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SMPL > SEC Filings for SMPL > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for SIMPLICITY BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SIMPLICITY BANCORP, INC.


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company and the Bank that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "should," "could," or "may" and similar expressions or the negative thereof. Certain factors that could cause actual results to differ materially from expected results include, changes in the interest rate environment, changes in general economic conditions, legislative and regulatory changes that adversely affect the business of Simplicity Bancorp, Inc. and Simplicity Bank, and changes in the securities markets. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.

Recent Developments

Effective November 13, 2012, the Bank was renamed Simplicity Bank. In addition, the Company changed its name to Simplicity Bancorp, Inc. and its trading symbol to SMPL. This new name aligns well with the core principles the Company was founded upon-to provide value, personal service and financial well being for its customers and communities. As Simplicity Bank, the Company will continue this legacy as the Bank grows and simplifies the banking experience for its customers with more options, better technology, enhanced service capacity, a fresh look and a renewed vision. In conjunction with the name change, the Company has launched an extensive branding campaign which includes signage, branch remodeling, and advertising. The integrated campaign will help to align our new name with our commitment to deliver exceptional service and convenience to our customers and the communities we serve.

On April 29, 2013, the Company entered into a settlement agreement with a borrower in connection with a judgment of foreclosure on a delinquent multi-family loan. The unpaid principal balance was approximately $1.76 million as of March 31, 2013 and no payment has been received for this loan since August 2009. In December 2011, the Company recorded a charge-off of approximately $1.0 million to recognize the loan at the fair value of the underlying collateral net of costs to sell, resulting in a recorded investment of approximately $700,000 and as of March 31, 2013 has incurred legal expenses and other fees relating to this loan of approximately $200,000. On May 3, 2013, the Company received $1.95 million from the borrower pursuant to the settlement agreement of which $1.0 million will be applied as recovery for amounts previously charged off and the remaining balance will be applied to offset expenses previously incurred by the Company. Due to the final resolution of the foreclosure suit by way of the settlement agreement in April, 2013 and subsequent payment in May, 2013, the recovery will be applied in the quarter ended June 30, 2013, which is the period in which payment was assured.

Market Area

Our success depends primarily on the general economic conditions in the California counties of Los Angeles, Orange, San Diego, San Bernardino, Riverside, Santa Clara and Alameda, as nearly all of our loans are to customers in this market area. To focus our strategic efforts and resources in retail markets that allow us to more effectively compete, the Riverside Branch located in a non-retail commercial business park was closed in September 2012. Customer accounts and records from the Riverside Branch were consolidated into the Fontana Branch. As of March 31, 2013, there has been no significant impact on our deposits previously assigned to the Riverside Branch and loan portfolios for customers or properties located in Riverside County.

There have been positive developments in current economic conditions since the end of the recession. Improving financial conditions, increasing credit availability, accommodative monetary policy, and healthier labor and housing markets all support the economic growth in our market area. According to the Beige Book published by the Federal Reserve Bank in April 2013, economic activity continued to expand at a moderate pace from February to early April 2013. In the Twelfth Federal Reserve District (San Francisco), demand for housing strengthened, and commercial real estate activity expanded. Although there were signs of improvement in home demand and housing prices, sales pace of new and existing homes is still well below its historical average both nationally and in our market area of California. Lenders still face margin compression due to the low interest rate environment, ample liquidity and generally stiff competition over well-qualified borrowers. In addition, while the California unemployment rate improved during the three months ended March 31, 2013, both California and national unemployment rates remain at historically high levels. In particular, California continues to experience elevated unemployment rates as compared to the national average. Unemployment rates in California were 9.4% in March 2013 as compared to 9.8% in December 2012. This compares to the national unemployment rate of 7.6% in March 2013 and 7.8% in December 2012.


Table of Contents

Comparison of Financial Condition at March 31, 2013 and June 30, 2012.

Assets. Total assets declined to $882.3 million at March 31, 2013 from $923.3 million at June 30, 2012 due primarily to a decrease in gross loans receivable, partially offset by an increase in loans held for sale, cash and cash equivalents, and securities available for sale.

