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| CFNB > SEC Filings for CFNB > Form 10-Q on 13-Feb-2009 | All Recent SEC Filings |
13-Feb-2009
Quarterly Report
GENERAL
California First National Bancorp, a California corporation, is a bank holding company headquartered in Orange County, California. The Leasing Companies 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 the Leasing Companies and provides commercial loans to businesses, including real estate based and unsecured revolving lines of credit, and participates in commercial loan syndications. CalFirst Bank gathers deposits from a centralized location primarily through posting rates on the Internet.
The Company's direct finance, loan and interest income includes interest income earned on the Company's investment in lease receivables, residuals and commercial loans. Other income primarily includes gains realized on the sale of leased property, income from sales-type and operating leases and gains realized on the sale of leases, and other fee income. Income from sales-type leases relates to the re-lease of lease property ("lease extensions") while income from operating leases generally involves lease extensions that are accounted for as an operating lease rather than as a sales-type lease.
The Company's operating results are subject to quarterly fluctuations resulting from a variety of factors, including the volume and profitability of leased property being re-marketed through re-lease or sale, the size and credit quality of the lease and loan portfolios, the interest rate environment, the volume of new lease or loan originations, including variations in the mix and funding of such originations, and economic conditions in general. The Company's principal market risk exposure 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 have decreased to a greater degree than bank deposit rates due to competitive market factors. As a result, this can result in a greater decline 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 securities, leases and loans held in its own portfolio, lease transactions in process, and residual investments. The Company takes steps to manage risks through the implementation of strict credit management processes and on-going risk management review procedures.
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements requires management to make certain critical accounting estimates that impact the stated amount of assets and liabilities at a financial statement date and the reported amount of income and expenses during a reporting period. These accounting estimates are based on management's judgment and are considered to be critical because of their significance to the financial statements and the possibility that future events may differ from current judgments, or that the use of different assumptions could result in materially different estimates. The critical accounting policies and estimates have not changed from and should be read in conjunction with the Company's Annual Report filed on Form 10-K for the year ended June 30, 2008.
The Company's estimates are reviewed continuously to ensure reasonableness. However, the amounts the Company may ultimately realize could differ from such estimated amounts.
Overview of Results and Trends
The following discussion is provided in addition to the required analysis of earnings in order to discuss trends in our business. We believe this analysis provides additional meaningful information on a comparative basis.
Net earnings of $2.5 million for the second quarter ended December 31, 2008 increased 40% from net earnings of $1.8 million from the second quarter of fiscal 2008. The large percentage increase in second quarter net earnings is largely due to a 14% reduction in SG&A expenses, higher income earned on the loan and investment portfolios and increased end of term lease income that compounded to offset a substantial increase in the provision for credit losses.
New lease bookings during the second quarter of fiscal 2009 of $41.3 million were 6.5% lower than the prior year, but with commercial loans boarded of $27.5 million, total loan and lease assets booked in the second quarter of fiscal 2009 increased 10% to $68.7 million. For the first six months of fiscal 2009, new lease bookings of $82.7 million were slightly above the first six months of fiscal 2008, and along with commercial loans boarded of $38.3 million contributed to a 42% increase in loan and lease assets booked to $121.0 million during the six months ended December 31, 2008. As a result, the net investment in leases and loans of $281.0 million at December 31, 2008 increased $18.7 million, or 7%, from the balance at June 30, 2008 and increased $35.0 million, or 14% from the balance at December 31, 2007.
The Bank's investment in leases and loans of $199.3 million at December 31, 2008 represented 71% of the Company's consolidated investment. In addition, the Bank increased its investment securities portfolio to $61.8 million at December 31, 2008 from $2.6 million at June 30, 2008. The new investments include certain U. S. agency mortgage-backed securities and investment grade bank issued trust-preferred securities that offer a better yield than federal funds sold and other short-term investments. To fund this portfolio, demand, money market and time deposits increased by 16% to $182.0 million from $156.2 million at June 30, 2008, and the Bank began using its availability under a credit line at the Federal Home Loan Bank of San Francisco ("FHLB") through borrowings of $35.4 million at an average annual interest rate of 0.67%.
During the second quarter of fiscal 2009, new lease originations and loan commitments were down over 20% when compared to the prior year, reflecting the disruption in the capital markets and deteriorating economy. As a result, at December 31, 2008, the backlog of approved lease and loan commitments of $58 million is 41% below the level of December 31, 2007. In the face of continued slow demand for leasing from its historical customer base, the Company will continue to pursue alternative investment opportunities.
