Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨
Smaller Reporting Company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $.01 par value – 7,400,102 shares outstanding as of February 5, 2015.
Securities held-to-maturity, fair value of $370 and $406 at December 31, 2014 and June 30, 2014, respectively
360
395
Federal Home Loan Bank stock, at cost
5,519
5,519
Loans held for sale
2,039
3,687
Loans receivable, net of allowance for loan losses of $3,914 and $4,580 at December 31, 2014 and June 30, 2014, respectively
680,879
715,750
Accrued interest receivable
2,054
2,252
Premises and equipment, net
3,338
3,764
Goodwill
3,950
3,950
Bank-owned life insurance
14,432
14,220
Real estate owned (REO)
—
284
Other assets
4,386
3,231
Total assets
$
863,207
$
879,188
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest bearing
$
58,352
$
60,569
Interest bearing
597,902
592,254
Total deposits
656,254
652,823
Federal Home Loan Bank advances, short-term
—
20,000
Federal Home Loan Bank advances, long-term
65,000
65,000
Accrued expenses and other liabilities
3,720
4,479
Total liabilities
724,974
742,302
Stockholders’ equity
Nonredeemable serial preferred stock, $.01 par value; 25,000,000 shares authorized; issued and outstanding — none
—
—
Common stock, $0.01 par value; 100,000,000 authorized; 7,392,908 and 7,368,296 shares issued and outstanding at December 31, 2014 and June 30, 2014, respectively
74
74
Additional paid-in capital
67,996
67,690
Retained earnings
73,958
73,210
Accumulated other comprehensive loss, net of tax
(138
)
(224
)
Unearned employee stock ownership plan (ESOP) shares
(3,657
)
(3,864
)
Total stockholders’ equity
138,233
136,886
Total liabilities and stockholders’ equity
$
863,207
$
879,188
The accompanying notes are an integral part of these unaudited consolidated financial statements
1
SIMPLICITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended December 31,
Six Months Ended December 31,
2014
2013
2014
2013
Interest income
Interest and fees on loans
$
7,236
$
8,016
$
14,953
$
16,034
Interest on securities, taxable
190
179
394
346
Federal Home Loan Bank dividends
103
84
207
164
Other interest
49
22
88
51
Total interest income
7,578
8,301
15,642
16,595
Interest expense
Interest on deposits
1,350
1,280
2,708
2,671
Interest on borrowings
293
287
605
536
Total interest expense
1,643
1,567
3,313
3,207
Net interest income
5,935
6,734
12,329
13,388
Provision for (recovery of) loan losses
(400
)
(300
)
(750
)
(300
)
Net interest income after provision for loan losses
6,335
7,034
13,079
13,688
Noninterest income
Service charges and fees
533
521
1,079
988
ATM fees and charges
461
503
949
1,020
Referral commissions
92
95
189
179
Bank-owned life insurance
107
110
212
219
Net gain on sales of loans
112
145
311
330
Other noninterest (loss) income
(9
)
20
(54
)
117
Total noninterest income
1,296
1,394
2,686
2,853
Noninterest expense
Salaries and benefits
3,004
3,122
5,944
6,138
Occupancy and equipment
680
723
1,430
1,509
ATM expense
519
550
1,019
1,128
Advertising and promotional
62
337
194
619
Legal Fees
224
39
414
87
Professional services
379
563
1,045
1,071
Federal deposit insurance premiums
115
117
224
249
Postage
55
52
103
104
Telephone
250
207
448
402
Loss on equity investment
147
75
297
136
REO foreclosure expenses and sales (gains)/losses, net
(123
)
(13
)
(168
)
15
Electronic services
121
123
245
248
Other operating expense
423
388
756
866
Total noninterest expense
5,856
6,283
11,951
12,572
Income before income tax expense
1,775
2,145
3,814
3,969
Income tax expense
835
805
1,797
1,480
Net income
$
940
$
1,340
$
2,017
$
2,489
Earnings per common share:
Basic
$
0.13
$
0.18
$
0.29
$
0.33
Diluted
$
0.13
$
0.18
$
0.29
$
0.33
The accompanying notes are an integral part of these unaudited consolidated financial statements
2
SIMPLICITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
Three Months Ended December 31,
Six Months Ended December 31,
2014
2013
2014
2013
Net income
$
940
$
1,340
$
2,017
$
2,489
Other comprehensive income (loss):
Unrealized gain (loss) on securities available for sale
202
(330
)
147
(237
)
Postretirement medical benefit costs
Net loss arising during the period
(8
)
(17
)
(21
)
(35
)