Cash and cash equivalents increased by $6.7 million, or 10.1%, to $72.7 million at March 31, 2013 from $66.0 million at June 30, 2012. The increase was primarily due to proceeds received from newly originated conforming fixed rate one-to-four family residential loans sold in the secondary market as well as principal repayments on outstanding loans held in our portfolio.

Securities available-for-sale increased by $4.8 million, or 9.0%, to $58.2 million at March 31, 2013 from $53.4 million at June 30, 2012 due to the purchase of $20.7 million in securities, offset by $15.8 million in maturities, principal repayments and amortization. During the nine months ended March 31, 2013, the Bank purchased four agency mortgage backed securities totaling $20.7 million at a weighted average yield of 1.20% and a weighted average life of 3.55 years. The purchased investments were funded with proceeds received from newly originated conforming fixed rate one-to-four family residential loans sold in the secondary market as well as principal repayments on outstanding loans held in our portfolio.

Gross loans receivable decreased by $65.4 million, or 8.5%, to $706.9 million at March 31, 2013 from $772.2 million at June 30, 2012 due primarily to the sale of newly originated conforming fixed rate one-to-four family residential loans in the secondary market along with principal repayments and payoffs. One-to-four family residential loans held for investment decreased $45.8 million, or 12.3%, to $325.5 million at March 31, 2013 from $371.3 million at June 30, 2012. The decrease was primarily due to sales of newly originated conforming fixed rate loans held for sale in the secondary market along with principal repayments and payoffs. Multi-family loans decreased $6.7 million, or 2.4%, to $276.8 million at March 31, 2013 from $283.6 million at June 30, 2012. Commercial real estate loans decreased $20.2 million, or 23.3%, to $66.7 million at March 31, 2013 from $87.0 million at June 30, 2012. The decrease in multi-family loans and commercial real estate loans were primarily attributable to principal repayments and payoffs. Other loans, which were comprised primarily of automobile and other consumer loans increased $7.7 million, or 26.5%, to $36.5 million at March 31, 2013 from $28.9 million at June 30, 2012. The increase was primarily attributable to the increase in automobile loans resulting from the pricing enhancements on automobile loan products during the nine months ended March 31, 2013. Real estate loans, including loans held for sale, comprised 97.0% of the total loan portfolio at March 31, 2013, compared with 96.3% at June 30, 2012. At March 31, 2013, $15.1 million of one-to-four family residential loans were classified as held for sale as compared to none at June 30, 2012. The Company continues to sell newly originated fixed rate conforming one-to-four family residential real estate loans in the secondary market while retaining the servicing rights. The ability to sell mortgage assets and retain the customer relationship is instrumental in ensuring the Bank is a viable option for customers that desire a mortgage loan.

The allowance for loan losses decreased by $1.1 million, or 14.2%, to $6.4 million at March 31, 2013 from $7.5 million at June 30, 2012. The decrease was due primarily to net charge-offs of $2.9 million, of which $1.3 million was previously reserved for loans individually evaluated for impairment, as well as a decline in the loan receivable balance collectively evaluated for impairment during the nine months ended March 31, 2013. The reductions in the allowance for loan losses were offset in part by the $1.9 million provision expense recorded during the nine months ended March 31, 2013 primarily due to an increase in the historical loss factors on criticized and classified real estate loans resulting from short sale losses and charge-offs of impaired loans.

Deposits. Total deposits decreased $12.9 million, or 1.9%, to $670.0 million at March 31, 2013 from $682.9 million at June 30, 2012. The decrease in deposits was comprised of a $5.2 million decrease in noninterest bearing deposits and a $7.7 million decrease in interest bearing deposits.

The $7.7 million decrease in interest bearing deposits consisted of a $17.6 million, or 5.7%, decrease in certificates of deposit from $306.9 million at June 30, 2012 to $289.3 million at March 31, 2013 and a $5.8 million, or 4.1%, decrease in savings accounts from $140.9 million at June 30, 2012 to $135.1 million at March 31, 2013. These decreases were partially offset by a $9.0 million, or 5.8%, increase in money market accounts from $156.0 million at June 30, 2012 to $165.0 million at March 31, 2013 and a $6.6 million, or 85.7%, increase in interest-bearing checking products from $7.8 million at June 30, 2012 to $14.4 million at March 31, 2013. The increase in money market accounts and interest bearing checking products were primarily a result of continued growth of new money market and interest-bearing checking products introduced during fiscal 2012.


