<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For transition period to
---------------- ----------------
Commission file number 0-13551
-------
MONARCH BANCORP
---------------
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-38663296
---------- -----------
(State of incorporation) (IRS Employer Identification No.)
30000 TOWN CENTER DRIVE, LAGUNA NIGUEL, CALIFORNIA 92677
--------------------------------------------------------
(Address of principal executive officers)
(714) 495 3300
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of May 14, 1997: 34,373,021
----------
<PAGE>
INDEX
PART I --FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) Page
Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income for the three
months ended March 31, 1997 and March 31, 1996 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and March 31, 1996 5
Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Operations 9
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Change in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
<PAGE>
PART 1 ITEM 1
FINANCIAL STATEMENTS
MONARCH BANCORP
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000's omitted, except share data)
<TABLE>
<CAPTION>
ASSETS 31-MAR-97 31-DEC-96
- --------------------------------------------------- ---------- ----------
<S> <C> <C>
Cash and due from banks $ 35,763 $ 37,385
Federal funds sold 17,618 4,217
--------- ---------
Total cash and cash equivalents 53,381 41,602
Investment securities
Held to maturity (Fair value of $6,909 and 6,928 7,270
$7,245 at 3/31/97 and 12/31/96, respectively)
Available for sale, at fair value 134,807 157,454
Loans, net 245,331 254,723
Premises and equipment 5,748 5,780
Other real estate owned 7,121 3,889
Goodwill 28,843 29,342
Other assets 11,883 12,301
--------- ---------
TOTAL ASSETS $ 494,042 $ 512,361
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------
Deposits $ 427,837 $ 442,984
Other borrowings 8,000 11,000
Accrued interest payable and other liabilities 3,573 4,249
--------- ---------
TOTAL LIABILITIES 439,410 458,233
Common stock, no par value,
authorized 100,000,000 shares and
34,373,021 outstanding 58,709 58,709
Accumulated deficit (3,823) (4,716)
Unrealized gain on investment
securities available for sale, net of taxes (254) 135
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 54,632 54,128
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 494,042 $ 512,361
--------- ---------
--------- ---------
</TABLE>
(See accompanying notes)
3
<PAGE>
MONARCH BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(000's omitted, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
--------------------------------
31-MAR-97 31-MAR-96
--------------- -----------
<S> <C> <C>
INTEREST AND LOAN FEE INCOME:
Investment securities $ 2,269 $ 403
Federal funds sold 81 71
Loans and leases 6,090 786
-------- ------
TOTAL INTEREST INCOME 8,440 1,260
INTEREST EXPENSE:
Deposits 2,336 325
Notes payable and other borrowings 233 -
-------- ------
TOTAL INTEREST EXPENSE 2,569 325
-------- ------
NET INTEREST INCOME 5,871 935
Less: provision for loan losses 225 50
-------- ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,646 885
NON-INTEREST INCOME
Service charges on deposits accounts 346 131
Other service charge and fee income 144 12
Data processing income 39 14
Rental income - 17
Gains on sale of securities available for sale 107 -
Other income 44 8
-------- ------
TOTAL NON-INTEREST INCOME 680 182
NON-INTEREST EXPENSE
Salaries and benefits 2,199 425
Occupancy 502 158
Advertising and business development 110 32
Other real estate owned (21) 6
Professional services 480 150
Telephone, stationery and supplies 192 48
Data processing 159 -
Goodwill amortization 499 -
Other 325 109
-------- ------
TOTAL NON-INTEREST EXPENSE 4,445 928
-------- ------
Income before provision for taxes 1,881 139
Provision for taxes 988 60
-------- ------
NET INCOME $ 893 $ 79
-------- ------
-------- ------
PER SHARE INFORMATION
Number of common shares and equivalents (weighted average) 35,514.4 8,228.4
Income per share (dollars) $ 0.03 $ 0.01
</TABLE>
(See accompanying notes)
4
<PAGE>
MONARCH BANCORP
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000's omitted)
<TABLE>
<CAPTION>
FOR THREE MONTH PERIOD ENDED
----------------------------
31-MAR-97 31-MAR-96
--------- ---------
<S> <C> <C>
Cash flow from operating activities