Reclassification adjustment for net periodic benefit cost and benefits paid
8
17
21
35
Income tax effect
(83
)
135
(61
)
97
Other comprehensive income (loss), net of tax
119
(195
)
86
(140
)
Comprehensive income
$
1,059
$
1,145
$
2,103
$
2,349
The accompanying notes are an integral part of these unaudited consolidated financial statements
3
SIMPLICITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(Dollars in thousands, except per share data)
Common Stock
Shares
Amount
Additional Paid-in
Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss), Net of tax
Unearned ESOP
Shares
Total
Balance, June 30, 2013
8,121,415
$
81
$
79,800
$
70,326
$
(491
)
$
(4,278
)
$
145,438
Net income
—
—
—
2,489
—
—
2,489
Other comprehensive income
—
—
—
—
(140
)
—
(140
)
Dividends declared ($0.16 per share)
—
—
—
(1,219
)
—
—
(1,219
)
Repurchase of common stock
(383,979
)
(3
)
(5,963
)
—
—
—
(5,966
)
Stock options earned
—
—
18
—
—
—
18
Allocation of stock awards
—
—
159
—
—
—
159
Issuance of stock awards
25,425
—
—
—
—
—
—
Allocation of ESOP common stock (20,710 shares allocated)
—
—
112
—
—
207
319
Balance, December 31, 2013
7,762,861
$
78
$
74,126
$
71,596
$
(631
)
$
(4,071
)
$
141,098
Balance, June 30, 2014
7,368,296
$
74
$
67,690
$
73,210
$
(224
)
$
(3,864
)
$
136,886
Net income
—
—
—
2,017
$
—
—
2,017
Other comprehensive income
—
—
—
—
86
—
86
Dividends declared ($0.18 per share)
—
—
—
(1,269
)
—
—
(1,269
)
Stock options earned
—
—
2
—
—
—
2
Allocation of stock awards
—
—
168
—
—
—
168
Issuance of stock awards
25,412
—
—
—
—
—
—
Forfeiture of stock awards
(800
)
—
—
—
—
—
—
Allocation of ESOP common stock (20,710 shares allocated)
—
—
136
—
—
207
343
Balance, December 31, 2014
7,392,908
$
74
$
67,996
$
73,958
$
(138
)
$
(3,657
)
$
138,233
The accompanying notes are an integral part of these unaudited consolidated financial statements
4
SIMPLICITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six Months Ended December 31,
2014
2013
OPERATING ACTIVITIES
Net income
$
2,017
$
2,489
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of net premiums on securities
162
195
Amortization of net premiums on loan purchases
43
203
Amortization of net loan origination costs
125
189
Provision for (recovery of) loan losses
(750
)
(300
)
Net gain on sale of REO
(181
)
(4
)
Net gain on sales of loans held for sale
(311
)
(330
)
Loans originated for sale
(17,296
)
(14,256
)
Proceeds from sales of loans held for sale
19,255
17,027
Decrease in valuation allowance for loans held for sale
—
(86
)
Depreciation and amortization
613
634
Loss on equity investment
297
136
Increase in cash surrender value of bank-owned life insurance
(212
)
(219
)
Allocation of ESOP common stock
343
319
Allocation of stock awards
168
159
Stock options earned
2
18
Net change in accrued interest receivable
198
113
Net change in other assets
(1,513
)
430
Net change in accrued expenses and other liabilities
(759
)
(2,938
)
Net cash provided by operating activities
2,201
3,779
INVESTING ACTIVITIES
Proceeds from maturities and principal repayments of available-for-sale securities
5,289
6,497
Proceeds from maturities and principal repayments of held-to-maturity securities
35
81
Net change in loans
35,147
(25,634
)
Proceeds from sale of real estate owned
771
329
Purchases of premises and equipment
(187
)
(728
)
Net cash provided by (used in) investing activities
41,055
(19,455
)
FINANCING ACTIVITIES
Proceeds from FHLB advances
—
25,000
Repayment of FHLB advances
(20,000
)
—
Dividends paid on common stock
(1,269
)
(1,219
)
Repurchase of common stock
—
(5,966
)
Net change in deposits
3,431
(30,168
)
Net cash used in financing activities
(17,838
)
(12,353
)
Net change in cash and cash equivalents
25,418
(28,029
)
Cash and cash equivalents at beginning of period
69,253
85,674
Cash and cash equivalents at end of period
$
94,671
$
57,645
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits and borrowings
$
3,321
$
3,214
Income taxes paid
2,150
2,075
SUPPLEMENTAL NONCASH DISCLOSURES
Transfer from loans to real estate owned
$
306
$
539
The accompanying notes are an integral part of these unaudited consolidated financial statements
5
SIMPLICITY BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Nature of Business and Significant Accounting Policies