Table of Contents

The increase in money market accounts and decline in savings and certificate of deposit accounts were a result of certain customers that prefer the short-term flexibility of non-certificate accounts in a low interest rate environment. The decrease in noninterest bearing deposits was primarily a result of the timing of customer payroll deposits as compared to June 30, 2012.

Borrowings. FHLB advances were at $60.0 million and $80.0 million at March 31, 2013 and June 30, 2012, respectively. A $20.0 million higher costing FHLB advance matured and was repaid during the nine months ended March 31, 2013. The weighted average cost of FHLB advances decreased to 1.64% at March 31, 2013 from 2.33% at June 30, 2012.

Stockholders' Equity. Total stockholders' equity, represented 16.59% of total assets and decreased to $146.4 million at March 31, 2013 from $154.1 million at June 30, 2012. The decrease in stockholders' equity was primarily attributable to $10.5 million shares repurchased pursuant to the Company's stock repurchase programs previously announced as well as cash dividends paid of $2.0 million, partially offset by an increase in retained earnings due to net income of $3.9 million during the nine months ended March 31, 2013.


Table of Contents

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table sets forth certain information for the three months ended
March 31, 2013 and 2012, respectively.



                                                              For the three months ended March 31,
                                                     2013 (1)                                     2012 (1)
                                                                     Average                                      Average
                                       Average                       Yield/         Average                       Yield/
                                       Balance        Interest        Cost          Balance        Interest        Cost
                                                                     (Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable(2)                   $ 718,186      $    8,559          4.77 %    $ 700,318      $    9,652          5.52 %
Securities(3)                            61,679             165          1.07         62,182             187          1.20
Federal funds sold                       55,696              34          0.24        118,926              69          0.23
FHLB stock                                7,211              44          2.44          9,305              12          0.52
Interest-earning deposits in other
financial institutions                       -               -             -           2,508               4          0.64

Total interest-earning assets           842,772           8,802          4.18        893,239           9,924          4.45

Noninterest earning assets               36,688                                       39,078

Total assets                          $ 879,460                                    $ 932,317

INTEREST-BEARING LIABILITIES
Interest-bearing checking             $  13,673      $        2          0.06 %    $   2,440      $        1          0.16 %
Money market                            163,322              90          0.22        144,896             136          0.38
Savings deposits                        131,611              29          0.09        136,248              53          0.16
Certificates of deposit                 294,638           1,435          1.95        314,128           1,657          2.11
Borrowings                               60,000             243          1.62        100,000             713          2.85

Total interest-bearing liabilities      663,244           1,799          1.08        697,712           2,560          1.47

Noninterest bearing liabilities          68,486                                       75,410

Total liabilities                       731,730                                      773,122
Equity                                  147,730                                      159,195

Total liabilities and equity          $ 879,460                                    $ 932,317

Net interest/spread                                  $    7,003          3.09 %                   $    7,364          2.98 %

Margin(4)                                                                3.32 %                                       3.30 %

Ratio of interest-earning assets to
interest-bearing liabilities             127.07 %                                     128.02 %

(1) Yields earned and rates paid have been annualized.

(2) Calculated net of deferred fees, loss reserves and includes non-accrual loans.

(3) Calculated based on amortized cost of held-to-maturity securities and fair value of available-for-sale securities.

(4) Net interest income divided by interest-earning assets.


Table of Contents

The following table sets forth certain information for the nine months ended March 31, 2013 and 2012, respectively.