Net income $ 893 $ 79
Adjustments to reconcile net income
to net cash provided by operating activities:
Gain on sale of securities available for sale (107) -
Provision for loan losses 225 50
Goodwill amortization 499 -
Depreciation 142 44
Net increase (decrease) in accrued interest
payable and other liabilities (676) 80
Net (increase) decrease in other assets 418 (158)
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 1,394 95
Cash flow from investing activities:
Proceeds from sale of investment securities available for sale 6,075 -
Principal payments received on investment securities 16,632 5,209
Purchase of investment securities - (784)
(Increase) decrease in net loans 5,935 (854)
Additions to premises and equipment (110) (110)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 28,532 3,461
Cash flow from financing activities:
Net increase (decrease) in deposits (15,147) 3,552
Repayment of debt (3,000) -
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES (18,147) 3,552
-------- --------
Net increase in cash and cash equivalents 11,779 7,108
Cash and cash equivalents at the beginning of the period 41,602 7,685
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 53,381 $ 14,793
-------- --------
-------- --------
Supplemental disclosure of cash flow information
Property acquired through foreclosure 3,566 186
-------- --------
-------- --------
Repayment of KSOP debt - 11
-------- --------
-------- --------
Loans to facilitate - -
-------- --------
-------- --------
Increase (decrease) of unrealized gain on investment
securities available for sale, net of tax (389) (19)
-------- --------
-------- --------
Cash paid for interest 2,607 365
-------- --------
-------- --------
Cash paid for taxes - -
-------- --------
-------- --------
</TABLE>
(See accompanying notes)
5
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. Monarch Bancorp (the "Company") is the holding company for Monarch Bank
("Monarch") and Western Bank ("Western"). The unaudited consolidated financial
statements of the Company and subsidiaries included herein reflect all
adjustments, consisting only of normal recurring adjustments, which are in the
opinion of management necessary to present a fair statement of the results for
the interim periods indicated. Certain reclassifications have been made to the
consolidated financial statements for 1996 to conform to the 1997 presentation.
Certain information and note disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. The results of operations for the
three months ended March 31, 1997, are not necessarily indicative of the results
of operations to be expected for the remainder of the year.
On January 1, 1997, the Company adopted Statement of Financial Standards No. 125
("SFAS 125"), ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. The adoption of SFAS 125 has not had a material
impact on the Company's financial condition or results of operations. 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.
In February, 1997 the FASB issued the Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), EARNINGS PER SHARE. SFAS 128 simplifies the
method for the calculation of earnings per share (EPS) and requires the
presentation of basic as well as diluted EPS on the face of the income
statement. In addition, SFAS 128 will require a reconciliation between basic
and diluted EPS for both the numerator and denominator. This Statement is
effective for financial statements issued for periods ending after December 15,
1997 and will require restatement of all prior-period EPS data presented.
Management has not yet determined the impact of adopting SFAS 128.
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.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-KSBA for the year ended December 31, 1996.
6
<PAGE>
2. Completed Acquisitions
WESTERN BANK ACQUISITION: On September 30, 1996 the Company acquired, for cash,
all of the issued and outstanding shares of Western Bank, a state chartered bank
located in west Los Angeles. Western has five offices, including its head
office in Westwood. In connection with the acquisition Western began operating
as a wholly-owned subsidiary of the Company.
The acquisition of Western was accounted for under the purchase method of
accounting. As such, the results of operations for Western were included in the
Company's results of operations beginning October 1, 1996.
