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SMPL > SEC Filings for SMPL > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for SIMPLICITY BANCORP, INC.

Form 10-Q for SIMPLICITY BANCORP, INC.


9-May-2014

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 February 2014, economic activity continued to expand from January to early February 2014. In the Twelfth Federal Reserve District (San Francisco), activity in residential and commercial real estate markets continued to expand. Home prices climbed further relative to the prior reporting period in our market area of California, although at a slower pace; however, the pace of home sales was still below historical averages in many areas. Occupancy rates for commercial real estate trended up in some areas, and increasing permit activity and sales of empty lots suggest that commercial construction may pick up further. Loan demand increased overall. However, lenders continue to face margin compression due to the low interest rate environment, ample liquidity and generally stiff competition over well-qualified borrowers. Some financial institutions relaxed underwriting standards in an effort to win new business or maintain existing business relationships. 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 high by historic standards. In particular, California continues to experience elevated unemployment rates as compared to the national average. Unemployment rates in California decreased slightly from 8.5% in June 2013 to 8.1% in March 2014. This compares to the national unemployment rate which trended down from 7.6% in June 2013 to 6.7% in March 2014.
Comparison of Financial Condition at March 31, 2014 and June 30, 2013. Assets. Total assets declined $6.2 million, 0.7%, to $861.2 million at March 31, 2014 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 $28.4 million, or 33.2%, to $57.2 million at March 31, 2014 from $85.7 million at June 30, 2013. The decrease was primarily due to cash deployed to fund the net growth in loans receivable. Securities available-for-sale decreased by $8.8 million, or 16.9%, to $43.4 million at March 31, 2014 from $52.2 million at June 30, 2013 due to maturities, principal repayments and amortization.
Gross loans receivable increased by $32.7 million, or 4.7%, to $727.0 million at March 31, 2014 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 newly originated conforming fixed rate one-to-four family residential loans in the secondary market. Multi-family loans increased $52.9 million, or 18.8%, to $333.7 million at March 31, 2014 from $280.8 million at June 30, 2013 due to $99.7 million in loan originations during the nine months ended March 31, 2014 as our emphasis remains on growing this portfolio segment. Commercial real estate loans decreased $10.3 million, or 18.6%, to $45.3 million at March 31, 2014 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 during the nine months ended March 31, 2014. One-to-four family residential real estate loans decreased $26.5 million, or 8.3%, to $293.1 million at March 31, 2014 from $319.6 million at June 30, 2013 due primarily to principal prepayments and payoffs and sales of newly originated conforming fixed rate loans held for sale in the


secondary market. Consumer loans at March 31, 2014 which were comprised primarily of automobile loans totaling $41.2 million and unsecured loans totaling $8.7 million increased $16.7 million, or 43.5%, to $55.0 million at March 31, 2014 from $38.3 million at June 30, 2013 due to $25.4 million and $10.7 million in automobile and unsecured loan originations, respectively, during the nine months ended March 31, 2014. The increase in consumer loans was primarily due to reintroduction of auto buying service, the successful launch of a consumer loan origination system in fiscal 2013, and implementation of the consumer loan sales team in fiscal 2014 which enabled the Company to provide customers with a simple shopping experience, originate consumer loans and generate an instant credit decision at the point of sale. In addition, through continued leveraging of retail delivery staff, building on brand recognition and consistent marketing of our competitive loan products, it is anticipated that our consumer loan portfolio will continue to grow.
The allowance for loan losses decreased by $632,000, or 11.2%, to $5.0 million at March 31, 2014 from $5.6 million at June 30, 2013 due primarily to a decrease in net charge-offs as well as improved asset quality of the loan portfolio as evidenced by a lower level of criticized, classified and non-accrual loans, and a decline in the historical loss factors. Non-performing assets decreased to $14.7 million, or 1.72% of total assets at March 31, 2014 as compared to $16.0 million, or 1.84% of total assets at June 30, 2013.
Deposits. Total deposits decreased $20.0 million, or 3.1%, to $634.6 million at March 31, 2014 from $654.6 million at June 30, 2013. The decline was comprised of a $18.8 million decrease in interest-bearing deposits and a $1.2 million decrease in non-interest bearing demand deposits.
The decrease in interest bearing deposits consisted of a $28.2 million, or 10.1%, decrease in certificates of deposit from $280.1 million at June 30, 2013 to $251.9 million at March 31, 2014, and a $2.4 million, or 1.8%, decrease in savings accounts from $134.9 million at June 30, 2013 to $132.4 million at March 31, 2014. These decreases were partially offset by a $6.5 million, or 44.8%, increase in interest-bearing checking from $14.5 million at June 30, 2013 to $20.9 million at March 31, 2014 and a $5.3 million, or 3.3%, increase in money market accounts from $159.6 million at June 30, 2013 to $164.9 million at March 31, 2014. The decrease in certificates of deposit was attributable to non-relationship customers seeking higher yields at other financial institutions as accounts repriced to lower offering rates. Savings accounts decreased primarily due to the seasonality of holiday club savings as well as the discontinuation of certain savings products which traditionally had higher offering rates. Interest-bearing checking balances increased due primarily to the timing of customer annual bonus payment deposits and tax refunds. 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. Non-interest bearing demand deposits decreased $1.2 million, or 1.8%, from $65.7 million at June 30, 2013 to $64.5 million at March 31, 2014. The decline in non-interest bearing demand deposits was primarily a result of the timing of customer payroll deposits as compared to June 30, 2013.
Borrowings. FHLB advances increased to $85.0 million at March 31, 2014 as compared to $60.0 million at June 30, 2013. The weighted average cost of FHLB advances was 1.57% at March 31, 2014 as compared to 1.64% at June 30, 2013. During the nine months ended March 31, 2014, the Bank borrowed $25.0 million in FHLB advances at a weighted average cost of 1.38%. The increase in borrowings has allowed the Bank to manage its liquidity position and improve its interest rate risk position by locking in lower cost longer term funding. Stockholders' Equity. Total stockholders' equity, represented 15.9% of total assets and decreased to $137.1 million at March 31, 2014 from $145.4 million at June 30, 2013. The decrease in stockholders' equity was primarily attributable to shares repurchased at an aggregate cost of $11.2 million during the nine months ended March 31, 2014 pursuant to the stock repurchase programs previously announced as well as cash dividends paid of $1.8 million, partially offset by net income of $3.7 million.


