ITEM 1. BUSINESS
California First National Bancorp, a California corporation (the “Company”), is a bank holding company headquartered in Orange County, California with a leasing subsidiary, California First Leasing Corp (“CalFirst Leasing”) and a bank subsidiary, California First National Bank (“CalFirst Bank” or the “Bank”). CalFirst Leasing and CalFirst Bank focus on leasing and financing capital assets through centralized marketing programs designed to offer cost-effective leasing alternatives. Leased assets are re-marketed at lease expiration. CalFirst Bank also provides business loans to fund the purchase of assets leased by third parties, including CalFirst Leasing, and provides commercial loans to businesses, including real estate based term loans, secured and unsecured revolving lines of credit, and purchases participations in commercial loan syndications. CalFirst Bank gathers deposits from a centralized location primarily through posting rates on the Internet.
On June 24, 2009 the Board of Directors approved a plan of corporate reorganization effective June 30, 2009, whereby Amplicon, Inc. merged with CalFirst Leasing, with CalFirst Leasing remaining the surviving corporation.
Forward-Looking Statements
This Form 10-K contains forward-looking statements. Forward-looking statements include, among other things, information concerning our possible future consolidated results of operations, business and growth strategies, financing plans, our competitive position and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “plan”, “may”, “should”, “will”, “would”, “project” and similar expressions. These forward-looking statements are based on information currently available to us and are subject to inherent risks and uncertainties, and certain factors could cause actual results to differ materially from those anticipated. Some of the risks and uncertainties that may cause our actual results or performance to differ materially from such forward-looking statements are included in “Item 1A.
ITEM 1A. RISK FACTORS
There are a number of factors, including those specified below, that may adversely affect the Company’s business, financial results or stock price. Additional risks that the Company currently does not know about or currently views as immaterial may also affect the Company’s business or adversely impact its financial results or stock price.
Industry Risk Factors
The Company’s business and financial results are subject to general business and economic conditions. The Company’s business activities and earnings are affected by general business conditions in the United States. The recent economic downturn has resulted in a deterioration of credit quality of certain lessees, prompting the need for an increase in the allowance for credit losses, and reduced demand for financing capital assets. Changes in the financial performance and condition of customers could negatively affect the repayment of their obligations. In addition, changes in securities markets and monetary fluctuations adversely affect the availability and terms of funding necessary to meet the Company’s liquidity needs.
Changes in the domestic interest rate environment could reduce the Company’s net direct finance and interest income. The Company’s net direct finance and interest income, which is the difference between income earned on leases, loans and investments and interest expense paid on deposits, is affected by market rates of interest, which in turn are affected by prevailing economic conditions, by the fiscal and monetary policies of the Federal government and by the policies of various regulatory agencies.
California First National Bancorp and Subsidiaries
Disruptions in the domestic credit markets and interest rate environment, including changes in interest spreads and the yield curve, could reduce net interest income. Higher interest rates and the inability to access capital markets could negatively affect certain customers and result in increased lease and loan losses.
Changes in the laws, regulations and policies governing financial services companies could alter the Company’s business environment and adversely affect operations. The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. Its fiscal and monetary policies determine in a large part the Company’s cost of funds and the return that can be earned on leases, loans and investments, which affect the Company’s net direct finance, loan and interest income.
The Company and the Bank are regulated by governmental entities. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole. Changes in statutes, regulations or policies could affect the Company in substantial and unpredictable ways. The Company cannot predict whether any potential legislation will be enacted, and if enacted, the effect that it or any regulations would have on the Company’s financial condition or results of operations.
The financial services industry is highly competitive, and competitive pressures could intensify and adversely affect the Company’s financial results. The Company operates in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes. The Company competes with other commercial banks, savings and lease associations, mutual savings banks, finance companies, credit unions and investment companies, many of which have greater resources than the Company.
Acts or threats of terrorism and political or military actions taken by the United States or other governments could adversely affect general economic or industry conditions.
Company Risk Factors
The Company’s allowance for credit losses may not be adequate to cover actual losses. The Company’s subsidiaries retain approximately 90% of lease transactions and all loans in their own portfolios, which exposes the Company to credit risk. The Company maintains an allowance for credit losses to provide for probable and estimatable losses in the portfolio. The Company’s allowance for credit losses is based on its historical experience as well as an evaluation of the risks associated with its portfolio, including the size and composition of the lease and loan portfolio, current economic conditions and concentrations within the portfolio. The allowance for credit losses may not be adequate to cover losses resulting from unanticipated adverse changes in the economy or the financial markets. If the credit quality of the customer base materially decreases, or if the reserve for credit losses is not adequate, future provisions for credit losses could materially and adversely affect financial results.
The Company may suffer losses in its lease and loan portfolio despite its underwriting practices. The Company seeks to mitigate the risks inherent in its lease and loan portfolio by adhering to specific credit practices. Although the Company believes that its criteria are appropriate for the various kinds of leases and loans it makes, the Company may incur losses on leases and loans that meet these criteria.
The Bank’s commercial loan initiative may increase the Company’s risk of losses. The Company’s commercial loan portfolio contains a number of commercial loans with relatively larger balances than its historical lease portfolio. The deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in an increase in the provision for losses and an increase in charge-offs, all of which could have a material adverse effect on the Company’s results of operations.
The Company’s diversification into broader investment alternatives may increase the Company’s risk of losses. The Company’s investment portfolio now includes U.S. Treasury and Agency Securities, Trust Preferred Securities, corporate bonds and closed-end mutual funds, in addition to interest-earning deposits, short-term money market securities and federal funds previously held. These securities subject the Company to increased risk of volatility in the valuation of the investment, as well as greater interest and market risks. The deterioration of one or a few of these investments on a permanent basis could result in an determination that the investment has been permanently impaired and require a write-down of such investment, all of which could have a material adverse effect on the Company’s results of operations.
California First National Bancorp and Subsidiaries
The Company may be adversely affected by significant changes in the bank deposit market and interest rates. CalFirst Bank has grown to represent 69% of the Company’s assets, and bank deposits now exceed $220 million. As a result, the Company’s sensitivity to changes in interest rates and demand for bank deposits has increased from historical levels. Time deposits due within one year of June 30, 2009 totaled $121 million. If these maturing deposits do not roll over, CalFirst Bank may be required to seek other sources of funds, including other time deposits and borrowings. Depending on market conditions, rates paid on deposits and borrowings may be higher than currently paid or no longer available. Although the Bank employs a matched funding strategy designed to correlate the repricing characteristics of assets with liabilities, the impact of interest rate movements and customer demand is not always consistent during different market cycles, and changes in the costs for deposits and yields on assets may not coincide.
The change in residual value of leased assets may have an adverse impact on the Company’s financial results. A portion of the Company’s leases is subject to the risk that the residual value of the property under lease will be less than the Company’s recorded value. Adverse changes in the residual value of leased assets can have a negative impact on the Company’s financial results. The risk of changes in the realized value of the leased assets compared to recorded residual values depends on many factors outside of the Company’s control.
The financial services business involves significant operational risks. Operational risk is the risk of loss resulting from the Company’s operations, including, but not limited to, the risk of fraud by employees or persons outside of the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements, and failure of business continuation and disaster recovery plans. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, the Company could suffer financial loss, face regulatory action and suffer damage to its reputation.
Quarterly operating results may fluctuate significantly. Operating results may differ from quarter to quarter due to a variety of factors, including the volume and profitability of leased property being remarketed, the size and credit quality of the lease and loan portfolio, the interest rate environment, the volume of new lease and loan originations, including variations in the property mix and funding of such originations and economic conditions in general. The results of any quarter may not be indicative of results in the future.
Negative publicity could damage the Company’s reputation and adversely impact its business and financial results. Reputation risk, or the risk to the Company’s business from negative publicity, is inherent in the Company’s business. Negative publicity can result from the Company’s actual or alleged conduct in any number of activities, including leasing practices, corporate governance, and actions taken by government regulators in response to those activities. Negative publicity can adversely affect the Company’s ability to keep and attract customers and can expose the Company to litigation and regulatory action.
The Company’s reported financial results are subject to certain assumptions and estimates and management’s selection of accounting method. The Company’s management must exercise judgment in selecting and applying many accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report the Company’s financial condition and results. In some cases, management may select an accounting policy which might be reasonable under the circumstances yet might result in the Company’s reporting different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting the Company’s financial condition and results. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include the estimate of residual values, the allowance for credit losses, and income taxes. For more information, refer to “Critical Accounting Policies and Estimates”.
California First National Bancorp and Subsidiaries
Changes in accounting standards could materially impact the Company’s financial statements. The Financial Accounting Standards Board (FASB) may change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. These changes can be hard to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the Company’s restating prior period financial statements.
Loss of certain key officers would adversely affect the Company’s business. The Company‘s business and operating results are substantially dependent on the certain key employees, including the Chief Executive Officer, Chief Operating Officer, Senior Vice President of Credit, Chief Financial Officer, the President and Chief Credit Officer of the Bank and certain key sales managers. The loss of the services of these individuals, particularly the Chief Executive Officer, would have a negative impact on the business because of their expertise and years of industry experience.
The Company’s business could suffer if the Company fails to attract and retain qualified people. The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for personnel in most activities the Company engages in can be intense. The Company may not be able to hire the best people or to keep them.