3. Pending Acquisitions
CALIFORNIA COMMERCIAL BANKSHARES ACQUISITION: On December 18, 1997, the Company
reached an agreement to merge with California Commercial Bancshares ("CCB"), a
bank holding company operating in Orange County, California. Pending regulatory
and shareholder approval, the merger is expected to be consummated by the end of
the second quarter of 1997 at an exchange ratio of 8.5 shares of common stock of
the Company for each share of common stock of CCB. The merger agreement calls
for the use of pooling-of-interests accounting. However, there are certain
events that may preclude the use of that accounting method. If that is the
case, the parties have the ability to waive the pooling-of-interests condition
and proceed with the acquisition using the purchase method of accounting.
SC BANCORP ACQUISITION: On April 29, 1997, the Company reached an agreement to
merge with SC Bancorp ("SCB"), a bank holding company operating in Orange County
and Los Angeles County, California. Pending regulatory and shareholder the
approval, the merger is expected to be consummated in the fourth quarter of
1997. The exchange ratio is based on a $14.25 price for SCB common stock
divided by the price of the Company's common stock in a range between $2.75 and
$3.75. At the date of the signing of the merger agreement, the closing price of
the Company's common stock was $3.62. This price would result in an exchange
ratio of 3.9365 of Company common stock for each share of SCB common stock. SCB
and the Company plan to use pooling-of-interests accounting for the merger.
The following tables show unaudited summary pro forma balance sheet information
for these pending acquisitions as of December 31, 1996 and March 31, 1997 and
unaudited summary pro forma income statement information for the quarters ended
March 31, 1997 and March 31, 1996. Pooling-of-interests accounting is used for
this pro forma information. The balance sheet adjustments shown below are
management's estimates for costs associated with these mergers.
7
<PAGE>
SUMMARY PRO FORMA BALANCE SHEET INFORMATION
(In thousands)
<TABLE>
<CAPTION>
As of March 31, 1997
-------------------------------------------------------------------
Adjust- Pro Forma
Monarch CCB SCB ments Combined
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Total assets 494,042 356,100 507,126 (1,089) 1,356,179
Securities 141,735 75,738 69,061 - 286,534
Loans, net 245,331 212,921 347,415 (3,712) 801,955
Deposits 427,837 324,845 448,618 - 1,201,300
Shareholders' equity 54,632 26,029 50,371 (10,659) 120,373
</TABLE>
<TABLE>
As of December 31, 1996
-------------------------------------------------------------------
Adjust- Pro Forma
Monarch CCB SCB ments Combined
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Total assets 512,361 351,464 476,013 (1,089) 1,338,749
Securities 164,724 91,504 76,590 - 332,818
Loans, net 254,723 204,650 342,228 (3,712) 797,889
Deposits 442,984 318,704 415,326 - 1,177,014
Shareholders' equity 54,128 25,000 49,919 (10,659) 118,388
</TABLE>
SUMMARY PRO FORMA INCOME STATEMENT INFORMATION
(In thousands except per share data)
<TABLE>
<CAPTION>
For the three month period ended March 31, 1997
-------------------------------------------------------------------
Adjust- Pro Forma
Monarch CCB SCB ments Combined
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net interest income and non-interest income 6,551 5,752 7,190 19,493
Provision for possible loan losses 225 150 350 725
Non-interest expense 4,445 4,037 4,879 13,361
Net income 893 938 1,145 2,976
Net income per share $ 0.03 $ 0.30 $ 0.15 $ 0.03
Weighted average shares 35,514 3,162 7,488 91,867
</TABLE>
<TABLE>
For the three month period ended March 31, 1996
-------------------------------------------------------------------
Adjust- Pro Forma
Monarch CCB SCB ments Combined
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net interest income and non-interest income 1,117 5,251 6,923 13,291
Provision for possible loan losses 50 300 280 630
Non-interest expense 928 4,167 5,324 10,419
Net income 79 470 763 1,312
Net income per share $ 0.01 $ 0.16 $ 0.10 $ 0.02
Weighted average shares 8,228 2,939 7,472 62,623
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
GENERAL
During the first quarter of 1997, the Company continued its efforts of
controlling costs and improving credit quality. Also, much effort has been and
is being focused on the integration of CCB into the Company.