Average Balances, Net Interest Income, Yields Earned and Rates Paid The following table sets forth certain information for the three months ended March 31, 2014 and 2013, respectively.

                                                     For the three months ended March 31,
                                               2014 (1)                                2013 (1)
                                                              Average                                 Average
                                   Average                     Yield/      Average                     Yield/
                                   Balance       Interest       Cost       Balance       Interest       Cost
                                                            (Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable(2)              $ 719,733     $    7,954       4.42 %   $ 718,186     $    8,559       4.77 %
Securities(3)                       44,833            173       1.54        61,679            165       1.07
Federal funds sold                  46,103             28       0.24        55,696             34       0.24
Federal Home Loan Bank stock         5,962            105       7.04         7,211             44       2.44
Total interest-earning assets      816,631          8,260       4.05       842,772          8,802       4.18
Noninterest earning assets          37,055                                  36,688
Total assets                     $ 853,686                               $ 879,460
INTEREST-BEARING LIABILITIES
Interest-bearing checking        $  16,883     $       14       0.33 %   $  13,673     $        2       0.06 %
Money market                       164,286             93       0.23       163,322             90       0.22
Savings deposits                   127,423             40       0.13       131,611             29       0.09
Certificates of deposit            254,195          1,094       1.72       294,638          1,435       1.95
Borrowings                          85,000            329       1.55        60,000            243       1.62
Total interest-bearing
liabilities                        647,787          1,570       0.97       663,244          1,799       1.08
Noninterest bearing liabilities     66,877                                  68,486
Total liabilities                  714,664                                 731,730
Equity                             139,022                                 147,730
Total liabilities and equity     $ 853,686                               $ 879,460
Net interest/spread                            $    6,690       3.08 %                 $    7,003       3.09 %
Margin(4)                                                       3.28 %                                  3.32 %
Ratio of interest-earning assets
to interest bearing liabilities     126.06 %                                127.07 %


 _____________________________


(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.


The following table sets forth certain information for the nine months ended March 31, 2014 and 2013, respectively.

                                                     For the nine months ended March 31,
                                               2014 (1)                               2013 (1)
                                                             Average                                Average
                                   Average                    Yield/      Average                    Yield/
                                   Balance      Interest       Cost       Balance      Interest       Cost
                                                           (Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable(2)              $ 714,543     $  23,989       4.48 %   $ 737,855     $  27,171       4.91 %
Securities(3)                       47,567           519       1.45        55,948           334       0.80
Federal funds sold                  45,414            78       0.23        64,121           115       0.24
Federal Home Loan Bank stock         5,962           269       6.02         7,785           112       1.92
Total interest-earning assets      813,486        24,855       4.07       865,709        27,732       4.27
Noninterest earning assets          37,635                                 37,406
Total assets                     $ 851,121                              $ 903,115
INTEREST-BEARING LIABILITIES
Interest-bearing checking        $  15,354     $      20       0.17 %   $  11,515     $       5       0.06 %
Money market                       162,565           280       0.23       162,773           322       0.26
Savings deposits                   130,299           100       0.10       135,456           129       0.13
Certificates of deposit            261,606         3,512       1.79       300,931         4,520       2.00
Borrowings                          72,500           864       1.59        72,000         1,140       2.11
Total interest-bearing
liabilities                        642,324         4,776       0.99       682,675         6,116       1.19
Noninterest bearing liabilities     66,875                                 69,788
Total liabilities                  709,199                                752,463
Equity                             141,922                                150,652
Total liabilities and equity     $ 851,121                              $ 903,115
Net interest/spread                            $  20,079       3.08 %                 $  21,616       3.08 %
Margin(4)                                                      3.29 %                                 3.33 %
Ratio of interest-earning assets
to interest bearing liabilities     126.65 %                               126.81 %


 _____________________________


(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.