Consolidated Statement of Earnings Analysis
Summary -- For the second quarter ended December 31, 2008, net earnings of $2.5 million increased $716,000, or 39.6%, compared to $1.8 million for the second quarter ended December 31, 2007. Diluted earnings per share increased 55.1% to $0.25 per share for the second quarter of fiscal 2009, compared to $0.16 per share for the second quarter of the prior year. Earnings per share comparisons benefited from the Company's August 2008 purchase of 1.3 million shares of common stock pursuant to a modified Dutch auction tender offer, which reduced the fully diluted average shares outstanding in the quarter by 10% to 10.2 million.
For the six months ended December 31, 2008, net earnings of $4.3 million increased $495,000, or 12.9%, compared to the six months ended December 31, 2007. Diluted earnings per share increased 21.6% to $0.41 for the first six months of fiscal 2009 compared to $0.34 for the same period of the prior year.
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 investments and interest paid on deposits and borrowings. Net direct finance, loan and interest income is affected by changes in the volume and mix of interest earning assets, the movement of interest rates, and funding and pricing strategies.
Net direct finance, loan and interest income was $6.0 million for the quarter ended December 31, 2008, a $497,000, or 9.0%, increase compared to the same quarter of the prior year. Total direct finance, loan and interest income for the second quarter ended December 31, 2008 increased 9.9% to $7.7 million from $7.0 million earned during the second quarter of fiscal 2008. The increase was primarily due to a $1.0 million increase in income earned on the commercial loan portfolio that stood at $62.4 million at December 31, 2008 and a $537,000 increase in investment income earned. Together, this income offset an $878,000 decrease in direct finance income that resulted from an 8% decline in the average net investment in leases. The average yield on leases held in the Company's own portfolio decreased 66 basis points to 10.1% while the average yield on loans decreased 93 basis points to 8.4%. With the expanded investment strategy, the average total investment in cash and securities increased to $83.2 million from $50.0 million for the second quarter of fiscal 2008, and the average yield earned on such investments increased 101 basis points to 4.95%. During the second quarter of fiscal 2009, interest expense paid on deposits and FHLB borrowings increased by $191,900 or 13% reflecting a 49% increase in average deposit balances to $169.5 million that was offset by a 129 basis point drop in average interest rates paid. During the second quarter, CalFirst Bank made its initial borrowings under a Federal Home Loan Bank line at an average cost of .67%.
For the six months ended December 31, 2008, net direct finance and interest income was $11.1 million, a $338,000 or 3.2% increase from the $10.7 million earned during the same period of the prior year. Total direct finance, loan and interest income increased 6% to $14.3 million for the first six months of fiscal 2009 compared to the same period of the prior year. The increase was due to a $1.7 million increase in income earned on the commercial loan portfolio and a $590,000 increase in investment income, was which offset by a $1.5 million decline in direct finance income. The average yield on leases held in the Company's own portfolio decreased by 52 basis points to 10.1% and the average yield on commercial loans decreased 182 basis points to 7.5%. The increased investment income reflected a 69% increase in the average investment in cash and securities to $81.4 million, with the average yield down 23 basis points to 3.87% for the six months ended December 31, 2008. For the six months ended December 31, 2008, interest expense on deposits and FHLB borrowings increased by $446,000 to $3.3 million, primarily reflecting a 122 basis point decrease in the average interest rates paid on average deposit balances that increased by 51% from the year before to $165.0 million.
The following table presents the components of the increases (decreases) in net direct finance and interest income by volume and rate:
Quarter ended Six Months ended
December 31, 2008 vs 2007 December 31, 2008 vs 2007
Volume Rate Total Volume Rate Total
(in thousands)
Interest income
Net investment in
leases $ (517 ) $ (361 ) $ (878 ) $ 1,484 $ (2,962 ) $ (1,478 )
Commercial loans 1,160 (130 ) 1,030 2,127 (455 ) 1,672
Discounted lease
rentals 70 (24 ) 46 136 (45 ) 91
Federal funds sold (250 ) (68 ) (318 ) (184 ) (273 ) (457 )
Investment securities 582 233 815 742 232 974
Interest-earning
deposits with banks 97 (57 ) 40 229 (156 ) 73
1,142 (407 ) 735 4,534 (3,659 ) 875
Interest expense
Non-recourse debt 70 (24 ) 46 136 (45 ) 91
Demand and money
market deposits 460 (179 ) 281 900 (348 ) 552
Time certificates of
deposits 211 (323 ) (112 ) 446 (575 ) (129 )
FHLB borrowings 23 - 23 23 - 23
764 (526 ) 238 1,505 (968 ) 537
Net direct finance,
loan and interest
income $ 378 $ 119 $ 497 $ 3,029 $ (2,691 ) $ 338
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The following tables present 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. Yields/rates are presented on an annualized basis.