The Company had a decline in both loans and deposits during the first quarter of
the year. However, the economy in Orange County and west Los Angeles is
improving and the Company is planning to take advantage of this market growth.
Despite the reductions in loans and deposits since December 31, 1996, the
acquisition of Western, focus on cost control, centralization and acquisition
integration has resulted in significant earnings improvements from the first
quarter of 1996 as the table below indicates:
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD
ENDED
--------------------------
31-MAR-97 31-MAR-96
----------- ---------
<S> <C> <C>
Income per share $ 0.03 $ 0.01
Income per share before goodwill amortization $ 0.04 $ 0.01
Return on average assets 0.73% 0.47%
Return on average equity 6.59% 2.89%
Return on average assets before goodwill amortization 1.21% 0.47%
Return on average equity before goodwill amortization 10.27% 2.89%
Efficiency ratio 69.0% 83.1%
Efficiency ratio before goodwill amortization 61.2% 83.1%
</TABLE>
The Southern California economy continues to reflect moderate but positive
improvements in local economic conditions. Among other trends with noticeable
improvement are increased employment. Recent state and county reports indicate
that job losses from a large reduction in aerospace and defense contracts, and
real estate investment in the area and the county during the recession of 1992
to early 1995 have been fully regained and that residential real estate values
have increased moderately.
9
<PAGE>
RESULTS OF OPERATIONS
The acquisition of Western occurred on September 30, 1996. As a result of the
use of purchase accounting, Western's operations are included in the results of
the quarter ended March 31, 1997, but are not part of the first quarter results
in 1996.
As of March 31, 1997, the Company had consolidated total assets, total deposits
and shareholders' equity of approximately $494.0 million, $427.8 million, and
$54.6 million, respectively versus $512.4 million, $443.0 million, and $54.1
million at December 31, 1996, respectively. For the three months ended March
31, 1997, the Company, on a consolidated basis, recorded net earnings of
approximately $893,000 versus approximately $79,000 for the three month period
ended March 31, 1996. Substantially all of the increase in net earnings assets
is the direct result of the Western acquisition and the equity issuance on
September 30, 1996.
Operating profits for the Company and the Bank are dependent on renewed loan
growth, controlling costs and continual efforts to prevent any unexpected loan
losses which would require additions to the ALL. Demand for quality loans has
increased in the Company's primary market areas, and the Company expects to take
advantage of this increased demand, while maintaining its conservative credit
standards. The Company's loan-to-deposit ratio, has declined slightly from
58.9% as of December 31, 1996 to 58.7% as of March 31, 1997.
NET INTEREST INCOME
The $4,936,000 increase in net interest income for the comparative three months
ended March 31, 1997 and 1996 is due primarily to increases in the volume of
earning assets as a result of the acquisition of Western. While the net
interest margin decreased from 6.13% to 5.78%, the net interest spread increased
slightly from 4.89% to 4.92%. This decline in net interest margin is a result
of the ratio of average earning assets to average interest bearing liabilities
declining from 1.58 to 1.34 from the three month period ended March 31, 1996 to
the three month period ended March 31, 1997.
The increase in interest income from the three month period ended March 31, 1996
to the three month period ended March 31, 1997 from approximately $1,260,000 to
$8,440,000 was due almost completely to the increase in average earning assets
from approximately $61.8 million to $412.2 million resulting from the Western
acquisition. For these three month periods the average yield on earning assets
increased slightly from 8.27% for the first quarter of 1996 to 8.30% for the
first quarter of 1997.
Interest expense increased from approximately $325,000 to $2,569,000 for the
three month periods ended March 31, 1996 and March 31, 1997, respectively.
This increase is due completely to the volume increase in average interest
bearing liabilities from approximately $39.0 million to $308.1 million as a
result of the Western acquisition. The average cost of funds remained
constant at 3.38%. The Company has a strong core deposit base, with 32.4% of
deposits in demand deposit accounts.