The Company relies on other companies to provide components of the Company’s business infrastructure. Third party vendors provide certain components of the Company’s business infrastructure, such as the Bank’s core processing and electronic banking systems, item processing, and Internet connections. While the Company has selected these third party vendors carefully, it does not control their actions. Any problems caused by these third parties not providing the Company their services for any reason or their performing their services poorly, could adversely affect the Company’s ability to deliver products and services to the Company’s customers and otherwise to conduct its business. Replacing these third party vendors could also entail significant delay and expense.
A natural disaster could harm the Company’s business. Natural disasters could harm the Company’s operations directly through interference with communications, including the interruption or loss of the Company’s websites, which would prevent the Company from gathering deposits, originating leases and loans and processing and controlling its flow of business, as well as through the destruction of facilities and the Company’s operational, financial and management information systems.
The Company faces systems failure risks as well as security risks, including “hacking” and “identity theft.” The computer systems and network infrastructure the Company and others use could be vulnerable to unforeseen problems. These problems may arise in both our internally developed systems and the systems of our third-party service providers. Our operations are dependent upon our ability to protect computer equipment against damage from fire, power loss or telecommunication failure. Any damage or failure that causes an interruption in our operations could adversely affect our business and financial results. In addition, our computer systems and network infrastructure present security risks, and could be susceptible to hacking or identity theft.
The Company relies on dividends from its subsidiaries for its liquidity needs. The Company is a separate and distinct legal entity from CalFirst Leasing and the Bank. The Company receives substantially all of its cash from dividends paid by CalFirst Leasing. These dividends are the principal source of funds to pay dividends on the Company’s stock. Various regulations limit the amount of dividends that the Bank may pay to the Company.
The Company’s stock price can be volatile. The Company’s stock price can fluctuate widely in response to a variety of factors, including: actual or anticipated variations in the Company’s quarterly operating results; operating and stock price performance of other companies that investors deem comparable to the Company; news reports relating to trends, concerns and other issues in the financial services industry, and changes in government regulations. General market fluctuations, industry factors and general economic and political conditions and events, including terrorist attacks, economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, could also cause the Company’s stock price to decrease regardless of the Company’s operating results. In addition, the volume of trading in the Company’s stock is very limited and can result in fluctuations in prices between trades.
The Company is a “controlled company” as defined by NASDAQ, with over 64% of the stock held by the Chief Executive Officer, over 77% held by two senior executives and fewer than 100 shareholders of record. As a result, senior management has the ability to exercise significant influence over the Company’s policies and business, and determine the outcome of corporate actions requiring stockholder approval. These actions may include, for example, the election of directors, the adoption of amendments to corporate documents, the approval of mergers, sales of assets and the continuation of the Company as a registered company with obligations to file periodic reports and other filings with the SEC.
California First National Bancorp and Subsidiaries
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
At June 30, 2009, the Company and its subsidiaries occupied approximately 43,000 square feet of office space in Irvine, California leased from an unaffiliated party. The lease provides for monthly rental payments that average $86,660 from July 2009 through August 2013.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is sometimes named as a defendant in litigation relating to its business operations. Management does not expect the outcome of any existing suit to have a material adverse effect on the Company's financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
California First National Bancorp and Subsidiaries
PART II
ITEM 5.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of California First National Bancorp trades on the NASDAQ Global Market System under the symbol CFNB. The following high and low closing sale prices for the periods shown reflect inter-dealer prices without retail markup, markdown or commissions and may not necessarily reflect actual transactions.
The Company had approximately 28 stockholders of record and in excess of 400 beneficial owners as of September 11, 2009.
The Board of Directors of the Company has adopted a policy of paying regular quarterly cash dividends, subject to an ongoing review of the Company’s profitability, liquidity and future operating cash requirements. The Board of Directors approved an increase in the quarterly dividend from $0.11 per share to $0.12 in January 2007. For the fiscal years ended June 30, 2009, 2008, and 2007, the Company declared cash dividends totaling $.48, $.48 and $.46, respectively, per common share.
In April 2001, the Board of Directors authorized management, at its discretion, to repurchase up to 1,000,000 shares of common stock. Since this authorization has no termination date, the Board of Directors reviews the authorization to repurchase common stock from time to time. During the year ended June 30, 2009, the Company repurchased 35,328 shares of common stock under this authorization. During the year ended June 30, 2008, the Company repurchased 75,000 and during the year ended June 30, 2007 the Company repurchased 108,621 shares of common stock. As of September 11, 2009, 374,255 shares remain available under this authorization. The following table summarizes share repurchase activity for the quarter ended June 30, 2009:
Common Stock Performance Graph
The graph below shows a comparison of the five-year cumulative return among the Company, the NASDAQ Composite Index and the Russell 2000. As required by Securities and Exchange Commission rules, total return in each case assumes the reinvestment of dividends paid.
California First National Bancorp and Subsidiaries
Tender Offer of Common Stock
On July 21, 2008, the Company commenced a modified “Dutch Auction” tender offer to purchase up to 1,300,000 shares of its common stock. CalFirst Bancorp shareholders were given the opportunity to tender part or all of their shares to the Company at a price not greater than $13.00 and not less than $12.00 per share. On August 20, 2008, the Company completed the purchase 1,300,000 shares of its common stock, representing approximately 11.4% of its outstanding shares, at a purchase price of $13.00 per share for a total cost of $16.9 million, excluding fees and expenses relating to the offer. The tender offer was funded through cash on hand.
Equity Compensation Plan Information
The following table provides information about shares of the Company’s Common Stock that may be issued upon the exercise of options under all of our existing equity compensation plans as of June 30, 2009.
(1)
The maximum number of shares that may be issued under the equity compensation plan increases each year by an amount equal to 1% of the total number of issued and outstanding shares of Common Stock as of June 30 of the fiscal year immediately preceding such fiscal year.
California First National Bancorp and Subsidiaries
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data and operating information of the Company and its subsidiaries. The selected financial data should be read in conjunction with the Financial Statements and notes thereto and Management's Discussion and Analysis of Results of Operations and Financial Condition contained herein.
California First National Bancorp and Subsidiaries
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company’s results include the operations of CalFirst Leasing and CalFirst Bank. The Company’s direct finance, loan and interest income includes interest income earned on the Company’s investment in lease receivables, residuals, commercial loans and investment securities. Other income primarily includes gains realized on the sale of leased property, income from sales-type and operating leases and gains realized on the sale of leases, and other income or loss. Income from sales-type leases relates to the re-lease of off-lease property (“lease extensions”) and new lease transactions that qualify as sales-type leases, generally where the fair value of the property subject to the lease differs from the Company’s carrying cost. Income from operating leases generally involves lease extensions that do not meet the accounting treatment required for sales-type leases.
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 portfolio, the volume and profitability of leased property being re-marketed through re-lease or sale, the interest rate environment, the volume of new lease or loan originations, including variations in the mix and funding of such originations, the market for investment securities and economic conditions in general. 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. The Company’s balance sheet structure historically has been short-term in nature, with a greater portion of assets that reprice or mature within one year.With the increased investment in commercial loans and investment securities with longer maturities, this maturity gap has diminished. The Company’s interest margin also is susceptible to timing lags related to varying movements in market interest rates. Many of Company’s leases, loans and liquid investments are tied to U.S. treasury rates and the fed funds rate that often do not move in step with bank deposit rates. As a result, this can result in 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 investment in leases and loans held in its own portfolio, securities, lease transactions-in-process, and residual investments. The Company takes steps to manage risks through the implementation of strict credit and risk 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 following is a description of the most critical accounting policies management applies, all of which require the use of accounting estimates and management’s judgment, based on the relevant information available at the end of each period.
Allowance for Credit Losses -- The allowance for credit losses provides coverage for probable and estimatable losses in the Company’s lease and commercial loan portfolios. The allowance recorded is based on a quarterly review of all leases and loans outstanding, loan commitments and transactions-in-process. The determination of the appropriate amount of any provision is based on management’s judgment at that time and takes into consideration all known relevant internal and external factors that may affect the lease and loan portfolio, including levels of non-performing leases and loans, customers financial condition, leased property values as well as general economic conditions and credit quality indicators. The Company’s allowance includes an estimate of reserves needed to cover specifically identified lease and loan losses and certain unidentified but inherent risks in the portfolio.
Fair Value of Investments - Investment securities are characterized as available-for-sale or held-to maturity based on managements ability and intent regarding such investment at acquisition. On an ongoing basis, management must estimate the fair value of its investment securities based on information and assumptions it deems reliable and reasonable, which may be quoted market prices or if quoted market prices are not available, fair values extrapolated from the quoted prices of similar instruments. Based on this information, an assessment must be made as to whether any decline in the fair value of an investment security should be considered an other-than-temporary impairment and recorded in non-interest income as a loss on investments. The determination of such impairment is subject to a variety of factors, including management’s judgment and experience.
