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EX-32.1 - EXHIBIT 32.1 - CALIFORNIA FIRST NATIONAL BANCORPexh_321.htm
EX-31.2 - EXHIBIT 31.2 - CALIFORNIA FIRST NATIONAL BANCORPexh_312.htm
EX-31.1 - EXHIBIT 31.1 - CALIFORNIA FIRST NATIONAL BANCORPexh_311.htm

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   March 31, 2017    
           
           
[  ] 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o    Accelerated filer o   Non-accelerated filer o Smaller Reporting Company þ   Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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 April 27, 2017 was 10,279,807.

 

 
 

 

California First National Bancorp

 

INDEX

 

    PAGE
PART 1. FINANCIAL INFORMATION NUMBER
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets -
March 31, 2017 and June 30, 2016
3
     
  Consolidated Statements of Earnings -
Three and nine months ended March 31, 2017 and 2016
4
     
  Consolidated Statements of Comprehensive Income - 
Three and nine months ended March 31, 2017 and 2016
5
     
  Consolidated Statements of Cash Flows -
Nine months ended March 31, 2017 and 2016
6
     
  Consolidated Statement of Stockholders’ Equity -
Nine months ended March 31, 2017 and 2016
7
     
  Notes to Consolidated Financial Statements 8 - 17
     
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
18 - 26
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27- 28
     
Item 4. Controls and Procedures 28
     
PART 2. OTHER INFORMATION  
     
Item 1A. Risk Factors 28
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
     
Item 6. Exhibits 28
     
Signature 29

 

 

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 regulation and 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

(thousands, except for share amounts)

 

   March 31,
2017
  June 30,
2016
   (Unaudited)   
ASSETS          
           
Cash and due from banks  $111,005   $105,094 
Securities available-for-sale   94,763    95,844 
Investments   3,955    3,957 
Receivables   1,304    1,333 
Property acquired for transactions in process   26,303    30,932 
Loans held for sale   29,126    - 
Leases and loans:          
Net investment in leases   190,067    239,964 
Commercial loans   379,938    408,308 
Allowance for credit losses   (7,604)   (6,862)
Net investment in leases and loans   562,401    641,410 
           
Net property on operating leases   2,472    2,928 
Income taxes receivable   69    121 
Other assets   2,282    2,108 
Discounted lease rentals assigned to lenders   1,060    4,449 
Total Assets  $834,740   $888,176 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Liabilities:          
  Demand and savings deposits  $103,425   $81,989 
  Time certificates of deposit   483,438    551,158 
  Short-term borrowings   40,000    40,000 
  Accounts payable   1,474    1,697 
  Accrued liabilities   3,456    3,622 
  Lease deposits   1,293    1,565 
  Non-recourse debt   1,060    4,449 
  Deferred income taxes, net   7,001    12,674 
Total Liabilities   641,147    697,154 
           
Commitments and contingencies          
           
Stockholders' equity:          
Preferred stock; 2,500,000 shares authorized; none issued   -    - 
Common stock; $.01 par value; 20,000,000 shares authorized; 10,279,807 (March 2017) and 10,279,807 (June 2016) issued and outstanding   103    103 
Additional paid in capital   2,244    2,240 
Retained earnings   191,265    187,334 
Accumulated other comprehensive (loss)/income, net of tax   (19)   1,345 
Total Stockholders’ Equity   193,593    191,022 
Total Liabilities and Stockholders’ Equity  $834,740   $888,176 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 3 
 

 

CALIFORNIA FIRST NATIONAL BANCORP

 

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

(thousands, except for per share amounts)

 

   Three months ended
March 31,
  Nine months ended
March 31,
   2017  2016  2017  2016
             
Finance and loan income  $6,404   $6,217   $20,833   $18,048 
Investment interest income   747    620    2,115    1,609 
Total interest income   7,151    6,837    22,948    19,657 
                     
Interest expense                    
Deposits   1,786    1,549    5,578    4,201 
Borrowings   60    66    154    146 
Net interest income   5,305    5,222    17,216    15,310 
Provision for credit losses   -    200    900    1,275 
                     
Net interest income after provision for credit losses   5,305    5,022    16,316    14,035 
                     
Non-interest income                    
Operating and sales-type lease income   356    112    1,795    366 
Gain on sale of loans, leases and leased property   1,326    352    4,025    1,564 
Gain on sale of investment securities   -    -    -    23 
Other income, net   94    33    276    149 
Total non-interest income   1,776    497    6,096    2,102 
                     
Non-interest expenses                    
Compensation and employee benefits   1,903    1,898    5,559    5,581 
Occupancy   173    173    521    511 
Professional and IT services   276    283    770    828 
FDIC and regulatory fees   118    141    390    386 
Repossessed asset   2    197    2    197 
Other general and administrative   225    192    624    625 
Total non-interest expenses   2,697    2,884    7,866    8,128 
                     
Earnings before income taxes   4,384    2,635    14,546    8,009 
Income taxes   1,873    1,024    5,887    3,115 
                     
Net earnings  $2,511   $1,611   $8,659   $4,894 
                     
Basic earnings per common share  $0.24   $0.15   $0.84   $0.47 
Diluted earnings per common share  $0.24   $0.15   $0.84   $0.47 
                     
Dividends paid per common share outstanding  $-   $-   $0.46   $0.44 
Weighted average common shares outstanding   10,280    10,397    10,280    10,439 
Diluted common shares outstanding   10,280    10,397    10,280    10,439 

 

The accompanying notes are an integral part

of these consolidated financial statements.

 

 4 
 

 

CALIFORNIA FIRST NATIONAL BANCORP

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

 

   Three months ended
March 31,
  Nine months ended
March 31,
   2017  2016  2017  2016
             
Net earnings  $2,511   $1,611   $8,659   $4,894 
                     
Other comprehensive income (loss):                    
                     
Unrealized (losses)/gains on securities available-for-sale   126    1,625    (2,254)   1,187 
                     
Reclassification adjustment of realized gain included in net income on securities available-for-sale   -    -    -    (23)
                     
Tax effect   (50)   (632)   890    (452)
                     
Total other comprehensive (loss)/income   76    993    (1,364)   712 
                     
Total comprehensive income  $2,587   $2,604   $7,295   $5,606 

 

 

 

 

 

The accompanying notes are an integral part

of these consolidated financial statements.

 

 5 
 

 

California First National Bancorp

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

   Nine Months Ended
March 31,
   2017  2016
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Earnings  $8,659   $4,894 
Adjustments to reconcile net earnings to cash flows provided by (used for) operating activities:          
Provision for credit losses   900    1,275 
Depreciation and net accretion   (203)   (36)
Proceeds from sales of loans held for sale   3,116    - 
Repossessed assets   -    197 
Gain on sale of leased property and sales-type lease income   (2,280)   (149)
Net gain recognized on investment securities   -    (23)
Deferred income taxes, including income taxes payable   (5,488)   (1,509)
Decrease in income taxes receivable   52    85 
Net (decrease) increase in accounts payable and accrued liabilities   (166)   222 
Other, net   (158)   (716)
Net cash provided by operating activities   4,432    4,240 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Investment in leases, loans and transactions in process   (200,726)   (292,772)
Payments received on lease receivables and loans   207,662    168,810 
Proceeds from sales of leased property and sales-type leases   6,177    1,981 
Proceeds from sales and assignments of leases   40,970    23,417 
Purchase of investment securities   (5,972)   (22,451)
Pay down on investment securities   4,634    3,007 
Proceeds from sale of investment securities   -    4,769 
Net increase in other assets   (254)   (1,916)
Net cash provided by (used for) investing activities   52,491    (115,155)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net (decrease) increase in time certificates of deposit   (67,720)   111,140 
Net increase in demand and savings deposits   21,436    10,954 
Net increase in short-term borrowings   -    15,000 
Payments to repurchase common stock   -    (2,360)
Dividends to stockholders   (4,728)   (4,603)
Net cash (used for) provided by financing activities   (51,012)   130,131 
           
NET CHANGE IN CASH AND CASH EQUIVALENTS   5,911    19,216 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   105,094    60,240 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $111,005   $79,456 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Decrease in lease rentals assigned to lenders and related non-recourse debt  $(3,389)  $(4,312)
Estimated residual values recorded on leases  $(358)  $(469)
Lease transferred to repossessed assets  $-   $1,500 
Transfers from loans held for investment to loans held for sale  $32,242   $- 
Net cash paid during the nine month period for:          
Interest  $5,743   $4,237 
Income taxes  $10,639   $4,540 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 6 
 

