UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[Mark One]
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended				September 30, 2016
[  ]	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
	(Exact name of registrant as specified in charter)

 

	California			33-0964185
	(State or other jurisdiction of			(I.R.S. Employer
	Incorporation or organization)			Identification No.)
	28 Executive Park
	Irvine, California			92614
	(Address of principal executive offices)			(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 and 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 þ     No o

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No o

 

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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o    Accelerated filer o   Non-accelerated filer o Smaller Reporting Company þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No þ

 

The number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of October 27, 2016 was 10,279,807.

 

California First National Bancorp

 

INDEX

 

 

		PAGE
PART 1. FINANCIAL INFORMATION		NUMBER
Item 1.	Financial Statements
	Consolidated Balance Sheets -
	September 30, 2016 and June 30, 2016	3
	Consolidated Statements of Earnings -
	Three months ended September 30, 2016 and 2015	4
	Consolidated Statements of Comprehensive Income -
	Three months ended September 30, 2016 and 2015	5
	Consolidated Statements of Cash Flows -
	Three months ended September 30, 2016 and 2015	6
	Consolidated Statement of Stockholders’ Equity -
	Three months ended September 30, 2016 and 2015	7
	Notes to Consolidated Financial Statements	8-16
Item 2.	Management's Discussion and Analysis of Financial
	Condition and Results of Operations	17 – 24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24 – 25
Item 4.	Controls and Procedures	25
PART 2. OTHER INFORMATION
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 6.	Exhibits	26
Signature		27

 

Forward-Looking Statements

 

This Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, the information concerning our possible future consolidated results of operations, business and growth strategies, financing plans, our competitive position and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “plan”, “may”, “should”, “will”, “would”, “project” and similar expressions. These forward-looking statements are based on information currently available to us and are subject to inherent risks and uncertainties, and certain factors could cause actual results to differ materially from those anticipated. Particular uncertainties arise from the behavior of financial markets, including fluctuations in interest rates and securities prices, from unanticipated changes in the risk characteristics of the lease and loan portfolio, the level of defaults and a change in the provision for credit losses, and from numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive or regulatory nature. Forward-looking statements speak only as of the date made. The Company undertakes no obligations to update any forward-looking statements. Management does not undertake to update our forward-looking statements to reflect events or circumstances arising after the date on which they are made.

 

California First National Bancorp

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except for share amounts)

 

 

The accompanying notes are an integral part

of these consolidated financial statements.

 

CALIFORNIA FIRST NATIONAL BANCORP

 

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

(in thousands, except share and per share amounts)

 

 

The accompanying notes are an integral part

of these consolidated financial statements.

 

CALIFORNIA FIRST NATIONAL BANCORP

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

 

 

 

 

 

The accompanying notes are an integral part

of these consolidated financial statements.

 

California First National Bancorp

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

The accompanying notes are an integral part

of these consolidated financial statements.

 

California First National Bancorp

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

(in thousands, except for share amounts)

 

 

 

 

The accompanying notes are an integral part

of these consolidated financial statements.

 

CALIFORNIA FIRST NATIONAL BANCORP

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

 

 

 

 

 

cALIFORNIA FIRST NATIONAL BANCORP

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

California First National Bancorp, a California corporation (the “Company”), is a bank holding company headquartered in Orange County, California with a bank subsidiary, California First National Bank (“CalFirst Bank” or the “Bank”) and a leasing subsidiary, California First Leasing Corp (“CalFirst Leasing”). The primary business of the Company is secured financing provided through leasing and financing capital assets, commercial loans acquired through participation in the syndicated commercial loan market, by providing non-recourse loans to third parties secured by leases and equipment, and direct commercial loans. CalFirst Bank, now responsible for substantially all lease and loan origination, has migrated from predominately leasing toward over 50% commercial loans, with a lease and loan portfolio diversified geographically and across industries. The Bank gathers deposits through posting rates on the Internet and conducts all banking and other operations from one central location.

 

The Company’s finance, loan and interest income includes interest income earned on the Company’s investment in lease receivables and residuals, commercial loans and investment securities. Non-interest income primarily includes gains realized on the sale of leased property and leases, income from sales-type and operating leases, gains and losses realized on investments, and other income. Income from sales-type leases relates to the re-lease of lease property (“lease extensions”) while income from operating leases generally involves lease extensions that are accounted for as an operating lease rather than as a sales-type lease.