Comparison of Results of Operations for the Three Months Ended March 31, 2014 and March 31, 2013.
General. Net income for the three months ended March 31, 2014 was $1.3 million, a decrease of $173,000, or 12.1%, as compared to net income of $1.4 million for the three months ended March 31, 2013. Earnings per basic and diluted common share were $0.17 for the three months ended March 31, 2014, compared to $0.18 for the three months ended March 31, 2013. The decrease in net income was due primarily to decreases in net interest income and noninterest income, partially offset by a decrease in provision for loan losses.
Interest Income. Interest income decreased $542,000, or 6.2%, to $8.3 million for the three months ended March 31, 2014 from $8.8 million for the three months ended March 31, 2013. The decline in interest income was primarily due to decreases in interest and fees on loans.
Interest and fees on loans decreased $605,000, or 7.1%, to $8.0 million for the three months ended March 31, 2014 from $8.6 million for the three months ended March 31, 2013. The primary reason for the decrease was a decline of 35 basis points in the average yield on loans from 4.77% for the three months ended March 31, 2013 to 4.42% for the three months ended March 31, 2014. 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 current period as a result of the low interest rate environment.
Interest Expense. Interest expense decreased $229,000, or 12.7% to $1.6 million for the three months ended March 31, 2014 from $1.8 million for the three months ended March 31, 2013. The decline reflected a reduction in the average cost of funds on deposits and borrowings as a result of continuing low interest rates as well as a lower average balance of deposits, offset by a higher average balance of borrowings during the three months ended March 31, 2014.
Interest expense on deposits decreased $315,000, or 20.2% to $1.2 million during the three months ended March 31, 2014 as compared to $1.6 million for the same period last year. The primary reason for the decrease was a 15 basis point decline in the average cost of deposits from 1.03% for the three months ended March 31, 2013 to 0.88% for the three months ended March 31, 2014 due to the downward repricing of deposits in the low interest rate environment as well as a decrease of $40.5 million in the average balance of deposits to $562.8 million for the three months ended March 31, 2014 from $603.2 million for the three months ended March 31, 2013. The decrease in the average balance of deposits was a result of a decrease in certificates of deposit due to non-relationship customers seeking higher yields at other financial institutions as accounts reprice to lower interest rates.
Interest expense on borrowings increased $86,000 or 35.4% to $329,000 during the three months ended March 31, 2014 as compared to $243,000 for the same period last year. The increase was primarily attributable to a higher average balance of borrowings resulting from a $25.0 million increase in FHLB advances during the second quarter of 2014 at a weighted average cost of 1.38%, partially offset by a 7 basis point decrease in the average cost of borrowings from 1.62% for the three months ended March 31, 2013 to 1.55% for the three months ended March 31, 2014.
Provision for Loan Losses. There was no provision for loan losses for the three months ended March 31, 2014 as compared to a $400,000 provision for loan losses for the same period last year. The decline in the provision during the current period was primarily a result of a decline in net charge-offs and overall historical loss factors on multi-family and unsecured loans collectively evaluated for impairment. Annualized net charge-offs decreased to 0.02% of average outstanding loans for the three months ended March 31, 2014 as compared to 0.33% of average outstanding loans for the same period last year. Non-performing assets decreased to $14.7 million, or 1.72% of total assets at March 31, 2014 as compared to $16.0 million, or 1.84% of total assets at June 30, 2013 and $19.6 million, or 2.66% of total assets at March 31, 2013. Delinquent loans 60 days or more past due were $6.9 million or 0.95% of total loans at March 31, 2014 as compared to $5.5 million, or 0.79% of total loans at June 30, 2013 and $6.9 million or 0.98% of total loans at March 31, 2013. The increase in delinquent loans at March 31, 2014 as compared to June 30, 2013 was primarily attributable to the addition of one impaired multi-family residential loan of $3.0 million that is being vigorously pursued by management. Loans 30 to 59 days delinquent increased to $2.6 million or 0.36% of total loans at March 31, 2014, as compared to $584,000, or 0.08% of total loans at June 30, 2013 and $773,000, or 0.11% of total loans at March 31, 2013. Loans 30 to 59 days delinquent were either criticized or classified assets. Some loans 30 to 59 days delinquent were individually evaluated for impairment and others were collectively evaluated for impairment with additional qualitative adjustments factored in due to loan classification.
Although there was no net provision for loan losses recorded, it was comprised of a $172,000 provision on one-to-four family loans, a $94,000 reduction in provision on multi-family loans, a $5,000 reduction in provision on commercial real estate loans, a $20,000 provision on automobile loans, and a $93,000 reduction in provision on other loans. The increase in provision on one-to-four family residential loans was primarily due to an increase in the historical loss factor on criticized one-to-four family loans collectively evaluated for impairment. The decrease in provision on multi-family loans was primarily due to a lower level of classified multi-family loans and a decline in the overall historical loss factors on multi-family loans collectively evaluated for