10
<PAGE>
PROVISION FOR LOAN LOSSES
During the three months ended March 31, 1997, approximately $481,000 in loans
were charged to the Company's Allowance for Loan Losses ("ALL") and
approximately $1,000 of loans were recovered. Because of the decline in loans
and the small improvement in coverage ratios, the Company provided only $225,000
for loan losses for the three month period ended March 31, 1997 (0.09% of
average gross loans) versus $50,000 for the three month period ended March 31,
1996 (0.15% of average gross loans). The ALL decreased from $5,393,000 or 2.07%
of gross loans as of December 31, 1996 to $5,138,000, or 2.04% of gross loans as
of March 31, 1997. The decrease in the allowance is consistent with the
decrease in the loan portfolio and the decline in nonperforming assets.
Management has concluded that the ALL is adequate based on all currently
available information.
NON-INTEREST INCOME
The following table shows the details of non-interest income (in thousands):
<TABLE>
<CAPTION>
1ST QUARTER 1997
-------------------------------
WESTERN MONARCH 1ST QTR
BANK BANK CONSOLIDATED 1996
------- ------- ------------ -------
<S> <C> <C> <C> <C>
Service charge on deposit accounts $ 186 $ 160 $ 346 $ 131
Other service charge and fee income 132 11 143 12
Data processing income - 39 39 14
Rental income - - - 17
Gains (losses) on securities 107 - 107 0
Other income 30 15 45 8
------ ------ ------ ------
Total non-interest income $ 455 $ 225 $ 680 $ 182
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Non-interest income increased by $498,000 for the three month period ended March
31, 1997 over the three month period ended March 31, 1996. $455,000 of this
increase was due to the acquisition of Western Bank which was not included in
the consolidated statement of income for the three month period ended March 31,
1996. Non-interest income at Monarch Bank increased by $43,000, or 23.6%, from
$182,000 to $225,000. Service charges on deposit accounts grew by $29,000, or
22.1% while average non-interest bearing deposits at Monarch Bank grew by 22.6%
over the same period. Data processing income at Monarch Bank grew by $25,000
due to the increase of back office services performed for another community
bank. Rental income decreased from $17,000 to $0 since Monarch Bank is no
longer obligated on the underlying lease.
Non-interest income at Western Bank was $455,000 for the three month period
ended March 31, 1997. $107,000 of this income was a gain on sale of securities
available for sale. These securities no longer met the investment strategy of
the Company. The remaining non-interest income of $348,000 was at expected
levels.
11
<PAGE>
NON INTEREST EXPENSE
The following table shows the details of non-interest expense (in thousands):
<TABLE>
<CAPTION>
1ST QUARTER 1997
-------------------------------------------------------
WESTERN MONARCH 1ST QTR
MBC BANK BANK CONSOLIDATED 1996
------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Salaries and benefits $ 149 $ 1,540 $ 510 $ 2,199 $ 425
Occupancy 5 325 172 502 158
Advertising and business development 5 74 31 110 32
Other real estate owned - (24) 3 (21) 6
Professional services 178 205 97 480 150
Telephone, stationary and supplies 6 98 88 192 48
Data processing - 159 - 159 0
Goodwill amortization - 499 - 499 0
Other 43 219 63 325 109
------ -------- ------ -------- -------
Total non-interest expense $ 386 $ 3,095 $ 964 $ 4,445 $ 928
------ -------- ------ -------- -------
------ -------- ------ -------- -------
</TABLE>
Non-interest expense grew during the comparative periods by approximately
$3,517,000. $3,095,000 of this increase is due to the acquisition of Western
Bank which was not included in the consolidated statement of income for the
three month period ended March 31, 1996. $386,000 of the increase is due to
new functions being performed at the parent company. For the three month
period ended March 31, 1997, expenses at the parent company included $149,000
for salaries and benefits of parent company personnel and $178,000 for
professional services, mostly associated with year end activities for the
Company.
