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SMPL > SEC Filings for SMPL > Form 10-Q on 8-Nov-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.


8-Nov-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.

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. 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 in September 2013, economic activity continued to expand at a modest to moderate pace from early July to August 2013. In the Twelfth Federal Reserve District (San Francisco), demand for housing strengthened further, and commercial real estate activity was stable or improved. Although levels remained significantly lower than in the pre-recession period, both home sales and house prices climbed further relative to the prior reporting period in our market area of California. However, lenders continue to face margin compression due to the low interest rate environment, ample liquidity and generally stiff competition over well-qualified borrowers. Future growth opportunities will be influenced by the stability of the nation and the regional economy and other trends within California, including unemployment rates and housing market conditions.

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 rose from 8.5% in June 2013 to 8.9% in August 2013. This compares to the national unemployment rate which trended down from 7.6% in June 2013 to 7.2% in September 2013.

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

Assets. Total assets declined to $834.6 million, or 3.8%, at September 30, 2013 from $867.4 million at June 30, 2013 due primarily to a decrease in cash and cash equivalents and securities available-for-sale, partially offset by an increase in gross loans receivable.

Cash and cash equivalents decreased by $50.7 million, or 59.2% to $35.0 million at September 30, 2013 from $85.7 million at June 30, 2013. The decrease was primarily due to cash deployed to fund the net growth in loans receivable and a decline in deposits.

Securities available-for-sale decreased by $4.1 million, or 7.8%, to $48.1 million at September 30, 2013 from $52.2 million at June 30, 2013 due to maturities, principal repayments and amortization.

Gross loans receivable increased by $24.2 million, or 3.5%, to $718.5 million at September 30, 2013 from $694.3 million at June 30, 2013. The increase was primarily attributable to organic loan growth in multi-family residential loans and consumer loans, offset in part by principal repayments and payoffs in addition to the sale of conforming fixed rate one-to-four family residential loans in the secondary market. Multi-family loans increased $36.8 million, or 13.1%, to $317.6 million at September 30, 2013 from $280.8 million at June 30, 2013 due to $51.5 million in loan originations during the three months ended September 30, 2013.


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Commercial real estate loans decreased $3.9 million, or 7.0%, to $51.7 million at September 30, 2013 from $55.6 million at June 30, 2013 due to principal prepayments and payoffs as there have been no new commercial real estate loan originations since January 2009. One-to-four family residential real estate loans decreased $11.3 million, or 3.5%, to $308.3 million at September 30, 2013 from $319.7 million at June 30, 2013 due primarily to principal prepayments and payoffs and sales of newly originated conforming fixed rate loans held for sale. Consumer loans which were comprised primarily of automobile loans increased $2.6 million, or 6.8%, to $40.9 million at September 30, 2013 from $38.3 million at June 30, 2013 due to $7.0 million in automobile loan originations during the three months ended September 30, 2013.

The allowance for loan losses decreased by $156,000, or 2.8%, to $5.5 million at September 30, 2013 from $5.6 million at June 30, 2013 due primarily to net charge-offs as well as improved asset quality of the loan portfolio and a decline in the historical loss factors for criticized and classified assets. Non-performing assets decreased to $13.8 million, or 1.66% of total assets at September 30, 2013 as compared to $16.0 million, or 1.84% of total assets at June 30, 2013.

Deposits. Total deposits decreased $27.8 million, or 4.2%, to $626.9 million at September 30, 2013 from $654.6 million at June 30, 2013. The decline was comprised of a $19.2 million decrease in interest-bearing deposits and a $8.6 million decrease in non-interest bearing demand deposits.

The decrease in interest bearing deposits consisted of a $17.2 million, or 6.1%, decrease in certificates of deposit from $280.1 million at June 30, 2013 to $262.9 million at September 30, 2013, a $2.6 million, or 1.9%, decrease in savings accounts from $134.9 million at June 30, 2013 to $132.3 million at September 30, 2013, and a $697,000, or 4.8% decrease in interest-bearing checking from $14.5 million at June 30, 2013 to $13.8 million at September 30, 2013. These decreases were partially offset by a $1.2 million, or 0.8%, increase in money market accounts from $159.6 million at June 30, 2013 to $160.8 million at September 30, 2013. The decrease in certificates of deposit was attributable to non-relationship customers seeking higher yields as accounts repriced to lower offering rates. Savings accounts decreased primarily due to the discontinuation of certain savings products which had lower offering rates. Non-interest bearing demand deposits decreased $8.6 million, or 13.1% from $65.6 million at June 30, 2013 to $57.1 million at September 30, 2013. The decline in non-interest bearing demand and interest-bearing checking was primarily a result of the timing of customer payroll deposits as compared to June 30, 2013. The slight 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. FHLB advances were $60.0 million at September 30, 2013 and June 30, 2013. The weighted average cost of FHLB advances of 1.64% remained unchanged from June 30, 2013.