Nature of Business: Simplicity Bancorp, Inc. (the “Company”), is a Maryland corporation that owns all of the outstanding common stock of Simplicity Bank (the “Bank”). The Company’s primary activity is holding all of the outstanding shares of common stock of Simplicity Bank. The Bank is a federally chartered savings bank headquartered in Covina, California. The Bank’s principal business activity consists of attracting retail deposits from the general public and originating or purchasing primarily loans secured by multi-family residences and first mortgages on owner-occupied, one-to-four family residences located in its market area, and to a lesser extent, commercial real estate, automobile and other consumer loans. The Bank also engages in mortgage banking activities and, as such, originates, sells and services one-to-four family residential mortgage loans.
On September 27, 2014, the Company entered into a merger agreement with HomeStreet, Inc. ("HomeStreet"), under which the Company will merge with and into HomeStreet and the Bank will merge with and into HomeStreet’s subsidiary, HomeStreet Bank (the "Merger"). Under the terms of the 100% stock agreement, the Company's stockholders are expected to receive one share of HomeStreet common stock for each share owned of the Company's common stock, subject to adjustment if HomeStreet’s closing stock price during a specified measurement period prior to closing is more than $20.00 or less than $15.00 per share. The Merger is expected to close in the first quarter of calendar year 2015, subject to certain conditions set forth in the merger agreement. For more information, please refer to the Agreement and Plan of Merger attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 1, 2014.
The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Unless the context otherwise requires, all references to the Company include the Bank and the Company on a consolidated basis.
Principles of Consolidation and Basis of Presentation: The financial statements of Simplicity Bancorp, Inc. have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and predominant practices followed by the financial services industry. The consolidated financial statements presented in this report include the accounts of Simplicity Bancorp, Inc. and its wholly-owned subsidiary, Simplicity Bank. All material intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of the financial condition and results of operations for the interim periods included herein have been made.
The results of operations for the three and six months ended December 31, 2014 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the fiscal year ending June 30, 2015. Certain information and note disclosures normally included in the Company’s annual financial statements have been condensed or omitted. Therefore, these consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes included in the 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Use of Estimates in the Preparation of Consolidated Financial Statements: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate owned, mortgage servicing assets (“MSAs”), mortgage banking derivatives, deferred tax assets and fair values of financial instruments.
Recent Accounting Pronouncements:
Effect of Newly Issued But Not Yet Effective Accounting Standards:
In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, which simplifies the amortization method an entity uses and modifies the criteria an entity must meet to account for a low-income housing tax credit investment by using ASC 323-740’s measurement and presentation alternative, including the simplified amortization method. This method permits an investment’s performance to be presented net of the related tax benefits as part of
6
income tax expense. For public entities, the ASU is effective for annual periods beginning after December 15, 2014, and interim periods therein. Early adoption is permitted. The amendments should be applied retrospectively to all periods presented. The adoption of this guidance is not expected to have a material effect on the Company's results of operations or financial position.