California First National Bancorp and Subsidiaries
Residual Values -- For capital leases that qualify as direct financing leases, the aggregate lease payments receivable and estimated residual value, if any, are recorded on the balance sheet, net of unearned income and allowances, as net investment in leases. Of the volume of leases booked during the fiscal years ended June 30, 2009, 2008 and 2007, approximately 30.6%, 29.2% and 25.3%, respectively, were structured such that the Company owns the leased asset at the end of the term and therefore, the Company recorded a residual value. The residual value is an estimate for accounting purposes of the fair value of the leased property at lease termination and is determined at the inception of the lease based on the property leased and the terms and conditions of the underlying lease contract. The realizability of any estimated residual value depends on future collateral values, contractual options available to the lessee, the credit of the lessee, market conditions and other subjective and qualitative factors. The estimated residual values established at lease inception are periodically reviewed to determine if values are realizable and any identified losses are recognized at such time.
Deferred S,G&A Expenses - A portion of the Company’s selling, general and administrative expenses (S.G&A”) that management estimates is directly related to originating lease and loan transactions is deferred through a reduction to SG&A expenses recognized in a period. The amount deferred reflects management’s estimate of the expenses applicable to the origination process, taking into account a variety of factors including sales productivity, credit and documentation efficiency and estimates of completion percentages.
Deferred Income Taxes and Valuation Allowance -- Deferred tax assets and liabilities result from temporary differences between the time income or expense items are recognized for financial statement purposes and for tax reporting. Such amounts are calculated using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The determination of current and deferred income taxes is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the difference between tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts due or owed such as the timing of reversals of temporary differences and current financial accounting standards. A valuation allowance is established if, based upon the relevant facts and circumstances, management believes that some or all of certain tax assets will not be realized. The Company has open tax years that may in the future be subject to examination by Federal and state taxing authorities. Management periodically evaluates the adequacy of related valuation allowances, taking into account our open tax return positions, tax assessments received and tax law changes. The process of evaluating allowance accounts involves the use of estimates and a high degree of management judgment. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities and reserves.
The Company's estimates are reviewed continuously to ensure reasonableness. However, the amounts the Company may ultimately realize could differ from such estimated amounts.
Overview of Results, Trends and Outlook
Net earnings for the year ended June 30, 2009 of $9.3 million were up 33.2% from $7.0 million for the prior year. The improvement in earnings is primarily attributable to a reduction in selling, general and administrative (“S,G&A”) expenses along with higher income earned on the commercial loan and investment portfolios. For the year ended June 30, 2009, new lease bookings of $143.7 million were 5% above the $137.3 million booked in the prior year, and with commercial loans boarded of $51.5 million contributed to an overall 8% increase in leases and loans booked to $195.1 million. The net investment in leases and loans of $284.8 million at June 30, 2009 was up 9% from June 30, 2008, however the increase was primarily due to the 70% growth in commercial loan portfolio to $71.1 million as the investment in leases declined 3% to $213.6 million. The Bank accounted for almost all of the growth in assets, with the Bank’s investment in leases and loans of $202.1 million at June 30, 2009 increasing from 64% to 71% of the Company’s consolidated investment.
Growth in net direct finance, loan and interest income was constrained by the decline in the investment in leases and lower yields earned, which was offset by increased income from loans and investments. The Company’s average investment portfolio increased over 100% to over $115 million for the year ended June 30, 2009 as the Company diversified into higher yielding investments and increased the average yield earned by 65 basis points. To fund the asset growth, the Bank’s demand, money market and time deposits increased by 41% to $220.9 million at June 30, 2009 from $156.2 million at June 30, 2008 but the average rate paid for deposits declined 136 basis points. Initial borrowings from the Federal Home Loan Bank (“FHLB”) and Federal Reserve of $45.4 million during the year contributed to lowering of CalFirst Bank’s funding costs by 167 basis points and improved the Bank’s net interest margin to 4.2% from 3.4% in fiscal 2008.
California First National Bancorp and Subsidiaries
Looking forward to fiscal 2010, management will continue to look for opportunities for growth through investment in assets that meet its risk/reward requirements. New lease and loan transactions approved (“lease and loan originations”) of approximately $159 million during fiscal 2009 were down 12% from the level in fiscal 2008 and the backlog of approved but un-booked leases and loans at June 30, 2009 is about 24% below the level of a year ago. Property acquired for transactions-in-process of $12.4 million was 57% below the level at June 30, 2008. While management has seen some improvement in demand from leasing customers, the projected volume is still below the level needed to expand the portfolio. As a result, the Company expects direct finance and loan income to be lower in fiscal 2010, unless the business climate improves materially in the next few months. With the diversified investment portfolio at June 30, 2009, interest income on investments should be up, but is dependent on the securities markets and interest rates. The ultimate growth in direct finance and loan income or outcome with respect to the investment in securities is subject to a variety of factors including the impact of credit markets, interest rates, as well as customers’ financial condition and choices. All these factors are beyond management’s control and therefore any expectations are subject to change.
Consolidated Statement of Earnings Analysis
Summary -- For the fiscal year ended June 30, 2009, net earnings increased 33.2% to $9.3 million, compared to $7.0 million for fiscal 2008. Diluted earnings per share increased 47.4% to $0.89 for fiscal year ended June 30, 2009, compared to $0.61 per share for fiscal 2008. Net earnings reflect a 15% decrease in S,G&A expenses, 11% increase in other income and 3% increase in net direct finance, loan and interest income. Growth in diluted earnings per share benefited from the Company’s August 2008 purchase of common stock pursuant to a modified Dutch auction tender offer that reduced the fully diluted shares outstanding for the year by 10% to 10.4 million.
Net Direct Finance, Loan and Interest Income -- Net direct finance, loan and 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 or other borrowings. Net direct finance, loan and interest income is affected by changes in the volume and mix of interest earning assets and liabilities, the movement of interest rates, and funding and pricing strategies.
Net direct finance, loan and interest income was $23.2 million for the fiscal year ended June 30, 2009 compared to $22.1 million for fiscal 2008 and $22.2 million in fiscal 2007. The increase in fiscal 2009 from fiscal 2008 was due to an increase of $2.7 million in interest earned on investments and $3.1 million increase in commercial loan income, offset by a decline of $3.8 million in direct finance income. These changes are primarily the result of changing lease and loan opportunities and the Company’s shift of available liquidity to higher yielding investments. The decrease in direct finance income reflects a 7.0% decline in the average investment in leases directly held by the Company and a 96 basis point decline in average yields on such investments. Commercial loan income growth reflects an almost 500% increase in average commercial loan balances, offset somewhat by an 86 basis point decline in the average yield earned. Higher interest expense on deposits reflects a 56% increase in average deposit balances to $183.8 million while the average rate paid decreased by 136 basis points. Borrowings from the FHLB and Federal Reserve averaged $23.7 million for the year at an average cost of 0.8%, which helped reduce the Company’s overall interest expense costs.
The slight decrease in net direct finance, loan and interest income in fiscal 2008 from fiscal 2007 was due to a $1.0 million increase in interest expense paid on deposits that exceeded the increase of $336,000 in direct finance income and addition of $745,000 in interest income recognized on the commercial loan portfolio. Higher interest expense on deposits reflected a 23% increase in average deposit balances to $118.1 million while the average rate paid decreased by 5 basis points. The increase in direct finance income reflected a 3.0% increase in the average investment in leases directly held by the Company, offset by a 17 basis point decline in average yields on such investments. A $143,000 decrease in interest income on cash and investments also contributed to the decline and resulted from a 78 basis point decrease in average yields earned offset by a 34% increase in the average balances.
California First National Bancorp and Subsidiaries
The following table presents the components of the increases (decreases) in net direct finance, loan and interest income by volume and rate:
The following table presents the Company’s average balance sheets, direct finance and loan income and interest earned or interest paid, the related yields and rates on major categories of the Company’s interest-earning assets and interest-bearing liabilities:
________________________________________________________
(1)
Direct finance income and interest expense on average discounted lease rentals and non-recourse debt of $9.0 million, $5.8 million and $7.4 million at June 30, 2009, 2008 and 2007, respectively, offset each other and do not contribute to the Company’s net interest and finance income.
(2)
Average balance is based on month-end balances, includes non-accrual leases, and is presented net of unearned income.
California First National Bancorp and Subsidiaries
Provision for Credit Losses -- The Company recorded a provision for credit losses of $1.7 million for fiscal 2009, compared to a provision of $1.2 million recognized in fiscal 2008 and a net recovery of $120,000 in fiscal 2007. The 2009 provision related to substantial growth in and heightened credit risk within the commercial loan portfolio, as well as deterioration in the credit quality of certain customers. The Company recorded a provision for credit losses of $1.2 million in fiscal 2008 due to the deterioration in the credit quality of certain leases and the growth of the commercial loan portfolio. The net recovery of $120,000 recorded in fiscal 2007 reflected a $633,000 recovery on a previously charged off lease receivable, offset by a provision of $513,000 during the year.
Total Non-interest Income -- Total non-interest income accounted for 24% of the Company’s gross profit during the year ended June 30, 2009, compared to 23% during 2008 and 29% during 2007. Total non-interest income of $6.8 million for the year ended June 30, 2009 increased $667,000, or 11%, from $6.1 million in 2008 but was 26% lower than the $9.2 million earned in fiscal 2007. The increase in non-interest income in fiscal 2009 compared to fiscal 2008 reflects an increase in the gain on sales of leases and leased property of $346,000, as higher income from sale of leases offset lower income from sale of leased property, as well as a $293,000 increase of in operating and sales-type income due to an increased volume of lease extensions and short-term lease renewals. Other income increased $212,000 on higher fees and charges collected. The Company recognized an impairment loss on investment securities of $869,000 in fiscal 2009 compared to an impairment loss of $685,000 in fiscal 2008. The Company continues to hold these investments.
