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SMPL > SEC Filings for SMPL > Form 10-K on 10-Sep-2013All Recent SEC Filings

Show all filings for SIMPLICITY BANCORP, INC.

Form 10-K for SIMPLICITY BANCORP, INC.


10-Sep-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This Annual Report on Form 10-K contains 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," "intend," "anticipate," "estimate," "project," "strategy," "plan," or future 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-K to reflect future events or developments.

Overview and Business Strategy

Our results of operations depend primarily on our net interest income, which is the difference between interest income earned on interest-earning assets, consisting of loans and investment securities, and interest expense paid on interest-bearing liabilities, consisting of deposits and borrowings. Our results of operations also are affected by the level of our provisions for loan losses, noninterest income and noninterest expenses. Noninterest income consists primarily of gain on sale of loans, service charges on deposit accounts and ATM fees and other charges. Noninterest expense consists primarily of salaries and employee benefits, occupancy, equipment, ATM costs, advertising, professional services and other expenses. Our results of operations may also be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

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.

With our six branch offices, one financial service center and ATM networks strategically located at or near Kaiser Permanente facilities, we will continue to be an attractive choice for our customer base. Financial service centers provide all the services of a branch office but do not accept or dispense cash except through an on-site ATM. Financial service centers in Riverside and Santa Clara


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California were closed in fiscal 2013 in order to focus our strategic efforts and resources in retail markets that allow us to more effectively compete.

Our mission is to create lasting value for our customers, employees, communities and investors by simplifying the banking experience. Consistent with that mission, our goal is to promote the financial well being of the customers and communities we serve, through the delivery of high quality financial services and prudent management. We seek to accomplish this goal by:

- continuing our emphasis on building and expanding customer relationships by utilizing online banking and bill payment services, mobile banking services and maintaining easily accessible offices and ATMs;

- expanding our branch network through leasing new branch/financial service center facilities or by acquiring branches from other financial institutions in locations that are strategically positioned to meet our business objectives. We have no current understandings or agreements for any specific acquisition;

- continuing our efforts to reduce non-performing assets;

- continuing to focus our efforts to diversify the loan portfolio to ensure profitable growth opportunities in all major loan categories, including one-to-four family residential real estate loans, multi-family residential loans, commercial real estate loans, consumer loans;

- continuing to focus on mortgage banking activities which primarily consists of the origination and sale of fixed rate conforming one-to-four family residential real estate loans in the secondary market with servicing generally retained; and

- cautiously evaluating expansion opportunities through acquisitions of other financial institutions, primarily in Southern California. We have no current understandings or agreements for any specific acquisition.

Remote access methods, such as our 58 ATMs, voice response, call center, bill payment and online banking services continue to process over 90% of our customer transactions. Branches and financial service centers strategically located for our markets provide touch points to attract new customers and facilitate transactions that cannot be completed electronically.

We have a commitment to our customers, existing and new, to provide high quality service. Our goal is to grow the Bank while providing cost effective services to our market area.

Critical Accounting Policies and Estimates

In reviewing and understanding our financial information, it is important to read and understand the significant accounting policies used in preparing our consolidated financial statements.

These policies are described in Note 1 to the consolidated financial statements and are essential in understanding Management's Discussion and Analysis of Financial Condition and Results of Operations. Our accounting and financial reporting policies conform to U.S. GAAP and to general practices within the banking industry. Accordingly, the consolidated financial statements require


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certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the years presented. Actual results could vary from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results.

Allowance for Loan Losses. The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by charge-offs and non-performing loan trends. Generally, one- to-four family residential real estate lending has a lower credit risk profile compared to consumer lending (such as automobile or personal lines of credit loans). While management intends to focus our efforts in diversifying the loan portfolio, in the past few years, our loan mix has changed as we focused our efforts on originating multi-family residential loans, which in turn increased our income property (multi-family residential and commercial real estate) loan portfolio over historical levels. Income property lending, however, has a higher credit risk profile than consumer and one- to-four family residential real estate loans due to these loans being larger in amount and non-homogenous in structure and term. Changes in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents probably incurred credit losses in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, our banking regulators and external auditor periodically review our allowance for loan losses. These entities may require us to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their review.