Quarter ended Quarter ended
(dollars in
thousands) December 31, 2008 December 31, 2007
Average Yield/ Average Yield/
Assets Balance Interest Rate Balance Interest Rate
Interest-earning
assets
Interest-earning
deposits with banks $ 34,126 $ 163 1.9 % $ 19,007 $ 122 2.6 %
Federal funds sold 6,959 14 0.8 % 28,415 332 4.7 %
Investment
securities 42,098 852 8.1 % 2,567 38 5.9 %
Commercial loans 55,216 1,163 8.4 % 5,683 133 9.4 %
Net investment in
leases, including
discounted lease
rentals (1,2) 226,409 5,599 9.9 % 241,348 6,431 10.7 %
Total
interest-earning
assets 364,808 7,791 8.5 % 297,020 7,056 9.5 %
Other assets 34,730 40,063
$ 399,538 $ 337,083
Liabilities and
Shareholders' Equity
Interest-bearing
liabilities
Demand and savings
deposits $ 46,843 365 3.1 % $ 7,259 84 4.6 %
Time deposits 122,653 1,270 4.1 % 106,411 1,382 5.2 %
FHLB borrowings 13,722 23 0.7 % - - 0.0 %
Non-recourse debt 9,654 132 5.5 % 5,350 86 6.4 %
Total
interest-bearing
liabilities 192,872 1,790 3.7 % 119,020 1,552 5.2 %
Other liabilities 20,327 18,504
Shareholders' equity 186,339 199,559
$ 399,538 $ 337,083
Net direct finance,
loan and interest
income $ 6,001 $ 5,504
Net direct finance,
loan and interest
income
to average
interest-earning
assets 6.6 % 7.4 %
Average
interest-earning
assets over
average
interest-bearing
liabilities 189.1 % 249.6 %
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Six months ended Six months ended
December 31, 2008 December 31, 2007
Average Yield/ Average Yield/
Assets Balance Interest Rate Balance Interest Rate
Interest-earning
assets
Interest-earning
deposits with banks $ 34,741 $ 362 2.1 % $ 19,357 $ 288 3.0 %
Federal funds sold 18,652 173 1.9 % 26,376 630 4.8 %
Investment
securities 28,006 1,043 7.4 % 2,400 70 5.8 %
Commercial loans 50,585 1,892 7.5 % 4,733 220 9.3 %
Net investment in
leases, including
discounted lease
rentals (1,2) 225,757 11,142 9.9 % 238,782 12,529 10.5 %
Total
interest-earning
assets 357,741 14,612 8.2 % 291,648 13,737 9.4 %
Other assets 36,428 42,847
$ 394,169 $ 334,495
Liabilities and
Shareholders' Equity
Interest-bearing
liabilities
Demand and savings
deposits $ 45,616 714 3.1 % $ 6,968 162 4.6 %
Time deposits 119,397 2,522 4.2 % 102,189 2,651 5.1 %
FHLB borrowings 7,841 23 0.6 % - - 0.0 %
Non-recourse debt 9,820 269 5.5 % 5,574 178 6.4 %
Total
interest-bearing
liabilities 182,674 3,528 3.9 % 114,731 2,991 5.2 %
Other liabilities 20,428 20,859
Shareholders' equity 191,067 198,905
$ 394,169 $ 334,495
Net direct finance,
loan and interest
income $ 11,084 $ 10,748
Net direct finance,
loan and interest
income
to average
interest-earning
assets 6.2 % 7.4 %
Average
interest-earning
assets over
average
interest-bearing
liabilities 195.8 % 254.2 %
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(1) Direct finance income and interest expense on discounted lease rentals and non-recourse debt of $9.3 million and $5.3 million at December 31, 2008 and 2007, respectively, offset each other and do not contribute to the Company's net direct finance and interest income.
(2) Average balance is based on month-end balances, and includes non-accrual leases, and is presented net of unearned income.
Provision for Credit Losses -- The Company recorded a provision for credit losses of $650,000 in the second quarter of fiscal 2009, compared to a provision of $90,000 in the second quarter of fiscal 2008. For the six-month period ended December 31, 2008, the provision was $875,000 compared to a provision of $130,000 for the same period of the prior fiscal year. The increase in the provision for both periods related to the substantial growth in the commercial loan portfolio and the heightened credit risk related to these assets, as well as deterioration in the credit quality of certain customers.
