CALIFORNIA FIRST LEASING CORP - Quarter Report: 2002 March (Form 10-Q)

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

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The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2001. The material under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is written with the presumption that the readers have read or have access to the 2001 Annual Report on Form 10-K, which contains Management's Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2001 and for the year then ended.

In the opinion of management, the unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the balance sheet as of March 31, 2002 and the statements of earnings for the three and nine month periods ended March 31, 2002 and 2001 and the statements of cash flows the for nine month periods ended March 31, 2002 and 2001. The results of operations for the nine month period ended March 31, 2002 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending June 30, 2002.

During the second quarter of fiscal 2002, the Company changed its income statement presentation to be more comparable to other bank holding companies. The new presentation results in the elimination of certain separate revenue and related cost amounts, as income from certain areas is now presented on a net basis in other income. Historically, the Company presented certain revenues and costs on a gross basis.

Certain reclassifications have been made to the third quarter of fiscal 2001 financial statements to conform with the presentation of the third quarter of fiscal 2002 financial statements.

NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS

On July 20, 2001, FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 provides that business combinations are to be accounted for under the purchase method and applies to all business combinations initiated or closed after June 30, 2001. SFAS 142 addresses how goodwill and other intangible assets should be accounted for in the financial statements and provides that goodwill and intangible assets acquired after June 30, 2001 will be subject immediately to the nonamortization and amortization provisions of SFAS 142. The Company does not expect the impact of the accounting requirements of SFAS No. 141 and SFAS 142 to be material to its financial position or results of operations.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). The objectives of SFAS 144 are to address significant issues relating to the implementation of FASB Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). Even though SFAS No. 144 supersedes SFAS No. 121, it retains the fundamental provisions of SFAS No. 121 for (1) the recognition and measurement of the impairment of long-lived assets to be held and used and (2) the measurement of long-lived assets to be disposed of by sale. SFAS 144 also requires that entities report discontinued operations separately from continuing operations and extends that reporting requirement to "a component of an entity" that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as "held for sale". SFAS No. 144 also amends the guidance of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" ("ARB 51") to eliminate the exception to consolidation for a temporarily controlled subsidiary. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company anticipates that the adoption of SFAS No. 144 will not have a significant effect on the Company's earnings or financial position.

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California First National Bancorp (the "Company") is a bank holding company. The Company has two leasing subsidiaries, Amplicon, Inc. ("Amplicon") and California First Leasing Corporation ("CFLC", collectively the "Leasing Companies") that are involved in the leasing and financing of computers, computer networks and other high technology assets. The leasing subsidiaries are also engaged in the re-marketing of leased assets at lease expiration. The operations of CFLC commenced on July 2, 2001. California First National Bank ("CalFirst Bank" or the "Bank"), which commenced operations on May 23, 2001, is a FDIC-insured national bank that gathers deposits using the telephone, the Internet, and direct mail, and leases capital assets to businesses and organizations and provides business loans to fund the purchase of assets leased by third parties.

The Company generates income from its leasing activities, the sale of leased property and from interest income earned on its cash and liquid investments. Direct finance income includes interest income earned on the Company's investment in lease receivables and residuals. Other income consists of operating and sales-type lease income, and gains on sales of leases and leased property presented on a net basis. Income from sales-type leases consist of the re-lease of leased property ("lease extensions") and new lease transactions that qualify as sales-type leases, generally where the fair value of the property subject to the lease differs from the Company's carrying cost. Income from operating leases generally involves the short-term rental of leased property. Gains on the sale of leases reflect gains recognized on the sale of leases in which the Company retains no significant continuing interest.

The Company's operating results are subject to quarterly and annual fluctuations resulting from a variety of factors, including the volume of new lease bookings, interest rate fluctuations, the volume and profitability from re-marketing leased property through re-lease or sale, variations in the mix of lease originations, the credit quality of its lease portfolios and economic conditions in general.