Management evaluates current information and events regarding a borrower's ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less estimated costs to sell, is used to determine the amount of impairment, if any. The amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses.

Fair Value of Financial Instruments. The estimation of fair value is significant to certain of our assets, including investment securities available-for-sale, real estate owned, mortgage servicing assets, loans held for sale, derivatives, and the value of loan collateral for impaired loans. These are all recorded at either fair value or the lower of cost or fair value. Fair values are determined based on third party sources, when available. Furthermore, GAAP requires disclosure of the fair value of financial instruments as a part of the notes to the consolidated financial statements.

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 17 of our consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.


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

Assets. Total assets decreased to $867.4 million at June 30, 2013 from $923.3 million at June 30, 2012 due primarily to a decrease in loans receivable, partially offset by an increase in cash and cash equivalents.

Total cash and cash equivalents increased by $19.7 million, or 29.8%, to $85.7 million at June 30, 2013 from $66.0 million at June 30, 2012. The increase was primarily due to a decrease in loans receivable which resulted in increased liquidity from the payoffs and repayments from such loans.

Our investment securities portfolio decreased by $1.9 million, or 3.5%, to $52.7 million at June 30, 2013 from $54.6 million at June 30, 2012. The decrease was primarily a result of proceeds from maturities and principal repayments of securities exceeding new purchases of securities available-for-sale. Securities available-for-sale decreased to $52.2 million at June 30, 2013 from $53.4 million at June 30, 2012.

Our gross loans receivable decreased $76.3 million, or 9.9%, to $694.3 million at June 30, 2013 from $770.6 million at June 30, 2012. The decrease was due to total loan principal repayments, sales and payoffs of $309.9 million exceeding new loan originations of $242.0 million. One-to-four family residential real estate loans decreased $51.6 million, or 13.9% to $319.7 million at June 30, 2013 from $371.3 million at June 30, 2012 due primarily to sales of newly originated conforming fixed rate loans held for sale in the secondary market . Multi-family residential loans decreased slightly by $2.8 million, or 1.0% to $280.8 million at June 30, 2013 from $283.6 million at June 30, 2012 due to principal repayments and payoffs exceeding originations. Commercial real estate loans decreased $31.3 million, or 36.0% to $55.6 million at June 30, 2013 from $87.0 million at June 30, 2012 due to principal repayments and payoffs as there have been no commercial real estate loan originations since January 2009. Real estate loans comprised 94.5% of the new total loan portfolio at June 30, 2013, compared to 96.3% at June 30, 2012. Consumer loans which are comprised primarily of automobile loans increased $9.4 million or 32.7% to $38.3 million at June 30, 2013 from $28.9 million at June 30, 2012 due to $30.4 million in loan originations in fiscal 2013. The increase in automobile loans was primarily attributable to the pricing and delivery channel enhancements on automobile loan products during fiscal 2013.

The allowance for loan losses decreased by $1.9 million, or 24.8%, to $5.6 million at June 30, 2013 from $7.5 million at June 30, 2012. The general valuation allowance decreased by $90,000 to $4.6 million at June 30, 2013 from $4.7 million at June 30, 2012. Delinquent loans 60 days or more past due decreased to $5.5 million or 0.79% of total loans at June 30, 2013 from $9.4 million or 1.22% of total loans at June 30, 2012. Non-performing assets decreased to $16.0 million or 1.84% of total assets at June 30, 2013 from $26.7 million or 2.89% of total assets at June 30, 2012. At June 30, 2013 the general valuation allowance was comprised of $2.1 million, $839,000, $1.6 million and $137,000 on one-to-four family residential, multi-family residential, commercial real estate and consumer loans, respectively. At June 30, 2012 the general valuation allowance was comprised of $2.5 million, $1.3 million, $852,000 and $120,000 on one-to-four family residential, multi-family residential, commercial real estate and consumer loans, respectively. The decline in the general valuation allowance on one-to-four family residential was a result of an improvement in historical loss factors coupled with a decline in the one-to-four family residential loan balance. The decline in the general valuation allowance on multi-family residential loans was primarily a result of a decline in the historical loss factors. The


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increase in the general valuation allowance on commercial real estate loans was primarily a result of an increase in classified assets of this loan type as well as an increase in the historical loss factors. The valuation allowances on loans individually evaluated for impairment decreased by $1.8 million to $1.0 million at June 30, 2013 from $2.8 million at June 30, 2012. The reduction in valuation allowances on impaired loans was attributable to charge-offs of allowances previously identified. See "Item 1-Business-Asset Quality-Allowance for Loan Losses."