 

The Company's operating results are subject to quarterly fluctuations resulting from a variety of factors, including the size and credit quality of the lease and loan portfolios, the volume and profitability of leased property being re-marketed through re-lease or sale, the interest rate environment, the market for investment securities, the volume of new lease or loan originations, including variations in the mix and funding of such originations, and economic conditions in general. The Company’s principal market risk exposure currently is related to interest rates and the impact the interest rate environment has on its net interest margin. The Company’s current balance sheet structure is short-term in nature, with over 70% of interest-earning assets, $614.5 million, and 83% of interest bearing liabilities, $554.9 million, repricing within one year. The Company’s interest margin is susceptible to the disparate impact of varying movements in market interest rates as many of the Company’s leases, loans and liquid investments are tied to U.S. Treasury rates and Libor that often do not move in step with bank deposit rates. As a result, this can cause a greater change in net interest income than indicated by the repricing asset and liability comparison.

 

The Company conducts its business in a manner designed to mitigate risks. However, the assumption of risk is a key source of earnings in the leasing and banking industries and the Company is subject to risks through its leases and loans held in its own portfolio, investment securities, lease transactions in process, and residual investments. The Company takes steps to manage 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 10-K for the year ended June 30, 2016.

 

The Company's estimates are reviewed continuously to ensure reasonableness. However, the amounts the Company may ultimately realize could differ from such estimated amounts.

 

Overview of Results and Trends

 

The following discussion is provided in addition to the required analysis of earnings in order to discuss trends in our business. The Company believes this analysis provides additional meaningful information on a comparative basis.

 

Net earnings for the first quarter ended September 30, 2016 of $1.96 million were up 13.6% from the first quarter of fiscal 2016 as the result of a 16% increase in interest income and lower provision for credit losses that was offset in part by a 50% increase in interest expense. The increased interest income in fiscal 2017 related to a 57% increase in the average loan portfolio from September 2015 while higher interest expense reflected higher deposit balances and rates paid.

 

New loan bookings of $51.5 million for the first quarter of fiscal 2017 were down 21.9% from $66.0 million during the first quarter of fiscal 2016, while new lease bookings of $30.5 million were up 18.8% from $25.6 million booked in the comparable quarter. Combined, total lease and loan bookings of $82.0 million were 11% below the $91.7 million booked the prior year. The net investment in leases and loans of $646.8 million at September 30, 2016 was up less than 1% from June 30, 2016 but increased 17.1% from $552.1 million at September 30, 2015.

 

New lease and loan originations during the first quarter of fiscal 2017, while 21% below the first quarter of fiscal 2016 which was an historic peak quarter for the Company, exceeded the last three quarters of fiscal 2016. As a result, the backlog of approved lease and loan commitments of $117.4 million at September 30, 2016 is down 7% from the level of a year ago but up 31.3% from June 30, 2016.

 

The Company’s portfolio of investment securities decreased 2.2% to $97.6 million at September 30, 2016 related to the payments received on certain securities and lower unrealized gains related to rising interest rates during the period. Total assets decreased 0.5% to $884.1 million, with net worth at $192.8 million and a common equity tier 1 capital of 24.8%.

 

Consolidated Statement of Earnings Analysis

 

Summary -- For the first quarter ended September 30, 2016, net earnings of $1.96 million increased $234,000, or 13.6% from $1.72 million earned during the first quarter ended September 30, 2015. Diluted earnings per share of $0.19 for the first quarter of fiscal 2017 increased 15.6% from $0.16 for the first quarter of fiscal 2016. The 2017 earnings per share benefitted from a reduction in average shares outstanding.

 

Net Interest Income -- Net interest income is the difference between interest earned on the investment in leases, loans, securities and other interest earning assets and interest paid on deposits and borrowings. Net 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.