Stockholders' Equity. Total stockholders' equity, represented 17.3% of total assets and decreased to $144.0 million at September 30, 2013 from $145.4 million at June 30, 2013. The decrease in stockholders' equity was primarily attributable to shares repurchased during the three months ended September 30, 2013 pursuant to the stock repurchase program previously announced of $2.2 million as well as cash dividends paid of $618,000, partially offset by net income of $1.1 million.


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

The following table sets forth certain information for the three months ended
September 30, 2013 and 2012, respectively.



                                                            For the three months ended September 30,
                                                     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)                   $ 706,331      $    8,018          4.54 %    $ 762,251      $    9,718          5.10 %
Securities(3)                            50,456             167          1.32         52,165              81          0.62
Federal funds sold                       49,269              29          0.24         57,838              32          0.22
Federal Home Loan Bank stock              5,962              80          5.37          8,305              10          0.48

Total interest-earning assets           812,018           8,294          4.09        880,559           9,841          4.47

Noninterest earning assets               37,586                                       38,019

Total assets                          $ 849,604                                    $ 918,578

INTEREST-BEARING LIABILITIES
Interest-bearing checking             $  14,211      $        2          0.06 %    $   9,050      $        2          0.09 %
Money market                            160,510              92          0.23        160,170             128          0.32
Savings deposits                        133,495              31          0.09        139,998              49          0.14
Certificates of deposit                 270,323           1,266          1.87        305,622           1,569          2.05
Borrowings                               60,000             249          1.66         80,000             469          2.35

Total interest-bearing liabilities      638,539           1,640          1.03        694,840           2,217          1.28

Noninterest bearing liabilities          66,353                                       70,123

Total liabilities                       704,892                                      764,963
Equity                                  144,712                                      153,615

Total liabilities and equity          $ 849,604                                    $ 918,578

Net interest/spread                                  $    6,654          3.06 %                   $    7,624          3.19 %


Margin(4)                                                                3.28 %                                       3.46 %


Ratio of interest-earning assets to
interest bearing liabilities             127.17 %                                     126.73 %

(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.


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Comparison of Results of Operations for the Three Months Ended September 30, 2013 and September 30, 2012.

General. Net income for the three months ended September 30, 2013 was $1.1 million, a decrease of $244,000 as compared to net income of $1.4 million for the three months ended September 30, 2012. Earnings per basic and diluted common share were $0.15 for the three months ended September 30, 2013, compared to $0.16 for the three months ended September 30, 2012. The decrease in net income was due primarily to a decrease in net interest income and noninterest income and an increase in noninterest expense, partially offset by a decrease in provision for loan losses.

Interest Income. Interest income decreased $1.5 million, or 15.7%, to $8.3 million for the three months ended September 30, 2013 from $9.8 million for the three months ended September 30, 2012. The decline in interest income was primarily due to decreases in interest and fees on loans.

Interest and fees on loans decreased $1.7 million to $8.0 million for the three months ended September 30, 2013 from $9.7 million for the three months ended September 30, 2012. The primary reason for the decrease was a decline of 56 basis points in the average yield on loans from 5.10% for the three months ended September 30, 2012 to 4.54% for the three months ended September 30, 2013 and a decrease of $55.9 million in the average balance of loans receivable to $706.3 million for the three months ended September 30, 2013 from $762.3 million for the three months ended September 30, 2012. The decrease in the average yield on loans was primarily caused by lower yields earned on new loan originations and payoffs of higher yielding seasoned loans during the period as a result of the low interest rate environment. The decrease in the average loan receivable balance was attributable to loan principal repayments, sales and payoffs.

Interest Expense. Interest expense decreased $577,000, or 26.0% to $1.6 million for the three months ended September 30, 2013 from $2.2 million for the three months ended September 30, 2012. The decline reflected a reduction in the average cost of funds on deposits and borrowings as a result of the continuing low interest rates during the three months ended September 30, 2013.