Deposits. Total deposits decreased $28.2 million, or 4.1%, to $654.6 million at June 30, 2013 from $682.9 million at June 30, 2012. The decline was comprised primarily of a decrease in certificates of deposit of $26.8 million, or 8.7% to $280.1 million at June 30, 2013 from $306.9 million at June 30, 2012. The decrease in certificates of deposit was attributable to non-relationship customers seeking higher yields as accounts reprice to lower offering rates. Total non-certificate accounts decreased $1.4 million, or 0.4%. Non interest-bearing demand and interest-bearing checking increased $1.1 million, or 1.3% to $80.2 million at June 30, 2013 from $79.1 million at June 30, 2012. Savings accounts decreased $6.1 million, or 4.3%, to $134.9 million at June 30, 2013 from $140.9 million at June 30, 2012. The decrease in savings accounts was primarily attributable to lower offering rates on certain savings products that were discontinued during the year. Money market accounts increased $3.6 million, or 2.3% to $159.6 million at June 30, 2013 from $156.0 million at June 30, 2012. The growth in money market balances was attributable to customers preferring the short-term flexibility of non-certificate accounts in a low interest rate environment.

Borrowings. Advances from the FHLB of San Francisco decreased to $60.0 million at June 30, 2013 as compared to $80.0 million at June 30, 2012 due to the payoff of a maturing $20 million higher costing advance. The weighted average cost of FHLB advances decreased to 1.64% at June 30, 2013 from 2.33% at June 30, 2012.

Stockholders' Equity. Total stockholders' equity represented 16.8% of total assets and decreased $8.7 million or 5.6%, to $145.4 million at June 30, 2013 from $154.1 million at June 30, 2012. The decrease in stockholders' equity was primarily attributable to shares repurchased during the year ended June 30, 2013 pursuant to the stock repurchase programs previously announced of $13.0 million as well as cash dividends paid of $2.6 million, partially offset by an increase in net income of $6.2 million.


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

The following table sets forth certain information for the years ended June 30, 2013, 2012 and 2011, respectively. The average yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the years presented. Average balances are derived primarily from month-end balances. Management does not believe that the use of month-end balances rather than daily average balances has caused any material differences in the information presented.

                                                                                              For the year ended June 30,
                                                         2013                                             2012                                            2011
                                        Average                        Average          Average                         Average          Average                        Average
                                        Balance        Interest      Yield/Cost         Balance        Interest       Yield/Cost         Balance        Interest      Yield/Cost
                                                                                                 (Dollars in thousands)
Interest-Earning Assets
Loans receivable(1)(2)                 $ 728,978       $  35,501            4.87 %     $ 709,394       $  39,619             5.58 %     $ 725,844       $  42,962            5.92 %
Securities(3)                             55,758             492            0.88          47,718             672             1.41           7,859             278            3.54
Federal funds sold                        65,930             155            0.24         106,017             262             0.25          81,074             195            0.24
FHLB stock                                 7,418             181            2.44           9,457              38             0.40          11,286              42            0.37
Interest-earning deposits in other
financial institutions                         -               -               -           4,908              38             0.77          11,775             109            0.93

Total interest-earning assets            858,084          36,329            4.23         877,494          40,629             4.63         837,838          43,586            5.20

Noninterest earning assets                37,115                                          39,014                                           39,925

Total assets                           $ 895,199                                       $ 916,508                                        $ 877,763


Interest-Bearing Liabilities
Interest-bearing checking              $  12,088       $       6            0.05 %     $   2,107       $       3             0.14 %     $       -       $       -               - %
Money market                             162,405             413            0.25         143,080             659             0.46         125,817             851            0.68
Savings deposits                         135,303             159            0.12         137,109             293             0.21         130,172             467            0.36
Certificates of deposit                  296,751           5,906            1.99         312,421           6,718             2.15         321,846           7,870            2.45
Borrowings                                69,231           1,386            2.00          93,077           2,943             3.16         100,615           4,752            4.72