Other Income -- Total other income for the quarter ended December 31, 2008 increased by $601,000, or 35.1%, to $2.3 million, compared to $1.7 million for the same quarter of the prior fiscal year. The increase in other income primarily reflects a $232,000 increase in gain on sales of leases and leased property, including an increase in income from the sale of leases of $140,000, and a $235,000 increase in operating and sales-type lease income. The increased income from end of term transactions primarily reflected greater income from lease extensions as well as slightly higher values realized on leased property sales.
For the first six months ended December 31, 2008, total other income of $3.9 million increased slightly compared to $3.6 million for the six months ended December 31, 2007. The increase was principally due to a $364,000 increase in gains recognized on the sale of leases, which offset the slight decline in income earned on end of term transactions. Other fee income of $394,000 increased $108,000 as fee income collected increased.
Selling, General, and Administrative ("S,G&A") Expenses - During the second quarter and first six months of fiscal 2009, S,G&A expenses of $3.6 million and $7.2 million declined by 14.4% and 11.6%, respectively. During both periods, the decrease is due to lower fixed and variable office costs resulting from efforts to lower overhead, including substantial savings in the second quarter from lower personnel costs.
Taxes - Income taxes were accrued at a tax rate of 37.5% for the first quarter and six months ended December 31, 2008 and December 31, 2007 representing the estimated annual tax rate for the fiscal years ending June 30, 2009 and 2008, respectively.
Financial Condition Analysis
As of December 31, 2008, consolidated total assets were up 12.1% to $433.3 million, compared to $386.6 million at June 30, 2008. The increase in total assets includes a $1.5 million decrease of the net investment in leases to $218.7 million, a 47.8% or $20.2 million increase in commercial loans to $62.4 million, a $57.7 million increase in investment securities to $64.1 million and a $25.8 million decrease in cash and equivalents, including federal funds sold.
Lease and Commercial Loan Portfolio Analysis
The Company's strategy is to develop lease and loan portfolios with risk/reward profiles that meet its objectives. The Company currently funds most new lease transactions internally, with a portion of lease receivables assigned to other financial institutions. During the first six months ended December 31, 2008, approximately 86% of the total dollar amount of new leases booked by the Company were held in its own portfolios, compared to 96% during the first six months of fiscal 2008. At December 31, 2008, the Company's net investment in leases decreased by $1.5 million from June 30, 2008. This decrease includes a $1.7 million decrease in the investment in estimated residual values offset by a slight increase in the net investment in lease receivables. The decrease in the investment in residual values is due to a larger volume of leases maturing than booked on which the Company realized a residual value. The Company's commercial loan portfolio increased $20.2 million to $62.4 million from June 30, 2008 and increased $56.7 million from December 31, 2007. The increase in loans held at the Bank since June 30, 2008 related to additional purchases of participations in syndicated transactions originated by other financial institutions.
The Company often makes payments to purchase leased property prior to the commencement of the lease. The disbursements for these lease transactions in process are generally made to facilitate the lessees' property implementation schedule. The lessee is contractually obligated by the lease to make rental payments directly to the Company during the period that the transaction is in process, and the lessee generally is obligated to reimburse the Company for all disbursements under certain circumstances. Income is not recognized while a transaction is in process and prior to the commencement of the lease. At December 31, 2008, the Company's investment in property acquired for transactions in process of $26.1 million related to approximately $57.1 million of approved lease commitments. This investment in transactions in process decreased from $29.0 million at June 30, 2008, which related to approved lease commitments of $100.2 million, and down from $28.0 million at December 31 2007, which related to approved lease commitments of $84.7 million. In addition to the approved lease commitments, CalFirst Bank had an unfunded loan commitment at December 31, 2008 of $1.0 million.
The Company monitors the performance of all leases and loans held in its own portfolio, transactions in process, as well as lease transactions assigned to lenders, if the Company retains a residual investment in the leased property subject to those leases. An ongoing review of all leases and loans ten or more days delinquent is conducted. 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 generally will be discontinued when the customer becomes ninety days or more past due on its payments to 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 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. There were no non-performing loans during the periods summarized below.
December 31,
2008 June 30, 2008
Non-performing Leases (dollars in thousands)
Non-accrual leases $ 2,381 $ 2,132
Restructured leases 282 398
Leases past due 90 days (other than above) - 39
Total non-performing leases $ 2,663 $ 2,569
Non-performing assets as % of net investment
in leases and loans before allowances 0.9 % 1.0 %
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The increase in non-performing leases at December 31, 2008 from June 30, 2008 is primarily due to one relationship placed on non-accrual, offset by payments received. In addition to the non-performing capital leases identified above, there was $2.2 million of investment in capital leases at December 31, 2008 for which management has concerns regarding the ability of the lessees to continue to meet existing lease obligations, compared to $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 . . .
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