will
merge with and into the Company; and, (b) each outstanding share of CCB Common
Stock, no par value, other than shares which have not been voted in favor of the
approval of the Merger and shares owned by Monarch, will be converted into the
right to receive one (1) share of Monarch Common Stock, no par value, after
giving effect to the 1:8.5 reverse stock split, all on, and subject to, the
terms and conditions contained in the Merger Agreement. The number of shares of
Monarch Common Stock to be issued for each share of CCB Common Stock, after
giving effect to the reverse stock split, is hereinafter referred to as the
"Conversion Number."
RP FINANCIAL BACKGROUND AND EXPERIENCE
RP Financial, as part of its financial institution valuation and consulting
practice, is regularly engaged in the valuation of financial institution
securities in connection with mergers and acquisitions of commercial banks and
savings institutions, initial and secondary offerings, and business valuations
for other corporate purposes for financial institutions. As specialists in the
securities of financial institutions, RP Financial has experience in, and
knowledge of, the capital markets for bank securities in the U.S., California
and, more specifically, Southern California. RP Financial is knowledgeable
regarding market conditions for "pink sheet" stocks of financial institutions.
In addition, RP Financial served as financial advisor to the Company in
conjunction with the Company's acquisition of Western Bank in 1996.
MATERIALS REVIEWED AND ANALYSES PERFORMED
RP Financial reviewed and analyzed the following material in conjunction
with its analysis of the Conversion Number as described in the Merger Agreement:
(1) the Amended and Restated Agreement and Plan of Merger, dated December 19,
1996, including exhibits (collectively, the "Merger Agreement") and the Joint
Proxy Statement-Prospectus dated May 12, 1997; (2) the following information for
CCB - (a) audited financial statements for the fiscal years ended December 31,
1994 through December 31, 1996, incorporated in Annual Reports to shareholders
or Form 10-Ks, shareholder and internal reports,
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RP FINANCIAL, LC.
BOARD OF DIRECTORS
MAY 12, 1997
PAGE 2
quarterly financial statements for the quarters ended March 31, 1996, June 30,
1996 and September 30, 1996 incorporated in Form 10-Qs and recent developments
through March 31, 1997 as disclosed in the Joint Proxy Statement--Prospectus;
(b) the Private Placement Memorandum for CCB dated September 28, 1995; (c) proxy
statements for the last two years, and (d) unaudited internal and regulatory
financial reports and analyses prepared by management of CCB regarding various
aspects of CCB's assets and liabilities, particularly rates, volumes,
maturities, market values, trends, credit risk, interest rate risk and liquidity
risk of assets, liabilities, off-balance sheet assets, commitments and
contingencies of CCB; and (3) the following information for the Company - (a)
audited financial statements for the fiscal years ended December 31, 1993
through December 31, 1996, incorporated in Annual Reports to shareholders or
Form 10-Ks; (b) recent developments as disclosed in the Joint Proxy
Statement--Prospectus and pro forma impact of the proposed acquistion of SC
Bancorp by the Company pursuant to the SC Bancorp Merger Agreement, dated April
29, 1997; (c) the Private Placement Memorandum for the Company dated May 6,
1996, prepared in conjunction with the Company's acquisition of Western Bank;
(d) proxy statements for the last two years, and (e) unaudited internal and
regulatory financial reports and analyses prepared by management of the Company
regarding various aspects of the Company's assets and liabilities, particularly
rates, volumes, maturities, market values, trends, credit risk, interest rate
risk and liquidity risk of assets, liabilities, off-balance sheet assets,
commitments and contingencies of the Company.
In its review of the Company, RP Financial reviewed the trading activity of
the Common Stock of the Company, and compared it to similar information for
commercial banking entities with comparable resources, financial condition,
earnings, operations and markets as the Company as well as for more widely
publicly-traded banks and bank holding companies ("BHCs") with comparable
financial condition, earnings, operations and markets. In the course of its
evaluation and analyses, RP Financial conducted discussions with management of
the Company and its advisors regarding past and current business operations,
financial condition, and future prospects. In its review of CCB, RP Financial
reviewed CCB's financial, operational and market area characteristics compared
to similar information for comparable banks and BHCs, evaluated the potential
for growth and profitability for CCB in its market, specifically regarding
competition by other banks, thrifts, mortgage banking companies and other
financial services companies, economic projections in the local market area, the
impact of the regulatory, legislative and economic environments on operations
and the public perception of the banking industry particularly in California. In
the course of its evaluation and analyses, RP Financial conducted discussions
with management of CCB regarding past and current business operations, financial
condition, and future prospects.
In the course of its review and analysis, RP Financial evaluated the pro
forma impact on the Company's financial condition and operations of the Merger,
including, but not limited to: the potential operating efficiencies and earnings
improvements available to the Company as a result of the Merger; the potential
dilutive impact on the current Monarch shareholders of the issuance of shares of
Monarch Common Stock and options in conjunction with the Merger; and the future
prospects for the Company on a post-Merger basis. In addition, RP Financial
reviewed the internal financial forecasts and budgets prepared by the
managements of the Company and CCB including, for the Company, financial
forecasts based on the stand-alone business plan and financial forecasts
assuming the successful completion of the Merger. RP Financial also considered
the potential impact of the proposed SC Bancorp acquisition to its analysis,
evaluating those components of the proposed SC Bancorp acquisition that could
reasonably affect the fairness conclusion.
RP Financial's analyses included, for purposes of evaluating the Conversion
Number, (a) an evaluation of the pricing ratios and financial terms, financial
condition, and operating condition of other recent business combinations among
comparable banks and BHCs in the Western United States and California,
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RP FINANCIAL, LC.
BOARD OF DIRECTORS
MAY 12, 1997
PAGE 3
as well as comparable banks throughout the United States on a historical basis;
(b) an impact analysis that quantifies the anticipated impact on the current
stockholders of the Company of the Merger in such relevant pro forma financial
measures such as tangible book value per share, book value per share, and
earnings per share, and (c) a discounted cash flow analysis comparing the
shareholder impact of the stand-alone business plan for the Company to the
merger business plan for the Company. In addition, RP Financial reviewed several
other considerations including the greater market capitalization of the merged
Company relative to the Company on a stand-alone basis, suggesting the potential
for greater liquidity in the shares of the common stock of the Company; the
likelihood that the merged company would be attractive to a greater number of
institutional and other investors by virtue of its greater asset size and market
capitalization relative to the Company on a stand-alone basis; and, the
potential benefits of combining two banking companies with adjacent market
areas, particularly in terms of greater economies of scale, market presence and
the complementary branch structure. The results of these analyses were evaluated
as a whole, with the aggregate results indicating a range of financial
parameters utilized to assess the Conversion Number as described in the Merger
Agreement.
In rendering our opinion, RP Financial relied, without independent
verification, on the accuracy and completeness of the information concerning the
Company and CCB furnished to us for review for purposes of this opinion, as well
as publicly-available information regarding other financial institutions and
economic data. To the best of our knowledge, except for the fee we will receive
from the Company for providing advisory services, RP Financial is independent of
the Company, CCB, and the other parties involved with the Merger. Neither the
Company nor CCB has restricted RP Financial as to the material it was permitted
to review. RP Financial has not performed or obtained any independent appraisals
or evaluations of the assets and liabilities and potential and/or contingent
liabilities of the Company or CCB. RP Financial expresses no opinion on matters
of a legal, accounting or tax nature or the ability of the Merger to be
consummated as set forth in the Merger Agreement.
OPINION
It is understood that this letter is directed to the Board of Directors of
the Company in its consideration of the Merger Agreement, and does not
constitute a recommendation to any shareholder of the Company as to any action
that such shareholder should take in connection with the Merger Agreement, or
otherwise.
It is understood that this opinion is based on market conditions and other
circumstances existing on the date hereof.
It is understood that this opinion may be included in its entirety in any
communciation by the Company or its Board of Directors to the stockholders of
the Company. It is also understood that this opinion may be included in its
entirety in any regulatory filing by the Company. Except as described above,
this opinion may not be summarized, excerpted from or otherwise publicly
referred to without our prior written consent.
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<PAGE>
RP FINANCIAL, LC.