Non-interest expense at Monarch Bank grew by $36,000, or 3.9%. The increases in
salary and benefits of $85,000 is a result of both the additional staff required
for the new branch in Laguna Beach, opened in June of 1996, and the additional
staff required to perform back office functions for another community bank. The
$40,000 increase in telephone, stationary and supplies is also a result of these
two events. The $53,000 decrease in professional services is due mostly to
certain functions now taking place at the parent versus at the bank level.
Approximately $48,000 of other expense for the period ended March 31, 1996 were
for parent company functions, versus $43,000 for the three month period ended
March 31, 1997.
Expenses at Western Bank were $3,095,000 for the three months ended March 31,
1997. Of this amount, $499,000 is for the amortization of goodwill associated
with the acquisition of Western Bank. Other expense levels at Western Bank are
at expected levels and are down from the comparable period in 1996.
12
<PAGE>
CREDIT QUALITY AND ANALYSIS
The Company defines nonperforming assets to include (i) loans on which it has
ceased to accrue interest ("Nonaccrual Loans"), (ii) foreclosed real estate
owned, and (iii) those loans whose terms have been modified such that the
interest rates charged to the borrowers have been reduced to levels below the
original contract rates and below market rates of interest at both the time of
modification and the reporting date ("Modified Loans").
Planned workout arrangements are currently in place for all nonperforming
assets, and, unless there are any unexpected changes in the financial condition
of the borrowers, management is not aware of any additional significant loss
potential that has not already been included in the Allowance for Loan Losses
("ALL").
The following table shows the historical trends in non performing assets at the
Company (In thousands):
<TABLE>
<CAPTION>
Monarch Bank Monarch & Western Banks
----------------------------------------------------- -------------------------------------
12/31/95 3/31/96 6/30/96 9/30/96 9/30/96 12/31/96 3/31/97
-------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming Loans $ 344 $ 177 $ 172 $ 532 $ 2,091 $ 9,315 $ 5,624
Other Real Estate Owned 150 335 337 338 5,409 3,889 7,121
------ ------ ------ ------ ------- -------- --------
Total Nonperforming Assets $ 494 $ 512 $ 509 $ 870 $ 7,500 $ 13,204 $ 12,745
------ ------ ------ ------ ------- -------- --------
------ ------ ------ ------ ------- -------- --------
</TABLE>
Comparative key credit statistics are shown in the following table (dollars in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
Past due 30 through 89 days and still accruing $ 2,349 $ 651
Past due 90 days or more and still accruing $ 472 $ -
Nonaccrual loans $ 5,624 $ 9,315
Other real estate owned 7,121 3,889
-------- --------
Nonperforming assets $ 12,745 $ 13,204
-------- --------
-------- --------
Impaired loans - gross $ 5,785 $ 9,574
Allocated reserves 350 541
-------- --------
Net investment in impaired loans $ 5,435 $ 9,033
-------- --------
-------- --------
Allowance for loan losses (ALL) $ 5,138 $ 5,393
Gross loans $251,340 $261,055
ALL to loans 2.04% 2.07%
ALL to nonaccrual loans 91.4% 57.9%
ALL to nonperforming assets 40.3% 40.8%
Nonperforming assets to loans and OREO 4.93% 4.98%
</TABLE>
13
<PAGE>
The Company has established a monitoring system for its loans in order to
identify impaired loans, potential problem loans and to permit periodic
evaluation of impairment and the adequacy of the allowance for loan losses in a
timely manner. The monitoring system and ALL methodology have evolved over a
period of years and loan classifications have been incorporated into the
determination of the ALL. This monitoring system and allowance methodology
include a loan-by-loan analysis for all Classified Loans as well as loss factors
for the balance of the portfolio that are based on migration analysis relative
to the unclassified portfolio. This analysis includes such factors as historical
loss experience, current portfolio delinquency and trends and other inherent
risk factors such as economic conditions, risk levels of particular loan
categories, internal loan review and oversight, concentrations in the portfolio
and changes in the quality of the lending staff of the Bank.