In January 2014, the FASB issued ASU 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. This ASU amends ASC 310 to clarify when an entity is considered to have obtained physical possession (from an in-substance possession or foreclosure) of a residential real estate property collateralizing a mortgage loan. A creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Upon physical possession of such real estate property, an entity is required to reclassify the nonperforming mortgage loan to other real estate owned. The ASU is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The amendments in the standard may be adopted using either a modified retrospective transition method or a prospective transition method. The adoption of this guidance is not expected to have a material effect on the Company's results of operations or financial position.
In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The ASU becomes effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The adoption of this guidance is not expected to have a material effect on the Company's results of operations or financial position.
Note 2 – Earnings Per Share
The following table sets forth earnings per share calculations for the three and six months ended December 31, 2014 and 2013:
Three months ended December 31,
Six months ended December 31,
2014
2013
2014
2013
(Dollars in thousands, except per share data)
Basic
Net income
$
940
$
1,340
$
2,017
$
2,489
Less: Net income allocated to restricted stock awards
11
11
21
21
Net income allocated to common shareholders
$
929
$
1,329
$
1,996
$
2,468
Weighted average common shares outstanding
6,975,798
7,410,160
6,970,620
7,518,064
Basic earnings per common share
$
0.13
$
0.18
$
0.29
$
0.33
Diluted
Net income
$
940
$
1,340
$
2,017
$
2,489
Less: Net income allocated to restricted stock awards
11
11
21
21
Net income allocated to common shareholders
$
929
$
1,329
$
1,996
$
2,468
Weighted average common shares outstanding
6,975,798
7,410,160
6,970,620
7,518,064
Add: Dilutive effect of stock options
25,753
22,642
25,810
21,082
Average shares and dilutive potential common shares
7,001,551
7,432,802
6,996,430
7,539,146
Diluted earnings per common share
$
0.13
$
0.18
$
0.29
$
0.33
The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings per share is determined for each class of common stock and participating securities according to dividends declared (or accumulated)
7
and participation rights in undistributed earnings. Restricted stock contains rights to non-forfeitable dividends and qualifies as a participating security. Employee Stock Ownership Plan (“ESOP”) shares are considered outstanding for this calculation unless unearned. For the three and six months ended December 31, 2014, 10,355 and 20,710 ESOP shares were allocated, respectively. 321,011 ESOP shares remained unearned at December 31, 2014 as compared to 362,432 ESOP shares remained unearned at December 31, 2013.
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. For the three and six months ended December 31, 2014, outstanding stock options to purchase 59,205 and 70,823 shares, respectively, were anti-dilutive and not considered in computing diluted earnings per common share. For the three and six months ended December 31, 2013, outstanding stock options to purchase 87,691 shares were anti-dilutive and not considered in computing diluted earnings per common share. Stock options are not considered participating securities as they do not contain rights to non-forfeitable dividends.
Note 3 – Fair Value Measurements
FASB ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
There were no financial or nonfinancial instruments transferred in or out of Level 1, 2, or 3 input categories during the three and six months ended December 31, 2014 and 2013.
Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Mortgage Servicing Assets: MSAs are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. The fair value is determined at a tranche level, based on a valuation model that calculates the present value of estimated future net servicing income. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data such as prepayment speeds, ancillary income, servicing costs, delinquency rates. The significant assumptions also include discount rate and prepayment speed incorporated into the valuation model that reflect management’s best estimate resulting in a level 3 classification.
8
Assets and liabilities measured at fair value on a recurring basis are summarized in the following tables:
Fair Value Measurements Using
Total
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
December 31, 2014
Assets
Available-for-sale securities
Mortgage-backed securities (residential)
$
32,513
$
—
$
32,513
$
—
Collateralized mortgage obligations (residential)
19,066
—
19,066
—
Total available-for-sale securities
$
51,579
$
—
$
51,579
$
—
June 30, 2014
Assets
Available-for-sale securities
Mortgage-backed securities (residential)
$
35,216
$
—
$
35,216
$
—
Collateralized mortgage obligations (residential)
21,667
—
21,667
—
Total available-for-sale securities
$
56,883
$
—
$
56,883
$
—
Nonrecurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the remeasurement is performed. The following assets were measured at fair value on a non-recurring basis:
Fair Value Measurements Using
Total
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Assets at December 31, 2014:
MSAs
$
81
$
—
$
—
$
81
Assets at June 30, 2014:
MSAs
$
75
$
—
$
—
$
75
At December 31, 2014 and June 30, 2014, no nonfinancial assets were measured at fair value on a non-recurring basis.