 

The following table presents the components of the increases (decreases) in net finance, loan and interest income before provision for credit losses by volume and rate:

 

		Quarter ended
		September 30, 2016 vs 2015
		Volume				Rate				Total
		(in thousands)
Interest income
Net investment in leases		$	(749	)		$	85			$	(664	)
Commercial loans			1,314				156				1,470
Investment securities			89				(21	)			68
Interest-earning deposits with banks			20				100				120
			674				320				994
Interest expense
Demand and savings deposits			14				73				87
Time deposits			392				160				552
Borrowings			(2	)			8				6
			404				241				645
Net interest income		$	270			$	79			$	349

 

Net interest income was $5.3 million for the quarter ended September 30, 2016, a $349,000, or 7.0% increase compared to the same quarter of the prior year. Total interest income for the first quarter ending September 30, 2016 increased 15.9% to $7.2 million from $6.2 million for the first quarter of fiscal 2016. This increase includes a $1.5 million, or 63.5%, increase in commercial loan income and a $187,900, or 39.7% increase in investment income offset by a $664,300, or 19.2% decrease in finance income. The growth in commercial loan income reflected a 56.7% increase in average loan balances to $405.7 million from $258.9 million, and a 15 basis point increase in average loan yield. The decrease in finance income was due to a 21.7% decrease in average lease balances to $223.5 million that offset a 15 basis point improvement in the average yield that benefited from accelerated finance income from early terminated leases, Without that boost, the average lease yield in the quarter would have been down by 17 basis points. For the first quarter of fiscal 2017, the average yield on cash and investments of 1.26% was unchanged from the first quarter of fiscal 2016 as investments increased 20.1% to $97.1 million, but at average yields that declined 9 basis points to 2.10%, while average cash balances increased by 62.5% to $113.4 million with an average yield up 35 basis points. Interest expense paid increased 49.9% to $1.9 million, reflecting a 28.2% increase in the average balance of deposits and borrowings to $671.3 million and a 17 basis point increase in average rate paid to 1.15%. The increased interest cost is largely due to a 16 basis points increase in average cost of deposits to 1.20% on a $149.5 million increase in average deposits, with the total funding cost increase tempered by a 8 basis point increase average rate of borrowings to 0.43%.

 

The following table presents the Company’s average balances, finance and loan 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.

 

		Quarter ended												Quarter ended
(dollars in thousands)		September 30, 2016												September 30, 2015
		Average								Yield/				Average								Yield/
Assets		Balance				Interest				Rate				Balance				Interest				Rate
Interest-earning assets
Interest-earning deposits with banks		$	113,406			$	151				0.53	%		$	69,771			$	31				0.18	%
Investment securities			97,113				510				2.10	%			80,852				442				2.19	%
Commercial loans			405,694				3,788				3.73	%			258,882				2,318				3.58	%
Net investment in leases			223,493				2,795				5.00	%			285,329				3,459				4.85	%
Total interest-earning assets			839,706				7,244				3.45	%			694,834				6,250				3.60	%
Other assets			47,084												50,721
		$	886,790											$	745,555
Liabilities and Shareholders' Equity
Interest-bearing liabilities
Demand and savings deposits			79,360				170				0.86	%			68,049				83				0.49	%
Time deposits			551,963				1,725				1.25	%			413,809				1,173				1.13	%
Other borrowings			40,000				43				0.43	%			42,000				37				0.35	%
Total interest bearing liabilities			671,323				1,938				1.15	%			523,858				1,293				0.99	%
Non-interest bearing demand deposits			2,134												2,245
Other liabilities			21,088												30,214
Shareholders' equity			192,245												189,238
		$	886,790											$	745,555
Net interest income						$	5,306											$	4,957
Net interest spread (2)											2.30	%											2.61	%
Net interest margin (3)											2.53	%											2.85	%
Average interest earning assets over
average interest bearing liabilities											125.1	%											132.6	%

 

(1)		Average balance is based on month-end balances, includes non-accrual leases, and is presented net of unearned income.
(2)		Net interest spread is equal to the difference between the average yield on interest earning assets and the average rate paid on interest-bearing liabilities.
(3)		Net interest margin represents net direct finance and interest income as a percent of average interest earning assets.