BOARD OF DIRECTORS
MAY 12, 1997
PAGE 4
Based upon and subject to the foregoing, and other such matters as we
consider relevant, it is RP Financial's opinion that, as of the date hereof, the
Conversion Number as described in the Merger Agreement, is fair to the existing
stockholders of the Company from a financial point of view.
Respectfully submitted,
RP FINANCIAL, LC.
D-4
<PAGE>
APPENDIX E
[OPINION OF THE FINDLEY GROUP]
May 12, 1997
The Board of Directors
California Commercial Bankshares
4100 Newport Place, Suite 900
Newport Beach, California 92660
Attn: William H. Jacoby, President
Gentlemen:
You have requested that we update our opinion of December 19, 1996 as to the
fairness, from a financial point of view, to the common shareholders of
California Commercial Bankshares (the "Company") of the Merger Consideration
Ratio as defined in the Agreement and Plan of Merger, dated as of December 19,
1996 (the "Merger Agreement"), by and among the Company and Monarch Bancorp
("Monarch"). The Merger Agreement provides for the merger of the Company with
and into Monarch (the "Merger"). In addition, Monarch Bank, the Company's wholly
owned subsidiary ("Bank") shall be merged with and into National Bank of
Southern California, the Company's wholly owned subsidiary ("NBSC"). In
connection with the Merger, each outstanding share of common stock no par value,
of the Company (the "Company Common Stock"), except as otherwise set forth in
the Merger Agreement, will be exchanged for shares of Monarch common stock, no
par value, equal to the quotient obtained by dividing (i) 1.6 times the Company
Per Share Book Value by, (ii) the Monarch Per Share Book Value as of December
31, 1996 (the "Conversion Ratio"). Since the issuance of the December 19, 1996
opinion as to fairness, the Specific Conversion Ratio of 8.5 was determined by
the parties which is better than the Assumed Conversion Ratio of 8.17 used in
connection with the issuance of the December 19, 1996 opinion. In addition,
Monarch is proceeding on a reverse stock split of 1 share for 8.5 shares so that
the Company shareholders will receive one share of Monarch common stock for each
share of the Company common stock after the reverse stock split. All capitalized
terms used but not defined in this letter, shall have the meanings specified in
the Merger Agreement.
Please be advised that while certain provisions of the Merger are summarized
above, the terms of the Merger are more fully described in the Merger Agreement.
As a result, the description of the Merger and certain other information
contained herein is qualified in its entirety by reference to the more detailed
information appearing or incorporated by reference in the Merger Agreement.
In updating our opinion, we have reviewed (i) the December 19, 1996 opinion
of The Findley Group, (ii) the Merger Agreement; (iii) the private placement
memorandum of Monarch for 1995 and the 1997 proxy statement/prospectus relating
to the annual meeting to be held in connection with the Merger Agreement (the
"Proxy Statement"); (iv) the audited annual financial statements of Monarch and
the Company for the five years ended December 31, 1996 (v) the annual financial
statement of Monarch on Form 10-KSBA and the Company on Form 10-K, as amended by
its Form 10-KA for December 31, 1996 and the quarterly unaudited financial
statements of Monarch on Form 10-QSB and the Company on Form 10-Q for the period
ended September 30, 1996, and certain unaudited financial analyses and
projections of the Company; (vi) Monarch's Form 8-Ks for 1996; (vii) the
December 31, 1996 Call Reports for NBSC, Bank and Monarch's other banking
subsidiary, Western Bank ("Western"); (viii) current and historical
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<PAGE>
Board of Directors -2- May 12, 1997
market prices of the common stock of Monarch and the Company; (ix) certain
publicly available information concerning the business of Monarch and the
Company and of certain other companies engaged in businesses comparable to
Monarch and the Company, and the reported prices for certain other companies'
securities deemed comparable; (x) publicly available terms of certain
transactions involving companies comparable to the Company and the consideration
received for such companies; (xi) certain internal financial analyses and
forecasts prepared by the Company and its management; (xii) the terms of other
relevant business combinations; (xiii) such other financial studies, analyses
and other information we deemed appropriate for the purposes of this opinion;
and (xiv) examinations of various regulatory agencies for Monarch, the Company
and their respective subsidiaries.
On April 29, 1997 Monarch entered into an Agreement and Plan of
Reorganization with SC Bancorp concerning the merger of SC Bancorp with and into
Monarch (the "SC Bancorp Merger"). We have not reviewed any of the terms or
conditions of the SC Bancorp Merger nor have we considered the impact of the SC
Bancorp Merger on the Merger or Conversion Ratio.
In addition, we have held discussions with certain members of the management
of the Company and Monarch with respect to certain aspects of the Merger; the
past and current business operations of the Company, Monarch and their
respective subsidiaries; the financial condition, regulatory condition, and
future prospects and operations of the Company and Monarch; and certain other
matters we believed necessary or appropriate to our inquiry.
In performing such analysis, we have used such valuation methodologies as we
have deemed necessary or appropriate for the purposes of this opinion. Our view
is based on (i) our consideration of the information the Company and Monarch
have supplied to us to date, (ii) our understanding of the terms upon which the
Company and Monarch intend to consummate the Merger, and (iii) the consummation
of the Merger within the time periods contemplated by the Merger Agreement.
In rendering our opinion, we have relied upon and assumed, without assuming
any responsibility or liability for independent verification, the accuracy and
completeness of all information that was publicly available or was furnished to
us by the Company or Monarch or otherwise reviewed by The Findley Group, and we
have not assumed any responsibility or liability therefor. We have not conducted
any valuation or appraisal of any assets or liabilities, nor have any such
valuations or appraisals been provided to us. In relying on financial analyses
provided to us by the Company and Monarch, we have assumed that they have been
reasonably prepared based on assumptions reflecting the best currently available
estimates and judgments by management as to the expected future results of
operations and financial condition of the Company and Monarch, including,
without limitation, projections regarding underperforming and nonperforming
assets and net charge-offs to which such analyses or forecasts relate. We are
not experts in the evaluation of allowances for loan losses and we have not
assumed any responsibility for making an independent evaluation of the adequacy
of the allowance for loan losses of the Company or Monarch nor have we reviewed
any of the credit files. We have also assumed that the Merger will have the tax
consequences described in the Merger Agreement and in discussions with, and
materials furnished to us by, representatives of Monarch and the Company.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
It should be understood that subsequent developments may affect this opinion and
that we do not have any obligation to update, revise, or reaffirm this opinion.
We have acted as investment banker and financial advisor to the Company with
respect to the proposed Merger and will receive a fee from the Company for our
services. Please be advised that we have no other current financial advisory or
other relationships with the Company or Monarch except that Gary Steven Findley
& Associates, which is an affiliated company to The Findley Group, has provided
ongoing
E-2
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Board of Directors -3- May 12, 1997
consulting/legal services to the Company. Principals of The Findley Group and
Gary Steven Findley & Associates do not have beneficial ownership in the Company
common stock and also have no beneficial ownership in Monarch common stock.
Our opinion is directed to the Board of Directors of the Company and does
not constitute a recommendation to any shareholder of the Company as to how such
shareholder should vote at any meeting of the Company held in connection with
the Merger or as to any other action which such shareholders may take.
This opinion may not be disclosed, referred to, or communicated by you (in
whole or in part) to any third party for any purpose whatsoever except with our
prior written consent in each instance. This opinion may be reproduced in full
in any proxy or information statement mailed to common shareholders of the
Company but may not otherwise be disclosed publicly in any manner without our
prior written approval and must be treated as confidential.
On the basis of and subject to the foregoing, it is our opinion as of the
date hereof that the Conversion Ratio is fair, from a financial point of view,
to the common shareholders of the Company.
Very truly yours,
THE FINDLEY GROUP
By: /s/ GARY STEVEN FINDLEY
------------------------------------------
Gary Steven Findley
DIRECTOR
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APPENDIX F
CORPORATIONS CODE
TITLE 1. CORPORATIONS
DIVISION 1. GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
Section 1300. Reorganization or short-form merger; dissenting shares;
corporate purchase at fair market value.