Impairment of MSAs is determined at the tranche level and recognized through a valuation allowance for each individual grouping, to the extent that fair value is less than the carrying amount. The impairment amount was $16,000 as of December 31, 2014 as compared to $10,000 as of June 30, 2014. There was a $6,000 impairment provision recorded during the six months ended December 31, 2014.
9
The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a recurring and non-recurring basis as of the dates indicated:
December 31, 2014
Fair Value
Valuation Techniques
Unobservable Inputs
Range
(Weighted Avg)
(Dollars in thousands)
MSAs
$
81
Discounted Cash Flow
Discount Rate
8.5%
Prepayment speed ("CPR")
6.95% - 17.18% (10.85%)
June 30, 2014
Fair Value
Valuation Techniques
Unobservable Inputs
Range
(Weighted Avg)
(Dollars in thousands)
MSAs
$
75
Discounted Cash Flow
Discount Rate
8.5%
Prepayment speed ("CPR")
5.90% to 14.52% (8.38%)
Fair Value of Financial Instruments
The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate fair value:
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents approximate fair values. Cash on hand and non-interest due from bank accounts are classified as Level 1 and federal funds sold are classified as Level 2.
Investments
Estimated fair values for securities held-to-maturity are obtained from quoted market prices where available and are classified as Level 1. Where quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments and are classified as Level 2.
Securities available-for-sale that are previously reported are excluded from the fair value disclosure below.
FHLB Stock
It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Loans Held for Sale
Fair value for loans held for sale is determined using quoted secondary-market prices such as loan sale commitments and is classified as Level 2.
Loans
Fair value for loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
MSAs
The Company uses the amortization method for its MSAs and assesses the MSAs for impairment based on fair value. The fair value of MSAs is determined at tranche level using significant assumptions such as discount rate and prepayment speed and is classified as Level 3. MSAs tranches with impairment recorded as described previously are excluded from the fair value disclosure below.
10
Accrued Interest Receivable
Consistent with the asset it is associated with, the carrying amount of accrued interest receivable approximates fair value resulting in a either Level 2 or Level 3 classification.
Deposits
The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) resulting in a Level 2 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
FHLB Advances
The fair values of the Company’s FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
Off-Balance Sheet Financial Instruments
The fair values for the Company’s off-balance sheet loan commitments are estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the Company’s customers. The estimated fair value of these commitments is not significant.
11
The carrying amounts and estimated fair values of the Company’s financial instruments are summarized as follows:
Fair Value Measurements at December 31, 2014 Using:
Carrying
Amount
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Fair
Value
(Dollars in thousands)
Financial assets:
Cash on hand
$
11,836
$
11,836
$
—
$
—
$
11,836
Federal funds sold
82,835
—
82,835
—
82,835
Securities held-to-maturity
360
—
370
—
370
Federal Home Loan Bank Stock
5,519
N/A
N/A
N/A
N/A
Loans held for sale
2,039
—
2,127
—
2,127
Loans receivable, net
680,879
—
—
704,777
704,777
MSAs
870
—
—
1,023
1,023
Accrued interest receivable - loans
1,970
—
—
1,970
1,970
Accrued interest receivable - investments
84
—
84
—
84
Financial liabilities:
Deposits
656,254
—
658,236
—
658,236
FHLB Advances
65,000
—
65,839
—
65,839
Fair Value Measurements at June 30, 2014 Using:
Carrying
Amount
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Fair
Value
(Dollars in thousands)
Financial assets:
Cash and due from banks
$
7,988
$
7,988
$
—
$
—
$
7,988
Federal funds sold
61,265
—
61,265
—
61,265
Securities held-to-maturity
395
—
406
—
406
Federal Home Loan Bank Stock
5,519
N/A
N/A
N/A
N/A
Loans held for sale
3,687
—
3,840
—
3,840
Loans receivable, net
715,750
—
—
738,391
738,391
MSAs
696
—
—
982
982
Accrued interest receivable - loans
2,159
—
—
2,159
2,159
Accrued interest receivable - investments
93
—
93
—
93
Financial liabilities:
Deposits
652,823
—
656,273
—
656,273
FHLB Advances
85,000
—
86,066
—
86,066
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Note 4 – Investments
The amortized cost and fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
There were no sales of securities during the three and six months ended December 31, 2014 and December 31, 2013.