The Company conducts its leasing business in a manner designed to minimize its risks. However, the assumption of risk is a key source of earnings in the leasing and banking industry and the Company is subject to risks through its investment in lease transactions in process, investment in lease receivables held in its own portfolios and residual investments. The Company establishes reserves to cover such risks and regularly reviews their adequacy considering levels of non-performing leases, lessees' financial condition, leased property values as well as general economic conditions and credit quality indicators.

THREE MONTHS ENDED MARCH 31, 2002 AND 2001

Net direct finance and interest income after provision for credit losses decreased $1,566,000, or 33.3%, for the third quarter ended March 31, 2002 to $3,139,000, compared to $4,705,000 for the third quarter ended March 31, 2001. This decrease is primarily due to a $1,168,000 increase in the provision for credit losses, which in large part was due to the deterioration in the underlying credit of one large lease transaction in process. In addition, interest income on investments decreased by $328,000 to $309,000 for the third quarter of fiscal 2002, compared to $637,000 for the third quarter of the prior year, as a result of lower interest rates which offset an increase in average balances on the Company's cash and cash equivalents. Direct finance income of $4,439,000 for the three months ended March 31, 2002, was essentially unchanged when compared to $4,468,000 for the same period of the prior year, as the Company's yield on its investment in capital leases improved, offsetting a decline in the aggregate investment amount.

Other income decreased $346,000, or 4.8%, to $6,806,000 for the third quarter ended March 31, 2002, compared to $7,152,000 for the third quarter ended March 31, 2001. The decrease in other income reflects a decrease in operating and sales type lease income of $844,000, or 23.1%, to $2,806,000 for the third quarter of fiscal 2002, compared to $3,650,000 for the same quarter of the prior year, due to fewer lease extensions. The decrease in operating and sales type income was offset in part by an increase of $448,000, or 13.2%, in gain on sale of leases and leased property to $3,856,000 for the third quarter of fiscal 2002, compared to $3,406,000 for the same quarter of the prior year, resulting from a higher level of leased property sales.

Selling, general and administrative expenses decreased $1,509,000, or 29.1%, to $3,681,000 for the three months ended March 31, 2002 compared to $5,190,000 for the three months ended March 31, 2001. The decrease is primarily the result of steps taken to lower sales and overhead expenses during a period of economic uncertainty.

Taxes were accrued at a tax rate of 38.5% for the quarters ending March 31, 2002 and 2001, representing the estimated annual tax rate for the years ending June 30, 2002 and 2001.

NINE MONTHS ENDED MARCH 31, 2002 AND 2001

Net direct finance and interest income after provision for credit losses decreased $4,759,000, or 31.6%, for the nine months ended March 31, 2002 to $10,294,000, compared to $15,053,000 for the nine month period ended March 31, 2001. This decrease reflects a $3,604,000 increase in the provision for credit losses, due primarily to the deterioration in the underlying credit of one large lease transaction in process. In addition, interest income earned on cash and cash equivalents declined $1,719,000, reflecting the decline in interest rates and despite a slight increase in average balances. These decreases were offset slightly by a $629,000, or 5.0% increase in direct finance income resulting from a higher average balance of net receivables retained in the Company's own portfolios.

Other income decreased $498,000, or 2.7%, to $17,750,000 for the nine month period ended March 31, 2002, compared to $18,248,000 for the nine month period ended March 31, 2001. This included a significant increase in the gain on sales of leases and leased property of $3,381,000, or 41.1%, due to a higher level of leased property sales. Offsetting this increase was a decrease in operating and sales-type lease income of $4,561,000, or 47.0%, resulting from fewer lease extensions.

Selling, general and administrative expenses decreased $3,263,000, or 22.8%, to $11,079,000 for the nine months ended March 31, 2002, compared to $14,342,000 for the nine months ended March 31, 2001. The decrease is primarily the result of steps taken to lower sales and overhead expenses during a period of economic uncertainty.

Taxes were accrued at a tax rate of 38.5% for the nine months ended March 31, 2002 and 2001, representing the estimated annual tax rate for the years ending June 30, 2002 and 2001.