The decrease in total non-interest income in fiscal 2008 compared to fiscal 2007 primarily reflects a decrease of $1.6 million in operating and sales-type income as the volume of lease extensions and short-term lease renewals declined. Gain on sales of leases and leased property declined $195,000, as higher income from sale of leases did not offset lower income from sale of leased property. Other income decreased $545,000, reflecting the $659,000 unrealized loss recorded on an equity investment.
Selling, General, and Administrative Expenses -- The Company’s selling, general and administrative expenses (“SG&A”) decreased $2.4 million, or 15%, to $13.5 million recognized for the year ended June 30, 2009. This compared to SG&A expenses in fiscal 2008 of $15.9 million, which had increased by $422,000, or 3%, from $15.5 million in fiscal 2007. The decrease in SG&A expenses during fiscal 2009 is due to lower fixed and variable office costs, including substantial savings from lower personnel costs.
For the year ended June 30, 2008 SG&A expenses increased $422,000, or 3%, to $15.9 million compared to SG&A expenses in fiscal 2007 of $15.5 million. The increase in SG&A expenses during fiscal 2008 is due to higher costs resulting from the growth in the sales organization and higher operating costs.
Included in SG&A expenses are FDIC insurance premiums of $228,427, $74,917 and $12,025, respectively, for the fiscal years ending June 30, 2009, 2008 and 2007. The Bank’s FDIC insurance premium rates were not increased during 2009 and 2008, although amounts paid increased in connection with the growth in deposits. Included in the fiscal 2009 amount is a special FDIC assessment of $130,000 recorded in June 2009. Effective June 30, 2009, the FDIC increased the assessment rate for the Bank from 5 basis points annually to 12 basis points.
Income Taxes -- Income taxes were accrued at a tax rate of 37.50% for the fiscal year ended June 30, 2009 as well as 37.50% for fiscal year ended June 30, 2008, and 38.25% for fiscal year ended June 30, 2007, representing the Company’s estimated annual tax rates for each respective year. The income tax rate remained the same in fiscal 2009 due to a similar amount of interest earned on leases where interest earned is exempt from certain taxes. Tax-exempt leases represented approximately 6.6% of new lease bookings in fiscal 2009, compared to 11.7% during fiscal 2008 and 8.1% in fiscal 2007.
Financial Condition Analysis
Lease Portfolio Analysis
The Company currently funds a high percentage of new lease transactions internally, while only a small portion of leases are assigned to unaffiliated financial institutions. During the fiscal year ended June 30, 2009, approximately 87% of the total dollar amount of new leases and loans booked by the Company were held in its own portfolio, compared to 92% during fiscal 2008 and 97% during fiscal 2007. For the fiscal year ended June 30, 2009, the Company’s net investment in lease receivables decreased by $6.1 million and the investment in estimated residual values decreased by $919,000. The decrease in the investment in lease receivables is primarily due to a larger run-off from the lease portfolio than new lease transactions booked and retained by the Company, while the decrease in investment in residual values is due to a lower volume of new leases on which the Company records a residual compared to the volume of residual values recognized at end of term.
California First National Bancorp and Subsidiaries
The Company often makes payments to purchase leased property prior to the commencement of the lease. The disbursements for these lease transactions-in-process are generally made to facilitate the lessees’ property implementation schedule. The lessee generally is contractually obligated by the lease to make rental payments directly to the Company during the period that the transaction is in process, and 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 June 30, 2009, the Company’s investment in property acquired for transactions-in-process was $12.4 million, down from $29.0 million at June 30, 2008, and $22.3 million below the $34.7 million at June 30, 2007.
The Company leases capital assets to businesses and other commercial or non-profit organizations. All leases are secured by the underlying property being leased. The Company’s strategy is to develop lease portfolios with risk/reward profiles that meet its objectives. The Company avoids risks that do not meet these requirements through the use of non-recourse financing. The strategy emphasizes diversification on both a geographic and customer level, and spreading the Company’s risk across a breadth of leases while minimizing the risk to any one customer. At June 30, 2009, no lessee accounted for more than 3% of the Company’s gross lease payments receivable. The investment in leases is diversified geographically, with the Company’s portfolio spread across all fifty states. At June 30, 2009, California (15%) was the only state that represented more than 10% of the Company’s net investment in leases. The Company has no exposure to foreign lessees. The Company’s leases are with lessees in a wide spectrum of industries; however, at June 30, 2009 approximately 34% of the Company’s net investment in capital leases was with public and private colleges, universities, elementary and secondary schools located throughout the United States (compared to 33% at June 30, 2008). No other industry sector represented more than 10%. The educational portfolio includes over 555 leases with over 246 different lessees. One university represented approximately 3% of the Company’s net investment in leases. The Company believes the exposure to this sector is warranted based on the historically good credit profile of this group.
Commercial Loan Portfolio Analysis
The Company’s commercial loan balance was $71.1 million at June 30, 2009 compared to $41.8 million at June 30, 2008, an increase of 70%. The commercial loan portfolio is comprised primarily of participations in leveraged loan syndications where the loans are secured by the borrower and the borrower’s subsidiary guarantor’s assets. Commercial loan syndications represent 84% of the commercial loan portfolio with the remainder of the portfolio comprised of commercial real estate loans originated directly by the Company. The loan portfolio at June 30, 2009 is distributed among 19 credits with an average balance of $3.9 million and includes companies in a variety of industries and dispersed around the country. However, there is some concentration in the hotel industry, with loans of $8.6 million representing 12% of the loan portfolio. The following table summarized the Company’s commercial loan portfolio as of June 30, 2009 compared to June 30, 2008:
California First National Bancorp and Subsidiaries
The estimated repayment of principle on the commercial loan portfolio is as follows:
Investment Securities
Total investment securities, available-for-sale and held-to-maturity, were $119.6 million as of June 30, 2009, compared to $6.4 million at June 30, 2008. The carrying cost and fair value of the Company’s investment portfolio at June 30, 2009 and 2008 is as follows:
During the fiscal year ended June 30, 2009, the Bank purchased $15.5 million of investment grade trust preferred securities, $46.7 million of collateralized mortgage obligations, $40.3 million of corporate bonds and $10.2 million of U.S. Treasury securities. Management evaluates investment securities for other-than-temporary impairment on a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For the year ended June 30, 2009, the Company recorded a pre-tax other-than-temporary impairment charge of $869,000 related to two closed-end mutual fund investments held in the investment portfolio. While the Company intends to retain these investments for a sufficient time to recover its investment, and the dividend payments have continued, at the same level, given the significant developments that have effected the market for these securities and the volatility of trading in the funds, the Company determined that an other-than-temporary impairment occurred.
At June 30, 2009 the available-for-sale securities portfolio included a $2.2 million net unrealized pre-tax gain compared with a net unrealized pre-tax loss of $360,000 at June 30, 2008. During this period of lower lease and loan originations, the Company will continue to look to deploy available liquidity toward investment securities with yield and risk profiles that are consistent with the Company’s policies and strategies.
California First National Bancorp and Subsidiaries
Asset Quality
The Company monitors the performance of all leases and loans held in its own portfolio, transactions-in-process and loan commitments as well as lease transactions assigned to lenders, if the Company retains a residual investment in the leased property subject to those leases. An ongoing review of all leases and loans ten or more days delinquent is conducted. Customers who 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 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.
The following table summarizes the Company’s non-performing leases and loans.
Non-performing assets increased during fiscal 2009 due primarily to the inclusion of a restructured loan and lease with one customer at June 30, 2009 for an aggregate amount of $8.1 million. These transactions were restructured to lower payments near term and increase the effective yield, without lengthening the term of the overall exposure. This relationship was current with its restructured payments at June 30, 2009 and the transactions remained on an accrual basis. The restructured lease and loan balance also includes leases revised to assist lessees with cash flow problems caused by the weakening economy. Direct finance income that would have been recorded had non-accrual leases at each respective fiscal year end been current in accordance with their original terms would have been $177,228, $110,118 and $148,655 during fiscal 2009, 2008 and 2007, respectively. The amount of direct finance income actually recorded on non-performing leases was $74,671, $225,582 and $173,620 during fiscal 2009, 2008 and 2007, respectively.
In addition to the transactions identified as non-performing above, there was $2.0 million of investment in leases at June 30, 2009 for which management has concerns regarding the ability of the lessees to continue to meet existing lease obligations, compared with $1.1 million at June 30, 2008. This amount consists of leases classified as substandard or doubtful, or with lessees that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future. Although these leases have been identified as potential problem leases, they may never become non-performing. These potential problem leases are considered in the determination of the allowance for credit losses. The amount has fluctuated throughout the year ended June 30, 2009 as potential problems have been identified, with increases offset by payments received, re-classification as non-accrual or actual write-offs.