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split, or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of Governors
of the Federal Reserve System, and the notice of meeting of shareholders to
act upon the reorganization summarizes this Section and Sections 1301, 1302,
1303 and 1304; provided, however, that this provision does not apply to any
shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of shares described
in subparagraph (A) or (B) if demands for payment are filed with respect to
5 percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
Section 1301. Notice to holders of dissenting shares in reorganizations;
demand for purchase; contents of demand
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
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of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
Section 1302. Submission of share certificates for endorsement;
uncertificated securities
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
Section 1303. Payment of agreed price with interest; agreement fixing fair
market value; filing; time of payment
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
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Section 1304. Action to determine whether shares are dissenting shares or
fair market value limitation; joinder; consolidation; determination of issues;
appointment of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
Section 1305. Report of appraisers; confirmation; determination by court;
judgment payment; appeal; costs
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
Section 1306. Prevention of immediate payment; status as creditors; interest
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
F-3
<PAGE>
Section 1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
Section 1308. Rights of dissenting shareholders pending valuation;
withdrawal of demand for payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
Section 1309. Termination of dissenting share and shareholder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
Section 1310. Suspension of right to compensation or valuation proceedings;
litigation of shareholders' approval
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
Section 1311. Exempt shares
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
Section 1312. Right of dissenting shareholders to attach, set aside or
rescind merger or reorganization; restraining order or injunction; conditions
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal
F-4
<PAGE>
terms of the reorganization are approved pursuant to subdivision (b) of Section
1202, is entitled to payment in accordance with the terms and provisions of the
approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
F-5
<PAGE>
PROXY CALIFORNIA COMMERCIAL BANKSHARES
4100 Newport Place
Newport Beach, California 92660
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR ANNUAL MEETING OF
SHAREHOLDERS JUNE 2, 1997
The undersigned hereby constitutes and appoints William H. Jacoby and Robert
L. McKay, or either of them, with full power of substitution, attorneys and
proxies of the undersigned, to represent the undersigned and vote all shares of
the common stock of California Commercial Bankshares ("CCB") which the
undersigned would be entitled to vote if personally present at CCB's Annual
Meeting of Shareholders to be held at 4100 Newport Place, Suite 370, Newport
Beach, California 92660 on June 2, 1997 at 10:00 a.m. and at any postponement or
adjournment thereof, in the following manner:
1. APPROVAL OF THE PRINCIPAL TERMS OF THE
MERGER / / FOR / / AGAINST / / ABSTAIN
<TABLE>
<S> <C> <C> <C>
2. ELECTION OF DIRECTORS / / FOR all nominees listed below / / WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees listed below
</TABLE>
P. Bush, M. Gertner, J. Hamilton, F. Hinkle, W. Jacoby, R. McKay, M. Stuenkel
(INSTRUCTION: To withhold authority to vote for any individual nominee write
that nominee's name below)
________________________________________
(CONTINUED ON REVERSE SIDE)
<PAGE>
WHEN THIS PROXY IS PROPERLY EXECUTED AND RETURNED, THE SHARES IT REPRESENTS
WILL BE VOTED AT THE MEETING IN ACCORDANCE WITH THE CHOICES SPECIFIED ABOVE. IF
NO CHOICES ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR PROPOSALS ONE AND TWO AND
IN ACCORDANCE WITH THE BEST JUDGMENT OF THE DESIGNATED INDIVIDUALS WITH RESPECT
TO MATTERS INCIDENT TO THE CONDUCT OF THE MEETING AND ANY OTHER MATTERS WHICH
MAY PROPERLY COME BEFORE THE MEETING. IF ANY OF THE NOMINEES FOR DIRECTOR IS
UNABLE TO SERVE OR FOR GOOD CAUSE WILL NOT SERVE, THE PROXY HOLDER WILL VOTE FOR
SUCH OTHER PERSON OR PERSONS AS THE BOARD OF DIRECTORS MAY RECOMMEND. Further,
if cumulative voting rights for the election of directors are exercised, the
Proxies, unless otherwise instructed, will cumulatively vote their shares as
provided in the Proxy Statement.
Please date and sign exactly as your name or names appear hereon. If more
than one owner, all should sign. When signing as attorney, executor,
administrator, trustee or guardian, give your full title as such. If the
signatory is a corporation or partnership, sign the full corporate or
partnership name by a duly authorized officer or partner.
Dated: _____________________, 1997
__________________________________
Signature
__________________________________
Signature
__________________________________
Type or Print
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND RETURN THIS PROXY USING THE ENCLOSED
ENVELOPE
<PAGE>
PROXY MONARCH BANCORP
30000 Town Center Drive
Laguna Niguel, California 92677
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR ANNUAL MEETING OF
SHAREHOLDERS JUNE 2, 1997
The undersigned hereby constitutes and appoints Hugh S. Smith, Jr. and
Arnold C. Hahn or either of them, with full power of substitution, attorneys and
proxies of the undersigned, to represent the undersigned and vote all shares of
the common stock of Monarch Bancorp ("Monarch") which the undersigned would be
entitled to vote if personally present at Monarch's Annual Meeting of
Shareholders to be held at the South Coast Medical Center, 31872 Pacific Coast
Highway, Laguna Beach, California 92677 on June 2, 1997 at 10:00 a.m. and at any
postponement or adjournment thereof, in the following manner:
<TABLE>
<S> <C> <C> <C>
1. APPROVAL OF THE PRINCIPAL TERMS OF THE MERGER
/ / FOR / / AGAINST / / ABSTAIN
2. APPROVAL OF AN AMENDMENT TO MONARCH'S AMENDED ARTICLES OF INCORPORATION TO CHANGE MONARCH'S NAME TO "WESTERN
BANCORP"
/ / FOR / / AGAINST / / ABSTAIN
3. APPROVAL OF AN AMENDMENT TO MONARCH'S AMENDED ARTICLES OF INCORPORATION TO EFFECT THE REVERSE STOCK SPLIT
/ / FOR / / AGAINST / / ABSTAIN
4. ELECTION OF DIRECTORS / / FOR all nominees listed below / / WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees listed
below
</TABLE>
Rice E. Brown, Joseph J. Digange, John W. Rose, Hugh S. Smith, Jr., Mathew P.
Wagner, Dale E. Walter and John M. Eggemeyer
(INSTRUCTION: To withhold authority to vote for any individual nominee write
that nominee's name below)
________________________________________
(CONTINUED ON REVERSE SIDE)
<PAGE>
WHEN THIS PROXY IS PROPERLY EXECUTED AND RETURNED, THE SHARES IT REPRESENTS
WILL BE VOTED AT THE MEETING IN ACCORDANCE WITH THE CHOICES SPECIFIED ABOVE. IF
NO CHOICES ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR PROPOSALS ONE, TWO, THREE
AND FOUR AND IN ACCORDANCE WITH THE BEST JUDGMENT OF THE DESIGNATED INDIVIDUALS
WITH RESPECT TO MATTERS INCIDENT TO THE CONDUCT OF THE MEETING AND ANY OTHER
MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING. IF ANY OF THE NOMINEES FOR
DIRECTOR IS UNABLE TO SERVE OR FOR GOOD CAUSE WILL NOT SERVE, THE PROXY HOLDER
WILL VOTE FOR SUCH OTHER PERSON OR PERSONS AS THE BOARD OF DIRECTORS MAY
RECOMMEND. Further, if cumulative voting rights for the election of directors
are exercised, the Proxies, unless otherwise instructed, will cumulatively vote
their shares as provided in the Proxy Statement.
Please date and sign exactly as your name or names appear hereon. If more
than one owner, all should sign. When signing as attorney, executor,
administrator, trustee or guardian, give your full title as such. If the
signatory is a corporation or partnership, sign the full corporate or
partnership name by a duly authorized officer or partner.