On March 31, 1997, the Company had approximately $5,785,000 of loans which
were considered to be impaired. This is a significant decrease from
$9,574,000 at December 31, 1996. This decrease is reflected in the increase
in OREO. There were allocated reserves of approximately $350,000 on these
loans at March 31, 1997. Of these loans, $5,624,000 are on nonaccrual status.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
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.
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers who may need assurance that
sufficient funds will be available to meet their credit needs. Interest rate
sensitivity management seeks to avoid fluctuating interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates.
Historically, the overall liquidity of the Company has been enhanced by a
significant aggregate amount of core deposits. The Company has not relied on
large denomination time deposits.
To meet short-term liquidity needs, the Company has maintained adequate balances
in federal funds sold, certificates of deposits with other financial
institutions and investment securities having maturities of five years or less.
Liquid assets (cash, federal funds sold and investment securities available for
sale) as a percent of total deposits are 44.0% and 44.9% as of March 31, 1997
and December 31, 1996, respectively.
14
<PAGE>
REGULATORY MATTERS
The Regulatory Capital Guidelines as well as the actual capitalization for
Monarch, Western and the Company as of March 31, 1997 follow:
<TABLE>
<CAPTION>
Adequately Well Monarch Western Company
Capitalized Capitalized Bank Bank Consolidated
--------------------------- ------------------------------ ------- -------- ------------
<S> <C> <C> <C> <C> <C>
Detailed computations of
Tier 1 leverage capital ratio GREATER THAN OR EQUAL TO 4.00% GREATER THAN OR EQUAL TO 5.00% 8.52% 6.71% 5.60%
Tier 1 risk-based capital ratio GREATER THAN OR EQUAL TO 4.00% GREATER THAN OR EQUAL TO 6.00% 13.68% 12.20% 9.92%
Total risk-based capital GREATER THAN OR EQUAL TO 8.00% GREATER THAN OR EQUAL TO 10.00% 14.93% 13.46% 11.18%
</TABLE>
15
<PAGE>
Part II -- Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
On February 28, 1997, the Company filed a Current Report on Form 8-K. This
report announced earnings for 1996 and the determination of the exchange ratio
for the CCB merger.
On April 14, 1997, the Company filed a Current Report on Form 8-K announcing
first quarter earnings.
On May 2, 1997, the Company filed a Current Report on Form 8-K announcing the
signing of a definitive agreement to acquire SC Bancorp.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MONARCH BANCORP
Date: May 14, 1997 /s/ Hugh S. Smith, Jr.
----------------------
Hugh S. Smith, Jr.
Chairman and Chief Executive Officer
Date: May 14, 1997 /s/ Arnold C. Hahn
------------------
Arnold C. Hahn
Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 35,763
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,618
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 134,807
<INVESTMENTS-CARRYING> 6,928
<INVESTMENTS-MARKET> 6,909
<LOANS> 251,340
<ALLOWANCE> 5,138
<TOTAL-ASSETS> 494,042
<DEPOSITS> 427,837
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,573
<LONG-TERM> 8,000
0
0
<COMMON> 58,709
<OTHER-SE> (4,077)
<TOTAL-LIABILITIES-AND-EQUITY> 494,042
<INTEREST-LOAN> 6,090
<INTEREST-INVEST> 2,269
<INTEREST-OTHER> 81
<INTEREST-TOTAL> 8,440
<INTEREST-DEPOSIT> 2,336
<INTEREST-EXPENSE> 233
<INTEREST-INCOME-NET> 5,871
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 107
<EXPENSE-OTHER> 4,445
<INCOME-PRETAX> 1,881
<INCOME-PRE-EXTRAORDINARY> 893
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 893
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
<YIELD-ACTUAL> 5.78
<LOANS-NON> 5,624
<LOANS-PAST> 472
<LOANS-TROUBLED> 253
<LOANS-PROBLEM> 5,785
<ALLOWANCE-OPEN> 5,393
<CHARGE-OFFS> 481
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 5,138
<ALLOWANCE-DOMESTIC> 5,138
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