LIQUIDITY AND CAPITAL RESOURCES

The Company funds its operating activities through internally generated funds, nonrecourse debt and bank deposits. The Leasing Companies' capital expenditures for leased property purchases are often financed by assigning certain base term lease 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. The Company does not purchase property until it has received a noncancelable lease from its customer. At March 31, 2002, the Leasing Companies had outstanding nonrecourse debt aggregating $81,273,000 relating to property under capital leases. In the past, the Leasing Companies have been able to obtain adequate nonrecourse funding commitments, and management believes they will be able to do so in the future.

In an effort to better utilize available cash balances, the Company has increased the level of new lease transactions held for the Company's benefit, rather than assigning the leases to unaffiliated financial institutions. The Company's minimum lease payments receivable decreased $14,000 to $93,509,000 as of March 31, 2002, from $93,495,000 at June 30, 2001, and increased $1,242,000 as compared to $92,267,000 as of March 31, 2001.

The Company will often make payments to purchase leased property prior to the commencement of a lease. The disbursements for such lease transactions in process are generally made to facilitate the property implementation schedule of the lessees. The lessee is contractually obligated by the lease to make rental payments during the period that the transaction is in process, and the lessee is generally obligated to reimburse the Company for all disbursements under certain circumstances. At March 31, 2002, the Company's investment in property acquired for transactions in process was $19,534,000, a decrease of $956,000 when compared to June 30, 2001.

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In April 1999 and April 2001, the Board of Directors authorized management, at its discretion, to repurchase up to 600,000 and 1,000,000 shares of common stock, respectively. During the nine months ended March 31, 2002, 94,000 shares were repurchased for $1,077,000. As of April 30, 2002, 905,356 shares remain available under the April 2001 authorization. All shares available under the April 1999 authorization have been purchased.

The need for cash used for operating activities will increase as the Company expands. The Company believes that existing cash balances, cash flow from operations, cash flows from its financing and investing activities, and assignments (on a nonrecourse basis) of anticipated lease payments will be sufficient to meet its foreseeable financing needs.

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

FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. Factors that might affect forward-looking statements include, among other things: (i) general economic or industry conditions could be less favorable than expected, resulting in a reduced demand for capital assets, deterioration in credit quality, and a change in the allowance for credit losses; (ii) changes in the domestic interest rate environment could reduce interest income and could increase credit losses; (iii) CalFirst Bank is a start-up bank and may not attract or retain sufficient deposits at attractive interest rates to fund its lease portfolio, and therefore could require additional investment by the Company, produce lower lease growth and greater losses; (iv) security breaches, systems failures, computer viruses or other similar events could damage CalFirst Bank's reputation, or Internet banks in general, and inhibit the ability to raise deposits; (v) the conditions of the securities markets could change, adversely affecting the value or credit quality of the Company's assets, or the availability and terms of funding necessary to meet the Company's liquidity needs; (vi) changes in the extensive laws, regulations and policies governing financial services companies could alter the Company's business environment or affect operations; (vii) catastrophic events could impair the Company's business operations or systems, or that of its lessees, resulting in losses; and (viii) all the above factors could impact the Company's ability to remain in compliance with commitments made to federal bank regulators in connection with the formation of CalFirst Bank. The result of these and other factors could cause a difference from expectations of the risk characteristics of the lease portfolio, the level of defaults and a change in the provision for loan and lease losses. Forward-looking statements speak only as of the date made. The Company undertakes no obligations to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.

CALIFORNIA FIRST NATIONAL BANCORP

There was one report on Form 8-K filed during the three months ended March 31, 2002. The report filed January 25, 2002 was regarding the Company's press release on the financial results for the three and six months ended December 31, 2001 and certain other information.

               (a) Exhibits

                     None

 

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CALIFORNIA FIRST NATIONAL BANCORP

SIGNATURE

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		California First National Bancorp
		Registrant
DATE: May 13, 2002	BY:	S. LESLIE JEWETT /s/
		S. LESLIE JEWETT
		Chief Financial Officer (Principal Financial and Accounting Officer)

 

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