Allowance for Credit Losses
The allowance for credit losses and the residual valuation allowance provide coverage for probable and estimatable losses in the Company’s lease and loan portfolios. The allowance recorded is based on a quarterly review of all leases and loans outstanding, loan commitments and transactions-in-process to determine that it is adequate to cover these inherent losses. The evaluation of each element and the overall allowance is based on a continuing assessment of problem credits, recent loss experience and other factors, including regulatory guidance and economic conditions. The Company utilizes similar processes to estimate its liability for unfunded loan commitments, which is included in other liabilities in the Consolidated Balance Sheets. Both the allowance for credit losses and the liability for unfunded loan commitments are included in the Company’s analysis of credit losses. 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 lease and loan portfolio.
California First National Bancorp and Subsidiaries
The allowance for credit losses increased to $4.83 million (1.7% of net investment in leases and loans) at June 30, 2009 from $3.91 million (1.5% of net investment in leases and loans) at June 30, 2008. The allowance at June 30, 2009 consisted of $1.9 million allocated to specific accounts that were considered impaired and $2.95 million that was available to cover losses inherent in the portfolio. This compared to $1.5 million allocated to specific impaired accounts at June 30, 2008 and $2.42 million that was available to cover losses inherent in the portfolio at such date. The allowance allocated to specific accounts increased $388,000 while the unallocated allowance increased $521,000 during fiscal 2009. The increase to the unallocated allowance reflects the growth in the lease and loan portfolio at CalFirst Bank. At June 30, 2009, the volume of transactions-in-process was down 57% from the end of the prior year and the volume of unfunded lease commitments decreased 24%. Based on the above factors, the Company considers the allowance for credit losses of $4.8 million at June 30, 2009 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 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, a continued economic slowdown 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. As the Company has retained a significantly greater percentage of leases and loans in its own portfolio, this creates increased exposure to delinquencies, repossessions, foreclosures and losses than the Company has historically experienced.
Liquidity and Capital Resources
The Company funds its operating activities through internally generated funds, bank deposits, Federal Home Loan Bank and Federal Reserve Bank advances and non-recourse debt. At June 30, 2009 and 2008, the Company’s cash and cash equivalents were $55.2 million and $71.8 million, respectively. Stockholders’ equity at June 30, 2009 was $191.4 million, or 39% of total assets, compared to $202.5 million, or 52% of total assets, at June 30, 2008. At June 30, 2009, the Company and the Bank exceed their regulatory capital requirements and are considered “well-capitalized” under guidelines established by the FRB and the OCC.
California First National Bancorp and Subsidiaries
Deposits at CalFirst Bank totaled $220.9 million at June 30, 2009, compared to $156.2 million at June 30, 2008. The $64.7 million increase was used to fund leases, loans and investments and maintain liquidity at the Bank. Deposit balances have risen steadily over the past three years commensurate with the growth in the Bank’s lease and loan portfolio. The Bank is competitive with major institutions in terms of its structure of interest rates, and generally offers interest rates on deposit accounts that are higher than the national average. Rates paid by the Bank on deposits have declined in varying degrees in response to the general decrease in market rates. The following table presents average balances and average rates paid on deposits for years ended June 30, 2009, 2008 and 2007:
The following table shows the maturities of certificates of deposits at the dates indicated:
During fiscal 2009, the Bank entered into borrowing agreements with the Federal Home Loan Bank of San Francisco. The Bank had outstanding balances of $35.4 million under these agreements at June 30, 2009, with $25.4 million classified as short-term and $10.0 million classified as long-term. These borrowings are collateralized by pledges of certain investment securities and loans of the Bank, with $10.4 million available under the agreement as of June 30, 2009. In January 2009, CalFirst Bank received approval to borrow from the Federal Reserve Discount Window amounts secured by certain lease receivables, with the total availability at June 30, 2009 estimated to be approximately $53 million. The Bank had an outstanding balance of $10.0 million under this agreement at June 30, 2009. In August 2009, the FRB announced revisions to the collateral margins that will be effective in October 2009. This change more likely than not will reduce the total borrowing capacity available to the Bank under the FRB agreement. The average annual interest rate paid on total borrowings was 0.79% for the year ended June 30, 2009.
CalFirst Leasing’s capital expenditures for leased property purchases are sometimes financed by assigning certain base lease term payments to banks or other financial institutions, including CalFirst Bank. The assigned lease payments are discounted at fixed rates such that the lease payments are sufficient to fully amortize the aggregate outstanding debt. At June 30, 2009, the Company had outstanding non-recourse debt aggregating $7.0 million relating to property under leases assigned to unaffiliated parties. 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.
At June 30, 2009, CalFirst Leasing has a $15 million line of credit with a bank, which was reduced from $25 million at June 30, 2008 when the line of credit was amended on April 3, 2009. The purpose of the line is to provide resources as needed for investment in transactions-in-process and leases. The agreement, as amended, provides for borrowings based on Libor, requires a commitment fee on the unused line balance and allows for advances through March 31, 2010. The agreement is unsecured, however, the Company guarantees CalFirst Leasing’s obligations. No borrowings have been made under this line of credit as of June 30, 2009.
California First National Bancorp and Subsidiaries
Contractual Obligations and Commitments
The following table summarizes various contractual obligations at June 30, 2009. Commitments to purchase property for unfunded leases are binding and generally have fixed expiration dates or other termination clauses. Commercial loan commitments are agreements to lend to a customer 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 commitment amounts do not necessarily represent the Company’s future liquidity requirements.
_________________________________________________
(1)
Disbursements to purchase property on approved lease or loan commitments are estimated to be completed within one year, but it is likely that some portion could be deferred or never funded.
The need for cash for operating activities will increase as the Company expands. The Company believes that existing cash balances, cash flow from operations, cash flows from its financing and investing activities, and assignments (on a 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.
Recent Accounting Pronouncements
See Note 1, “Summary of Significant Accounting Policies,” of the Company’s consolidated financial statements for disclosure of recent accounting pronouncements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from changes in market indices such as interest rates and equity prices. The Company’s principal market risk exposure is interest rate risk, which is the exposure due to differences in the repricing characteristics of interest-earning assets and interest-bearing liabilities. Market risk also arises from the impact that fluctuations in interest rates may have on security prices that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for at fair value. As the banking operations of the Company have grown and securities and deposits represent a greater portion of the Company’s assets and liabilities, the Company is subject to increased market risk. The Bank has an Asset/Liability Management Committee and policies established to manage its interest rate and market risk.
At June 30, 2009, the Company had $57.7 million invested in securities of very short duration, including $12.0 million in federal funds sold and securities purchased under agreements to resell. The Company’s gross investment in lease payments receivable and loan principal of $284.8 million consists of leases with fixed rates and loans with fixed and variable rates, however, $175.0 million of such investment is due within one year of June 30, 2009. This compares to the Bank’s interest bearing deposit liabilities and short-term borrowings of $256.4 million, of which 88%, or $224.3 million, mature within one year. CalFirst Leasing has no interest-bearing debt, and non-recourse debt does not represent an interest rate risk to the Company because it is fully amortized through direct payments from lessees to the purchaser of the lease receivable.
The consolidated gap analysis below sets forth the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities for selected time bands. The mismatch between repricings or maturities within a time band is commonly referred to as the “gap” for that period. A positive gap (asset sensitive) where interest rate sensitive assets exceed interest rate sensitive liabilities generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite result on the net interest margin. However, the traditional gap analysis does not assess the relative sensitivity of assets and liabilities to changes in interest rates and other factors that could have an impact on interest rate sensitivity or net interest income. Sudden and substantial increase or decrease in interest rates may adversely impact our income to the extent that the interest rates associated with the assets and liabilities do not change at the same speed, to the same extent, or on the same basis.
California First National Bancorp and Subsidiaries
Consolidated Interest Rate Sensitivity
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.
California First National Bancorp and Subsidiaries
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and supplementary financial information are included herein at the pages indicated below:
California First National Bancorp and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of California First National Bancorp
We have audited the accompanying consolidated balance sheets of California First National Bancorp and Subsidiaries as of June 30, 2009 and 2008 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of California First National Bancorp and Subsidiaries as of June 30, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2009, in conformity with accounting principles generally accepted in the United States of America.
Vavrinek, Trine, Day & Co., LLP
Laguna Hills, California
September 11, 2009
California First National Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
The accompanying notes are an integral
part of these consolidated financial statements.
California First National Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share and per share amounts)
The accompanying notes are an integral
part of these consolidated financial statements.
California First National Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except for share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
California First National Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
California First National Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies:
Nature of Operations
California First National Bancorp, a California corporation (the “Company”) is a bank holding company with two subsidiaries, California First Leasing Corp. (“CalFirst Leasing”) and California First National Bank (“CalFirst Bank” or the “Bank”). CalFirst Leasing and CalFirst Bank lease high-technology and other capital assets to customers located throughout the United States and re-market leased assets at lease expiration. CalFirst Bank also provides business loans to fund the purchase of assets leased by third parties, and has expanded into commercial loans through participations and direct loans to businesses, including real estate based, secured and unsecured revolving lines of credit. As an FDIC-insured national bank, CalFirst Bank gathers deposits from a centralized location primarily by posting rates on the Internet. .
On June 24, 2009 the Board of Directors approved a plan of corporate reorganization whereby the Company’s subsidiary, Amplicon, Inc., merged with CalFirst Leasing with CalFirst Leasing remaining the surviving corporation.