Dated: ____________________ , 1997
__________________________________
Signature
__________________________________
Signature
__________________________________
Type or Print Name
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND RETURN THIS PROXY USING THE ENCLOSED
ENVELOPE
<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317 of the CGCL authorizes a court to award, or a corporation's
Board of Directors to grant, indemnity to directors, officers and employees in
terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act. Articles Five and Six of Monarch's Amended
Articles of Incorporation (Exhibit 3.3) and Article VI of Monarch's By-Laws
(Exhibit 3.2) currently provide, and its Restated Articles of Incorporation
(Exhibit 3.6) will provide, for indemnification of its directors, officers,
employees and other agents to the fullest extent permitted by the CGCL.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of December 19, 1996, between Monarch and
CCB (Appendix A to this Registration Statement on Form S-4 incorporated by reference)
2.2 Agreement and Plan of Merger, dated as of March 15, 1997, between Monarch Bank and NBSC
3.1 Articles of Incorporation of Monarch (Exhibit 3.11 of Registration Statement No. 2-84426 incorporated by
reference)
3.2 Bylaws of Monarch (Exhibit 3.2 of Registration Statement No. 2-84426 incorporated by reference)
3.3 Amended Articles of Incorporation of Monarch 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 of Monarch 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 of Monarch approved on February 29, 1996 (Exhibit 3.5 of 12/31/95 Annual Report on Form
10-KSB incorporated by reference)
3.6 Form of the Restated Articles of Incorporation of Monarch
4.1 Form of Certificate representing shares of Monarch Common Stock
4.2 Convertible subordinated note issued in September 1998 (Exhibit 4.2 of 12/31/89 Annual Report on Form
10-K incorporated by reference)
5.1 Opinion and Consent of Sullivan & Cromwell
8.1 Tax Opinion of Sullivan & Cromwell
8.2 Tax Opinion of O'Melveny & Myers LLP
9.1 Shareholder Agreement, dated as of December 19, 1996, by and between Farrell G. Hinkle and Monarch
Bancorp. (Exhibit 9.1 of 12/31/95 Annual Report on Form 10-KSB incorporated by reference)
9.2 Shareholder Agreement, dated as of December 19, 1996, by and between Phillip L. Bush and Monarch
Bancorp. (Exhibit 9.2 of 12/31/95 Annual Report on Form 10-KSB incorporated by reference)
</TABLE>
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
9.3 Shareholder Agreement, dated as of December 19, 1996, by and between Michael Gertner and Monarch
Bancorp. (Exhibit 9.3 of 12/31/95 Annual Report on Form 10-KSB incorporated by reference)
9.4 Shareholder Agreement, dated as of December 19, 1996, by and between James W. Hamilton and Monarch
Bancorp. (Exhibit 9.4 of 12/31/95 Annual Report on Form 10-KSB incorporated by reference)
9.5 Shareholder Agreement, dated as of December 19, 1996, by and between William H. Jacoby and Monarch
Bancorp. (Exhibit 9.5 of 12/31/95 Annual Report on Form 10-KSB incorporated by reference)
9.6 Shareholder Agreement, dated as of December 19, 1996, by and between Robert L. McKay and Monarch
Bancorp. (Exhibit 9.6 of 12/31/95 Annual Report on Form 10-KSB incorporated by reference)
9.7 Shareholder Agreement, dated as of December 19, 1996, by and between Mark H. Stuenkel and Monarch
Bancorp. (Exhibit 9.7 of 12/31/95 Annual Report on Form 10-KSB incorporated by reference)
10.0 Monarch Bancorp 1983 Stock Option Plan; Form Incentive Stock Option Agreement and Form Nonstatutory
Stock Option Agreement. (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-KSB incorporated by reference)
10.8 General Release of Claims and Agreement, dated February 1, 1997, among E. Lynn Caswell, Monarch and
Monarch Bank. (Exhibit 10.8 of 12/31/96 Annual Report on Form 10-KSB)
10.9 1993 Stock Option Plan as Amended May 15, 1996. (Exhibit 10.9 of 12/31/96 Annual Report on Form 10-KSB)
10.10 Stock Option Agreement, dated December 19, 1996, between Monarch and CCB (Exhibit 4.6 of 12/31/97 Annual
Report on Form 10KSB incorporated by reference)
10.11 Agreement and Plan of Merger, dated as of April 29, 1997, between Monarch and SC Bancorp (Exhibit 99.1
of Monarch's Schedule 13D, dated May 9, 1997 incorporated by reference)
10.12 Stock Option Agreement, dated as of April 29, 1997, between Monarch and SC Bancorp (Exhibit 99.2 of
Monarch's Schedule 13D, dated May 9, 1997 incorporated by reference)
</TABLE>
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
11.1 Computation of Per Share Earnings and Common Stock Equivalents (see "Consolidated Statements of Income"
contained in Item 7 of Monarch's 12/31/96 Annual Report on Form 10-KSB)
22.1 Subsidiaries of Monarch
22.2 Subsidiaries of CCB
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Sullivan & Cromwell (included in opinion filed as Exhibits 5.1)
23.4 Consent of O'Melveny & Myers LLP
23.5 Consent of Dayton & Associates
23.6 Consent of Sullivan & Cromwell
23.7 Consent of RP Financial (included in opinion incorporated by reference from Appendix D to this
Registration Statement)
23.8 Consent of The Findly Group (included in opinion incorporated by reference from Appendix E to this
Registration Statement)
24.1 Powers of Attorney (included in signature page)
27. Financial Data Schedule
99.1 Consent of Robert L. McKay
99.2 Consent of William H. Jacoby
99.3 Consent of Mark H. Stuenkel
</TABLE>
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Laguna Niguel, State of
California on May 12, 1997.
MONARCH BANCORP
By: /s/ HUGH S. SMITH, JR.
-----------------------------------------
Name: Hugh S. Smith, Jr.
Title: Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Hugh S. Smith, Jr. and Arnold C. Hahn, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed on May 12, 1997,
by the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
<CAPTION>
/s/ HUGH S. SMITH, JR.
------------------------------------------- Chairman, Chief Executive Officer and Director
Hugh S. Smith, Jr.
<C> <S>
/s/ ARNOLD C. HAHN
------------------------------------------- Executive Vice President, Chief Financial Officer and
Arnold C. Hahn Secretary
/s/ MATTHEW P. WAGNER
------------------------------------------- President and Director
Matthew P. Wagner
/s/ RICE E. BROWN
------------------------------------------- Director
Rice E. Brown
/s/ JOSEPH J. DIGANGE
------------------------------------------- Director
Joseph J. Digange
/s/ JOHN M. EGGEMEYER
------------------------------------------- Director
John M. Eggemeyer
/s/ JOHN W. ROSE
------------------------------------------- Director
John W. Rose
/s/ DALE E. WALTER
------------------------------------------- Director
Dale E. Walter
</TABLE>
II-4
<PAGE>
EXECUTION COPY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF THE 15TH DAY OF MARCH 1997
BY AND BETWEEN
MONARCH BANK
AND
NATIONAL BANK OF SOUTHERN CALIFORNIA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
RECITALS
ARTICLE I. THE MERGER
SECTION 1.1. Structure of the Merger....................................... 2
SECTION 1.2. Effect on Outstanding Shares.................................. 3
SECTION 1.3. Assumption of Liabilities..................................... 3
SECTION 1.4. Capital Structure of Surviving
Association................................................... 3
ARTICLE II. CONDUCT PENDING THE MERGER
SECTION 2.1. Conduct Pending the Merger.................................... 4
ARTICLE III. REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties
of NBSC ...................................................... 4
SECTION 3.2. Representations and Warranties
of Monarch ................................................... 4
ARTICLE IV. COVENANTS
SECTION 4.1. Certain Filings, Consents and
Arrangements.................................................. 4
SECTION 4.2. Additional Agreements......................................... 4
SECTION 4.3. Tax-Free Reorganization Treatment............................. 5
SECTION 4.4. Directors; Resignations....................................... 5
ARTICLE V. CONDITIONS TO CONSUMMATION
SECTION 5.1. Conditions to All Parties'
Obligations .................................................. 5
ARTICLE VI. TERMINATION
SECTION 6.1. Termination................................................... 5
SECTION 6.2. Effect of Termination......................................... 6
ARTICLE VII. EFFECTIVE DATE AND EFFECTIVE TIME
SECTION 7.1. Effective Date and Effective Time............................. 6
-i-
<PAGE>
Page
----
ARTICLE VIII. OTHER MATTERS
SECTION 8.1. Survival...................................................... 6
SECTION 8.2. Waiver........................................................ 6
SECTION 8.3. Counterparts.................................................. 7
SECTION 8.4. Governing Law................................................. 7
SECTION 8.5. WAIVER OF JURY TRIAL.......................................... 7
SECTION 8.6. Expenses...................................................... 7
SECTION 8.7. Notices....................................................... 7
SECTION 8.8. Entire Agreement; Etc......................................... 8
SECTION 8.9. Assignment.................................................... 8
-ii-
<PAGE>
INDEX OF DEFINED TERMS
Page
----
CCB.......................................................................... 1
Code......................................................................... 2
Effective Date............................................................... 6
Effective Time............................................................... 6
MB........................................................................... 1
Merger....................................................................... 2
Monarch...................................................................... 1
Monarch Common Stock......................................................... 1
Monarch Rights............................................................... 1
NBSC......................................................................... 1
NBSC Common Stock............................................................ 1
Parent Merger................................................................ 2
Parent Plan.................................................................. 2
Person....................................................................... 1
Plan......................................................................... 1
Surviving Association........................................................ 2
U.S. Banking Law............................................................. 2
-iii-
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of the 15th day of March, 1997
(this "Plan"), by and between Monarch Bank, a California banking corporation
("Monarch"), and National Bank of Southern California, a national banking
association ("NBSC").
RECITALS:
A. MONARCH. Monarch is a banking corporation duly incorporated,
validly existing and in good standing under the laws of the State of California,
with its principal executive offices located in Laguna Niguel, California. As
of the date hereof, Monarch has (i) 1,000,000 authorized shares of common stock,
no par value ("Monarch Common Stock"), of which no more than 391,743 shares were
outstanding as of the date hereof and (ii) no other class of capital stock
authorized. All of the outstanding shares of capital stock of Monarch are owned
by Monarch Bancorp, a California corporation ("MBC").
B. MONARCH RIGHTS, ETC. Monarch does not have any shares of its
capital stock reserved for issuance, any outstanding option, call or commitment
relating to shares of its capital stock or any outstanding securities,
obligations or agreements convertible into or exchangeable for, or giving any
individual, corporation, partnership, association, trust or unincorporated
organization (hereinafter "Person") any right (including, without limitation,
preemptive rights) to subscribe for or acquire from it, any shares of its
capital stock.
C. NBSC. NBSC is a national banking association duly incorporated,
validly existing and in good standing under the laws of the United States of
America, with its principal executive offices located in Newport Beach,
California. As of the date hereof, NBSC has (i) 562,500 authorized shares of
common stock, $5.00 par value ("NBSC Common Stock"), of which no more than
450,000 shares were outstanding as of the date hereof and (ii) no other class of
capital stock authorized. All of the outstanding shares of capital stock of
NBSC are owned by California Commercial Bankshares, a California corporation
("CCB").
D. NBSC RIGHTS, ETC. NBSC does not have any shares of its capital
stock reserved for issuance, any outstanding option, call or commitment relating
to shares of its capital stock or any outstanding securities, obligations or
agreements convertible into or exchangeable for, or giving any Person any right
(including, without limitation,
<PAGE>
preemptive rights) to subscribe for or acquire from it, any shares of its
capital stock.
E. APPROVALS. The respective Boards of Directors have, or will have
prior to the Effective Time, duly approved this Plan and have, or will have
prior to the Effective Time, duly authorized its execution and delivery, and the
sole shareholder of Monarch and the sole shareholder of NBSC have, or will have
prior to the Effective Time, approved the terms of this Plan. Accordingly, no
dissenters' rights will be exercised by the sole shareholder of either Monarch
or NBSC.
F. INTENTION OF THE PARTIES. It is the intention of the parties to
this Plan that (a) the consummation of the Merger (as hereinafter defined) is
conditioned upon and will occur concurrently with or immediately after the
merger of CCB with and into MBC pursuant to the Agreement and Plan of Merger,
dated as of December 19, 1996 (the "Parent Plan"), between MBC and CCB (the
"Parent Merger") and (b) the Merger for federal income tax purposes shall
qualify as a "reorganization" within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code").
G. CAPITAL AND SURPLUS. Monarch has capital surplus of $4,255,000 and
undivided profits, including capital reserves, of $(590,000) as of December 31,
1996. NBSC has capital surplus of $12,551,000 and undivided profits, including
capital reserves, of $11,502,000 as of December 31, 1996.
In consideration of their mutual promises and obligations hereunder,
the parties hereto adopt and make this Plan and prescribe the terms and
conditions hereof and the manner and basis of carrying it into effect, which
shall be as follows:
ARTICLE I. THE MERGER
SECTION 1.1. STRUCTURE OF THE MERGER. On the Effective Date (as
defined in Section 7.1 hereof), Monarch will merge (the "Merger") with and into
NBSC, with NBSC being the surviving association (the "Surviving Association"),
pursuant to the provisions of, and with the effect provided in, the California
Financial Code and General Corporation Law and the National Bank Act (the "U.S.
Banking Law"). The corporate existence of Monarch and NBSC shall be merged into
and continued in the Surviving Association and the Surviving Association shall
be deemed to be the same corporation as Monarch and NBSC. All rights,
franchises,
-2-
<PAGE>
and interests of Monarch and NBSC in and to every type of property (real,
personal or mixed) and choses in action shall be transferred to and vested in
the Surviving Association by virtue of the Merger and without any deed or other
transfer. The Surviving Association, upon the Merger, and without any order or
other action on the part of any court or otherwise, shall hold and enjoy all
rights of property, franchises and interests in any fiduciary capacity, in the
same manner and to the same extent as such rights, franchises and interests were
held or enjoyed by Monarch or NBSC at the time of the Merger. At the Effective
Time (as defined in Section 7.1 hereof), the articles of association,
organization certificate, bylaws, charter and certificate of authority to
commence banking of the Surviving Association shall be the articles of
association, organization certificate, bylaws, charter and certificate of
authority to commence banking of NBSC immediately prior to the Effective Time.
SECTION 1.2. EFFECT ON OUTSTANDING SHARES. (a) By virtue of the
Merger, automatically and without any action on the part of the holder thereof,
every nine shares of Monarch Common Stock issued and outstanding at the
Effective Time shall become and be converted, automatically and without any
action on the part of the holder thereof, into one share of NBSC Common Stock
with no consideration being issued in lieu of fractional shares.
(b) At the Effective Time, the issued and outstanding shares of NBSC
Common Stock, including shares issued pursuant to Section 1.2(a) hereof, shall
constitute all of the issued and outstanding shares of capital stock of the
Surviving Association.
SECTION 1.3. ASSUMPTION OF LIABILITIES. The Surviving Association
shall be responsible for all of the liabilities of every kind and description,
including liabilities arising from the operation of a trust department, of both
Monarch and NBSC existing as of the Effective Time.
SECTION 1.4. CAPITAL STRUCTURE OF SURVIVING ASSOCIATION. The amount
of capital of the Surviving Association shall be $5,051,000 divided into 493,527
shares of common stock, each of $5.00 par value, and at the Effective Time, the
Surviving Association shall have a surplus of $16,806,000 and undivided profits
of $10,912,000, including capital reserves, which will be equal to the combined
capital structures of Monarch and NBSC set forth in the Recitals, adjusted,
however, for normal earnings and expenses between December 31, 1996 and the
Effective Time.
-3-
<PAGE>
ARTICLE II. CONDUCT PENDING THE MERGER
SECTION 2.1. CONDUCT PENDING THE MERGER. Except as expressly
provided in this Plan or in the Parent Plan, during the period from the date of
this Plan to the Effective Time, each of Monarch and NBSC shall comply with the
provisions of Article II of the Parent Plan, which Article is incorporated
herein by this reference, to the extent applicable.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
SECTION 3.1. REPRESENTATIONS AND WARRANTIES OF NBSC. NBSC represents
and warrants to Monarch that the Recitals of this Plan with respect to NBSC are
true and correct.
SECTION 3.2. REPRESENTATIONS AND WARRANTIES OF MONARCH. Monarch
represents and warrants to NBSC that the Recitals of this Plan with respect to
Monarch are true and correct.