Interest expense on deposits decreased $357,000, or 20.4% to $1.4 million during the three months ended September 30, 2013 as compared to $1.7 million for the same period last year. The primarily reason for the decrease was a 16 basis point decline in the average cost of deposits from 1.03% for the three months ended September 30, 2012 to 0.87% for the three months ended September 30, 2013 due to the downward repricing of deposits in the low interest rate environment as well as a decrease of $36.6 million in the average balance of deposits to $578.5 million for the three months ended September 30, 2013 from $614.8 million for the three months ended September 30, 2012.

Interest expense on borrowings decreased $220,000 or 46.9% to $249,000 during the three months ended September 30, 2013 as compared to $469,000 for the same period last year. The decline was primarily attributable to a 69 basis point decrease in the average cost of borrowings from 2.35% for the three months ended September 30, 2012 to 1.66% for the three months ended September 30, 2013 as a result of the pay down of $20.0 million in scheduled maturities of higher costing borrowings during December 2012.

Provision for Loan Losses. There was no provision for loan losses for the three months ended September 30, 2013 as compared to $850,000 for the same period last year. The decline in the provision during the current quarter was primarily a result of a decline in net charge-offs and loss factors on loans collectively evaluated for impairment. Annualized net charge-offs decreased to 0.09% of average outstanding loans for the three months ended September 30, 2013 as compared to 0.29% of average outstanding loans for the year ended June 30, 2013. Non-performing loans decreased to $13.5 million, or 1.88% of total loans at September 30, 2013 as compared to $15.9 million, or 2.29% of total loans at June 30, 2013 while delinquent loans, 60 days or more, increased slightly to $6.4 million or 0.89% of total loans at September 30, 2013 as compared to $5.5 million, or 0.79% of total loans at June 30, 2013.

Although the provision for loan losses was zero during the three months ended September 30, 2013, it was comprised of a $352,000 reduction in provision on one-to-four family loans, a $548,000 provision on multi-family loans, a $247,000 reduction in provision on commercial real estate loans, a $47,000 provision on automobile loans, no provision on home equity loans and a $4,000 provision on other loans. The decrease in provision on one-to-four family loans was primarily due to a decline in the overall historical loss factors on loans collectively evaluated for impairment. The increase in provision on multi-family loans was primarily due to an increase in the balance of multi-family loans collectively evaluated for impairment partially offset by a decline in the overall loss factors on loans collectively evaluated for impairment.


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There was also a charge-off of approximately $100,000 on a multi-family loan that exhibited weakness during the first fiscal quarter of 2014 but remained current on its loan payments. The reduction in provision on commercial real estate loans was primarily due to a decline in the overall loss factors and a reduction in the balance of commercial real estate loans collectively evaluated for impairment. 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.

Noninterest Income. Our noninterest income decreased $108,000, or 6.9%, to $1.5 million for the three months ended September 30, 2013 as compared to $1.6 million for the three months ended September 30, 2012 due primarily to a $239,000 decline in pre-tax gains on one-to-four family mortgage loans sold reflecting the impact of a lower loan sale volume and reduced gain on loan sale margins driven by the recent increase in interest rates.

Noninterest Expense. Our noninterest expense increased $146,000, or 2.4% to $6.3 million for the three months ended September 30, 2013 as compared to $6.1 million for the three months ended September 30, 2012 primarily due to an increase in advertising and promotional expenses, occupancy and equipment costs, professional services and ATM expenses, partially offset by a decrease in salaries and benefits expense.

Advertising and promotional expenses increased $149,000, or 112.9%, to $281,000 for the three months ended September 30, 2013 as compared to $132,000 for the three months ended September 30, 2012. The increase was primarily due to expenses incurred related to continuing branding and marketing campaign efforts. Occupancy and equipment costs increased $73,000, or 10.2%, to $786,000 for the three months ended September 30, 2013 as compared to $713,000 for the three months ended September 30, 2012 due to leasehold improvement resulting from branch relocation and remodeling. Professional services expenses increased $60,000, or 12.1%, to $555,000 for the three months ended September 30, 2013 as compared to $495,000 for the three months ended September 30, 2012 due to higher information technology network consulting services, e-commerce initiatives, and legal services. ATM expenses increased $57,000, or 10.9%, to $578,000 for the three months ended September 30, 2013 as compared to $521,000 for the three months ended September 30, 2012 due to costs associated with ATM support and ATM card issuance and maintenance.

Salaries and benefits expense decreased $206,000, or 6.4%, to $3.0 million for the three months ended September 30, 2013 as compared to $3.2 million for the three months ended September 30, 2012 due primarily to lower estimated accruals for the annual incentive plan.