All mortgage-backed securities and collateralized mortgage obligations have varying contractual maturity dates at December 31, 2014. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties. There were no mortgage-backed securities called prior to the maturity date during the three and six months ended December 31, 2014.
Securities with unrealized losses at December 31, 2014 and June 30, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
(Dollars in thousands)
December 31, 2014
Description of Securities
Mortgage-backed securities
$
8,570
$
(11
)
$
15,362
$
(275
)
$
23,932
$
(286
)
Collateralized mortgage obligations (residential)
682
(5
)
712
(7
)
1,394
(12
)
Total temporarily impaired
$
9,252
$
(16
)
$
16,074
$
(282
)
$
25,326
$
(298
)
June 30, 2014
Description of Securities
Mortgage-backed securities
$
—
$
—
$
16,404
$
(376
)
$
16,404
$
(376
)
Collateralized mortgage obligations (residential)
12,636
(14
)
1,598
(9
)
14,234
(23
)
Total temporarily impaired
$
12,636
$
(14
)
$
18,002
$
(385
)
$
30,638
$
(399
)
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the Company does not have the intent to sell these securities and it is not more likely than not that it will be required to sell the securities before their anticipated recovery. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
At December 31, 2014, eight debt securities had an aggregate unrealized loss of 1.4% of the Company’s amortized cost basis. At June 30, 2014, ten debt securities had an unrealized loss of 1.3% of the Company’s amortized cost basis. We do not own any non-agency mortgage-backed securities (“MBSs”) or collateralized mortgage obligations (“CMOs”). All MBSs and CMOs were issued
by a wholly-owned government corporation, Ginnie Mae, or U.S. government-sponsored enterprises and agencies, including Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. The unrealized losses relate principally to the general change in interest rates and liquidity, and not credit quality, that has occurred since the securities’ purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future. As management has the intent and ability to hold debt securities until recovery, which may be maturity, and it is not more likely than not that it will be required to sell the securities before their anticipated recovery, no declines in fair value are deemed to be other-than-temporary as of December 31, 2014 and June 30, 2014.
At December 31, 2014 and June 30, 2014, there were no investments in any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
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Note 5 – Loans
The composition of loans consists of the following:
December 31, 2014
June 30, 2014
(Dollars in thousands)
Real Estate:
One-to-four family residential
$
278,501
$
288,960
Multi-family residential
313,270
335,040
Commercial real estate
31,477
38,062
623,248
662,062
Consumer:
Automobile
48,351
45,686
Home equity
607
625
Other consumer loans, primarily unsecured
12,323
11,481
61,281
57,792
Total loans
684,529
719,854
Deferred net loan origination costs
44
213
Net premium on purchased loans
220
263
Allowance for loan losses
(3,914
)
(4,580
)
Loans receivable, net
$
680,879
$
715,750
Loans held for sale totaled $2.0 million as of December 31, 2014 as compared to $3.7 million as of June 30, 2014. Loans held for sale are recorded at the lower of cost or fair value. Fair value, if lower than cost, is determined by outstanding commitments from the investor. Proceeds from sales of loans held for sale were $19.3 million and $17.0 million during the six months ended December 31, 2014 and 2013, resulting in net gain on sales of $311,000 and $330,000, respectively.
15
The following is an analysis of the changes in the allowance for loan losses: