FORM 10-Q SECURITIES AND EXCHANGE
COMMISSION |
|||
[Mark One] | |||
[X] | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
||
For the quarterly period ended March 31, 2003 | |||
[ ] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
||
For the transition period from _____________ | to ________________________ | ||
Commission
File No.: 0-15641
|
|||
California First National
Bancorp |
|||
California (State or other jurisdiction of incorporation or organization) |
33-0964185 (I.R.S. Employer Identification No.) |
||
18201
Von Karman Ave., Suite 800 Irvine, California (Address of principal executive offices) |
92612 (Zip Code) |
||
Registrant's telephone number, including area code: (949) 255-0500 | |||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 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 X No | |||
The number of shares outstanding of the Registrant's Common Stock, par value $.01 per share, as of April 25, 2003 was 10,933,509. |
CALIFORNIA
FIRST NATIONAL BANCORP
|
||
INDEX |
||
PART I. FINANCIAL INFORMATION |
PAGE
NUMBER |
|
Item 1. Financial Statements | ||
Consolidated
Balance Sheets - March 31, 2003 and June 30, 2002 |
3
|
|
Consolidated Statements of Earnings
- Three and nine |
4
|
|
Consolidated Statements of Cash Flows
- Nine months |
5
|
|
Notes to Consolidated Financial Statements |
6
|
|
Item
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations |
7-13
|
|
Item 4. Controls and Procedures |
14
|
|
Item 6. Exhibits and Reports on Form 8-K |
14
|
|
Signature |
15
|
|
Certifications |
16-17
|
CONSOLIDATED BALANCE SHEETS |
|||
ASSETS |
(UNAUDITED)
March 31, 2003 |
June 30,
2002 |
|
|
|
||
Cash and due from banks |
$ 65,425,000 |
$ 78,503,000 |
|
Federal funds sold and securities purchased
under |
6,480,000
|
9,890,000
|
|
|
|
||
Total cash and cash equivalents |
71,905,000 |
88,393,000 |
|
Security held to maturity |
560,000 |
583,000 |
|
Net receivables |
12,737,000 |
15,961,000 |
|
Property acquired for transactions in process |
19,452,000 |
20,570,000 |
|
Net investment in capital leases |
128,749,000 |
108,091,000 |
|
Income taxes receivable |
- |
1,142,000 |
|
Other assets |
2,125,000 |
1,147,000 |
|
Discounted lease rentals assigned to lenders |
46,703,000 |
72,754,000 |
|
|
|
||
$ 282,231,000 |
$ 308,641,000 |
||
|
|
||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||
Liabilities: |
|||
Accounts payable |
$ 929,000 |
$ 1,422,000 |
|
Accrued liabilities |
3,439,000 |
3,996,000 |
|
Demand and money market deposits |
555,000 |
1,333,000
|
|
Time certificates of deposit |
6,707,000 |
7,636,000 |
|
Lease deposits |
6,843,000 |
7,608,000 |
|
Nonrecourse debt |
46,703,000 |
72,754,000 |
|
Income taxes payable, including deferred taxes |
21,576,000 |
22,501,000 |
|
|
|
||
86,752,000 |
117,250,000 |
||
|
|
|
|
Commitments and contingencies | |||
Stockholders' equity: |
|||
Preferred
stock; 2,500,000 shares |
- |
- |
|
Common
stock; $.01 par value; 20,000,000 shares |
110,000 |
112,000 |
|
Additional paid in capital |
1,616,000 |
2,900,000 |
|
Retained earnings |
193,753,000 |
188,379,000 |
|
|
|
||
195,479,000 |
191,391,000 |
||
|
|
||
$ 282,231,000 |
$ 308,641,000 |
||
|
|
||
The accompanying notes are
an integral part
of these consolidated financial statements. |
3
CONSOLIDATED
STATEMENTS OF EARNINGS (UNAUDITED)
|
||||||||
Three months ended
March 31, |
Nine months ended |
|||||||
|
|
|||||||
2003 |
2002 |
2003 |
2002 |
|||||
Direct finance income |
$ 5,105,000 |
$ 4,439,000 |
$14,629,000 |
$13,170,000 |
||||
Interest income on investments |
190,000 |
309,000 |
807,000 |
1,193,000 |
||||
|
|
|
|
|||||
Total direct finance and interest income |
5,295,000 |
4,748,000 |
15,436,000 |
14,363,000 |
||||
Interest expense on deposits |
55,000 |
41,000 |
184,000 |
65,000 |
||||
Provision for lease losses |
120,000 |
1,568,000 |
338,000 |
4,004,000 |
||||
|
|
|
|
|||||
Net direct finance and interest income after |
5,120,000 |
3,139,000 |
14,914,000 |
10,294,000 |
||||
|
|
|
|
|||||
Other income |
||||||||
Operating and sales type lease income |
1,879,000 |
2,806,000 |
4,975,000 |
5,144,000 |
||||
Gain on sale of leases and leased property |
1,176,000 |
3,856,000 |
5,816,000 |
11,614,000 |
||||
Other income |
183,000 |
144,000 |
468,000 |
992,000 |
||||
|
|
|
|
|||||
Total other income |
3,238,000 |
6,806,000 |
11,259,000 |
17,750,000 |
||||
|
|
|
|
|||||
Gross profit |
8,358,000 |
9,945,000 |
26,173,000 |
28,044,000 |
||||
Selling, general and administrative expenses |
4,639,000 |
3,681,000 |
12,805,000 |
11,079,000 |
||||
|
|
|
|
|||||
Earnings before income taxes |
3,719,000 |
6,264,000 |
13,368,000 |
16,965,000 |
||||
Income taxes |
1,432,000 |
2,412,000 |
5,147,000 |
6,532,000 |
||||
|
|
|
|
|||||
Net earnings |
$ 2,287,000 |
$ 3,852,000 |
$ 8,221,000 |
$ 10,433,000 |
||||
|
|
|
|
|||||
Basic earnings per common share |
$ .21 |
$ .34 |
$ .74 |
$ .93 |
||||
|
|
|
|
|||||
Diluted earnings per common share |
$ .21 |
$ .34 |
$ .73 |
$ .91 |
||||
|
|
|
|
|||||
Dividends declared per common share outstanding |
$ .04 |
$ .04 |
$ .12 |
$ .12 |
||||
|
|
|
|
|||||
Weighted average common shares outstanding |
10,993,000 |
11,199,000 |
11,070,000 |
11,220,000 |
||||
|
|
|
|
|||||
Diluted common shares outstanding |
11,138,000 |
11,399,000 |
11,291,000 |
11,435,000 |
||||
|
|
|
|
|||||
The accompanying notes are
an integral part |
4
CONSOLIDATED STATEMENTS
OF CASH FLOWS (UNAUDITED)
|
||||
Nine Months Ended
March 31, |
||||
|
||||
2003
|
2002
|
|||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
Net earnings |
$ 8,221,000
|
$ 10,433,000
|
||
Adjustments to reconcile
net earnings to cash flows used for operating activities: |
||||
Interest accretion of estimated unguaranteed residual values |
(1,515,000
|
) |
(2,140,000
|
) |
Decrease in estimated unguaranteed residual values |
4,944,000
|
9,723,000
|
||
Provision for lease losses |
338,000
|
4,004,000
|
||
Net
decrease in income taxes payable, including deferred taxes |
(925,000 | ) | (2,046,000 | ) |
Net decrease (increase) in net receivables |
3,224,000
|
(559,000
|
) | |
Decrease in income taxes receivable |
1,142,000
|
7,612,000
|
||
Net
decrease (increase) in property acquired for transactions in process |
1,118,000 | (1,794,000 | ) | |
Net
decrease
in accounts payable and accrued liabilities |
(1,050,000 | ) | (1,242,000 | ) |
Decrease in customer lease deposits | (765,000 | ) | (946,000 | ) |
|
|
|||
Net cash provided by operating activities |
14,732,000
|
23,045,000
|
||
|
|
|||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||
Net increase in minimum lease payments receivable |
(22,182,000
|
) |
(1,218,000
|
) |
Proceeds from sale of security held to maturity |
23,000
|
-
|
||
Net (increase) decrease in other assets |
(978,000
|
) |
299,000
|
|
Increase
in estimated unguaranteed residual values recorded on leases |
(2,243,000 | ) | (2,192,000 | ) |
|
|
|||
Net cash used for investing activities | (25,380,000 | ) | (3,111,000 | ) |
|
|
|||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
Net (decrease) increase in time certificates of deposit |
(929,000
|
) |
6,343,000
|
|
Net (decrease) increase in demand and money market deposits |
(778,000
|
) |
255,000
|
|
Payments to repurchase common stock |
(3,000,000
|
) |
(1,077,000
|
) |
Dividends to stockholders |
(1,327,000
|
) |
(1,345,000
|
) |
Proceeds from exercise of stock options |
194,000
|
176,000
|
||
|
|
|||
Net cash (used for) provided by financing activities |
(5,840,000
|
) |
4,352,000
|
|
|
|
|||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
(16,488,000
|
) |
24,286,000
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
88,393,000
|
59,089,000
|
||
|
|
|||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$71,905,000
|
$83,375,000
|
||
|
|
|||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | ||||
Decrease
in lease rentals assigned to lenders and related nonrecourse debt |
($26,051,000 | ) | ($39,727,000 | ) |
|
|
|||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||
Cash paid during the nine month period for: | ||||
Interest |
$ 61,000
|
$ 50,000
|
||
|
|
|||
Income taxes |
$ 4,900,000
|
$ 966,000
|
||
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
5
CALIFORNIA FIRST NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements should be read in conjunction with the financial statements and notes thereto included in the California First National Bancorp's Annual Report on Form 10-K for the year ended June 30, 2002. The material under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is written with the presumption that the readers have read or have access to the 2002 Annual Report on Form 10-K, which contains Management's Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2002 and for the year then ended.
In the opinion of management, the unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the balance sheet as of March 31, 2003 and the statements of earnings and cash flows for the nine month periods ended March 31, 2003 and 2002. The results of operations for the nine month period ended March 31, 2003 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending June 30, 2003.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting costs associated with the exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity Including Certain Costs Incurred in Restructuring." The Company anticipates the adoption of FASB 146 will not have an impact on the financial statements.
In June 2002, FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions" (SFAS 147). SFAS 147 removes acquisition of financial institutions from the scope of both SFAS No. 72, "Accounting for Certain Acquisitions of Banking and Thrift Institutions," and FASB Interpretation No. 9, "Applying APB Opinion No. 16 and 17 When a Savings and Loan Association or Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method" and requires those transactions be accounted for in accordance with SFAS Statements No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." In addition, SFAS 147 amends SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" to include in its scope long-term customer-relationship intangible assets of financial institutions. The Company anticipates the adoption of FASB 147 will not have an impact on the financial statements.
NOTE 3 - STOCK-BASED COMPENSATION
At March 31, 2003, the Company had two stock option plans
which are more fully described in Note 5 in the Company's 2002 Annual Report
on form 10-K. The Company accounts for these Plans under APB Opinion No. 25,
"Accounting for Stocks Issued to Employees," under which no compensation
cost has been recognized. In accordance with Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," (SFAS No. 148) the Company adopted the disclosure requirements
of SFAS No. 148. Had compensation cost for these plans been determined consistent
with SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the following proforma amounts:
Three months ended March 31,
|
Nine months ended March 31,
|
||||||
|
|
||||||
2003
|
2002
|
2003
|
2002
|
||||
Net earnings |
$2,287,000
|
$3,852,000
|
$8,221,000
|
$10,433,000
|
|||
Proforma compensation cost |
(111,000)
|
|
(121,000)
|
|
(333,000)
|
|
(363,000)
|
Proforma net earnings |
$2,176,000
|
|
$3,731,000
|
|
$7,888,000
|
|
$10,070,000
|
|
|
|
|
|
|
|
|
Proforma basic EPS |
$ 0.20
|
|
$ 0.33
|
|
$ 0.71
|
|
$ 0.90
|
|
|
|
|
|
|
|
|
Proforma diluted EPS |
$ 0.20
|
|
$ 0.33
|
|
$ 0.70
|
|
$ 0.88
|
Since the SFAS No. 123 method of accounting
has not been applied to options granted prior to July 1, 1995, the resulting
pro forma compensation cost may not be indicative of that to be expected in
future periods.
6
CALIFORNIA FIRST NATIONAL BANCORP
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
California First National Bancorp (the "Company") is a bank holding company. The Company has two leasing subsidiaries, Amplicon, Inc. ("Amplicon") and California First Leasing Corporation ("CFLC", collectively the "Leasing Companies") that are involved in the leasing and financing of computers, computer networks and other high technology assets. The leasing subsidiaries are also engaged in the re-marketing of leased assets at lease expiration. The operations of CFLC commenced on July 2, 2001. California First National Bank ("CalFirst Bank" or the "Bank"), another subsidiary, which commenced operations on May 23, 2001, is a FDIC-insured national bank that gathers deposits using the telephone, the Internet, and direct mail, and leases capital assets to businesses and organizations and provides business loans to fund the purchase of assets leased by third parties.
The Company's direct finance income includes interest income
earned on the Company's investment in lease receivables and residuals. Other
income primarily includes gains realized on the sale of leased property, income
from sales-type and operating leases and gains realized on the sale of leases,
and other fee income. Income from sales-type leases relates to the re-lease
of off-lease property ("lease extensions") and new lease transactions
that qualify as sales-type leases, generally where the fair value of the property
subject to the lease differs from the Company's carrying cost. Income from operating
leases generally involves the short-term rental of leased property.
The Company's operating results are subject to quarterly fluctuations resulting
from a variety of factors, including the volume of new lease originations, the
volume and profitability of leased property being re-marketed through re-lease
or sale, variations in the mix of lease originations, the size and credit quality
of the lease portfolio, interest rates and economic conditions in general. The
Company has insignificant interest bearing liabilities, and therefore, reductions
in interest rates in general can reduce the yield earned on the investment in
lease receivables and on the investment in securities and other interest earning
assets.
The Company conducts its leasing business in a manner designed to minimize risks. However, the assumption of risk is a key source of earnings in the leasing and banking industry and the Company is subject to risks through its investment in lease receivables held in its own portfolio, lease transactions in process, and residual investments. The Company takes steps to mitigate risks through the implementation of strict credit management processes and on-going risk management review procedures.
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements requires
management to make certain critical accounting estimates that impact the stated
amount of assets and liabilities at a financial statement date and the reported
amount of income and expenses during a reporting period. These accounting estimates
are based on management's judgment and are considered to be critical because
of their significance to the financial statements and the possibility that future
events may differ from current judgments, or that the use of different assumptions
could result in materially different estimates. The critical accounting policies
and estimates have not changed from and should be read in conjunction with the
Company's Annual Report filed on Form 10K for the year ended June 30, 2002.
The Company's estimates are reviewed continuously to ensure reasonableness.
However, the amounts the Company may ultimately realize could differ from such
estimated amounts.
CONSOLIDATED STATEMENT OF EARNINGS ANALYSIS
Summary
-- For the third quarter ended March 31, 2003, net earnings of $2.3 million
decreased $1.6 million, or 40.6%, compared to $3.9 million for the third quarter
ended March 31, 2002. Diluted earnings per share decreased 38.2% to $0.21 per
share for the third quarter of fiscal 2003 compared to $0.34 per share for the
third quarter of the prior year. Third quarter results of fiscal 2003 reflect
the impact of a significant decrease in income from end of term transactions
and higher selling, general and administrative ("SG&A") expenses.
These factors offset the benefit of a significant decrease in the provision
for lease losses, and higher income from the lease portfolio. The volume of
new lease transactions booked during the third quarter of fiscal 2003 was $29.2
million, a 24.4% increase from the same quarter of the prior year.
7
For the nine months ended March 31, 2003, net earnings of $8.2 million decreased $2.2 million, or 21.2%, compared to the nine months ended March 31, 2002. Diluted earnings per share decreased 19.8% to $0.73 for the first nine months of fiscal 2003 compared to $0.91 for the same period of the prior year. The results of the first nine months of fiscal 2003 reflect the impact of a significant decrease in income from sales of leased property and a 16% increase in SG&A expense levels, which offset the benefit of a significant decrease in the provision for lease losses and higher income from the lease portfolio . The volume of new lease transactions booked during the first nine months ended March 31, 2003 was $90.8 million, a 24.9% increase from the same period of the prior year.
Net Direct Finance and Interest Income -- Net direct finance and interest income is the difference between interest earned on the investment in capital leases, securities and other interest earning investments and interest paid on deposits or other borrowings. Net direct finance and interest income is affected by changes in the volume and mix of interest earning assets, the movement of interest rates, and funding and pricing strategies.
Net
direct finance and interest income was $5.2 million for the quarter ended March
31, 2003, a $533,000, or 11.3% increase compared to the same quarter of the
prior year. Direct finance income of $5.1 million increased by $666,000 largely
as a result of a larger average investment in capital leases. Interest income
on investments declined by $119,000 due to declines in interest rates and the
average balances of cash and cash equivalents during the period. Interest expense
on deposits was $55,000 for the third quarter of fiscal 2003 compared to $41,000
for the same quarter of the prior year, reflecting an increase in the average
balances offset slightly by a decline in rates.
For the nine months
ended March 31, 2003, net direct finance and interest income was $15.3 million,
a $954,000, or 6.7%, increase compared to the same period of the prior year.
Direct finance income of $14.6 million increased by $1.5 million as a result
of higher yields on a larger average investment in capital leases outstanding.
Interest income on investments declined by $386,000 due primarily to a decline
in interest rates, which offset an increase in average balances of cash and
cash equivalents during the period. Interest expense on deposits was $184,000
for the first nine months of fiscal 2003 compared to $65,000 for the same period
of the prior year, reflecting an increase in the average balances.
The
following table presents the components of the increases (decreases) in net
direct finance and interest income by volume and rate:
Nine Months Ended March 31, 2003 compared to 2002 |
||||||
Volume |
|
Rate |
|
Total |
||
Direct Finance and Interest income |
||||||
Net investment in capital leases |
$ 933,525 |
$ 525,498 |
$ 1,459,023 |
|||
Discounted lease rentals (1) |
(2,846,533) |
(25,253) |
(2,871,786) |
|||
Federal funds sold |
(175,974) |
(40,132) |
(216,106) |
|||
Interest-bearing deposits with banks |
296,851 |
|
(466,872) |
|
(170,021) |
|
Total finance and interest income |
(1,792,131) |
|
(6,759) |
|
(1,798,890) |
|
Interest expense |
||||||
Nonrecourse debt (1) |
(2,846,533) |
(25,253) |
(2,871,786) |
|||
Demand and money market deposits |
2,725 |
237 |
2,962 |
|||
Time certificates of deposit |
152,791 |
|
(36,716) |
|
116,075 |
|
Total interest expense |
(2,691,017) |
|
(61,732) |
|
(2,752,749) |
|
Net direct finance and interest income |
$ 898,886 |
|
$ 54,973 |
|
$ 953,859 |
(1) Direct finance income and interest expense on discounted lease rentals and nonrecourse debt offset each other, and do not contribute to the Company's net direct finance and interest income.
8
The following table presents the Company's average balance sheets, direct finance income and interest earned or interest paid, the related yields and rates on major categories of the Company's interest-earning assets and interest-bearing liabilities. Yields/rates are presented on an annualized basis.
Nine months ended
March 31, 2003 |
Nine months ended
March 31, 2002 |
||||||
Assets |
Average
Balance |
Interest
|
Yield/
Rate |
Average
Balance |
Interest
|
Yield/
Rate |
|
Interest-earning assets | |||||||
Interest-bearing deposits with banks |
$ 69,204,219
|
$ 731,219
|
1.4%
|
$ 52,057,491
|
$ 901,240
|
2.3%
|
|
Federal funds sold |
5,966,875
|
76,028
|
1.7%
|
15,006,250
|
292,134
|
2.6%
|
|
Net investment
in capital leases including discounted lease rentals (1,2) |
179,068,334
|
18,324,783
|
13.6%
|
214,230,299
|
19,737,547
|
12.3%
|
|
Total interest-earning assets |
254,239,428
|
19,132,030
|
10.0%
|
281,294,040
|
20,930,921
|
9.9%
|
|
Other assets |
37,446,838
|
|
38,003,096
|
|
|||
$291,686,266
|
|
$319,297,136
|
|
||||
Liabilities and Stockholders' Equity | |||||||
Interest-bearing liabilities | |||||||
Demand and money market deposits |
$
253,219
|
3,655
|
1.9%
|
$
51,341
|
693
|
1.8%
|
|
Time certificates of deposit |
6,992,543
|
180,797
|
3.4%
|
2,048,519
|
63,722
|
4.1%
|
|
Nonrecourse debt (1) |
56,571,262
|
3,696,270
|
8.7%
|
99,841,708
|
6,568,056
|
8.8%
|
|
Total interest bearing liabilities |
63,817,024
|
3,880,722
|
8.1%
|
101,941,568
|
6,632,471
|
8.7%
|
|
Other liabilities |
34,116,676
|
34,019,770
|
|||||
Stockholders' equity |
193,752,566
|
|
183,335,798
|
||||
$291,686,266
|
|
$319,297,136
|
|||||
Net direct finance and interest income |
$15,251,308
|
1.9%
|
|
|
$14,298,450
|
1.2%
|
|
Net direct finance
and interest income to average interest-earning assets |
8.0%
|
|
|
|
6.8%
|
||
Average interest-earning assets
over average interest bearing liabilities |
398.4%
|
|
|
|
275.9%
|
(1) Direct finance income and interest expense on discounted lease rentals and nonrecourse debt of $46,703,000 and $81,273,000 at March 31, 2003 and 2002, respectively, offset each other and do not contribute to the Company's net direct finance and interest income.
(2) Average balance is based on quarter-end balances, and includes non-accrual leases, and is presented net of unearned income.
Provision for Lease Losses -- The Company's provision for lease losses in the third quarter and nine months ended March 31, 2003 was $120,000 and $338,000, respectively, compared to $1,568,000 and $4,004,000, respectively, for the same periods of the prior fiscal year. The reduction in the provision reflects the fact that the volume of problem leases remained relatively unchanged during the period. The prior fiscal year periods include a provision for the deterioration in the underlying credit of two large lease transactions, which was not required during the first nine months of this year.
Other
Income -- Other income is a significant source of income for the Company,
accounting for 39% of the Company's gross profit during the quarter ended March
31, 2003 and 68% during the third quarter of fiscal 2002. Total other income
for the quarter ended March 31, 2003 decreased by $3.6 million, or 52%, to $3.2
million, compared to $6.8 million for the same quarter of the prior fiscal year.
The decrease in other income is primarily due to a 70% decrease in gain on sale
of leases and leased property to $1.2 million for the third quarter of fiscal
2003 from $3.9 million for the same period of the prior year. This primarily
reflected a lower volume of leased property sales. Operating and sales type
lease income decreased $927,000 to $1.9 million in the third quarter of fiscal
2003 compared to $2.8 million in the same quarter of fiscal 2002. These decreases
reflect a reduction in the volume of leases reaching their end of term.
9
For
the nine months ended March 31, 2003, other income accounted for 43% of the
Company's gross profit compared to 63% for the comparable period of the prior
fiscal year. Total other income for the first nine months of fiscal 2003 decreased
$6.5 million, or 37%, to $11.3 million from $17.8 million for the same period
of the prior fiscal year. The decrease in other income is primarily due to a
$5.8 million, or 50%, decrease in gain on sale of leases and leased property
to $5.8 million for the nine months ended March 31, 2003 from $11.6 million
for the same period of the prior year. This primarily reflected a lower volume
of leased property sales. Operating and sales type income of $5.0 million decreased
$169,000, or 3%, during the first nine months of fiscal 2003 compared to $5.1
million for the same period of fiscal 2002.
Selling, General,
and Administrative Expenses -- S,G&A expenses increased by $958,000,
or 26%, to $4.6 million during the third quarter of fiscal 2003 compared to
$3.7 million during the third quarter of fiscal 2002. For the first nine months
of fiscal 2003, S,G&A expenses increased 16% to $12.8 million from $11.1
million reported for the first nine months of the prior fiscal year. The increase
in S,G&A for both periods is due to higher costs related to an expansion
of the sales organization.
Taxes --
Taxes were accrued at a tax rate of 38.5% for the nine months ended March 31,
2003 and 2002, representing the estimated annual tax rate for the years ending
June 30, 2003 and 2002, respectively.
FINANCIAL CONDITION ANALYSIS
Lease Portfolio Analysis
The
Company's risk assets are comprised almost exclusively of leases for capital
assets to businesses and other commercial or non-profit organizations. All leases
are secured by the underlying property being leased. A portion of lease originations
are discounted to banks or finance companies on a nonrecourse basis at fixed
interest rates. Leases that are not assigned to financial institutions are held
in internal portfolios. Over the past two fiscal years, the Company has funded
a significantly greater percentage of new lease transactions internally. During
the nine months ended March 31, 2003, approximately 92% of the total dollar
amount of new leases booked by the Company were held in its own portfolio, compared
to 70% during the first nine months of fiscal 2002. During the nine months ended
March 31, 2003, the Company's net investment in capital leases increased by
$19.1 million. This increase includes a $21.8 million increase in the Company's
investment in lease receivables, and a $1.2 million reduction in the investment
in estimated residual values. The increase in the investment in capital leases
is primarily due to the higher volume of new lease transactions booked and retained
in the Company's portfolio as compared to the volume of lease transactions coming
to their end of term during the period.
The Company often makes payments to purchase leased property prior to the commencement
of the lease. The disbursements for these lease transactions in process are
generally made to facilitate the lessees' property implementation schedule.
The lessee is contractually obligated by the lease to make rental payments directly
to the Company during the period that the transaction is in process, and the
lessee is generally obligated to reimburse the Company for all disbursements
under certain circumstances. At March 31, 2003, the Company's investment in
property acquired for transactions in process was $19.5 million, compared to
$20.6 million at June 30, 2002 and $19.5 million at March 31, 2002.
The Company monitors the performance of all leases held in its own portfolio,
transactions in process as well as lease transactions assigned to lenders, if
the Company retains a residual investment in the leased property subject to
the lease. An ongoing review of all leases 10 or more days delinquent is conducted.
Lessees that are delinquent with the Company or an assignee are coded in the
Company's accounting and tracking systems in order to provide management visibility,
periodic reporting, and appropriate reserves. The accrual of interest income
on leases will generally be discontinued when the lease becomes 90 days or more
past due on its lease payments with the Company, unless the Company believes
the investment is otherwise recoverable. Leases may be placed on non accrual
earlier if the Company has significant doubt about the ability of the lessee
to meet its lease obligations, as evidenced by consistent delinquency, deterioration
in the lessee's financial condition or other relevant factors.
10
The following table summarizes the Company's non-performing capital leases:
March 31, 2003 |
June 30, 2002 |
||
Non-Performing Capital Leases |
|||
Non-accrual leases |
$ 3,439,109 |
$ 1,293,594 |
|
Restructured leases |
- |
90,150 |
|
Leases past due 90 days (other than above) |
- |
278,172 |
|
Total non-performing capital leases |
$ 3,439,109 |
$ 1,661,916 |
|
Non-performing assets as % of |
2.3% |
1.3% |
In addition to the non-performing capital leases identified above, there was $5.4 million of investment in capital leases at March 31, 2003 for which management has concerns regarding the ability of the lessees to continue to meet existing lease obligations, compared with $6.8 million at June 30, 2002. This amount consists of leases classified as substandard or doubtful, or with lessees that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future.
Allowance for Lease Losses
The allowance for lease losses provides coverage for probable
and estimatable losses in the Company's lease portfolios. The allowance recorded
is based on a quarterly review of all leases outstanding and transactions in
process. Lease receivables or residuals are charged off when they are deemed
completely uncollectible. The determination of the appropriate amount of any
provision is based on management's judgment at that time and takes into consideration
all known relevant internal and external factors that may affect the lease portfolio.
Nine months ended March 31,
|
|||
(dollars in 000's)
|
|||
2003
|
2002
|
||
Allowance for lease losses at beginning of period |
$ 5,502 |
|
$ 3,401 |
Charge-off of lease receivables |
(592) |
|
(319) |
Recovery of amounts previously written off |
283 |
|
186 |
Provision for lease losses |
338 |
|
4,004 |
Allowance for lease losses at end of period |
$ 5,531 |
|
$ 7,272 |
Net investment in capital leases at end of period |
$128,749 |
|
$110,861 |
Allowance for lease losses as percent of net investment |
4.3% |
|
6.6% |
The allowance for lease losses remained flat at $5.5 million (4.3% of net investment in capital leases) at March 31, 2003 compared to $5.5 million (5.1% of net investment in capital leases) at June 30, 2002. This allowance consisted of $3.8 million allocated to specific accounts and $1.7 million that was unallocated. During the first nine months of fiscal 2003, the aggregate amount of specifically identified problem assets increased $75,000 from June 30, 2002. The Company considers the allowance for doubtful accounts of $5.5 million at March 31, 2003 adequate to cover losses specifically identified as well as inherent in the lease portfolios at such date. However, no assurance can be given that the Company will not, in any particular period, sustain lease losses that are sizeable in relation to the amount reserved, or that subsequent evaluations of the lease portfolio, in light of factors then prevailing, including economic conditions and the on-going credit review process will not require significant increases in the allowance for loan and lease losses. Among other factors, a continued economic slowdown may have an adverse impact on the adequacy of the allowance for lease losses by increasing credit risk and the risk of potential loss even further. As the Company has retained a significantly greater percentage of leases in its own portfolio, this creates increased exposure to delinquencies, repossessions, foreclosures and losses than the Company has historically experienced.
11
Liquidity and Capital Resources
The Company funds it's operating activities through internally generated funds, nonrecourse debt and bank deposits. The Leasing Companies' capital expenditures for leased property purchases are occasionally financed by assigning certain base lease term payments to banks or other financial institutions, including CalFirst Bank. The assigned lease payments are discounted at fixed rates such that the lease payments are sufficient to fully amortize the aggregate outstanding debt. At March 31, 2003, the Company had outstanding nonrecourse debt aggregating $46.7 million relating to property under capital leases. In the past, the Company has been able to obtain adequate nonrecourse funding commitments, and the Company believes it will be able to do so in the future.
Deposits have not been an important source of funds for
the Company. Deposits totaled $7.3 million at March 31, 2003, compared to $6.7
million at March 31, 2002. The following table presents average balances and
average rates paid on deposits for the nine months ended March 31, 2003 and
2002:
Nine months ended March 31, |
||||||||
2003 |
|
2002 |
||||||
Average |
Average |
Average |
Average |
|||||
Non-interest bearing demand deposits |
$1,036,084 |
n/a |
$ 477,256 |
n/a |
||||
Interest-bearing demand deposits |
20,529 |
0.49% |
13,714 |
0.50% |
||||
Savings deposits |
232,690 |
2.05% |
37,627 |
2.27% |
||||
Time deposits less than $100,000 |
4,344,837 |
3.41% |
1,465,741 |
4.08% |
||||
Time deposits, $100,000 or more |
$2,647,706 |
3.50% |
$ 582,778 |
4.29% |
In April 2001, the Board of Directors authorized management, at its discretion, to repurchase up to 1,000,000 shares of common stock. During the nine months ended March 31, 2003 the Company purchased 241,500 shares at $3.0 million. As of April 25, 2003, 612,956 shares remain available under this authorization.
At March 31, 2003, the Company's cash and cash equivalents were $71.9 million. The need for cash used for operating activities will increase as the Company expands. The Company believes that existing cash balances, cash flow from operations, cash flows from its financing and investing activities, and assignments (on a nonrecourse basis) of lease payments will be sufficient to meet its foreseeable financing needs.
Stockholders' equity at March 31, 2003 was $195.5 million, or 69% of total assets, compared to $191.4 million, or 62% of total assets, at June 30, 2002. At March 31, 2003, the Company and the Bank exceed their regulatory capital requirements and are considered "well-capitalized" under guidelines established by the FRB and the OCC.
Inflation has not had a significant impact upon the operations
of the Company.
12
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. Factors that might affect forward-looking statements include, among other things:
The result of these and other factors could cause a difference from expectations of the risk characteristics of the lease portfolio, the level of defaults and a change in the provision for loan and lease losses. Forward-looking statements speak only as of the date made. The Company undertakes no obligations to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.
13
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
The Company's principal executive officer and its principal financial officer, based on their evaluation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a -14 (c)) as of a date within 90 days prior to the filing of this Quarterly Report on Form 10-Q, have concluded that the Company's disclosure controls and procedures are adequate and effective for the purposes set forth in the definition in Exchange Act rules.
Changes in internal controls.
There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the date of their evaluation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There was one report on Form 8-K filed during the three months ended March 31, 2003. The report filed on January 24, 2003 related to the release of the Company's earnings for the quarter and six months ended December 31, 2002.
(a) Exhibits
Exhibit | Description |
Page
Number |
10.8 | Office Lease dated January 30, 2003, between California First National Bancorp and World Trade Center Building, Inc. |
18-68
|
99 | Additional exhibit - Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
69
|
14
CALIFORNIA FIRST NATIONAL BANCORP
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
California First National Bancorp | ||
Registrant
|
||
DATE: May 14, 2003 | BY: | S. LESLIE JEWETT /s/ |
S. LESLIE JEWETT | ||
Chief Financial Officer |
15
I, Patrick E. Paddon, certify that:
Date: May 14, 2003
PATRICK E PADDON /S/
Patrick E. Paddon
Chief Executive Officer
16
I, S. Leslie Jewett, certify that:
Date: May 14, 2003
S. LESLIE JEWETT /S/
S. Leslie Jewett
Chief Financial Officer
17