 

California First National Bancorp

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

(in thousands, except for share amounts)

 

   Shares  Amount  Additional
Paid in
Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income
  Total
                   
Nine months ended March 31, 2016                              
                               
Balance, June 30, 2015   10,459,924   $105   $3,376   $184,506   $231   $188,218 
                               
  Net earnings   -    -    -    4,894    -    4,894 
  Other comprehensive income   -    -    -    -    712    712 
  Stock based compensation expense   -    -    4    -    -    4 
  Stock repurchased   (180,117)   (2)   (1,141)   (1,217)   -    (2,360)
  Dividends paid   -    -    -    (4,603)   -    (4,603)
                               
Balance, March 31, 2016   10,279,807   $103   $2,239   $183,580   $943   $186,865 
                               
                               
Nine months ended March 31, 2017                              
                               
Balance, June 30, 2016   10,279,807   $103   $2,240   $187,334   $1,345   $191,022 
                               
  Net earnings   -    -    -    8,659    -    8,659 
  Other comprehensive loss   -    -    -    -    (1,364)   (1,364)
  Stock based compensation expense   -    -    4    -    -    4 
  Dividends paid   -    -    -    (4,728)   -    (4,728)
                               
Balance, March 31, 2017   10,279,807   $103   $2,244   $191,265   $(19)  $193,593 

 

 

 

The accompanying notes are an integral part

of these consolidated financial statements.

 

 7 
 

 

California First National Bancorp

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1- BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of California First National Bancorp (the “Company”) and its subsidiaries California First National Bank (“CalFirst Bank” or the “Bank”) and California First Leasing Corporation (“CalFirst Leasing”) have been prepared in accordance with U.S. 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 Annual Report on Form 10-K for the year ended June 30, 2016. 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 2016 Annual Report on Form 10-K, which contains Management’s Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2016 and for the year then ended.

 

In the opinion of management, the unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the consolidated balance sheet as of March 31, 2017 and the statements of earnings, comprehensive income, cash flows and stockholders’ equity for the periods presented. The results of operations for the three and nine month periods ended March 31, 2017 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending June 30, 2017.

 

Certain reclassifications have been made to the fiscal 2016 financial statements to conform to the presentation of the fiscal 2017 financial statements.

 

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In March 2017, the FASB issued ASU 2017-08, “Receivable – Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities.” This ASU amends guidance on the amortization period of premiums on certain purchased callable debt securities to shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the potential impact of ASU 2016-02 on its financial statements and disclosures.

 

In June 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 addresses diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact of this new requirement on the cash flow statement of the Company.

 

NOTE 3 – STOCK-BASED COMPENSATION

 

At March 31, 2017, the Company has one stock option plan, which is more fully described in Note 14 in the Company’s 2016 Annual Report on Form 10-K. Pursuant to ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”), compensation expense is recognized over the requisite service period using the fair-value based method for all new awards calculated at the grant date.

 

During the quarter and nine months ended March 31, 2017, the Company recognized pre-tax stock-based compensation expense of $1,100 and $3,500, respectively. Such expense related to options granted during fiscal 2013. The Company has not awarded any new grants since fiscal 2013 and has calculated the stock-based compensation expense based upon the original grant date fair value as allowed under ASC 718. The valuation variables utilized at the grant dates are discussed in the Company’s 2013 Annual Report on Form 10-K, the year of the original grant. As of March 31, 2017, approximately $1,500 of total unrecognized compensation expense related to unvested shares is expected to be recognized over the next 4 months.

 

 8 
 

 

Stock option activity for the periods indicated is summarized in the following table:

 

   For the nine months ended
   March 31, 2017  March 31, 2016
   Shares  Weighted Average
Exercise Price
  Shares  Weighted Average
Exercise Price
Options outstanding at beginning of period   10,000   $16.00    10,000   $16.00 
Exercised   -    -    -    - 
Granted   -    -    -    - 
Options outstanding at end of period   10,000   $16.00    10,000   $16.00 
Options exercisable at end of period   8,000         6,000      

 

Stock options outstanding and exercisable are summarized below:

 

   As of March 31, 2017
   Options Outstanding  Options Exercisable
Range of
Exercise prices
  Number
Outstanding
  Weighted Average
Remaining Contractual
Life (in years)
  Weighted Average
Exercise Price
  Number
Exercisable
  Weighted Average
Exercise Price
 $16.00 - 16.00   10,000    5.33   $16.00   8,000  $16.00 

 

NOTE 4 – FAIR VALUE MEASUREMENT

 

ASC Topic 820: “Fair Value Measurements and Disclosures” defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. ASC Topic 820 establishes a three-tiered value hierarchy that prioritizes inputs based on the extent to which inputs used are observable in the market and requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs.  If a value is based on inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. The three levels of inputs are defined as follows:

 

  • Level 1 - Valuation is based upon unadjusted quoted prices for identical instruments traded in active markets;
  • Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market;
  • Level 3 - Valuation is generated from model-based techniques that use inputs not observable in the market and based on the entity’s own judgment. Level 3 valuation techniques could include the use of option pricing models, discounted cash flow models and similar techniques, and rely on assumptions that market participants would use in pricing the asset or liability.

ASC 820 applies whenever other accounting pronouncements require presentation of fair value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value. As such, ASC 820 does not apply to the Company’s investment in leases. The Company’s financial assets measured at fair value on a recurring basis include loans held for sale and securities available-for-sale and at March 31, 2017 and June 30, 2016, there were no liabilities subject to ASC 820. 

 

Management has designated certain loans as loans held for sale, which are carried at the lower of cost or fair value as determined by firm purchase commitments or quoted prices, and are reported as level 2 inputs. Any amount by which cost exceeds fair value is initially recorded as a valuation allowance and subsequently reflected in the gain or loss when sold.

 

Securities available-for-sale include U.S. Treasury notes, corporate bonds, U.S. government agency (“Agency”) mortgaged-backed securities (“MBS”), and a mutual fund investment and generally are reported at fair value utilizing Level 1 and Level 2 inputs. The fair value of corporate bonds and the Agency MBS are obtained from independent quotation bureaus that use computerized valuation formulas to calculate current values based on observable transactions, but not a quoted bid, or are valued using prices obtained from the custodian, who uses third party data service providers (Level 2 inputs). U.S. Treasury notes, equity securities and the mutual fund are valued by reference to the market closing or last trade price (Level 1 inputs). In the unlikely event that no trade occurred on the applicable date, an indicative bid or the last trade most proximate to the applicable date would be used (Level 2 inputs).

 

 9 
 

 

The Company’s assets, which are measured at fair value on a recurring basis as of March 31, 2017 and June 30, 2016 are summarized as follows:

 

Description of Assets / Liabilities  Total
 Fair Value
  Quoted Price in
Active Markets for
Identical Assets
 (Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
   (in thousands)
As of March 31, 2017                    
Loans held for sale  $29,126   $-   $29,126   $- 
U.S. Treasury Notes   47,724    47,724    -    - 
Corporate debt securities   13,217    -    13,217    - 
Agency MBS   26,665    -    26,665    - 
Equity securities   5,875    5,875    -    - 
Mutual fund investment   1,282    1,282    -    - 
   $123,889   $54,881   $69,008   $- 
                     
As of June 30, 2016                    
U.S. Treasury notes  $48,774   $48,774   $-   $- 
Corporate debt securities   13,385    -    13,385    - 
Agency MBS   32,223    -    32,223    - 
Mutual fund investment   1,462    1,462    -    - 
   $95,844   $50,236   $45,608   $- 

 

Certain financial assets, such as collateral dependent impaired loans and repossessed or returned assets are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. During the year ended June 30, 2016, the equipment subject to a lease rejected in bankruptcy was transferred from lease receivables and recorded as repossessed equipment in other assets.

 

The fair value of repossessed equipment is based on available market information, including independent appraisal and sales results, less estimated selling costs. The equipment repossessed was initially recorded at the estimated fair value less estimated selling costs at the time of transfer to repossessed assets and subsequently written down based on an updated appraisal.

 

The following table summarizes the Company’s assets which are measured at fair value on a non-recurring basis as of March 31, 2017 and June 30, 2016.

 

Description of Assets / Liabilities  Total
 Fair Value
  Quoted Price in
Active Markets for
Identical Assets
 (Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
   (in thousands)
As of March 31, 2017            
Repossessed asset  $1,300   $-   $-   $1,300 
As of June 30, 2016                    
Repossessed asset  $1,300   $-   $-   $1,300 

 

NOTE 5 – fair value of Financial Instruments

 

In accordance with ASC 825-50, the following table summarizes the estimated fair value of financial instruments as of March 31, 2017, and June 30, 2016, and includes financial instruments that are not accounted for or carried at fair value. In accordance with disclosure guidance, certain financial instruments, including all lease related assets and liabilities and all non-financial instruments are excluded from fair value of financial instrument disclosure requirements. Accordingly, the aggregate of the fair values presented does not represent the total underlying value of the Company. These fair value estimates are based on relevant market information and data, however, given there is no active market or observable market transactions for certain financial instruments, the Company has made estimates of fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimated values.

 

 10 
 

 

For cash and cash equivalents and demand and savings deposits, because of their short-term nature, the carrying amounts approximate the fair value and are classified as Level 1 in the fair value hierarchy. Values for investments and available-for-sale securities are determined as set forth in Note 4, 6 and 7. The fair value of loans held for sale are determined by outstanding commitments held by investors and are classified as Level 2 in the fair value hierarchy. The fair values of commercial loan participations that trade regularly in the secondary market are based upon current bid prices in such market at the measurement date and are classified as Level 2 in the fair value hierarchy. For other loans, the estimated fair value is calculated based on discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and are classified as Level 3 in the fair value hierarchy. These calculations have been adjusted for credit risk based on the Company’s historical credit loss experience. The fair value of certificates of deposit and short-term borrowings are estimated based on discounted cash flows using current offered market rates or interest rates for borrowings of similar maturity and are classified as Level 3 in the fair value hierarchy.

 

The estimated fair values of financial instruments were as follows:

 

   March 31, 2017  June 30, 2016
   Carrying
Amount
  Estimated
Fair Value
  Carrying
Amount
  Estimated
Fair Value
   (in thousands)
Financial Assets:                    
Cash and cash equivalents  $111,005   $111,005   $105,094   $105,094 
Investments   3,955    3,968    3,957    3,972 
Securities available-for-sale   94,763    94,763    95,844    95,844 
Loans held for sale   29,126    29,126    -    - 
Commercial loan participations   361,627    362,485    389,511    388,781 
Other commercial loans   13,000    12,889    14,225    14,512 
Financial Liabilities:                    
Demand and savings deposits   103,425    103,425    81,989    81,989 
Time certificate of deposits   483,438    485,838    551,158    551,508 
Short-term borrowings  $40,000   $39,996   $40,000   $40,001 

 

 

NOTE 6 – INVESTMENTS:

 

Investments are carried at cost and consist of the following:

 

   March 31, 2017  June 30, 2016
   Carrying Cost  Fair Value  Carrying Cost  Fair Value
   (in thousands)
Federal Reserve Bank Stock  $1,955   $1,955   $1,955   $1,955 
Federal Home Loan Bank Stock   1,886    1,886    1,886    1,886 
Mortgage-backed investment   114    127    116    131 
   $3,955   $3,968   $3,957   $3,972 

 

The investment in Federal Home Loan Bank of San Francisco (“FHLB”) stock is a required investment related to CalFirst Bank’s borrowing relationship with the FHLB. The FHLB obtains its funding primarily through issuance of consolidated obligations of the Federal Home Loan Bank system. The U.S. Government does not guarantee these obligations, and each of the twelve FHLB’s are generally jointly and severally liable for repayment of each other’s debt. Therefore, the Company’s investment could be adversely impacted by the financial operations of the FHLB and actions by the Federal Housing Finance Agency. These investments have no stated maturity and the cost approximates fair value based on redemption at par value.

 

CalFirst Bank is required to hold Federal Reserve Bank stock equal to 6% of its capital surplus, which is defined as additional paid-in capital stock, less any gains (losses) on available for sale securities as of the current period end.

 

The mortgage-backed investment consists of one U.S. agency issued security. Fair value is obtained from an independent quotation bureau, Level 2 input. The Company has determined that it has the ability to hold this investment until maturity and, given the Company’s intent to do so, anticipates that it will realize the full carrying value of its investment and carries the security at amortized cost.

 

 11 
 

 

NOTE 7 – SECURITIES AVAILABLE FOR SALE:

 

The amortized cost and fair value of securities available for sale at March 31, 2017 were as follows:

 

(in thousands)  Amortized  Gross Unrealized  Fair
   Cost  Gains  Losses  Value
U.S. Treasury Notes  $47,408   $316   $-   $47,724 
Corporate debt securities   13,178    39    -    13,217 
Agency MBS   27,021    3    (359)   26,665 
Equity securities   5,972    -    (97)   5,875 
Mutual fund investment   1,215    67    -    1,282 
Total securities available-for-sale  $94,794   $425   $(456)  $94,763 

 

The amortized cost and fair value of securities available for sale at June 30, 2016 were as follows:

 

(in thousands)  Amortized  Gross Unrealized  Fair
   Cost  Gains  Losses  Value
U.S. Treasury notes  $47,355   $1,419   $-   $48,774 
Corporate debt securities   13,291    97    (3)   13,385 
Agency MBS   31,782    441    -    32,223 
Mutual fund investment   1,215    247    -    1,462 
Total securities available-for-sale  $93,643   $2,204   $(3)  $95,844 

 

The available-for-sale securities amortized cost and estimated fair value at March 31, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Amortized Cost  Fair Value
   (in thousands)
Due in one year or less  $3,164   $3,171 
Due after one year but less than 5 years   57,421    57,770 
Due after five years   27,021    26,665 
No stated maturity   7,188    7,157 
Total securities available-for-sale  $94,794   $94,763 

 

For the nine months ended March 31, 2017, the Company had no realized gains or losses from the sale of available-for-sale securities. During the nine months ended March 31, 2016, the Company realized a gain of $23,000 from an early call of a corporate debt security for proceeds of $4.8 million. The following table presents the fair value and associated gross unrealized loss on available-for-sale securities at March 31, 2017 and June 30, 2016.

 

   Less than 12 Months  12 Months or More  Total
   Unrealized
Loss
  Estimated
Fair Value
  Unrealized
Loss
  Estimated
Fair Value
  Unrealized
Loss
  Estimated
Fair Value
   (in thousands)
At March 31, 2017                  
Equity securities  $(97)  $5,875   $-   $-   $(97)  $5,875 
Agency MBS   (359)   23,346    -    -    (359)   23,346 
Total  $(456)  $29,221   $-   $-   $(456)  $29,221 

 

   Less than 12 Months  12 Months or More  Total
   Unrealized
Loss
  Estimated
Fair Value
  Unrealized
Loss
  Estimated
Fair Value
  Unrealized
Loss
  Estimated
Fair Value
   (in thousands)
At June 30, 2016                  
Corporate debt securities  $(3)  $3,266   $-   $-   $(3)  $3,266 
Total  $(3)  $3,266   $-   $-   $(3)  $3,266 

 

 12 
 

 

The Company conducts a regular assessment of its investment portfolios to determine whether any securities are other-than-temporarily impaired. In estimating other-than-temporary impairment losses, management considers, among other factors, length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, the intent of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery and whether it is more likely than not the Company will be required to sell the security before recovery to its amortized cost. The $456,000 unrealized losses at March 31, 2017 are related to changes in interest rates of the Agency MBS and for the equity securities the decline in value is related to changes in the market value and not credit quality. The Company has the intent and the ability to hold these securities to recovery or maturity and more likely than not, will not need to sell them. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2017 or June 30, 2016.

 

At March 31, 2017 and at June 30, 2016, U.S. Treasury notes and Agency MBS with an amortized cost of $74.4 million and $79.1 million, respectively, were pledged to secure borrowings from the FHLB (see Note 11).

 

NOTE 8 – NET INVESTMENT IN LEASES

 

Net investment in leases consists of the following:

 

   March 31,
2017
  June 30,
2016
   (in thousands)
Minimum lease payments receivable  $195,694   $248,527 
Estimated residual value   7,365    10,871 
Less unearned income   (12,992)   (19,434)
Net investment in leases before allowances   190,067    239,964 
Less allowance for lease losses   (2,231)   (2,228)
Less valuation allowance for estimated residual value   (62)   (62)
Net investment in leases  $187,774   $237,674 

 

The minimum lease payments receivable and estimated residual value are discounted using the internal rate of return method related to each specific capital lease. Unearned income includes the offset of initial direct costs of $2.6 million at March 31, 2017 and at June 30, 2016.

 

NOTE 9 – COMMERCIAL LOANS

 

Commercial loans consist of the following:

 

   March 31,
2017
  June 30,
2016
   (in thousands)
Commercial term loans  $371,053   $399,239 
Commercial real estate loans   6,358    6,682 
Revolving lines of credit   3,074    3,405 
Total commercial loans   380,485    409,326 
Less unearned income and discounts   (547)   (1,018)
Less allowance for loan losses   (5,311)   (4,572)
Net commercial loans  $374,627   $403,736 

 

Commercial loans are reported at their outstanding unpaid principal balances reduced by the allowance for loan losses and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related commercial loan.

 

In addition to the amount outstanding on revolving lines of credit set forth above, the Company had additional unused commitments on revolving lines of credit in the amount of $3.4 million at March 31, 2017 and $524,000 at June 30, 2016. The Company has a recorded liability for unfunded loan commitments of $50,000 at March 31, 2017 and at June 30, 2016 related to such commitments.

 

 13 
 

 

NOTE 10 – CREDIT QUALITY OF FINANCING RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

 

The following tables provide information on the credit profile of the components of the portfolio and allowance for credit losses related to “financing receivables” as defined under ASC Topic 310, Receivables.  This disclosure on “financing receivables” covers the Company’s direct finance and sales-type leases and all commercial loans, but does not include operating leases and transactions in process.   The portfolio is disaggregated into segments and classifications appropriate for assessing and monitoring the portfolios’ risk and performance. This disclosure does not encompass all risk assets or the entire allowance for credit losses.

 

Portfolio segments identified by the Company include leases and loans. These segments have been disaggregated into four classes: 1) commercial leases, 2) education, government and non-profit leases, 3) commercial and industrial loans and 4) commercial real estate loans. Relevant risk characteristics for establishing these portfolio classes generally include the nature of the borrower, structure of the transaction and collateral type. The Company’s credit process includes a policy of classifying all leases and loans in accordance with a risk rating classification system consistent with regulatory models under which leases and loans may be rated as “pass”, “special mention”, “substandard”, or “doubtful”. These risk categories reflect an assessment of the ability of the borrowers to service their obligation based on current financial position, historical payment experience, and collateral adequacy, among other factors. The Company uses the following definitions for risk ratings:

 

Pass – Includes credits of the highest quality as well as credits with positive primary repayment source but one or more characteristics that are of higher than average risk.

 

Special Mention – Have a potential weakness that if left uncorrected may result in deterioration of the repayment prospects for the lease or loan or of the Company’s credit position at some future date.

 

Substandard – Are inadequately protected by the paying capacity of the obligor or the collateral, if any. Substandard credits have a well-defined weakness that jeopardize the liquidation of the debt or indicate the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful – Based on current information and events, collection of all amounts due according to the contractual terms of the lease or loan agreement is considered highly questionable and improbable.

 

The risk classification of financing receivables by portfolio class is as follows:

 

(dollars in thousands)  Commercial
 Leases
  Education
Government
 Non-profit
 Leases
  Commercial
 & Industrial
 Loans
  Commercial
 Real Estate
 Loans
  Total
Financing
 Receivable
As of March 31, 2017:               
Pass  $137,353   $49,064   $368,313   $6,357   $561,087 
Special Mention   3,433    213    5,268    -    8,914 
Substandard   -    -    -    -    - 
Doubtful   2    2    -    -    4 
   $140,788   $49,279   $373,581   $6,357   $570,005 
Non-accrual  $2   $2   $-   $-   $4 
                          
As of June 30, 2016:                         
Pass  $174,679   $58,344   $397,910   $6,679   $637,612 
Special Mention   6,308    380    3,719    -    10,407 
Substandard   241    -    -    -    241 
Doubtful   10    2    -    -    12 
   $181,238   $58,726   $401,629   $6,679   $648,272 
Non-accrual  $10   $2   $-   $-   $12 

 

The accrual of interest income on leases and loans will be discontinued when the customer becomes ninety days or more past due on its lease or loan 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 doubt about the ability of the customer to meet its lease or loan obligations, as evidenced by consistent delinquency, deterioration in the customer’s financial condition or other relevant factors. Payments received while on non-accrual are applied to reduce the Company’s recorded value.

 

 14 
 

 

The aging of financing receivables by portfolio class is as follows:

 

(dollars in thousands)  31-89
Days
  Greater
Than
 90 Days
  Total
 Past Due
  Current  Total
Financing
 Receivable
  Over 90
Days &
Accruing
                   
As of March 31, 2017:                  
Commercial Leases  $-   $2   $2   $140,786   $140,788   $- 
Education, Government, Non-profit Leases   -    2    2    49,277    49,279    - 
Commercial and Industrial Loans   -    -    -    373,581    373,581    - 
Commercial Real Estate Loans   -    -    -    6,357    6,357    - 
   $-   $4   $4   $570,001   $570,005   $- 
                               
As of June 30, 2016:                              
Commercial Leases  $-   $10   $10   $181,228   $181,238   $- 
Education, Government, Non-profit Leases   -    2    2    58,724    58,726    - 
Commercial and Industrial Loans   -    -    -    401,629    401,629    - 
Commercial Real Estate Loans   -    -    -    6,679    6,679    - 
   $-   $12   $12   $648,260   $648,272   $- 

 

The allowance balances and activity in the allowance related to financing receivables, by portfolio segment for the three and nine months ended March 31, 2017 and 2016 are presented in the following table:

 

(dollars in thousands)  Commercial
 Leases
  Education
Government
Non-profit
 Leases
  Commercial
 & Industrial
 Loans
  Commercial
 Real Estate
 Loans
  Total
 Allowance
For the three months ended March 31, 2017:               
Balance beginning of period  $1,828   $465   $5,411   $61   $7,765 
Charge-offs   -    -    (161)   -    (161)
Recoveries   -    -    -    -    - 
Provision   -    -    -    -    - 
Balance end of period  $1,828   $465   $5,250   $61   $7,604 
                          
For the three months ended March 31, 2016:                         
Balance beginning of period  $2,264   $417   $3,761   $61   $6,503 
Charge-offs   -    -    -    -    - 
Recoveries   -    50    -    -    50 
Provision   (350)   -    550    -    200 
Balance end of period  $1,914   $467   $4,311   $61   $6,753 
                          
For the nine months ended March 31, 2017:                         
Balance beginning of period  $1,825   $465   $4,511   $61   $6,862 
Charge-offs   -    -    (161)   -    (161)
Recoveries   3    -    -    -    3 
Provision   -    -    900    -    900 
Balance end of period  $1,828   $465   $5,250   $61   $7,604 
                          
For the nine months ended March 31, 2016:                         
Balance beginning of period  $2,592   $817   $2,936   $111   $6,456 
Charge-offs   (1,029)   -    -    -    (1,029)
Recoveries   1    50    -    -    51 
Provision   350    (400)   1,375    (50)   1,275 
Balance end of period  $1,914   $467   $4,311   $61   $6,753 

 

 15 
 

 

The following table presents the recorded investment in loans and leases and the related allowance based on impairment method as of March 31, 2017 and June 30, 2016 by portfolio segment.

 

(dollars in thousands)  Commercial
 Leases
  Education
Government
 Non-profit
 Leases
  Commercial
 & Industrial
 Loans
  Commercial
 Real Estate
 Loans
  Total
Financing
 Receivable
As of March 31, 2017:                         
Allowance for lease and loan losses                         
Individually evaluated for impairment  $173   $2   $-   $-   $175 
Collectively evaluated for impairment   1,655    463    5,250    61    7,429 
Total ending allowance balance  $1,828   $465   $5,250   $61   $7,604 
                          
Finance receivables                         
Individually evaluated for impairment  $3,435   $2   $-   $-   $3,437 
Collectively evaluated for impairment   137,353    49,277    373,581    6,357    566,568 
Total ending finance receivable balance  $140,788   $49,279   $373,581   $6,357   $570,005 
                          
As of June 30, 2016:                         
Allowance for lease and loan losses                         
Individually evaluated for impairment  $37   $2   $-   $-   $39 
Collectively evaluated for impairment   1,788    463    4,511    61    6,823 
Total ending allowance balance  $1,825   $465   $4,511   $61   $6,862 
                          
Finance receivables                         
Individually evaluated for impairment  $242   $2   $-   $-   $244 
Collectively evaluated for impairment   180,996    58,724    401,629    6,679    648,028 
Total ending finance receivable balance  $181,238   $58,726   $401,629   $6,679   $648,272 

 

NOTE 11 – BORROWINGS

 

CalFirst Bank is a member of the Federal Home Loan Bank of San Francisco and can take advantage of FHLB programs for overnight and term advances at published rates. Under terms of a blanket collateral agreement, advances from the FHLB are collateralized by qualifying real estate loans and investment securities. The Bank also has authority to borrow from the Federal Reserve Bank (“FRB”) discount window amounts secured by certain lease receivables. Borrowing capacity from the FHLB or FRB may fluctuate based upon the acceptability and risk rating of securities, loan and lease collateral and both the FRB and FHLB could adjust advance rates applied to such collateral at their discretion. 

 

The borrowings from the FHLB and weighted average interest rates at March 31, 2017 and June 30, 2016 were as follows:

 

   March 31, 2017  June 30, 2016
(dollars in thousands)  Amount  Weighted
Average Rate
  Amount  Weighted
Average Rate
             
Short-term borrowings                    
FHLB advances  $40,000    0.75%  $40,000    0.42%

 

At March 31, 2017, there was available borrowing capacity from the FHLB of $31.8 million related to qualifying real estate loans of $6.5 million and securities pledged with an amortized cost of $74.4million. There were no borrowings from the FRB at March 31, 2017 and 2016. Borrowing availability from the FRB at March 31, 2017 was approximately $84.1 million secured by $107.1 million of lease receivables. Borrowing availability from the FHLB and FRB at June 30, 2016 was approximately $40.8 million and $107.2 million, respectively.

 

 16 
 

 

NOTE 12 – SEGMENT REPORTING

 

The Company’s two subsidiaries, CalFirst Bank, an FDIC-insured national bank, and CalFirst Leasing are considered to be two different business segments. Below is a summary of each segment’s financial results for the quarters and nine months ended March 31, 2017 and 2016:

 

   CalFirst
Bank
  CalFirst
Leasing
  Bancorp and
Eliminating
Entries
  Consolidated
        (in thousands)          
Quarter ended March 31, 2017                    
Total interest income  $6,989   $157   $5   $7,151 
Net interest income after provision for credit losses   5,099    201    5    5,305 
Other income   844    932    -    1,776 
Net income  $2,320   $644   $(453)  $2,511 
                     
Quarter ended March 31, 2016                    
Total interest income  $6,558   $276   $3   $6,837 
Net interest income after provision for credit losses   4,653    366    3    5,022 
Other income   421    76    -    497 
Net income  $1,606   $209   $(204)  $1,611 
                     
Nine months ended March 31, 2017                    
Total interest income  $22,277   $659   $12   $22,948 
Net interest income after provision for credit losses   15,525    779    12    16,316 
Other income   3,742    2,354    -    6,096 
Net income  $8,033   $1,764   $(1,138)  $8,659 
                     
Nine months ended March 31, 2016                    
Total interest income  $18,654   $998   $5   $19,657 
Net interest income after provision for credit losses   12,753    1,277    5    14,035 
Other income   1,346    756    -    2,102 
Net income  $4,439   $1,070   $(615)  $4,894 
                     
Total assets at March 31, 2017  $796,878   $69,123   $(31,261)  $834,740 
Total assets at March 31, 2016  $821,627   $77,605   $(38,342)  $860,890 

 

 

 17 
 

 

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 predominantly leasing toward over 60% 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 generally 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 73% of interest-earning assets, $606.5 million, and 86% of interest bearing liabilities, $536.5 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. Net interest income is also vulnerable to volatility in the timing of loan repayments and deposit withdrawals. 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 should be read in conjunction with the Company’s Annual Report filed on Form 10-K for the year ended June 30, 2016, and have not changed except to address recent transfers of certain loans to a held for sale category that are accounted for as follows:

 

Loans Held for Sale Loans that were originated with the intent to hold but which have been subsequently designated as being held for sale are recorded at the lower of cost or fair value at the time of transfer to held for sale. Fair value is determined by firm purchase commitments or quoted prices and if cost exceeds fair value at the transfer date, the difference is taken as a charge against the allowance for loan losses. Loans held for sale continue to be carried at the lower of cost or fair value until sold, with any subsequent decline in fair value recorded as a valuation allowance for held for sale loans and then reflected in the gain or loss on sale when sold.

 

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

 

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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. We believe this analysis provides additional meaningful information on a comparative basis.

 

In January 2017, CalFirst Bank was advised by its primary regulator to cease originating new leveraged or non-leveraged syndicated commercial loans, and was further advised in March 2017 to take action to substantially reduce its concentration of leveraged loans. As a result, the Bank did not originate any new loans after January 2017 and has seen a high volume of loan payoffs during the third quarter, occurring both in the normal course and accelerated by the Bank’s inability to participate in extending the term of certain loans. During the third quarter, new loan bookings of $10.5 million were offset by loan payoffs of $57.5 million. In addition, the Bank transferred $29.1 million of loans to loans held for sale at March 31, 2017. As a result, the Bank’s commercial loan portfolio declined 17% from $450.2 million at December 31, 2016 to $374.6 million at March 31, 2017 and was down 7% from $403.7 million at June 30, 2017.

 

Lease bookings of $25.6 million for the third quarter of fiscal 2017 were down 39.0% from the third quarter of fiscal 2016, while nine month lease bookings of $79.9 million were down 24.2%. Combined lease and loan bookings for the first nine months of fiscal 2017 of $203.4 million declined 31.3% from $296.2 million booked during the first nine months of fiscal 2016. As a result, the Company’s net investment in leases and loans of $562.4 million at March 31, 2017 is down 13.8% from $652.4 million at December 31, 2016 and 12.3% from $641.4 million at June 30, 2016.

 

CalFirst Bank is pursuing an appeal of the regulatory restrictions on its loan portfolio, but cannot predict if it will be successful in its appeal, or what the conditions of any relief might be. At this time, the Bank expects no new syndicated loan originations during the fourth quarter of fiscal 2017 and expects that, in addition to the $29 million of loans held for sale at March 31, 2017, another 10% of the loan portfolio may also be sold or paid off during the fourth quarter ending June 30, 2017.

 

In light of the decline in the loan portfolio, the Company took action in March 2017 to reduce deposits, particularly certificates of deposits (“CD”s), by drastically cutting rates offered on CDs. As a result, during the third quarter CDs declined by 9% and overall deposits declined by 8%. Nonetheless, the Company’s cash increased by over 20% to $111 million at March 31, 2017. The abrupt decline in commercial loan originations and accelerated loan payoffs during the third quarter, prior to realizing any benefit from reducing deposits and lower deposit rates, is believed to have negatively impacted net interest income during the third quarter. Through this period of managing the decline in commercial loans and deposits, the Company expects to carry higher liquidity invested in lower yielding fed funds as the timing of withdrawals and payoffs can be unpredictable. As a result, management is not able to estimate the impact on fourth quarter 2017 and beyond results with any accuracy.

 

Consolidated Statement of Earnings Analysis

 

Summary – For the third quarter ended March 31, 2017, net earnings of $2.5 million increased $900,000, or 55.9%, from $1.6 million for the third quarter ended March 31, 2016 due to a $1.3 million increase in non-interest income from the sale of leases and leased property and a $283,000 increase in net interest income. Growth in interest income reflected 26% growth in commercial loan income offset by a 22% reduction in finance income. For the nine months ended March 31, 2017, net earnings increased $3.8 million, or 76.9% to $8.7 million from $4.9 million for the first nine months of fiscal 2016. Diluted earnings per share of $0.24 for the third quarter of fiscal 2017 increased 57.7% from the $0.15 per share for the third quarter of fiscal 2016. For the nine months ended March 31, 2017, diluted earnings per share of $0.84 increased 79.7%, compared to $0.47 per share for the same prior year period.

 

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.

 

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

 

   Quarter ended  Nine Months ended
   March 31, 2017 vs 2016  March 31, 2017 vs 2016
   Volume  Rate  Total  Volume  Rate  Total
   (in thousands)
Interest income                              
Net investment in leases  $(866)  $208   $(658)  $(2,261)  $1,424   $(837)
Commercial loans   714    131    845    3,210    412    3,622 
Investment securities   (25)   6    (19)   76    72    148 
Interest-earning deposits with banks   48    98    146    80    278    358 
    (129)   443    314    1,105    2,186    

3,291

 
Interest expense                              
Demand and savings deposits   29    89    118    68    270    338 
Time deposits   72    47    119    729    310    1,039 
Borrowings   (20)   14    (6)   (28)   36    8 
    81    150    231    769    616    1,385 
Net interest income  $(210)  $293   $83   $336   $1,570   $2,906 

 

Net interest income was $5.3 million for the quarter ended March 31, 2017, an $83,000, or a 1.6% increase compared to the same quarter of the prior year. Total interest income for the third quarter of fiscal 2017 increased 4.9% to $7.2 million from $6.8 million during the third quarter of the prior year. This increase includes an $845,000, or 26.3%, increase in commercial loan income that reflected a 22.2% increase in average loan balances to $424.9 million and a 12 basis point increase in average rates earned to 3.82%. Finance income decreased by $658,200 or 21.9% that reflected a 28.9% decrease in the average investment in leases to $192.5 million, offset by a 43 basis point increase in average lease yield to 4.87%. Investment income increased by 20.4%, or $126,700, as average cash and investment balances increased 19.1% to $212.8 million but the average yield only increased by 2 basis points to 1.40% as higher percent of investments were held in fed funds. Interest expense paid on deposits and borrowings during the third quarter of fiscal 2017 increased by $230,700, or 14.3%, reflecting a 4.9% increase in average balances to $661.2 million compared to the third quarter of the prior year, while the average rate paid increased 10 basis points from 1.02% to 1.12%.

 

   Quarter ended  Quarter ended
(dollars in thousands)  March 31, 2017  March 31, 2016
   Average     Yield/  Average     Yield/
Assets  Balance (1)  Interest  Rate  Balance (1)  Interest  Rate
Interest-earning assets                              
Interest-earning deposits with banks  $117,201   $242    0.83%  $78,223   $96    0.49%
Investment securities   95,560    505    2.11%   100,454    524    2.09%
Commercial loans   424,895    4,063    3.82%   347,724    3,218    3.70%
Net investment in leases   192,459    2,341    4.87%   270,612    2,999    4.43%
Total interest-earning assets   830,115    7,151    3.45%   797,013    6,837    3.43%
Other assets   41,409              45,524           
   $871,524             $842,537           
                               
Liabilities and Shareholders' Equity                              
Interest-bearing liabilities                              
Demand and savings deposits  $102,550    215    0.84%  $79,158    97    0.49%
Time deposits   518,634    1,571    1.21%   494,415    1,452    1.17%
Other borrowings   40,000    60    0.60%   57,000    66    0.46%
Total interest-bearing liabilities   661,184    1,846    1.12%   630,573    1,615    1.02%
Non-interest bearing demand deposits   2,701              2,117           
Other liabilities   14,790              22,243           
Shareholders' equity   192,849              187,604           
   $871,524             $842,537           
Net interest income       $5,305             $5,222      
                               
Net interest spread (2)             2.33%             2.41%
Net interest margin (3)             2.56%             2.62%
Average interest earning assets over average interest bearing liabilities             125.5%             126.4%

 

(1)   Average balances are based on month-end balances, include non-accrual leases, and are presented net of unearned income.

(2)   Net interest spread is the difference between the average rates on interest-earning assets and interest-bearing liabilities.

(3)   Net interest margin represents net interest income as a percent of average interest earning assets.

 

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Net interest income for the nine months ended March 31, 2017 was $17.2 million, a $1.9 million, or 12.4% increase from $15.3 million for the nine months ended March 31, 2016. Total interest income for the first nine months of fiscal 2017 increased 16.7% to $22.9 million from $19.7 million for first nine months of the prior year as a result of a $3.6 million increase in commercial loan income that reflected a 38.5% increase in average loan balances to $420.9 million, while average rates earned increased 13 basis points to 3.79%. For the first nine months of fiscal 2017, finance income decreased $837,700, or 8.6%, to $8.9 million as the average investment in leases declined 23.3% to $211.9 million while the average yield earned increased by 90 basis points to 5.58%. The increase in average yield benefitted from the recognition of $1.3 million of finance income during the second quarter related to a transaction in process that was unwound in bankruptcy and from accelerated finance income from other early lease terminations. This boosted the reported yield by 81 basis points. Without that benefit, the average lease yield for the first nine months of fiscal 2017 would have increased by 8 basis points. Investment income increased by 31.5%, or $506,100, to $2.1 million as average cash and investment balances increased 24.1% to $203.3 million and average yields increased by 8 basis points to 1.39%. For the first nine months of fiscal 2017, the Company’s average interest earning deposits with banks increased 47.7% to $107.4 million and the average yield increased 34 basis points to 0.65% related to the increase in rates on deposits held at the FRB. The increased yield on investments included the benefit from a large FHLB dividend during the second quarter that increased the yield by 10 basis points to 2.21%. For the nine months ended March 31, 2017, interest expense on deposits and borrowings increased by $1.4 million, or 31.9%, to $5.7 million on a 16.3% increase in average deposits and borrowings to $667.4 million compared to the first nine months of the prior year. The average rate paid increased from 1.07% to 1.19% as FHLB borrowings at 0.51% helped offset the increase in average deposit costs from 1.01% to 1.15%.

 

   Nine months ended  Nine months ended
(dollars in thousands)  March 31, 2017  March 31, 2016
   Average     Yield/  Average     Yield/
Assets  Balance (1)  Interest  Rate  Balance (1)  Interest  Rate
Interest-earning assets                              
Interest-earning deposits with banks  $107,366   $527    0.65%  $72,673   $169    0.31%
Investment securities   95,948    1,588    2.21%   91,180    1,440    2.11%
Commercial loans   420,900    11,970    3.79%   303,992    8,348    3.66%
Net investment in leases   211,850    8,863    5.58%   276,244    9,700    4.68%
Total interest-earning assets   836,064    22,948    3.66%   744,089    19,657    3.52%
Other assets   43,683              48,838           
   $879,747             $792,927           
                               
Liabilities and Shareholders' Equity                              
Interest-bearing liabilities                              
Demand and savings deposits  $90,333    604    0.89%  $71,989    266    0.49%
Time deposits   537,030    4,974    1.23%   453,040    3,935    1.16%
Other borrowings   40,000    154    0.51%   49,055    146    0.40%
Total interest bearing liabilities   667,363    5,732    1.15%   574,084    4,347    1.01%
Non-interest bearing demand deposits   2,376              2,201           
Other liabilities   18,647              28,640           
Shareholders' equity   191,361              188,002           
   $879,747             $792,927           
Net interest income       $17,216             $15,310      
                               
Net interest spread (2)             2.51%             2.51%
Net interest margin (3)             2.75%             2.74%
Average interest earning assets over average interest bearing liabilities             125.3%             129.6%

 

(1)   Average balances are based on month-end balances, include non-accrual leases, and are presented net of unearned income.

(2)   Net interest spread is the difference between the average rates on interest-earning assets and interest-bearing liabilities.

(3)   Net interest margin represents net interest income as a percent of average interest earning assets.

 

For the first nine months of fiscal 2017, the average yield on all interest earning assets increased 14 basis points to 3.66% from 3.52%, while the average rate paid on all interest-bearing liabilities also increased by 14 basis points to 1.15%. As a result, the net interest margin and spread for the first nine months of fiscal 2017 were generally unchanged from the prior year, largely due to the benefit of accelerated finance income discussed above that increased the margin and spread by about 21 basis points for the nine month period. Without that benefit, the spread and margin would have been below the prior year due to a higher percentage of earning assets in lower yielding commercial loans and fed funds, and higher rates paid on deposits. The average yield on interest earnings assets can fluctuate from quarter to quarter due to transaction activity in the portfolios.

 

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Provision for Credit Losses – The Company did not record a provision for credit losses during the third quarter of fiscal 2017, compared to a $200,000 provision made during the third quarter ending March 31, 2016. No provision was required in the third quarter of fiscal 2017 due to the lease and loan portfolio declining $90.1 million, or 14% to $570.0 million from $660.2 million at December 31, 2016. For the first nine months of fiscal 2017, the provision for credit losses of $900,000, compared to a $1.275 million provision recorded during the first nine months of fiscal 2016. At March 31, 2017, the allowance for credit losses of $7.6 million, 1.3% of the investment in leases and loans, is up from 1.1% at June 30, 2016 and at the high end of estimates. Given the disruption related to regulatory oversight of the Bank’s loan portfolio, management determined to maintain higher reserves at this time.

 

Non-interest Income – Total non-interest income of $1.8 million for the third quarter of fiscal 2017 more than tripled from $497,400 for the same period of the prior year. Income from leases reaching their end-of-term increased to $1.1 million from $148,900. The increase also reflects gains on the sale of leases and loans of $538,500 in the third quarter of fiscal 2017 compared to $314,600 in the third quarter of the prior year.

 

Total non-interest income of $6.1 million for the first nine months of fiscal 2017 was up 190.0% from $2.1 million reported for the first nine months of fiscal 2017. The increase includes a $2.5 million increase in income recognized on leases reaching the end of term, and a $1.4 million increase in the gain on sale of leases and loans.

 

Non-interest Expenses – Third quarter fiscal 2017 non-interest expenses of $2.7 million were down 6.5% from $2.9 million for third quarter of fiscal 2016. For the nine months ended March 31, 2017, non-interest expenses of $7.9 million declined 3.2% from the same period of the prior year. The difference in both periods is primarily due to the cost included in fiscal 2016 of the write-down of a repossessed asset.

 

Taxes – Income taxes were accrued at a tax rate of 40.50% for the three and nine months ended March 31, 2017, compared to 39.5% for the same periods of the prior year, representing the estimated annual tax rate at the end of each respective period. The increase in the fiscal 2017 tax rate reflects a slight increase to the federal rate and estimated state rate resulting from apportionment changes.

 

Financial Condition Analysis

 

Consolidated total assets at March 31, 2017 of $834.7 million decreased 6.5% from $888.2 million at June 30, 2016. The decline in total assets includes a $49.9 million decrease in the net investment in leases and $4.9 million decline in property acquired for transactions in process, offset by a $6 million increase in cash and equivalents.

 

Lease Portfolio

 

During the first nine months of fiscal 2017, 74.2% of the direct leases booked by the Company were held in its own portfolios, with 25.8% sold to other financial institutions. In addition, the Company sold $19.1 million of lease receivables held at June 30, 2016. As a result, the Company’s net investment in leases at March 31, 2017 of $187.8 million was down 21.0% from $237.7 million at June 30, 2016 and 30.3% from $269.2 million at March 31, 2016.

 

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 generally is 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 March 31, 2017, the Company’s investment in property acquired for transactions in process of $26.3 million was down 15.0% from $30.9 million at June 30, 2016, but up 8.2% from $24.3 million at March 31, 2016.

 

Commercial Loan Portfolio

 

The Company’s commercial loan portfolio of $374.6 million at March 31, 2017 decreased by $75.7 million, or 17%, from $450.2 million at December 31, 2016, and was down $29.1 million, or 7.2%, from $403.7 million at June 30, 2016. For reasons noted above, commercial loan bookings for the first nine months of fiscal 2017 were down 35.2% from $190.8 million booked during the prior year period. The change in the Company’s commercial loan portfolio during the first nine months of fiscal 2017 included the investment of $123.5 million in new commercial loan participations offset by loan payoffs and repayments aggregating of $123.5 million, plus the transfer of $29.1 million of loans to loans held for sale. At March 31, 2017 the Company had only one unfunded commercial loan commitment of $6.0 million related to a direct real estate loan.

 

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At March 31, 2017, 97% of the commercial loan portfolio consists of participations in syndicated transactions, compared to 96% at June 30, 2016, with approximately 65% characterized as “leveraged loans” under guidance promulgated by federal bank regulators, down from 79% under such guidance at June 30, 2016. At March 31, 2017, approximately 17% of the syndicated loan portfolio is rated investment grade (Baa3 or higher) by Moody's Investors Service compared to 24% of the syndicated loan portfolio at June 30, 2016, while approximately 16% relates to companies that are rated lower than Ba, up from 12% at June 30, 2016. There were 72 different credits in the syndicated loan portfolio at March 31, 2017, 60 of which are publicly traded companies accounting for 87% of the syndicated loan portfolio, with an estimated average equity market capitalization of $7.0 billion.

 

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 day’s 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.

 

   March 31,  June 30,
   2017  2016
Non-performing Leases and Loans  (dollars in thousands)
Non-accrual leases  $4   $12 
Restructured leases   -    - 
Leases past due 90 days (other than above)   -    - 
Total non-performing leases   4    12 
Repossessed equipment   1,300    1,300 
Total non-performing assets  $1,304   $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   0.16%   0.15%

 

The change in non-performing leases at March 31, 2017 as compared to June 30, 2016 reflects a payment received on one old problem lease with no new problem assets added. In addition to the non-performing leases identified above, there was $3.42 million of investment in leases at March 31, 2017 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 $136,000 at March 31, 2016. 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 estimable 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.

 

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The following table summarizes the activity in the allowance for loan and lease losses for the first nine months of fiscal 2016 and 2017:

 

   Nine months ended
   March 31,
   2017  2016
   (dollars in thousands)
       
Property acquired for transactions in process before allowance  $26,303   $24,306 
Net investment in leases and loans before allowance   570,005    650,247 
Net investment in “risk assets”  $596,308   $674,553 
           
Allowance for credit losses at beginning of period  $6,862   $6,456 
Charge-off of loan and lease receivables   (161)   (1,029)
Recovery of amounts previously written off   3    51 
Provision for credit losses   900    1,275 
Allowance for credit losses at end of period  $7,604   $6,753 
           
Components of allowance for credit losses:          
Allowance for lease losses  $2,231   $2,311 
Residual valuation allowance   62    70 
Allowance for loan losses   5,311    4,372 
   $7,604   $6,753 
Allowance for credit losses as a percent of net investment in leases and loans before allowances   1.33%   1.04%
Allowance for credit losses as a percent of net investment in “risk assets”   1.28%   1.00%

 

The allowance for credit losses increased $742,000 to $7.60 million (1.33% of net investment in leases and loans before allowances) at March 31, 2017 from $6.86 million (1.06% of net investment in leases and loans before allowances) at June 30, 2016. This allowance consisted of $175,200 allocated to specific accounts that were identified as problems and $7.43 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 $6.82 million available for losses inherent in the portfolio at that time.

 

The increase in the specific allowance at March 31, 2017 primarily relates to the downgrade of the credit of one lease that was offset in part by the upgrade of another. The Company considers the allowance for credit losses of $7.60 million at March 31, 2017 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.

 

Investment Securities Available-for-sale

 

Total available-for-sale investment securities of $94.8 million as of March 31, 2017 decreased from $95.8 million at June 30, 2016. The amortized cost and fair value of the Company’s securities portfolio available-for-sale at March 31, 2017 and June 30, 2016 are as follows:

 

   As of March 31, 2017  As of June 30, 2016
(in thousands)  Amortized  Fair  Amortized  Fair
   Cost  Value  Cost  Value
Available-for-sale                    
U.S. Treasury Notes  $47,408   $47,724   $47,355   $48,774 
Corporate debt securities   13,178    13,217    13,291    13,385 
Agency MBS   27,021    26,665    31,782    32,223 
Equity securities   5,972    5,875    -    - 
Mutual fund investment   1,215    1,282    1,215    1,462 
Total securities available-for-sale  $94,794   $94,763   $93,643   $95,844 

 

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During the first nine months of fiscal 2017, the Company’s portfolio of securities available-for-sale included the purchase of equity securities of $6.0 million that was offset by pay downs, net of accretion, of $4.8 million and a $2.2 million decrease in the fair value of securities that resulted in an overall $1.1 million decrease in portfolio value. The rise in interest rates since June 2016 swung an unrecognized net gain of $2.2 million at June 30, 2016 to an unrealized net loss of $31,000 at March 31, 2017. The weighted average maturity of the portfolio at March 31, 2017 is 4.6 years and the corresponding weighted average yield was 2.02%.

 

Liquidity and Capital Resources

 

The Company funds its operating activities through internally generated funds, bank deposits, FHLB borrowings and non-recourse debt. At March 31, 2017 and June 30, 2016, the Company’s cash and due from banks were $111.0 million and $105.1 million, respectively.

 

Deposits at CalFirst Bank of $586.9 million at March 31, 2017 were down 1.2% from $594.0 million at March 31, 2016 and down 7.3% from $633.1 million at June 30, 2016. The $7.1 million decrease from March 31, 2016 is related to the 12.6% decline in the lease and loan portfolio over that period and the Company’s reduced funding needs. The following table presents average balances and average rates paid on deposits for the nine months ended March 31, 2017 and 2016:

 

   Nine months ended March 31,
   2017  2016
   Ending  Average  Average  Ending  Average  Average
   Balance  Balance  Rate Paid  Balance  Balance  Rate Paid
   (in thousands)
Non-interest bearing demand deposits  $3,310   $2,376     n/a   $2,743   $2,201    n/a 
Interest-bearing demand deposits   1,237    1,167    0.20%   1,510    2,367    0.20%
Money market deposits   98,878    89,166    0.90%   77,148    69,622    0.50%
Time deposits, less than $100,000   92,111    98,675    1.22%   91,668    79,011    1.15%
Time deposits, $100,000 or more  $391,327   $438,355    1.24%  $420,931   $374,029    1.16%

 

The following table shows the maturities of certificates of deposits at March 31, 2017:

 

    $250,000    More than 
    or less    $250,000 
    (in thousands) 
Under 3 months  $98,164   $28,952 
3 – 6 months   63,497    20,862 
7 – 12 months   138,096    46,817 
13 – 24 months   55,294    18,870 
25 – 36 months   10,299    2,587 
   $365,350   $118,088 

 

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 short-term borrowings outstanding of $40.0 million at March 31, 2017 at an average rate of 0.51% and an outstanding balance of $57.0 million at March 31, 2016 at an average rate of 0.40%. Under terms of the blanket collateral agreement, advances from the FHLB are collateralized by qualifying securities and real estate loans, with $31.8 million available under the agreement as of March 31, 2017. 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 March 31, 2017 of approximately $84.1 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 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 March 31, 2017, the Company had outstanding non-recourse debt of $1.1 million relating to discounted lease rentals assigned to unaffiliated lenders, down from $4.4 million at June 30, 2016 and $5.9 million at March 31, 2016. 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.

 

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The following table presents capital and capital ratio information for the Company and CalFirst Bank as of March 31, 2017 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.

 

   March 31,  June 30,
   2017  2016
   (dollars in thousands)
California First National Bancorp  Amount  Ratio  Amount  Ratio
Common equity Tier 1 capital  $193,611    27.68%  $189,677    25.12%
Tier 1 risk-based capital  $193,611    27.68%  $189,677    25.12%
Total risk-based capital  $201,266    28.77%  $196,589    26.04%
Tier 1 leverage capital  $193,611    22.45%  $189,677    21.67%
                     
California First National Bank                    
Common equity Tier 1 capital  $124,412    18.27%  $116,379    15.88%
Tier 1 risk-based capital  $124,412    18.27%  $116,379    15.88%
Total risk-based capital  $131,864    19.37%  $123,091    16.79%
Tier 1 leverage capital  $124,412    14.86%  $116,379    13.94%

 

Contractual Obligations and Commitments

 

The following table summarizes various contractual obligations as of March 31, 2017. 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)  $36,893   $36,893   $-   $- 
Commercial loan and lease purchase commitments   6,000    6,000    -    - 
FHLB Borrowings   40,000    40,000    -    - 
Operating lease rental payments   1,015    713    302    - 
Total contractual commitments  $83,908   $83,606   $302   $- 

_________________________________________

  (1)     Disbursements to purchase property on approved lease 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 is increasing as the Company expands its portfolios. 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.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of loss of value in a financial instrument arising from changes in market indices such as interest rates, credit spreads and securities 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 CalFirst Bank’s deposits have increased significantly, the Company is subject to greater interest rate risk. The Bank has an Asset/Liability Management Committee and policies established to manage its interest rate risk. 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.

 

At March 31, 2017, the Company had $118.2 million of cash or invested in securities of very short duration, but only $3.2 million of the $98.7 million investment in securities matures within twelve months. The Company’s investment in loans held for sale, gross lease payments receivable and commercial loans of $612.7 million consists of leases with fixed rates and loans with variable rates, however, $485.1 million of such investment matures or reprices within one year of March 31, 2017. This compares to interest bearing deposit and borrowing liabilities of $626.9 million, of which $536.5 million, or 86.0%, mature within one year. Based on the foregoing, at March 31, 2017 the Company had assets of $606.5 million subject to changes in interest rates over the next twelve months, compared to repricing liabilities of $536.5 million.

 

The regulatory directive for the Bank to substantially reduce its concentration of leveraged loans provides the Bank with latitude to comply in an orderly fashion and coordinate any reduction in the loan portfolio with reductions in deposits and other funding liabilities, consistent with a prudent asset liability management strategy. However, this process could have a material adverse effect on net interest income.

 

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 repricing 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.

 

Consolidated Interest Rate Sensitivity

 

         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  $111,005   $-   $-   $-   $-   $111,005 
Investment securities   7,158    3,171    57,770    30,619    -    98,718 
Loans held for sale   29,126    -    -    -    -    29,126 
Net investment in leases   19,732    66,228    114,232    2,866    (15,284)   187,774 
Commercial loans   367,811    2,222    7,344    3,109    (5,859)   374,627 
Non-interest earning assets   -    -    -    -    33,490    33,490 
Totals   534,832    71,621    179,346    36,594    12,347   $834,740 
Cumulative total for RSA  $534,832   $606,453   $785,799   $822,393           
                               
Rate Sensitive Liabilities (RSL):                              
Demand and savings deposits  $100,115   $-   $-   $-   $3,310   $103,425 
Time deposits   127,116    269,272    87,050    -    -    483,438 
Borrowings   40,000    -    -    -    -    40,000 
Non-interest bearing liabilities   -    -    -    -    13,600    13,600 
Stockholders' equity   -    -    -    -    194,277    194,277 
Totals  $267,231   $269,272   $87,050   $-   $211,187   $834,740 
Cumulative total for RSL  $267,231   $536,503   $623,553   $623,553           
                               
Interest rate sensitivity gap  $267,601   $(197,651)  $92,296   $36,594           
Cumulative GAP  $267,601   $69,950   $162,246   $198,840           
                               
RSA divided by RSL (cumulative)   200.14%   113.04%   126.02%   131.89%          
Cumulative GAP / total assets   32.06%   8.38%   19.44%   23.82%          

 

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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 Executive Vice President concluded that the Company's disclosure controls and procedures were effective as of March 31, 2017 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

 

The following is an update to, and should be read in conjunction with the risk factors previously disclosed under Item 1A in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Regulatory restrictions on the Bank’s ability to originate syndicated commercial loans may not be rescinded which could have a long term negative impact on the Company. At March 31, 2017, $366.9 million, or 97% of the commercial loan portfolio consists of participations in syndicated transactions, with approximately $248.1 million, or 65%, characterized as “leveraged loans” under guidance promulgated by federal bank regulators. These loans have accounted for a substantial portion of the Company’s growth over the past few years and the ongoing curtailment in loan originations will result in further declines in interest earning assets. In addition, Bank deposit customers who have withdrawn funds as a result of the sharp drop in the deposit rates offered by the Bank may never return.

 

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

 

The following table summarizes share repurchase activity for the quarter ended March 31, 2017:

 

         Maximum Number
   Total number     of shares that may
   of shares  Average price  yet be purchased
Period  Purchased  paid per share  under the plan (1)
          
January 1, 2017 - January 31, 2017   -   $-    188,237 
February 1, 2017 - February 28, 2017   -   $-    188,237 
March 1, 2017 - March 31, 2017   -   $-    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 30
  31.2 Rule 13a-14(a)/15d-14(a) Certifications of Principal Financial Officer 31
  32.1 Section 1350 Certifications by Principal Executive Officer and Principal Financial Officer 32

 

 28 
 

 

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 1, 2017   BY: /s/ S. Leslie Jewett  
        S. Leslie Jewett  
        Chief Financial Officer  
        (Principal Financial and Accounting Officer)

 

 

 

 

 

 

 

 

 

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