                                                           For the nine months ended March 31,
                                                   2013 (1)                                    2012 (1)
                                                                  Average                                     Average
                                     Average                      Yield/         Average                      Yield/
                                     Balance       Interest        Cost          Balance       Interest        Cost
                                                                  (Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable(2)                 $ 737,855      $  27,171          4.91 %    $ 701,349      $  29,835          5.67 %
Securities(3)                          55,948            334          0.80         45,144            521          1.54
Federal funds sold                     64,121            115          0.24        111,669            201          0.24
FHLB stock                              7,785            112          1.92          9,693             26          0.36
Interest-earning deposits in
other financial institutions               -              -             -           6,380             34          0.71

Total interest-earning assets         865,709         27,732          4.27        874,235         30,617          4.67

Noninterest earning assets             37,406                                      38,997

Total assets                        $ 903,115                                   $ 913,232

INTEREST-BEARING LIABILITIES
Interest-bearing checking           $  11,515      $       5          0.06 %    $     976      $       1          0.14 %
Money market                          162,773            322          0.26        140,032            540          0.51
Savings deposits                      135,456            129          0.13        136,055            245          0.24
Certificates of deposit               300,931          4,520          2.00        313,776          5,141          2.18
Borrowings                             72,000          1,140          2.11         93,000          2,227          3.19

Total interest-bearing
liabilities                           682,675          6,116          1.19        683,839          8,154          1.59

Noninterest bearing liabilities        69,788                                      70,465

Total liabilities                     752,463                                     754,304
Equity                                150,652                                     158,928

Total liabilities and equity        $ 903,115                                   $ 913,232

Net interest/spread                                $  21,616          3.08 %                   $  22,463          3.08 %

Margin(4)                                                             3.33 %                                      3.43 %

Ratio of interest-earning assets
to interest-bearing liabilities        126.81 %                                    127.84 %

(1) Yields earned and rates paid have been annualized.

(2) Calculated net of deferred fees, loss reserves and includes non-accrual loans.

(3) Calculated based on amortized cost of held-to-maturity securities and fair value of available-for-sale securities.

(4) Net interest income divided by interest-earning assets.


Table of Contents

Comparison of Results of Operations for the Three Months Ended March 31, 2013 and March 31, 2012.

General. Net income for the three months ended March 31, 2013 was $1.4 million, a decrease of $218,000 as compared to net income of $1.6 million for the three months ended March 31, 2012. Earnings per basic and diluted common share were $0.18 for the three months ended March 31, 2013 and 2012. The decrease in net income was due primarily to a decrease in net interest income and an increase in provision for loan losses, partially offset by an increase in noninterest income.

Interest Income. Interest income decreased $1.1 million, or 11.3%, to $8.8 million for the three months ended March 31, 2013 from $9.9 million for the three months ended March 31, 2012. The decline in interest income was primarily due to a decrease in interest and fees on loans.

Interest and fees on loans decreased $1.1 million to $8.6 million for the three months ended March 31, 2013 from $9.7 million for the three months ended March 31, 2012. The primary reason for the decrease was a decline of 75 basis points in the average yield on loans from 5.52% for the three months ended March 31, 2012 to 4.77% for the three months ended March 31, 2013, partially offset by an increase of $17.9 million in the average balance of loans receivable to $718.2 million for the three months ended March 31, 2013 from $700.3 million for the three months ended March 31, 2012. The decrease in the average yield on loans was primarily caused by lower yields earned on new loan originations and the payoffs of higher yielding older loans during the period as a result of the low interest rate environment. The increase in the average loan receivable balance was attributable to new loan originations during the current period.

Interest Expense. Interest expense decreased $761,000, or 29.7% to $1.8 million for the three months ended March 31, 2013 from $2.6 million for the three months ended March 31, 2012. The decrease in interest expense reflected a reduction in the cost of funds on deposits and borrowings as a result of the low interest rate environment and repayment of higher costing FHLB advances in fiscal 2012 and 2013. The decrease in the cost of funds was primarily attributable to a 39 basis points decline in the average cost of interest bearing liabilities to 1.08% for the three months ended March 31, 2013 from 1.47% for the three months ended March 31, 2012 due to continued low market interest rates on deposits. Additionally, the average balance of total interest bearing liabilities decreased $34.5 million to $663.2 million for the three months ended March 31, 2013 from $697.7 million for the three months ended March 31, 2012. The decrease in the average balance of total interest-bearing liabilities was due primarily to the decrease in the average balance of FHLB advances due to repayment of higher costing FHLB advances during fiscal 2012 and 2013 and the decrease in the average balance of certificate of deposit and savings products, partially offset by an increase in the average balance of money market and interest-bearing checking deposits resulting from continued growth of new money market and interest-bearing checking products introduced during fiscal 2012.