impairment. The increase in provision on automobile loans was primarily caused by an increase in the balance of automobile loans collectively evaluated for impairment. The decline in provision on other loans was primarily attributable to a decrease in loss factors and the balance of unsecured 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 $249,000, or 15.4%, to $1.4 million for the three months ended March 31, 2014 as compared to $1.6 million for the three months ended March 31, 2013 due primarily to a decline in gains on one-to-four family residential mortgage loans sold, partially offset by an increase in service charges and fees.
Net gain on sales of loans decreased $344,000, or 79.1%, to $91,000 for the three months ended March 31, 2014 as compared to $435,000 for the same period last year, reflecting the impact of lower loan sale volume as a result of the increase in interest rates since June 2013.
Service charges and fees increased $170,000, or 49.1%, to $516,000, for the three months ended March 31, 2014 as compared to $346,000 for the same period last year, primarily attributable to higher mortgage loan servicing fee income as well as higher service charge income on non-interest bearing demand deposits during the three months ended March 31, 2014. Management periodically reviews service charge rates to compensate for services provided while still maintaining a competitive position.
Noninterest Expense. Our noninterest expense increased slightly by $19,000, or 0.3%, to $5.9 million for the three months ended March 31, 2014 primarily due to increases in electronic services expenses and advertising and promotional expenses, offset by a decline in federal deposit insurance premiums. Electronics services expenses increased $60,000, or 63.2%, to $155,000 for the three months ended March 31, 2014 as compared to $95,000 for the same period last year. The increase was due primarily to higher maintenance and support costs in relation to on-line and mobile banking services due to increased number of users and transaction volume.
Advertising and promotional expenses increased $45,000, or 19.8%, to $272,000 for the three months ended March 31, 2014 as compared to $227,000 for the same period last year. The increase was primarily due to expenses incurred related to continuing branding and marketing campaign efforts.
Federal deposit insurance premiums decreased $46,000, or 27.2%, to $123,000 for the three months ended March 31, 2014 as compared to $169,000 for the same period last year resulting from a decrease in average consolidated total assets. Income Tax Expense. Income tax expense decreased $8,000, or 0.9% to $856,000 for the three months ended March 31, 2014 as compared to $864,000 for the three months ended March 31, 2013. The effective tax rates were 40.5% and 37.7% for the three months ended March 31, 2014 and 2013, respectively. This higher effective tax rate for the three months ended March 31, 2014 as compared to the same period last year was primarily the result of the termination of the California enterprise zone tax deduction as well as the expiration of California affordable housing tax credits effective January 2014.
Comparison of Results of Operations for the Nine Months Ended March 31, 2014 and March 31, 2013.
General. Net income for the nine months ended March 31, 2014 was $3.7 million, a decrease of $184,000 as compared to the $3.9 million for the nine months ended March 31, 2013. Earnings per basic and diluted common share were $0.50 for the nine months ended March 31, 2014, compared to $0.48 for the nine months ended March 31, 2013. The decrease in net income was due primarily to decreases in net interest income and noninterest income offset by a decrease in provision for loan losses and noninterest expense.
Interest Income. Interest income decreased $2.9 million, or 10.4%, to $24.9 million for the nine months ended March 31, 2014 from $27.7 million for the nine months ended March 31, 2013. The decline in interest income was primarily due to decreases in interest and fees on loans.
Interest and fees on loans decreased $3.2 million, or 11.7%, to $24.0 million for the nine months ended March 31, 2014 from $27.2 million for the nine months ended March 31, 2013. The primary reason for the decrease was a decline of 43 basis points in the average yield on loans from 4.91% for the nine months ended March 31, 2013 to 4.48% for the nine months ended March 31, 2014 and a decrease of $23.3 million in the average balance of loans receivable to $714.5 million for the nine months ended March 31, 2014 from $737.9 million for the nine months ended March 31, 2013. 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 exceeding new loan originations.
Interest Expense. Interest expense decreased $1.3 million, or 21.9% to $4.8 million for the nine months ended March 31, 2014 from $6.1 million for the nine months ended March 31, 2013. The decline reflected a reduction in the average . . .

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