 

The average yield on all interest-earning assets for the first quarter of fiscal 2017 decreased to 3.45% from 3.60% for the first quarter ended September 30, 2015, while the average rate paid on all interest-bearing liabilities increased by 17 basis points to 1.15%. As a result, the net interest margin decreased to 2.53% in the first quarter of fiscal 2017 from 2.85% in the first quarter of fiscal 2016. The decline in net interest spread and margin in fiscal 2017 is largely due to the increase in lower yielding commercial loans to 48% of average interest earning assets from 37% during the first quarter of fiscal 2016, and this is compounded by higher rates paid on deposits. The average yield on interest earning assets can fluctuate from quarter to quarter due to transaction activity in both the lease and loan portfolio.

 

Provision for Credit Losses -- The Company recorded a $300,000 provision for credit losses during the first quarter of fiscal 2017, compared to a $500,000 provision made during the quarter ending September 30, 2015. The first quarter 2017 provision related to the growth in the loan portfolio since June 30, 2016 while the overall credit profile of the portfolios remained stable.

 

Non-interest Income -- Total non-interest income for the first quarter of fiscal 2017 increased by 2.1% to $915,000 from $896,000 in the first quarter of the prior year reflecting a 39% increase in income from end of term transactions and $240,000 decline in gains on sale of leases. Operating and sales-type lease income related to end-of-term transactions increased by $440,600 and offset a decline in gains realized on the sale of leases and leased property of $454,000.

 

Non-interest Expenses -- The Company’s non-interest expenses of $2.7 million reported for the quarter ended September 30, 2016 increased by $154,000 or 6.1% from $2.5 million in the first quarter of fiscal 2016. The increase reflected higher compensation expense recognized during the period.

 

Income Taxes -- Income taxes were accrued at a tax rate of 39.50% and 38.91% for the first quarter ended September 30, 2016 and 2015, respectively, representing the estimated annual tax rate at the end of each respective first quarter. The increase in the fiscal 2017 tax rate relates primarily to state apportionment changes.

 

Financial Condition Analysis

 

Consolidated total assets at September 30, 2016 of $884.1 million decreased 0.5% from $888.2 million at June 30, 2016 but increased 16.3% from September 30, 2015. The change since June 30, 2016 reflects a $18.8 million increase in the commercial loan portfolio offset by declines in the net investment in leases of $13.4 million, $4.4 million in cash and due from banks, $2.2 million in securities available-for-sale and $2.0 million of property acquired for transactions in process.

 

Lease Portfolio

 

During the three months ended September 30, 2016 and 2015, 100% and 96.4%, respectively, of the new leases booked by the Company were held in its own portfolios. Of the new leases booked during the first quarter of fiscal 2017, 100% were originated directly by the Company compared to 94% during the prior year first quarter. The Company’s net investment in leases at September 30, 2016 of $224.3 million compared to $237.7 million at June 30, 2016. The $13.4 million decrease in the net investment in leases during the quarter is due to the volume of new leases being booked during the period not exceeding payments received and leases terminating.

 

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 generally is obligated by the lease to make rental payments directly to the Company during the period that the transaction is in process, and contractually obligated to reimburse the Company for all disbursements under certain circumstances. Income is not recognized while a transaction is in process and prior to the commencement of the lease. At September 30, 2016, the Company’s investment in property acquired for transactions in process of $28.9 million was down from $30.9 million at June 30, 2016, and from $40.8 million at September 30, 2015.

 

Commercial Loan Portfolio

 

The Company’s net commercial loan portfolio increased $18.8 million during the first quarter of fiscal 2017 to $422.5 million compared to $403.7 million at June 30, 2016. The increase in the Company’s commercial loan portfolio reflected new commercial loans booked of $51.5 million offset by repayments aggregating to $32.6 million during the quarter. Additional loan commitments of $22.0 million were made during the quarter but not funded, and at September 30, 2016 unfunded commercial loan commitments of $29.0 million were up from $15.3 million at June 30, 2016.

 

Asset Quality

 

The Company monitors the performance of all leases and loans 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 those leases. An ongoing review of all leases and loans ten or more days delinquent is conducted. Leases and loans 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 and loans generally will be discontinued when the lease or loan becomes ninety days or more past due on its payments with the Company, unless the Company believes the investment is otherwise recoverable. Leases and loans may be placed on non-accrual earlier if the Company has significant doubts about the ability of the customer to meet its obligations, as evidenced by consistent delinquency, deterioration in the customer’s financial condition or other relevant factors.

 

The following table summarizes the Company’s non-performing leases and loans.

 

		September 30,				June 30,
		2016				2016
Non-performing Leases and Loans		(dollars in thousands)
Non-accrual leases and loans		$	12			$	12
Restructured leases			-				-
Leases past due 90 days (other than above)			-				-
Total non-performing leases and loans			12				12
Repossessed equipment			1,300				1,300
Total non-performing assets		$	1,312			$	1,312
Non-performing leases as % of net investment
in leases and loans before allowances			0.00	%			0.00	%
Non-performing assets as % of total assets			0.15	%			0.15	%

 

There was no change in non-performing assets at September 30, 2016 as compared to June 30, 2016. In addition to the non-performing leases identified above, there was $3.93 million of investment in leases at September 30, 2016 classified as substandard or with credits that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future. This amount compared to $3.96 million at June 30, 2016 and $271,000 at September 30, 2015. Although these credits have been identified as potential problems, they may never become non-performing. These potential problem leases are considered in the determination of the allowance for credit losses.

 

Allowance for Credit Losses

 

The allowance for credit losses provides coverage for probable and estimatable losses in the Company’s lease and loan portfolios. The allowance recorded is based on a quarterly review of all leases and loans outstanding and transactions in process. Lease receivables, loans 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 portfolios.

 

		Three months ended
		September 30,
		2016				2015
		(dollars in thousands)
Property acquired for transactions in process before allowance		$	28,936			$	40,795
Net investment in leases and loans before allowance			653,952				559,074
Net investment in “risk assets”		$	682,888			$	599,869
Allowance for credit losses at beginning of period		$	6,862			$	6,456
Charge-off of lease receivables			-				(1	)
Recovery of amounts previously written off			3				-
Provision for credit losses			300				500
Allowance for credit losses at end of period		$	7,165			$	6,955
Components of allowance for credit losses:
Allowance for lease losses		$	2,231			$	3,539
Residual valuation allowance			62				69
Allowance for loan losses			4,872				3,347
		$	7,165			$	6,955
Allowance for credit losses as a percent of net investment
in leases and loans before allowances			1.10	%			1.24	%
Allowance for credit losses as a percent of net investment in “risk assets”			1.05	%			1.16	%

 

The allowance for credit losses increased $303,000 to $7.16 million (1.10% of net investment in leases and loans before allowances) at September 30, 2016 from $6.86 million (1.06% of net investment in leases and loans before allowances) at June 30, 2016. The allowance at September 30, 2016 consisted of $230,900 allocated to specific accounts that were identified as problems and $6.93 million that was available to cover losses inherent in the portfolio. This compared to $48,000 allocated to specific accounts at June 30, 2016 and $6.8 million available for losses inherent in the portfolio at that time. The increase in the specific allowance at September 30, 2016 primarily relates to the downgrade during the quarter of the credit of two specific leases. The Company considers the allowance for credit losses of $7.16 million at September 30, 2016 adequate to cover losses specifically identified as well as inherent in the lease and loan portfolios. However, no assurance can be given that the Company will not, in any particular period, sustain lease and loan losses that are sizeable in relation to the amount reserved, or that subsequent evaluations of the lease and loan 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 credit losses. Among other factors, economic and political events may have an adverse impact on the adequacy of the allowance for credit losses by increasing credit risk and the risk of potential loss even further.

 

Securities Available-for-sale

 

Total securities available-for-sale was $93.7 million as of September 30, 2016, compared with $95.8 million at June 30, 2016. The amortized cost and fair value of the Company’s securities portfolio available-for-sale at September 30, 2016 and June 30, 2016 are as follows:

 

		As of September 30, 2016								As of June 30, 2016
(in thousands)		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Available-for-sale
U.S. Treasury Notes		$	47,373			$	48,486			$	47,355			$	48,774
Corporate debt securities			13,253				13,348				13,291				13,385
Agency MBS			29,961				30,403				31,782				32,223
Mutual fund investment			1,215				1,455				1,215				1,462
Total securities available-for-sale		$	91,802			$	93,692			$	93,643			$	95,844

 

During the first quarter of fiscal 2017, the Company’s portfolio of securities available-for-sale declined $2.2 million due to pay downs of $1.8 million and a decrease in unrecognized gains in the value of the securities of $312,000. At September 30, 2016, the weighted average maturity of the portfolio is 5.6 years and the corresponding weighted average yield was 1.91%.

 

Liquidity and Capital Resources

 

The Company funds its operating activities through internally generated funds, bank deposits and borrowings, and non-recourse debt. At September 30, 2016 and June 30, 2016, the Company’s cash and cash equivalents were $100.7 million and $105.1 million, respectively.

 

Deposits at CalFirst Bank totaled $629.7 million at September 30, 2016 compared to $497.3 million at September 30, 2015 and $633.1 million at June 30, 2016. The $132.4 million increase from September 30, 2015 was used primarily to fund the growth in the Bank’s loan and securities portfolios and maintain liquidity. The following table presents the ending balances, average balances and average rates paid on deposits for the quarters ended September 30, 2016 and 2015:

 

		Three months ended September 30,
		2016												2015
		Ending				Average				Average				Ending				Average				Average
		Balance				Balance				Rate Paid				Balance				Balance				Rate Paid
		(in thousands)
Non-interest bearing demand deposits		$	1,732			$	2,134				n/a			$	1,845			$	2,245				n/a
Interest-bearing demand deposits			1,133				1,196				0.20	%			2,669				2,701				0.20	%
Money market and savings deposits			79,195				78,164				0.87	%			63,874				65,348				0.50	%
Time deposits, less than $100,000			101,514				99,575				1.24	%			74,419				71,695				1.13	%
Time deposits, $100,000 or more		$	446,106			$	452,388				1.25	%		$	354,470			$	342,113				1.14	%

 

The following table shows the maturities of certificates of deposits at September 30, 2016:

 

		$250,000 or less				More Than $250,000
		(in thousands)
Under 3 months		$	81,902			$	28,125
3 – 6 months			100,557				33,496
7 – 12 months			149,613				40,894
13 – 24 months			70,183				23,402
25 – 36 months			15,083				4,365
		$	417,338			$	130,282

 

The Bank has borrowing agreements with the Federal Home Loan Bank of San Francisco (“FHLB”) and as such, can take advantage of FHLB programs for overnight and term advances at published daily rates. The Bank had a short-term borrowing outstanding of $40.0 million at September 30, 2016 at an average rate of 0.43% and an outstanding balance of $42.0 million at September 30, 2015 at an average rate of 0.35%. Under terms of the blanket collateral agreement, advances from the FHLB are collateralized by qualifying securities and real estate loans, with $36.5 million available under the agreement as of September 30, 2016. The Bank also has the authority to borrow from the Federal Reserve Bank (“FRB”) discount window amounts secured by certain lease receivables with unused borrowing availability at September 30, 2016 of approximately $97.3 million.

 

An additional source of liquidity for financing and managing the lease portfolio comes from selling, participating or assigning certain lease term payments to banks or other financial institutions. If the transaction is characterized as a sale of the financial asset or meets the parameters of a participating interest, the lease is removed from the balance sheet and a resulting gain or loss is recognized. If the Company retains a controlling interest in the lease, the assignment is considered a secured borrowing with the associated financing characterized as non-recourse debt. The assigned lease payments are discounted at fixed rates such that the lease payments are sufficient to fully amortize the aggregate outstanding debt. At September 30, 2016, the Company had outstanding non-recourse debt aggregating $3.0 million relating to discounted lease rentals assigned to unaffiliated lenders. In the past, the Company has been able to obtain adequate non-recourse funding commitments, and the Company believes it will be able to do so in the future.

 

The following table presents capital and capital ratio information for the Company and CalFirst Bank as of September 30, 2016 and June 30, 2016 and reflects the transition to the Basel III capital standard from previous regulatory capital adequacy guidelines under the Basel I framework. The Basel III capital standard phases in through 2019 and revises the definition of capital, increases minimum capital ratios, introduces regulatory capital buffers above those minimums, introduces a common equity Tier 1 capital ratio and revises the rules for calculating risk-weighted assets. Under Basel III, the Bank made a one-time election to opt out of the requirement to include components of accumulated other comprehensive income (loss) in common equity Tier 1 capital. The adoption of the new capital standard had an immaterial impact on capital levels and related ratios and the Company and Bank continue to exceed regulatory capital requirements and are considered “well-capitalized” under guidelines established by the FRB and OCC.

 

		September 30,								June 30,
		2016								2016
		(dollars in thousands)
California First National Bancorp		Amount				Ratio				Amount				Ratio
Common equity Tier 1 capital		$	191,637				24.83	%		$	189,677				25.12	%
Tier 1 risk-based capital		$	191,637				24.83	%		$	189,677				25.12	%
Total risk-based capital		$	198,852				25.76	%		$	196,589				26.04	%
Tier 1 leverage capital		$	191,637				21.69	%		$	189,677				21.67	%
California First National Bank
Common equity Tier 1 capital		$	118,387				15.78	%		$	116,379				15.88	%
Tier 1 risk-based capital		$	118,387				15.78	%		$	116,379				15.88	%
Total risk-based capital		$	125,399				16.71	%		$	123,091				16.79	%
Tier 1 leverage capital		$	118,387				14.02	%		$	116,379				13.94	%

 

Contractual Obligations and Commitments

 

The following table summarizes various contractual obligations as of September 30, 2016. Commitments to purchase property for leases are binding and generally have fixed expiration dates or other termination clauses. Commercial loan commitments are agreements to lend to a customer or purchase a participation provided there is no violation of any condition in the contract.  These commitments generally have fixed expiration dates or other termination clauses.  Since the Company expects some of the commitments to expire without being funded, the total amounts do not necessarily represent the Company’s future liquidity requirements.

 

		Due by Period
						Less Than								After
Contractual Obligations		Total				1 Year				1-5 Years				5 Years
		(in thousands)
Lease property purchases (1)		$	60,132			$	60,132			$	-			$	-
Commercial loan commitments			26,992				26,992				-				-
FHLB Borrowings			40,000				40,000				-				-
Operating lease rental payments			1,362				697				665				-
Total contractual commitments		$	128,486			$	127,821			$	665			$	-

 

(1)

Disbursements to purchase property on approved lease or loan commitments are estimated to be completed within one year, but it is likely that some portion could be deferred or never funded.

 

The need for cash for operating activities has been increasing as the Company expands its loan portfolio. The Company believes that existing cash balances, cash flow from operations, cash flows from its financing and investing activities, and assignments (on a non-recourse basis) of lease payments will be sufficient to meet its foreseeable financing needs.

 

Inflation has not had a significant impact upon the operations of the Company.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of loss in a financial instrument arising from changes in market indices such as interest rates and equity prices. The Company’s principal market risk exposure is interest rate risk, which is the exposure due to differences in the repricing characteristics of interest-earning assets and interest-bearing liabilities. Market risk also arises from the impact that fluctuations in interest rates may have on security prices that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for at fair value. As the banking operations of the Company have grown and securities and deposits represent a greater portion of the Company’s assets and liabilities, the Company is subject to increased market risk. The Bank has an Asset/Liability Management Committee and policies established to manage its interest rate and market risk.

 

At September 30, 2016, the Company had $102.1 million of cash or invested in securities of very short duration. The Company’s gross investment in lease payments receivable and loan principal of $675.2 million consists of leases with fixed rates and loans with fixed and variable rates, however, $512.4 million of such investments reprice within one year of September 30, 2016. This compares to the Bank’s interest bearing deposit and borrowing liabilities of $669.9 million, of which 83.1%, or $554.9 million, reprice within one year. CalFirst Leasing has no interest-bearing debt, and non-recourse debt does not represent an interest rate risk to the Company because it is fully amortized through direct payments from lessees to the purchaser of the lease receivable. Based on the foregoing, at September 30, 2016 the Company had assets of $614.5 million subject to changes in interest rates over the next twelve months, compared to repricing liabilities of $554.9 million.

 

The consolidated gap analysis below sets forth the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities for selected time bands. The mismatch between repricings or maturities within a time band is commonly referred to as the “gap” for that period. A positive gap (asset sensitive) where interest rate sensitive assets exceed interest rate sensitive liabilities generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite result on the net interest margin. However, the traditional gap analysis does not assess the relative sensitivity of assets and liabilities to changes in interest rates and other factors that could have an impact on interest rate sensitivity or net interest income. Sudden and substantial increase or decrease in interest rates may adversely impact our income to the extent that the interest rates associated with the assets and liabilities do not change at the same speed, to the same extent, or on the same basis.

 

										Over 1
		3 Months				Over 3 to				Through				Over				Non-rate
(in thousands)		or Less				12 Months				5 years				5 years				Sensitive				Total
Rate Sensitive Assets (RSA):
Cash due from banks		$	100,669			$	-			$	-			$	-			$	-			$	100,669
Investment securities			1,455				-				61,834				34,359				-				97,648
Net investment in leases			23,886				72,481				143,204				7,419				(22,709	)			224,281
Commercial loans			414,787				1,215				9,006				3,248				(5,750	)			422,506
Non-interest earning assets			-				-				-				-				38,946				38,946
Totals			540,797				73,696				214,044				45,026				10,487			$	884,050
Cumulative total for RSA		$	540,797			$	614,493			$	828,537			$	873,563
Rate Sensitive Liabilities (RSL):
Demand and savings deposits		$	80,328			$	-			$	-			$	-			$	1,732			$	82,060
Time deposits			110,027				324,560				113,033				-				-				547,620
Borrowings			40,000				-				-				-				-				40,000
Non-interest bearing liabilities			-				-				-				-				21,588				21,588
Stockholders' equity			-				-				-				-				192,782				192,782
Totals		$	230,355			$	324,560			$	113,033			$	-			$	216,102			$	884,050
Cumulative total for RSL		$	230,355			$	554,915			$	667,948			$	667,948
Interest rate sensitivity gap		$	310,442			$	(250,864	)		$	101,011			$	45,026
Cumulative GAP		$	310,442			$	59,578			$	160,589			$	205,615
RSA divided by RSL (cumulative)			234.77	%			110.74	%			124.04	%			130.78	%
Cumulative GAP / total assets			35.12	%			6.74	%			18.17	%			23.26	%

 

In addition to the consolidated gap analysis, the Bank measures its asset/liability position through duration measures and sensitivity analysis, and calculates the potential effect on earnings using maturity gap analysis. The interest rate sensitivity modeling includes the creation of prospective twelve month "baseline" and "rate shocked" net interest income simulations. After a "baseline" net interest income is determined, using assumptions that the Bank deems reasonable, market interest rates are raised or lowered by 100 to 300 basis points instantaneously, parallel across the entire yield curve, and a "rate shocked" simulation is run. Interest rate sensitivity is then measured as the difference between calculated "baseline" and "rate shocked" net interest income.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures.

 

As of the end of the period covered by this report, the Company's management, including its principal executive officer and its principal financial officer, evaluated the effectiveness of the Company's disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2016 to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes made during the most recent fiscal quarter to the Company's internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1A. Risk Factors.

 

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table summarizes share repurchase activity for the quarter ended September 30, 2016: 

 

										Maximum number
		Total number								of shares that may
		of shares				Average price				yet be purchased
Period		purchased				paid per share				under the plan (1)
July 1 - July 31, 2016			-			$	-				188,237
August 1 - August 31, 2016			-			$	-				188,237
September 1 - September 30, 2016			-			$	-				188,237
			-			$	-

 

1)

In April 2001, the Board of Directors authorized management, at its discretion, to repurchase up to 1,000,000 shares of common stock.

 

ITEM 6. EXHIBITS

 

	(a) Exhibits		Page
	31.1	Rule 13a-14(a)/15d-14(a) Certifications of Principal Executive Officer	28
	31.2	Rule 13a-14(a)/15d-14(a) Certifications of Principal Financial Officer	29
	32.1	Section 1350 Certifications by Principal Executive Officer and Principal Financial Officer	30

 

 

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:	October 27, 2016		BY:	/s/ S. Leslie Jewett
				S. Leslie Jewett Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

 

 

 

 

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