Basis of Presentation
The consolidated financial statements include the accounts of California First National Bancorp and its wholly owned subsidiaries, CalFirst Leasing and CalFirst Bank. All intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of these statements, cash and cash equivalents include cash in banks, cash in demand deposit accounts, money market accounts and federal funds sold, all of which have initial maturities of less than ninety days. Included in cash and cash equivalents at June 30, 2009 and 2008 was $17,833,088 and $36,922,748, respectively, that was held by the Bank and was only available to fund the Bank’s operations.
Investment Securities
Investment securities that the Company has the intent and ability to hold until maturity are classified as “held-to-maturity” and are stated at cost adjusted for amortization of premium or accretion of discount under criteria established with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” All other securities are classified as available for sale and reported at fair value. Changes in unrealized gains and losses, net of related deferred taxes, for available-for-sale securities are recorded in comprehensive income.
The Company conducts a regular assessment of its investment securities to determine whether any are other-than-temporarily impaired. In estimating other-than-temporary impairment losses, management considers, among other factors, the 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, and the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery. Any decline in fair value that is considered other-than-temporary is recorded in non-interest income as an impairment loss on investment securities.
California First National Bancorp and Subsidiaries
Leases
Capital Leases
New lease transactions are generally structured as direct financing leases. The re-lease of property that has come off lease may be accounted for as a sales-type lease or as an operating lease, depending on the terms of the re-lease. Leased property that comes off lease and is re-marketed through a sale to the lessee or a third party is accounted for as sale of leased property.
For leases that qualify as direct financing leases, the aggregate lease payments receivable and estimated residual value, if any, are recorded net of unearned income as net investment in leases. The unearned income is recognized as direct finance income on an internal rate of return method calculated to achieve a level yield on the Company’s investment over the lease term. There are no costs or expenses related to direct financing leases since lease income is recorded on a net basis.
For capital leases that qualify as sales-type leases, the Company recognizes profit or loss at lease inception to the extent the fair value of the property leased differs from the Company's carrying value. The difference between the discounted value of the aggregate lease payments receivable and the property cost, less the discounted value of the residual, if any, and any initial direct costs is recorded as sales-type lease income. For balance sheet purposes, the aggregate lease payments receivable, and estimated residual value, if any, are recorded net of unearned income as net investment in leases. Unearned income is recognized as direct finance income over the lease term on an internal rate of return method.
The residual value is an estimate for accounting purposes of the fair value of the lease property at lease termination. The estimates are reviewed periodically to ensure reasonableness, however, the amounts the Company may ultimately realize could differ from the estimated amounts.
The Company assigns, on a non-recourse basis, the minimum lease payments receivable related to certain leases to financial institutions at fixed interest rates. When leases are assigned to unaffiliated financial institutions without recourse, the discounted value of the minimum lease payments receivable is recategorized on the balance sheet as discounted lease rentals assigned to lenders. The related obligations resulting from the discounting of the leases are recorded as non-recourse debt. The unearned income related to the lease is reduced by the interest expense from the non-recourse debt. In the event of default by a lessee, the lender has a first lien against the underlying leased property with no further recourse against the Company. If this occurs, the Company may not realize its residual investment in the leased property.
A portion of the Company's selling, general and administrative (“S,G&A”) costs directly related to originating direct financing lease transactions is deferred through a reduction to SG&A expenses recognized in the period, with the deferred costs amortized over the lease term as a reduction to direct finance income utilizing the effective interest method.
Operating Leases
Lease contracts, which do not meet the criteria of capital leases, are accounted for as operating leases. Property on operating leases is recorded at the lower of cost or fair value and depreciated on a straight-line basis over the lease term to the estimated residual value at the termination of the lease. Most operating leases involve the re-lease of off-lease property and the associated cost is the Company’s estimated residual. Rental income is recorded monthly or quarterly when due.
Loans
Loans are reported at their principal amount outstanding, net of unearned discounts and unamortized nonrefundable fees and direct costs associated with their origination or acquisition. Interest earned on loans without discounts is credited to income based on loan principal amounts outstanding at appropriate interest rates. Material origination and other nonrefundable fees net of direct costs and discounts on loans are credited to income over the terms of the loans using a method that approximates an effective yield.
California First National Bancorp and Subsidiaries
Allowance for Credit Losses
The allowance for credit losses is an estimate based on management’s judgment applying the principles of Statement of Financial Accounting Standards (“SFAS”) 5, “Accounting for Contingencies,” SFAS 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS 118, “Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures.” The allowance for credit losses and residual valuation allowance are periodically reviewed for adequacy considering levels of past due payments and non-performing assets, customers’ financial condition, leased property values as well as general economic conditions and credit quality indicators. The need for reserves is subject to future events, which by their nature are uncertain. Therefore, changes in economic conditions or other events affecting specific customers or industries may necessitate additions or deductions to the allowance for credit losses or the residual valuation allowance. The allowance is maintained at a level believed to be adequate to absorb probable losses inherent in the portfolios.
Property Acquired for Transactions-in-process
Property acquired for transactions-in-process represents partial deliveries of property, which the lessee has accepted on in-process lease transactions. Such amounts are stated at cost, net of any lessee payments related to the property. Income is not recognized while a transaction is in process and prior to the commencement of the lease. At lease commencement, any pre-commencement payments are included in minimum lease payments receivable and the unearned income is recognized as direct finance income over the lease term.
Earnings Per Share
Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share includes the effect of the potential shares outstanding, including dilutive stock options, using the treasury stock method.
The following table reconciles the components of the basic net income per share calculation to diluted net income per share:
The Company did not include the following number of antidilutive stock options in its calculation of diluted earnings per share:
California First National Bancorp and Subsidiaries
Recent Accounting Pronouncements
In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” FASB Staff Position FAS 140-4 and FIN 46(R)-8 amends FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to require public entities to provide additional disclosures about transfers of financial assets. This FSP requires certain disclosures to be provided by a public enterprise that is (a) a sponsor of a qualifying special purpose entity (SPE) that holds a variable interest in the qualifying SPE but was not the transferor of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE that holds a significant variable interest in the qualifying SPE but was not the transferor of financial assets to the qualifying SPE. The disclosures required by this FSP are intended to provide greater transparency to financial statement users about the transferor’s continuing involvement with transferred financial assets and an enterprise’s involvement with variable interest entities and qualifying SPEs. The adoption of this FSP had no effect on the Company’s financial position and results of operations.
In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” FSP No. FAS 157-3 clarifies the application of FAS No. 157, “Fair Value Measurements,” in a market that is not active and was effective upon issuance. Adoption of this FSP has had no material impact on results of operations and financial condition.
On April 9, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”). These FSP’s require an entity to recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the noncredit component in other comprehensive income when the entity does not intend to sell the security prior to recovery. FSP FAS 115-2 also requires expanded disclosures. FSP FAS 115-2 does not change the recognition of other-than-temporary impairment for equity securities. The impact of adoption and the expanded disclosures related to FSP FAS 115-2 are included in Note 2.
In May 2009, FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) effective for the financial reporting period ended June 30, 2009. This statement provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued. The Company evaluated all events or transactions that occurred after June 30, 2009 up through the date the financial statements were available to be issued. During this period, the Company did not have any material recognizable subsequent events.
In June 2009, FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” SFAS No 168 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS No. 168 will be effective for interim and annual periods ending after September 15, 2009. The guidance provided by SFAS No. 168 is not expected to have a significant impact on the Company’s financial statements.
Reclassifications
Certain reclassifications have been made to the fiscal 2007 and 2008 financial statements to conform to the presentation of the fiscal 2009 financial statements.
California First National Bancorp and Subsidiaries
Note 2 - Investment Securities:
The amortized cost, fair value, and carrying value of investment securities held at June 30, 2009 were as follows:
The amortized cost, fair value, and carrying value of investment securities held at June 30, 2008 were as follows:
Securities classified as "held-to-maturity" are two U.S. agency issued securities and the Federal Reserve Bank and Federal Home Loan Bank Stock. The Company has determined that it has the ability to hold these investments 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 securities at amortized cost.
The investment in Federal Home Loan Bank of San Francisco ("FHLB") stock is a required investment related to CalFirst Bank's borrowings from 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 12 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.
The following table presents the fair value and associated gross unrealized losses only on available-for-sale securities with gross unrealized losses at June 30, 2009, including the investment securities for which a other-than-temporary impairment has been recognized. The table also discloses whether these securities have had gross unrealized losses for less than 12 months or 12 months or longer.
California First National Bancorp and Subsidiaries
At June 30, 2009, the change in fair value of the equity and mutual fund investments is primarily due to the downturn in the equity markets, and concerns for the long-term recovery of the economy and credit derivative markets. During the third quarter of fiscal 2009, the Company recorded a pre-tax impairment charge of $869,000 related to two closed-end mutual fund investments held in the investment portfolio. While the Company has the ability and intent to retain these investments for a sufficient time to recover its investment, and dividend payments continued to be received at the same level, given the significant developments that have affected the market for these securities and the volatility of trading over the last year, the Company determined that an other-than-temporary impairment occurred.
At June 30, 2009, investment securities with carrying values of $46.6 million were pledged to secure FHLB advances.