Total interest-bearing liabilities       675,778           7,870            1.16         687,794          10,616             1.54         678,450          13,940            2.05

Noninterest bearing liabilities           69,900                                          70,835                                           67,126

Total liabilities                        745,678                                         758,629                                          745,576
Equity                                   149,521                                         157,879                                          132,187

Total liabilities and equity           $ 895,199                                       $ 916,508                                        $ 877,763

Net interest/spread(4)                                 $  28,459            3.07 %                     $  30,013             3.09 %                     $  29,646            3.15 %

Margin(5)                                                                   3.32 %                                           3.42 %                                          3.54 %

Ratio of interest-earning assets to
interest-bearing liabilities              126.98 %                                        127.58 %                                         123.49 %

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

(2) Interest income includes loan fees of $164,000 $50,000, and $151,000 for the fiscal years ended June 30, 2013, 2012, and 2011, respectively.

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

(4) The spread between average yield on total interest-earning assets and average cost on total interest-bearing liabilities.

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


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Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in volume multiplied by the old rate;
(2) changes in rate, which are changes in rate multiplied by the old volume; and
(3) changes in rate/volume, which are the changes in rate times the changes in volume.

                                                       For the Year Ended June 30,                           For the Year Ended June 30,
                                                              2013 vs. 2012                                         2012 vs. 2011
                                                           Increase (Decrease)                                   Increase (Decrease)
                                                                  Due to                                                Due to
                                                                         Rate/                                                 Rate/
                                             Volume         Rate        Volume         Net         Volume         Rate        Volume         Net
                                                                                         (in thousands)
Interest-Earning Assets
Loans receivable(1)                          $ 1,094      $ (5,072 )    $  (140 )    $ (4,118 )    $  (974 )    $ (2,424 )    $    55      $ (3,343 )
Securities                                       113          (251 )        (42 )        (180 )      1,411          (167 )       (849 )         395
Federal funds sold                               (99 )         (13 )          5          (107 )         60             5            2            67
FHLB stock                                        (8 )         193          (42 )         143           (7 )           3           (1 )          (5 )
Interest-earning deposits in other
financial institutions                           (38 )         (38 )         38           (38 )        (64 )         (18 )         10           (72 )

Total interest-earning assets                $ 1,062      $ (5,181 )    $  (181 )    $ (4,300 )    $   426      $ (2,601 )    $  (783 )    $ (2,958 )


Interest-Bearing Liabilities
Interest-bearing checking                    $    14      $     (2 )    $    (9 )    $      3      $     -      $      -      $     3      $      3
Money market                                      89          (295 )        (40 )        (246 )        117          (272 )        (37 )        (192 )
Savings deposits                                  (4 )        (132 )          2          (134 )         25          (189 )        (10 )        (174 )
Certificates of deposit                         (337 )        (500 )         25          (812 )       (231 )        (949 )         28        (1,151 )
Borrowings                                      (754 )      (1,080 )        277        (1,557 )       (356 )      (1,571 )        118        (1,809 )

Total interest-bearing liabilities           $  (992 )    $ (2,009 )    $   255      $ (2,746 )    $  (445 )    $ (2,981 )    $   102      $ (3,323 )


Change in net interest income/spread         $ 2,054      $ (3,172 )    $  (436 )    $ (1,554 )    $   871      $    380      $  (885 )    $    365

(1) Total loans are net of deferred fees and costs.


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Comparison of Results of Operations for the Years Ended June 30, 2013 and 2012.

General. Net income for the year ended June 30, 2013 was $6.2 million, a decrease of $1.0 million, or 13.8%, as compared to net income of $7.2 million for the year ended June 30, 2012. Earnings per basic and diluted common share were $0.76 for the year ended June 30, 2013 compared to $0.81 for the year ended June 30, 2012. The decrease in net income primarily resulted from a decrease in net interest income of $1.6 million and an increase in noninterest expense of $2.7 million, which were partially offset by an increase in noninterest income of $2.5 million for the year ended June 30, 2013.

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