ARTICLE IV. COVENANTS
SECTION 4.1. CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS. Monarch and
NBSC shall (a) as soon as practicable make any filings and applications required
to be filed in order to obtain all approvals, consents and waivers of
governmental authorities necessary or appropriate for the consummation of the
transactions contemplated hereby and use their reasonable best efforts to cause
the applications for the approvals described in Section 5.1(b) of the Parent
Plan to be initially filed on or before March 31, 1997; (b) cooperate with one
another (i) in promptly determining what filings are required to be made or
approvals, consents or waivers are required to be obtained under any relevant
federal, state or foreign law or regulation and (ii) in promptly making any such
filings, furnishing information required in connection therewith and seeking
timely to obtain any such approvals, consents or waivers; and (c) deliver to the
other copies of the publicly available portions of all such filings and
applications promptly after they are filed.
SECTION 4.2. ADDITIONAL AGREEMENTS. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use its
reasonable best efforts to take promptly, or cause to be taken promptly, all
actions
-4-
<PAGE>
and to do promptly, or cause to be done promptly, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Plan as soon as practicable,
including using efforts to obtain all necessary actions or non-actions,
extensions, waivers, consents and approvals from all applicable governmental
entities, effecting all necessary registrations, applications and filings
(including, without limitation, filings under any applicable state securities
laws) and obtaining any required contractual consents and regulatory approvals.
SECTION 4.3. TAX-FREE REORGANIZATION TREATMENT. Neither Monarch nor
NBSC shall take or cause to be taken any action, whether before or after the
Effective Time, which would disqualify the Merger as a "reorganization" within
the meaning of Section 368 of the Code.
SECTION 4.4. DIRECTORS; RESIGNATIONS. The parties agree that the
directors of NBSC immediately prior to the Effective Time shall continue to be
the directors of the Surviving Association at and after the Effective Time.
Monarch shall cause to be delivered to NBSC at the Effective Time the
resignations of the members of its Board of Directors.
ARTICLE V. CONDITIONS TO CONSUMMATION
SECTION 5.1. CONDITIONS TO ALL PARTIES' OBLIGATIONS. The respective
obligations of Monarch and NBSC to effect the Merger shall be subject to the
satisfaction or waiver prior to the Effective Time of the condition that all
conditions contained in Article V of the Parent Plan have been satisfied or
waived, which Article V is incorporated herein by this reference, and that the
Parent Merger shall have been consummated.
ARTICLE VI. TERMINATION
SECTION 6.1. TERMINATION. This Plan shall terminate, and the Merger
shall be abandoned, prior to the Effective Date, upon the termination of the
Parent Plan pursuant to Article VI thereof. This Plan may be terminated, and
the Merger abandoned, prior to the Effective Date, by Monarch or NBSC, upon
written notice to the other party, if either (i) any approval, consent or waiver
of a governmental
-5-
<PAGE>
authority required to permit consummation of the Merger or any transaction
necessary to consummate the Merger shall have been denied or (ii) any
governmental authority of competent jurisdiction shall have issued a final,
unappealable order enjoining or otherwise prohibiting consummation of the Merger
or any transaction necessary to consummate the Merger.
SECTION 6.2. EFFECT OF TERMINATION. In the event of the termination
of this Plan as provided above, this Plan shall thereafter become void and,
subject to the provisions of Section 8.1 hereof, there shall be no liability on
the part of any party hereto or their respective officers or directors, except
that any such termination shall be without prejudice to the rights of any party
hereto arising out of the willful breach by any other party of any covenant or
willful misrepresentation contained in this Plan or the Parent Plan.
ARTICLE VII. EFFECTIVE DATE AND EFFECTIVE TIME
SECTION 7.1. EFFECTIVE DATE AND EFFECTIVE TIME. Upon the
satisfaction or waiver of all conditions to the consummation of the Merger, all
documents required to effect the Merger shall be executed in accordance with all
appropriate legal requirements and shall be filed as required by law, and the
Merger provided for herein shall become effective upon such filing. The date of
such filing is herein called the "Effective Date." The "Effective Time" of the
Merger shall be the time of such filing.
ARTICLE VIII. OTHER MATTERS
SECTION 8.1. SURVIVAL. Only those agreements and covenants of the
parties that are by their terms applicable in whole or in part after the
Effective Time shall survive the Effective Time. All other representations,
warranties, agreements and covenants shall be deemed to be conditions of the
Plan and shall not survive the Effective Time. If the Plan shall be terminated,
the agreements of the parties in Section 6.2, this Section 8.1, Section 8.5 and
Section 8.6 hereof shall survive such termination.
SECTION 8.2. WAIVER. Prior to the Effective Time, any provision of
this Plan may be: (i) waived by the party benefitted by the provision; or
(ii) amended or modified at any time (including the structure of the
transaction) by an agreement in writing between the parties hereto approved by
their respective Boards of Directors.
SECTION 8.3. COUNTERPARTS. This Plan may be executed in
counterparts, each of which shall be deemed to
-6-
<PAGE>
constitute an original, but all of which together shall constitute one and the
same instrument.
SECTION 8.4. GOVERNING LAW. This Plan shall be governed by, and
interpreted in accordance with, the laws of the State of California, and to the
extent applicable, federal law.
SECTION 8.5. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS PLAN OR THE TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 8.6. EXPENSES. Each party hereto will bear all expenses
incurred by it in connection with this Plan and the transactions contemplated
hereby.
SECTION 8.7. NOTICES. All notices, requests, acknowledgments and
other communications hereunder to a party shall be in writing and shall be
deemed to have been duly given when delivered by hand, telecopy, telegram or
telex (confirmed in writing) to such party at its address set forth below or
such other address as such party may specify by notice to the other party
hereto.
If to NBSC, to:
National Bank of Southern California
4100 Newport Place
Newport Beach, CA 92660
Telecopier: (714) 863-2336
Attention: Mark H. Stuenkel
With copies to:
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, CA 90071
Telecopier: (213) 669-6407
Attention: Frances E. Lossing
And
The Findley Group
1470 North Hundley Street
Anaheim, CA 92806-1322
Telecopier: (714) 630-7910
Attention: Gary Steven Findley
-7-
<PAGE>
If to Monarch, to:
Monarch Bank
1251 Westwood Blvd.
Los Angeles, CA 90024
Telecopier: (310) 477-8611
Attention: Arnold C. Hahn
With copies to:
Sullivan & Cromwell
444 South Flower Street
Los Angeles, California 90071
Telecopier: (212) 683-0458
Attention: Stanley F. Farrar
SECTION 8.8. ENTIRE AGREEMENT; ETC. This Plan represents the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written agreements
heretofore made. All terms and provisions of this Plan shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns. Nothing in this Plan is intended to confer upon any
other Person any rights or remedies of any nature whatsoever under or by reason
of this Plan.
SECTION 8.9. ASSIGNMENT. This Plan may not be assigned by any party
hereto without the written consent of the other parties.
IN WITNESS WHEREOF, the parties hereto have caused this Plan to be
executed by their duly authorized officers as of the day and year first above
written.
MONARCH BANK
By: /s/ Matthew P. Wagner
------------------------------
Name: Matthew P. Wagner
Title: Chief Executive Officer
NATIONAL BANK OF SOUTHERN CALIFORNIA
By: /s/ William H. Jacoby
------------------------------
Name: William H. Jacoby
Title: Chairman
-8-
<PAGE>
By: /s/ Mark H. Stuenkel
------------------------------
Name: Mark H. Stuenkel
Title: President
-9-
<PAGE>
The Directors of Monarch Bank, by signing below, acknowledge that they
have approved the foregoing Merger Agreement and the transactions contemplated
thereby.
By: /s/ Raymond B. Cox
------------------------------
Name: Raymond B. Cox
Title: Director
By: /s/ Alfred H. Jannard
------------------------------
Name: Alfred H. Jannard
Title: Director
By: /s/ Cheryl Moore
------------------------------
Name: Cheryl Moore
Title: Director
By: /s/ David C. Wooten
------------------------------
Name: David C. Wooten
Title: Director
By: /s/ Henry E. Schielein
------------------------------
Name: Henry E. Schielein
Title: Director
By: /s/ Rice E. Brown
------------------------------
Name: Rice E. Brown
Title: Director
By: /s/ Margaret A. Redmond
------------------------------
Name: Margaret A. Redmond
Title: Director
By: /s/ John W. Rose
------------------------------
Name: John W. Rose
Title: Director
By: /s/ Hugh S. Smith, Jr.
------------------------------
Name: Hugh S. Smith, Jr.
Title: Director
-10-
<PAGE>
The Directors of National Bank of Southern California, by signing
below, acknowledge that they have approved the foregoing Merger Agreement and
the transactions contemplated thereby.
By: /s/ William H. Jacoby
------------------------------
Name: William H. Jacoby
Title: Director
By: /s/ Mark H. Stuenkel
------------------------------
Name: Mark H. Stuenkel
Title: Director
By: /s/ Michael Gertner
------------------------------
Name: Michael Gertner
Title: Director
By: /s/ Farrell G. Hinkle
------------------------------
Name: Farrell G. Hinkle
Title: Director
By: /s/ Robert L. McKay
------------------------------
Name: Robert L. McKay
Title: Director
By: /s/ Phillip L. Bush
------------------------------
Name: Phillip L. Bush
Title: Director
By: /s/ James W. Hamilton
------------------------------
Name: James W. Hamilton
Title: Director
-11-
<PAGE>
FORM OF RESTATED ARTICLES OF INCORPORATION
OF
MONARCH BANCORP
Matthew P. Wagner and Arnold C. Hahn hereby certify that:
1. They are the President and Secretary,
respectively, of Monarch Bancorp, a California Corporation.
2. The articles of incorporation of Monarch Bancorp, as amended to
the date of the filing of this certificate, including amendments set forth
herein but not separately filed (and with the omissions required by Section
910 of the California Corporations Code) are restated as follows:
ARTICLE ONE. The name of the Corporation shall be:
WESTERN 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. (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 authorized to be issued is One Hundred Million
(100,000,000). Upon the restatement of this article to read as set
forth herein, each 8.5 outstanding shares of Common Stock are
converted into 1.0 share of Common Stock.
(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
<PAGE>
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.
ARTICLE 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.
ARTICLE 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 California Corporations Code, subject to the limits on
such excess indemnification set forth in Section 204 of the
California Corporations Code.
3. The foregoing amendment and restatement of the Articles of
Incorporation has been duly approved by the Board of Directors.
4. The foregoing amendment and restatement of Articles of
Incorporation has been duly approved by the required vote of shareholders in
accordance with Section 902 of the California Corporations Code. The total
number of outstanding shares of the Corporation is 4,043,885, after giving
effect to the reverse stock split provided for herein. The number of shares
voting in favor of the amendment equaled or exceeded the vote required. The
percentage vote required was more than 50%.
-2-
<PAGE>
We further declare under penalty of perjury under the law of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: ___, 1997
------------------------------
Matthew P. Wagner
President
------------------------------
Arnold C. Hahn
Secretary
-3-
<PAGE>
EXHIBIT 4.1
[LOGO]
MONARCH BANCORP
INCORPORATED UNDER THE LAWS
OF THE STATE OF CALIFORNIA SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 609022 20 7
This Certifies that
is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK, NO PAR VALUE, OF
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
CERTIFICATE OF STOCK
Dated: ________________
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION CHAIRMAN OF THE BOARD
(GLENDALE, CA)
TRANSFER AGENT AND REGISTRAR
[SEAL]
By
Authorized Signature
Secretary
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ...............Custodian...............
TEN ENT -- as tenants by the entireties (cust) (MINOR)
JT TEN -- as joint tenants with right of Under Uniform Gift to Minors
survivorship and not as tenants Act ...............................
in common. (State)
UNIF TRF MIN ACT -- ...............Custodian (until age....)
(cust)
.............under Uniformed Transforms
(Minor)
To Minors Act..........................
(State)
</TABLE>
ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN THE ABOVE LIST.
FOR VALUE RECEIVED, ________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
of the common stock represented by the within Certificate and do hereby
irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------------------
X
---------------------------------
X
---------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed
By
-----------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF SULLIVAN & CROMWELL]
May 12, 1997
Monarch Bancorp,
30000 Town Center Drive,
Laguna Niguel, California 92677.
Dear Sirs:
In connection with the registration under the Securities Act of 1933
(the "Act") of 3,187,476 shares (the "Securities") of Common Stock, without par
value, of Monarch Bancorp, a California corporation (the "Company"), we, as your
special counsel, have examined such corporate records, certificates and other
documents, and such questions of law, as we have considered necessary or
appropriate for the purposes of this opinion. Upon the basis of such
examination, we advise you that, in our opinion, when the registration statement
relating to the Securities (the "Registration Statement") has become effective
under the Act, the terms of the sale of the Securities have been duly
established in conformity with the Company's articles of
<PAGE>
Monarch Bancorp
-2-
incorporation, the Securities have been duly issued and sold as contemplated by
the Registration Statement and upon consummation of the merger of California
Commercial Bankshares with and into the Company, the Securities will be validly
issued, fully paid and nonassessable.
The foregoing opinion is limited to the Federal laws of the United
States, and the laws of the State of California, and we are expressing no
opinion as to the effect of the laws of any other jurisdiction.
We have relied as to certain matters on information obtained from
public officials, officers of the Company and other sources believed by us to be
responsible.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Validity of
Monarch Common Stock" in the Prospectus. In giving such consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Act.
Very truly yours,
/s/ Sullivan & Cromwell
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF SULLIVAN & CROMWELL]
January 17, 1997
Monarch Bancorp,
1251 Westwood Blvd.,
Los Angeles, California 90024.
Gentlemen:
We have acted as counsel to Monarch Bancorp, a California corporation
("Monarch"), in connection with the merger of California Commercial Bankshares
(the "Company") with and into Monarch as contemplated by the Agreement and Plan
of Merger dated as of the 19th day of December, 1996, by and between Monarch and
the Company (the "Merger Agreement"), and we render this opinion to you pursuant
to Section 5.1(g) of the Merger Agreement. Capitalized terms not defined herein
have the meanings assigned to them in the Merger Agreement.
For purposes of the opinion set forth below, we have relied, with your
consent, upon the accuracy and completeness of (i) the representations and other
statements of fact set forth in the Merger Agreement and (ii) the letters of
representation and certificates dated January 17, 1997, that we have received
from Monarch, the Company,
<PAGE>
Monarch Bancorp
-2-
Robert McKay and William Jacoby. With your consent, we have not attempted to
verify independently the accuracy of any information in these documents and have
assumed that the statements and representations contained therein will be true
from the date of this opinion through the Effective Time. In addition, in
connection with this opinion we have assumed, with your consent, that (i) the
Merger will be effected in accordance with the Merger Agreement, (ii) all the
provisions of the Merger Agreement will be performed in accordance with their
terms and (iii) no persons other than those listed as 5% shareholders in the
representation letter we have received from the Company own 5% or more of the
Company Common Stock.
On the basis of the foregoing, and our consideration of such other
matters of law and fact as we have considered necessary or appropriate, we
advise you that, in our opinion, the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code and Monarch and the Company
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
The tax consequences described above may not apply to Company
shareholders that acquired shares upon the exercise of employee stock options or
otherwise as compensation, that hold their shares as part of a "straddle"
<PAGE>
Monarch Bancorp
-3-
or "conversion transaction" or that are insurance companies, securities dealers,
financial institutions or foreign persons.
Very truly yours,
/s/ Sullivan & Cromwell
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF O'MELVENY & MYERS]
January
17th
1 9 9 7
613,388-006
LA3-768163
(213) 669-6467
California Commercial Bankshares
41000 Newport Place
Newport Beach, California 92660
Re: Proposed Merger of California Commercial
Bankshares With and Into Monarch Bancorp
----------------------------------------
Dear Sir or Madam:
We have acted as counsel for California Commercial Bankshares, a
California corporation ("CCB"), in connection with the proposed merger of CCB
with and into Monarch Bancorp, a California corporation ("Monarch") (the
"Merger"), pursuant to an Agreement and Plan of Merger dated as of December
19, 1996, (the "Merger Agreement"), between Monarch and CCB under which each
outstanding share of common stock of CCB (other than (i) dissenting shares,
(ii) fractional interests (for which cash will be paid) and (iii) any shares
owned by Monarch or any wholly owned subsidiary of Monarch (other than shares
in trust accounts, managed accounts and the like that are beneficially owned
by third parties), which will be cancelled) will be converted (pursuant to
the conversion ratio set forth in the Merger Agreement) into common stock of
Monarch.
In that connection, you have requested our opinion regarding the
qualification of the Merger as a reorganization within the meaning of the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"). In
providing our opinion, we have examined the Merger Agreement and such other
documents and corporate records as we have deemed necessary or appropriate for
<PAGE>
Page 2 - California Commercial Bankshares - January 17, 1997
purposes of our opinion, and in addition with your consent have relied
(without any independent investigation on our part) on the statements and
representations contained in the Certificates of CCB, Monarch, Robert L.
McKay, and William H. Jacoby, each dated January 17, 1997, and delivered to
us for purposes of this opinion.
Based upon the foregoing, it is our opinion that, if the Merger
Agreement is carried out in accordance with its terms, the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code,
and Monarch and CCB will each be a party to that reorganization within the
meaning of Section 368(b) of the Code.
This opinion is based on current authorities and upon facts and
assumptions as of the date of this opinion. It is subject to change in the
event of a change in the applicable law or change in the interpretation of
such law by the courts or by the Internal Revenue Service, or a change prior
to the effective time of the Merger of any of the facts and assumptions upon
which it is based. There is no assurance that legislative or administrative
changes or court decisions may not be forthcoming which would significantly
modify the statements and opinions expressed herein. Any such changes may or
may not be retroactive with respect to transactions prior to the date of such
changes. This opinion represents only counsel's best legal judgment, and has
no binding effect or official status of any kind, so that no assurance can be
given that the positions set forth above will be sustained by a court, if
contested. No ruling will be obtained from the Internal Revenue Service with
respect to the Merger.
Respectfully submitted,
/s/ O'MELVENY & MYERS
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF MONARCH BANCORP
1. WESTERN BANK
2. MONARCH BANK
<PAGE>
EXHIBIT 22.2
SUBSIDIARIES OF CALIFORNIA COMMERCIAL BANKSHARES
1. NATIONAL BANK OF SOUTHERN CALIFORNIA
2. VENTURE PARTNERS
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
Monarch Bancorp:
We consent to the use of our report dated February 24, 1997, incorporated herein
by reference, on the consolidated financial statements of Monarch Bancorp and
subsidiaries as of and for the year ended December 31, 1996, and to the
reference to our firm under the heading "Experts" in the Joint Proxy Statement.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
May 9, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Monarch Bancorp on
Form S-4 of our Report on the consolidated financial statements of California
Commercial Bankshares and subsidiary, dated January 24, 1997 (March 17, 1997
as to Notes 7 and 13), incorporated by reference in the Joint Proxy Statement
- - Prospectus, which is part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Joint Proxy Statement -
Prospectus.
/s/ Deloitte & Touche
Los Angeles, California
May 12, 1997
<PAGE>
Exhibit 23.4
CONSENT OF O'MELVENY & MYERS
The Board of Directors of
California Commercial Bankshares
We consent to the filing of our tax opinion dated January 17, 1997 and
this consent as exhibits to the Registration Statement and to the reference
to us under the headings "SUMMARY--Certain Tax Consequences," "THE
MERGER--Certain Federal Income Tax Consequences," "SUMMARY--Conditions to the
Merger" and "THE MERGER AGREEMENT--Conditions" in the Prospectus.
/s/ O'Melveny & Myers
Los Angeles, California
May 12, 1997
<PAGE>
EXHIBIT 23.5
[LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent, as successor accountants of Dayton & Associates (said firm
being merged with and into Vavrinek, Trine, Day & Co. on September 1, 1996) to
the inclusion of their Independent Auditor's Report dated February 29, 1996
regarding the consolidated balance sheets of Monarch Bancorp and Subsidiaries as
of December 31, 1995 and December 31, 1994, and the related statements of
operations, changes in capital, and cash flows for each of the two years in the
period ended December 31, 1995, and the reference to our firm as "experts", in
the Form 10-KSB filed with the Securities and Exchange Commission and the
reference to our firm as "experts" in the Form S-4 filed with the Securities and
Exchange Commission.
/s/ VAVRINEK, TRINE, DAY & CO.
May 9, 1997
Laguna Hills, California
<PAGE>
[LETTERHEAD]
Exhibit 23.6
May 12, 1997
We hereby consent to the filing of our opinion, dated January 17, 1997,
addressed to Monarch Bancorp as an exhibit to the Registration Statement,
dated the date hereof (the "Registration Statement"), and the reference to us
under the headings "SUMMARY -- Certain Tax Consequences," "THE MERGER --
Certain Tax Consequences," "SUMMARY -- Conditions to the Merger" and "THE
MERGER AGREEMENT -- Conditions" in the Prospectus included in the
Registration Statement. In giving such consent, we do not hereby admit that
we are in the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended.
/s/ Sullivan & Cromwell
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 37,385
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,217
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 157,454
<INVESTMENTS-CARRYING> 7,270
<INVESTMENTS-MARKET> 7,245
<LOANS> 260,116
<ALLOWANCE> 5,393
<TOTAL-ASSETS> 512,361
<DEPOSITS> 442,984
<SHORT-TERM> 11,000
<LIABILITIES-OTHER> 4,249
<LONG-TERM> 0
0
0
<COMMON> 58,713
<OTHER-SE> (4,585)
<TOTAL-LIABILITIES-AND-EQUITY> 512,361
<INTEREST-LOAN> 8,207
<INTEREST-INVEST> 3,683
<INTEREST-OTHER> 607
<INTEREST-TOTAL> 12,497
<INTEREST-DEPOSIT> 3,761
<INTEREST-EXPENSE> 3,952
<INTEREST-INCOME-NET> 8,545
<LOAN-LOSSES> 228
<SECURITIES-GAINS> 267
<EXPENSE-OTHER> 8,602
<INCOME-PRETAX> 738
<INCOME-PRE-EXTRAORDINARY> 738
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 738
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
<YIELD-ACTUAL> 7.93
<LOANS-NON> 9,315
<LOANS-PAST> 0
<LOANS-TROUBLED> 3,870
<LOANS-PROBLEM> 9,574
<ALLOWANCE-OPEN> 854
<CHARGE-OFFS> 868
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 5,393
<ALLOWANCE-DOMESTIC> 5,393
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
May 9, 1997
Board of Directors
Monarch Bancorp
30000 Town Center Drive
Laguna Niguel, California 92677
Ladies and Gentlemen:
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named as a person who will become a
director of Monarch Bancorp, a California corporation (the "Company"), in the
Company's Registration Statement on Form S-4 filed with the Securities and
Exchange Commission (the "Registration Statement"), and to the filing of this
consent as an exhibit to such Registration Statement.
Very truly yours,
/s/ Robert L. McKay
-----------------------------------
Robert L. McKay
<PAGE>
May 9, 1997
Board of Directors
Monarch Bancorp
30000 Town Center Drive
Laguna Niguel, California 92677
Ladies and Gentlemen:
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named as a person who will become a
director of Monarch Bancorp, a California corporation (the "Company"), in the
Company's Registration Statement on Form S-4 filed with the Securities and
Exchange Commission (the "Registration Statement"), and to the filing of this
consent as an exhibit to such Registration Statement.
Very truly yours,
/s/ William H. Jacoby
-----------------------------------
William H. Jacoby
<PAGE>
May 9, 1997
Board of Directors
Monarch Bancorp
30000 Town Center Drive
Laguna Niguel, California 92677
Ladies and Gentlemen:
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named as a person who will become a
director of Monarch Bancorp, a California corporation (the "Company"), in the
Company's Registration Statement on Form S-4 filed with the Securities and
Exchange Commission (the "Registration Statement"), and to the filing of this
consent as an exhibit to such Registration Statement.
Very truly yours,
/s/ Mark H. Stuenkel
-----------------------------------
Mark H. Stuenkel