Provision for Loan Losses. Provision for loan losses increased to $400,000 for the three months ended March 31, 2013 as compared to no provision for the same period last year. The balance of non-performing loans decreased to $19.6 million, or 2.77% of total loans at March 31, 2013 as compared to $25.4 million, or 3.29% of total loans at June 30, 2012. Delinquent loans 60 days or more totaled $6.9 million, or 0.98% of total loans at March 31, 2013 as compared to $9.4 million, or 1.22% of total loans at June 30, 2012.

The provision for loan losses of $400,000 during the three months ended March 31, 2013 was comprised of a $144,000 provision on one-to-four family loans, a $78,000 provision on multi-family loans, a $138,000 provision on commercial real estate loans, a $3,000 reduction in provision on automobile loans, a $5,000 provision on home equity loans and a $38,000 provision on other loans. The increase in provision on one-to-four family loans was primarily due to an increase in the historical loss factors on classified and criticized one-to-four family loans resulting from short sales losses and charge-offs on impaired loans. The increase in provision on multi-family loans was primarily due to a charge-off on a multi-family loan that exhibited weakness during the three-month period ended March 31, 2013 but remains current on its loan payments. The increase in provision on commercial real estate loans was primarily due to an increase in the historical loss factors on criticized commercial real estate loans as well as an increase in the balance of classified commercial real estate loans. The provision reflects management's continuing assessment of the credit quality of the Company's loan portfolio, which is affected by various trends, including current economic conditions.


Table of Contents

Noninterest Income. Our noninterest income increased $477,000, or 41.9%, to $1.6 million for the three months ended March 31, 2013 as compared to $1.1 million for the three months ended March 31, 2012 due primarily to $435,000 in pre-tax gains on fixed rate conforming one-to-four family loans sold during the three months ended March 31, 2013.

Noninterest Expense. Our noninterest expense was $5.9 million for the quarter ended March 31, 2013 and for the same period last year. Salaries and benefits expense remained consistent at $2.9 million for the three months ended March 31, 2013 and 2012. The increases in advertising and promotional expenses, occupancy and equipment costs and ATM expenses were offset by a decrease in REO and foreclosure expenses, professional services and other operating expenses.

Advertising and promotional expenses increased $135,000 or 146.7%, to $227,000 for the three months ended March 31, 2013 as compared to $92,000 for the three months ended March 31, 2012. The increase was primarily due to expenses incurred related to the branding campaign associated with our new name. Occupancy and equipment costs increased $93,000 or 14.4%, to $740,000 for the three months ended March 31, 2013 as compared to $647,000 for the three months ended March 31, 2012 due to an increase in depreciation expenses resulting from ATM replacements. ATM expenses increased $72,000 or 14.6%, to $564,000 for the three months ended March 31, 2013 as compared to $492,000 for the three months ended March 31, 2012 due to costs associated with ATM support and ATM card issuance as a result of our new name.

REO and foreclosure expenses decreased $133,000, or 82.1%, to $29,000 for the three months ended March 31, 2013 as compared to $162,000 for the three months ended March 31, 2012 due to a decline in foreclosure activities as a result of more negotiated short sales. Professional services expenses decreased $110,000 or 17.9%, to $505,000 for the three months ended March 31, 2013 as compared to $615,000 for the three months ended March 31, 2012 due to less financial advisory, strategic and leadership advisory services costs and recruitment costs during the three months ended March 31, 2013 as compared to the same period last year. Other operating expenses decreased $66,000 or 14.1%, to $402,000 for the three months ended March 31, 2013 as compared to $468,000 for the three months ended March 31, 2012 due to a gain on the settlement of a short sale in the quarter ended March 31, 2013.

Income Tax Expense. Income tax expense decreased $108,000, or 11.1% to $864,000 for the three months ended March 31, 2013 compared to $972,000 for the three months ended March 31, 2012. This decrease was primarily the result of lower pretax income for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The effective tax rates were 37.7% and 37.1% for the three months ended March 31, 2013 and 2012, respectively.

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