The amortized cost and estimated fair value of investment securities at June 30, 2009, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Note 3 - Receivables:
The Company's receivables consist of the following:
Note 4 - Net Investment in Leases:
The Company's net investment in leases consists of the following:
California First National Bancorp and Subsidiaries
The minimum lease payments receivable and estimated residual value are discounted using the internal rate of return method related to each specific lease. Unearned income and discounts includes the offset of initial direct costs of $4,769,249 and $5,050,523 at June 30, 2009 and 2008, respectively.
At June 30, 2009, approximately $14 million of lease receivables are pledged to secure $10.0 million borrowed from the Federal Reserve Discount Window.
At June 30, 2009, a summary of the installments due on minimum lease payments receivable, and the expected maturity of the Company's estimated residual value are as follows:
Non-recourse debt, which relates to the discounting of lease receivables, bears interest at rates ranging from 4.95% to 8.13%. Maturities of such obligations at June 30, 2009 are as follows:
Deferred interest expense of $336,000 at June 30, 2009 will be amortized against direct finance income related to the Company's discounted lease rentals assigned to lenders of $6,989,000 using the effective yield method over the applicable lease term.
Note 5 - Commercial Loans:
The Company’s investment in commercial loans consists of the following:
California First National Bancorp and Subsidiaries
Note 6 - Allowance for Credit Losses:
The allowance for credit losses includes amounts to cover losses related to the net investment in leases and commercial loans, transactions-in-process and unfunded loan commitments. A summary of the allocation of the allowance for credit losses and selected statistics is as follows:
Note 7 - Short and Long Term Borrowings:
At June 30, 2009, CalFirst Leasing had a line of credit with a bank. The line of credit was amended on April 3, 2009 to reduce the available line of credit from $25 million to $15 million. The purpose of the line is to provide resources as needed for investment in transactions-in-process and leases. The agreement, as amended, provides for borrowings based on Libor, requires a commitment fee on the unused line balance and allows for advances through March 31, 2010. The agreement is unsecured, however, the Company guarantees CalFirst Leasing’s obligations. Under provisions of the agreement, CalFirst Leasing must maintain a minimum net worth and profitability, and is prohibited from repaying any indebtedness owed to the Company. No borrowings have been made under this line of credit as of June 30, 2009.
CalFirst Bank is a member of 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. Under terms of a blanket collateral agreement, advances from the FHLB are collateralized by qualifying investment securities. The Bank also has authority to borrow from the Federal Reserve Bank (“FRB”) discount window amounts secured by certain lease receivables, with the total estimated availability at June 30, 2009 of approximately $50 million. At June 30, 2009, the Bank had an outstanding advance of $10.0 million maturing in less than 90 days under this agreement. 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. Short-term borrowings and long-term debt and weighted average interest rates at June 30, 2009 were as follows (there were no borrowings as of June 30, 2008 or prior):
California First National Bancorp and Subsidiaries
Note 8 - Fair Value of Financial Instruments:
On July 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). In accordance with the SFAS No. 157-2, “Effective Date of SFAS No. 157”, the Company has not applied the provisions of this statement to non-financial assets and liabilities except those that are disclosed at fair value on a recurring basis (at least annually). SFAS 157, among other things, defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. The adoption of SFAS 157 had no material effect on the Company’s financial statements.
SFAS 157 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. SFAS 157 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 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. 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.
SFAS 157 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, SFAS 157 does not apply to the Company’s investment in leases or investment securities held to maturity. The Company’s financial assets measured at fair value on a recurring basis primarily include securities available-for-sale and at June 30, 2009, there were no liabilities subject to SFAS 157.
Securities available-for-sale include collateralized mortgage obligations issued by government-backed agencies, trust-preferred securities, corporate bonds, U.S. Treasury Securities, mutual fund investments and an equity security and generally are reported at fair value utilizing Level 1 and Level 2 inputs. The fair value of collateralized mortgage obligations and corporate bonds 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 input). Publicly traded trust preferred securities, U.S. Treasury Securities, mutual funds and the common stock 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 input).
The following table summarizes the Company’s assets, which are measured at fair value on a recurring basis as of June 30, 2009:
Certain financial instruments, such as impaired loans and unfunded loan commitments, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances, usually if there was evidence of impairment. The Company had no such assets or liabilities at June 30, 2009.
California First National Bancorp and Subsidiaries
The fair value of commercial loans held by the Company, which generally re-price every 90 days based on changes in an applicable base rate, approximate their carrying amount. For other loans held by the Company, 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 for similar maturities. These calculations have been adjusted for credit risk based on the Company’s historical credit loss experience.
The estimated fair values of financial instruments were as follows:
Note 9 - Deposits:
The composition of deposits is as follows:
Included in savings deposits at June 30, 2009 is a deposit in the amount of $12.6 million from an affiliate, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, of the Company. The terms of such account are the same terms offered on similar accounts to non-affiliated depositors.
Time certificates of deposits with balances of $100,000 or more amounted to $80.1 million and $57.6 million at June 30, 2009 and 2008, respectively. Interest expense on such deposits amounted to $2.7 million for the years ended June 30, 2009 and 2008, and $2.2 million for the year ended June 30, 2007.
At June 30, 2009, the scheduled maturities of time certificates of deposit are as follows:
California First National Bancorp and Subsidiaries
Note 10 - Income Taxes:
The Company accounts for its income taxes under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Among other provisions, this standard requires deferred tax balances to be determined using the enacted income tax rate for the years in which taxes will be paid or refunds received. From time to time, various governmental taxing authorities audit the Company. The Company believes that its accrual for income taxes is adequate for adjustments, if any, which may result from these examinations.
The provision for income taxes is summarized as follows:
Deferred taxes result principally from the method of recording lease income on capital leases and depreciation methods for tax reporting, which differ from financial statement reporting. Deferred income tax liabilities (assets) are comprised of the following:
The differences between the Federal statutory income tax rate and the Company's effective tax rate are as follows:
As a result of the adoption of FIN 48 on July 1, 2007, the Company recorded a $1,200,000 decrease in deferred tax liabilities and a corresponding increase to retained earnings. As of June 30, 2009, there was $885,000 of unrecognized tax benefits, all of which, if recognized, would affect the effective tax rate. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2009, accrued penalties and interest on unrecognized tax benefits are estimated to be $159,000.
California First National Bancorp and Subsidiaries
At June 30, 2009, there have been no material changes to the liability for uncertain tax positions and unrecognized tax benefits. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including additions related to current year tax positions, the expiration of the statute of limitations on open tax years, status of examinations and changes in management’s judgment. The Company is subject to U.S. Federal income tax jurisdiction as well as multiple state and local tax jurisdictions as a result of doing business in most states. The Company’s Federal tax returns are subject to examination from 2005 to the present, while state income tax returns are generally open from 2004 forward, and vary by individual state statutes of limitation.
At June 30, 2009 and 2008, the Company had an income taxes receivable balance of $3,968,000 and $4,239,000 respectively.
Note 11 - Capital Structure and Stock-based Compensation:
At June 30, 2009, the Company has 20,000,000 authorized shares of common stock and is authorized to issue 2,500,000 shares of preferred stock, from time to time, in one or more series and to fix the voting powers, designations, preferences and the relative participating, optional or other rights, if any, of any wholly unissued series of preferred stock.
In November 1995, the Company’s stockholders approved the 1995 Equity Participation Plan (the “1995 Plan”), which replaced a previous plan. The 1995 Plan provides for the granting of options, restricted stock and stock appreciation rights (“SARs”) to key employees, directors and consultants of the Company. Under the 1995 Plan, the maximum number of shares of common stock that can be issued upon the exercise of options or SARs, or upon the vesting of restricted stock awards, was initially 1,000,000, but the maximum number of available shares of common stock could increase by an amount equal to 1% of the total number of issued and outstanding shares of common stock as of June 30 of the fiscal year immediately preceding such fiscal year. Each grant or issuance under the 1995 Plan is set forth in a separate agreement and indicates, as determined by the stock option committee, the type, terms, vesting period and conditions of the award.
On July 1, 2005, the Company implemented Statement of Financial Accounting Standards 123(R), “Share-Based Payments” (“SFAS 123R”) which replaced SFAS 123 and supercedes APB Opinion No. 25 and the related implementation guidance. SFAS 123R addresses accounting for equity-based compensation arrangements, including employee stock options. The Company adopted the “modified prospective method” where stock-based compensation expense is recorded beginning on the adoption date and prior periods are not restated. Under this method, compensation expense is recognized using the fair-value based method for all new awards granted after July 1, 2005. Additionally, compensation expense for unvested stock options that are outstanding at July 1, 2005 is recognized over the requisite service period based on the fair value of those options as previously calculated at the grant date under the pro-forma disclosures of SFAS 123. The fair value of each grant is estimated using the Black-Scholes option-pricing model.
During the years ended June 30, 2009 and 2008, the Company recognized pre-tax stock-based compensation expense of $12,066 and $63,219, respectively, as a result of adopting SFAS 123R. Such expense related to options granted during the fiscal years 2002 through 2004. The Company has not awarded any new grants since fiscal 2004 and has calculated the stock-based compensation expense based upon the original grant date fair value as allowed under SFAS 123R.
California First National Bancorp and Subsidiaries
The following table summarizes activity related to stock options for the periods indicated:
At June 30, 2009, the aggregate intrinsic value of options outstanding and options exercisable were $999,000. The total intrinsic value of options exercised during the year ended June 30, 2009 was $105,000. As of June 30, 2009, there is no remaining unrecognized compensation expense related to unvested shares to be recognized.