Income Tax Expense. Income tax expense decreased $130,000, or 16.1% to $676,000 for the three months ended September 30, 2013 compared to $806,000 for the three months ended September 30, 2012. This decrease was primarily the result of lower pretax income for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The effective tax rates were 37.0% and 36.7% for the three months ended September 30, 2013 and 2012, respectively.

Asset Quality

General. We continue our disciplined lending practices including our strict adherence to a long standing regimented credit culture that emphasizes the consistent application of underwriting standards to all loans. In this regard, we fully underwrite all loans based on an applicant's employment history, credit history and an appraised value of the subject property. With respect to loans we purchase, we underwrite each loan based upon our own underwriting standards prior to making the purchase except for loans purchased with a credit guarantee. The credit guarantee requires the seller to substitute or repurchase any loans sold to the Bank that become 60 days or more delinquent at the Bank's option. The credit quality of the loans purchased in fiscal 2012 was to our satisfaction and did not result in substitution or repurchase of any loans purchased.


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The following underwriting guidelines, among other things, have been used by us as underwriting tools to further limit our potential loss exposure:

All variable rate one-to-four family residential loans are underwritten using the fully indexed rate.

We only lend up to 80% of the lesser of the appraised value or purchase price for one-to-four family residential loans without private mortgage insurance ("PMI"), and up to 97% with PMI.

We only lend up to 75% of the lesser of the appraised value or purchase price for multi-family residential loans.

We only lend up to 65% of the lesser of the appraised value or purchase price for commercial real estate loans.

Additionally, our portfolio has remained strongly anchored in traditional mortgage products. We do not originate or purchase construction and development loans, teaser option-ARM loans, negatively amortizing loans or high loan-to-value loans.

All of our real estate loans are secured by properties located in California. The following tables set forth our real estate loans and non-accrual real estate loans by county (dollars in thousands):

                                    Real Estate Loans by County as of September 30, 2013
                                                            Multi-family        Commercial real
County                            One-to-four family        residential             estate              Total        Percent

Los Angeles                      $            129,897      $      270,731      $          24,733      $ 425,361         62.78 %
Orange                                         45,096              15,509                 12,375         72,980         10.77
San Diego                                      21,016              10,926                  2,545         34,487          5.09
San Bernardino                                 19,472              10,227                  3,316         33,015          4.87
Riverside                                      14,322               3,003                  6,117         23,442          3.46
Santa Clara                                    18,378                 493                     -          18,871          2.78
Alameda                                        13,866               1,643                    445         15,954          2.35
Other                                          46,261               5,034                  2,202         53,497          7.90

Total                            $            308,308      $      317,566      $          51,733      $ 677,607        100.00 %

                                     Real Estate Loans by County as of June 30, 2013
                                                           Multi-family
County                           One-to-four family        residential          Commercial           Total        Percent

Los Angeles                     $            131,290      $      232,353      $        27,124      $ 390,767         59.56 %
Orange                                        47,146              17,646               13,489         78,281         11.93
San Diego                                     23,457              11,760                2,545         37,762          5.76
San Bernardino                                20,404              10,288                3,333         34,025          5.19
Riverside                                     15,060               3,125                6,151         24,336          3.71
Santa Clara                                   17,471                 501                   -          17,972          2.74
Alameda                                       13,814                  25                  447         14,286          2.18
Other                                         50,989               5,073                2,532         58,594          8.93

Total                           $            319,631      $      280,771      $        55,621      $ 656,023        100.00 %


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                                      Non-accrual Real Estate Loans by County as of September 30, 2013
                                                                                                                           Percent of Non-
                                                               Multi-family         Commercial real                        accrual to Loans
County                            One-to-four family           residential              estate              Total          in Each Category

Los Angeles                      $               3,034        $           -        $           1,144       $  4,178                     0.98 %
Orange                                             386                    -                       -             386                     0.53
San Diego                                          707                   498                   2,545          3,750                    10.87
San Bernardino                                   1,593                   701                      -           2,294                     6.95
Riverside                                          298                   456                      -             754                     3.22
Santa Clara                                      1,744                    -                       -           1,744                     9.24
Alameda                                            390                    -                       -             390                     2.44

Total                            $               8,152        $        1,655       $           3,689       $ 13,496                     1.99

                                       Non-accrual Real Estate Loans by County as of June 30, 2013
                                                                                                                         Percent of Non-
. . .
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