Note 12 - Regulatory Capital Requirements:
The Company and CalFirst Bank are subject to regulatory capital adequacy guidelines administered by federal banking agencies. Failure to meet minimum capital requirements can result in the initiation of certain actions by the federal agencies that, if undertaken, could have a material effect on the Company’s financial statements. The Company currently is required to maintain (i) Tier 1 risk-based capital equal to at least six percent (6%) of its risk-weighted assets; (ii) total risk-based capital (the sum of Tier 1 and Tier 2 capital) equal to ten percent (10%) of risk-weighted assets; and (iii) a minimum Tier 1 "leverage ratio" (measuring Tier 1 risk-based capital as a percentage of adjusted total assets) of at least five percent (5%). CalFirst Bank is subject to risk-based and leverage capital requirements mandated by the Office of the Comptroller of the Currency. The Bank is required to maintain (i) a minimum ratio of Tier 1 risked-based capital to risk-adjusted assets of four percent (4%) and (ii) a minimum ratio of qualifying total capital to risk-adjusted assets of eight percent (8%).
The following table presents capital and capital ratio information for the Company and its banking subsidiary as of June 30, 2009 and 2008. At June 30, 2009, the Company and CalFirst Bank exceeded all capital requirements by significant amounts.
California First National Bancorp and Subsidiaries
Note 13 - Commitments and Contingencies:
Leases
The Company leases its corporate offices under an operating lease that expires in fiscal 2014. Rent expense was $973,396 (2009), $1,144,295 (2008) and $1,117,486 (2007).
Litigation
From time to time, the Company is party to legal actions and administrative proceedings and subject to various claims arising out of the Company’s normal business activities. Management does not expect the outcome of any of these matters, individually and in the aggregate, to have a material adverse effect on the financial condition and results of operations of the Company.
401(k) Plan
Employees of the Company may participate in a voluntary defined contribution plan (the "401K Plan") qualified under Section 401(k) of the Internal Revenue Code of 1986. Under the 401K Plan, employees who have met certain age and service requirements may contribute up to a certain percentage of their compensation. The Company has made contributions of $113,960 (2009), $124,946 (2008) and $133,051 (2007).
Note 14 - Segment Reporting:
The Company has a leasing subsidiary, CalFirst Leasing, involved in leasing and financing capital assets, and re-marketing leased assets at lease expiration.
The Company’s banking subsidiary, CalFirst Bank, is an FDIC-insured national bank that gathers deposits from a centralized location and is involved in leasing and remarketing capital assets in a manner similar to CalFirst Leasing. CalFirst Bank provides business loans to fund the purchase of assets leased by CalFirst Leasing and other third parties and has expanded its product offerings to include commercial loans.
The accounting policies of each segment are the same as those described in “Summary of Significant Accounting Policies” (see Note 1). Below is a summary of each segment’s financial results for 2009, 2008 and 2007:
California First National Bancorp and Subsidiaries
California First National Bancorp and Subsidiaries
Note 15 - California First National Bancorp (Parent Only) Financial Information:
The condensed financial statements of California First National Bancorp as of and for the years ended June 30, 2009, and 2008 are presented below:
California First National Bancorp and Subsidiaries
Note 16 - Selected Quarterly Financial Data (Unaudited):
Summarized quarterly financial data for the fiscal years ended June 30, 2009 and 2008 is as follows:
California First National Bancorp and Subsidiaries
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it 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. 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 and have concluded that the Company's disclosure controls and procedures are adequate and effective for the purposes set forth in the definition in Exchange Act rules.
Management’s Report on Internal Control Over Financial Reporting
The management of California First National Bancorp is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2009. In making its assessment, management used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The assessment included the documentation and understanding of the Company’s internal control over financial reporting. Management evaluated the design effectiveness and tested the operating effectiveness of internal controls over financial reporting to form its conclusion.
Based on this evaluation, management concluded that, as of June 30, 2009, the Company’s internal control over financial reporting is effective to provide reasonable assurance that the Company’s financial statements are fairly presented in conformity with generally accepted accounting principles.
Vavrinek, Trine, Day and Co., LLP, independent registered public accounting firm, is not required to nor has it reported on the effectiveness of the Company’s internal control over financial reporting as of June 30, 2009.
Changes in Internal Control Over Financial Reporting
There were no significant changes made during the most recent fiscal year to the Company's internal controls or other factors that could significantly affect the Company's internal control over financial reporting
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
California First National Bancorp and Subsidiaries
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 2009 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
We have a Code of Business Conduct and Ethics within the meaning of Item 406 of Regulation S-K adopted by the SEC under the Exchange Act that applies to our principal executive officer, principal financial officer and principal accounting officer. Our Code of Business Conduct and Ethics is available on the Company’s website (www.calfirstbancorp.com), and we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendment to, or waiver from, a provision of our code of ethics by posting such information on our website. The information contained on the Company’s website is not part of this or any other report we file with or furnish to the SEC and is not incorporated by reference herein.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 2009 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 2009 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 2009 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 2009 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
California First National Bancorp and Subsidiaries
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Schedules
All financial statements are set forth under Item 8 of this annual report on Form 10-K. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.
(b) Exhibits:
Exhibit #
Description of Exhibit
Page No.
2.1
Agreement of Merger dated as of May 22, 2001 among Amplicon, Inc., California First National Bancorp and CFNB Merger Sub (incorporated by reference to Exhibit 2.1 to Registrant's Statement on Form 8-K dated May 25, 2001)
3.1
Articles of Incorporation of California First National Bancorp (incorporated by reference to Exhibit 3.1 to Registrant's Statement on Form 8-K dated May 25, 2001)
3.2
Bylaws of California First National Bancorp (incorporated by reference to Exhibit 3.2 to Registrant's Statement on Form 8-K dated May 25, 2001)
10.1
1995 Equity Participation Plan, as amended to date (incorporated by reference to Exhibit 10.1 to Registrant’s Statement on Form S-8 File No. 333-15683)
10.2
Capital Assurances and Liquidity Maintenance Agreement between California First National Bancorp and California First National Bank, effective as of May 23, 2001 (incorporated by reference to Exhibit 10.1 to Registrant's Statement on Form 8-K dated May 25, 2001)
10.3
Agreement by and between California First National Bank and the Office of the Comptroller of the Currency dated as of May 23, 2001 (incorporated by reference to Exhibit 10.2 to Registrant's Statement on Form 8-K dated May 25, 2001)
10.4
Office Lease dated January 30, 2003, between California First National Bancorp and World Trade Center Building, Inc. (incorporated by reference to Exhibit 10.8 to the Registrant’s March 31, 2003 Form 10-Q)
10.5
Business Loan Agreement dated as of January 20, 2006 between California First Leasing Corporation and Amplicon, Inc. and Bank of America (incorporated by reference to Exhibit 10.6 to the Registrant’s December 31, 2005 Form 10-Q).
10.6
First Amendment to the Business Loan Agreement between California First Leasing Corporation and Amplicon, Inc. and Bank of America dated as of March 29, 2007 (incorporated by reference to Exhibit 10.7 to Registrant's Statement on Form 8-K dated April 2, 2007)
10.7
Second Amendment to the Business Loan Agreement between California First Leasing Corporation and Amplicon, Inc. and Bank of America dated as of March 29, 2008 (incorporated by reference to Exhibit 10.7 to Registrant's Statement on Form 8-K dated June 16, 2008)
10.8
Second Amendment to Office Lease dated June 11, 2008, between California First National Bancorp and World Trade Center Building, Inc. (incorporated by reference to Exhibit 10.8 to the Registrant’s Statement on Form 8-K dated June 16, 2008)
10.9
Third Amendment to the Business Loan Agreement between California First Leasing Corporation and Amplicon, Inc. and Bank of America dated as of April 3, 2009 (incorporated by reference to Exhibit 10.9 to Registrant's Statement on Form 8-K dated April 6, 2009)
31.1
Rule 13a-14(a)/15d-14(a) Certifications of Principal Executive Officer
31.2
Rule 13a-14(a)/15d-14(a) Certifications of Principal Financial Officer
32.0
Section 1350 Certifications by Principal Executive Officer and Principal Financial Officer
California First National Bancorp and Subsidiaries
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
By /s/ S. Leslie Jewett
Date: September 25, 2009
S. Leslie Jewett
Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes each of Patrick E. Paddon, S. Leslie Jewett and Glen T. Tsuma as attorney-in-fact to sign on his behalf, individually in each capacity stated below, and to file all amendments and/or supplements to this Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Patrick E. Paddon
President, Chief Executive
September 25, 2009
Patrick E. Paddon
Officer and Director
/s/ Glen T. Tsuma
Vice President, Chief Operating
September 25, 2009
Glen T. Tsuma
Officer and Director
/s/ S. Leslie Jewett
Chief Financial Officer
September 25, 2009
S. Leslie Jewett
(Principal Financial and Accounting Officer)
/s/ Michael H. Lowry
Director
September 25, 2009
Michael H. Lowry
/s/ Harris Ravine
Director
September 25, 2009
Harris Ravine
/s/ Danilo Cacciamatta
Director
September 25, 2009
Danilo Cacciamatta