CALIFORNIA FIRST LEASING CORP - Annual Report: 2008 (Form 10-K)
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year
ended
June
30, 2008______________
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the
transition period
from
______________ to ______________
Commission
File number 0-15641
CALIFORNIA
FIRST NATIONAL BANCORP
(Exact
name of registrant as specified in its charter)
|
California
|
33-0964185
|
|
(State
or other jurisdiction of Incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
18201
Von Karman Avenue, Suite 800, Irvine, CA 92612
(Address
of principal executive offices)
|
Registrant's
telephone number, including area code:
|
(949)
255-0500
|
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of Each
Class
|
Name of Each Exchange
on Which Registered
|
|
|
Common
Stock, $.01 par value
|
The
NASDAQ Stock Market LLC
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act
Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act
Yes o No þ
Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer, large accelerated filer and smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large accelerated
filer o
|
Accelerated filer o
|
Non-accelerated filer o
|
Smaller reporting
company þ
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
o No þ
The
aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of December 31, 2007 was $33,099,000. Number of shares
outstanding as of September 19, 2008: Common Stock 10,159,195.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III
incorporates information by reference from Registrant's definitive Proxy
Statement to be filed with the Commission within 120 days after the close of the
Registrant's fiscal year ended June 30, 2008.
California
First National Bancorp and Subsidiaries
TABLE
OF CONTENTS
1
California
First National Bancorp and Subsidiaries
California First National Bancorp, a
California corporation (the “Company”), is a bank holding company headquartered
in Orange County, California with leasing and bank subsidiaries. The Company has
two leasing subsidiaries, California First Leasing Corporation (“CalFirst
Leasing”) and Amplicon, Inc. (“Amplicon”), collectively, the “Leasing Companies”
and a bank subsidiary, California First National Bank (“CalFirst Bank” or the
“Bank”), which is an FDIC-insured national bank.
The Leasing Companies and CalFirst
Bank focus on leasing and financing capital assets, primarily computer systems
and networks and other technology-based assets, through centralized marketing
programs designed to offer cost-effective leasing alternatives. Leased assets
are re-marketed at lease expiration through sale or re-lease. CalFirst Bank also
purchases finance receivables from the Leasing Companies and other third
parties, and has expanded into commercial loans. CalFirst Bank
gathers deposits from a centralized location primarily through posting rates on
the Internet.
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. Risk Factors” of this report. All forward-looking statements are
qualified in their entirety by this cautionary statement and the Company
undertakes no obligation to revise or update any forward-looking statements to
reflect events or circumstances arising after the date on which they were
made.
Leasing
Activities
The Company leases and finances most
capital assets used by businesses and organizations, with a focus on high
technology equipment and software systems. The leases are structured
individually and can provide end-of-term options to accommodate a variety of our
customers’ objectives. Approximately 34% and 39% of the leases booked
in fiscal 2008 and 2007, respectively, involved computer workstations and
networks, mid-range computers and computer software. Other major property groups
during fiscal 2008 included furniture and fixtures (19%), manufacturing
equipment (18%), medical equipment (8%), transportation (8%), and
telecommunications systems (6%).
Computer Systems.
Advances in technology, including the continually expanding capabilities of
computer systems and the Internet, have led to ongoing demand for more powerful
computer servers and communications networks. Computer networks typically
consist of a central server, which may be a mid-range computer or high-end
microcomputer, multiple personal computers and workstations, network
communications hardware and software, printers and associated
products. Computer networks generally range in cost from $100,000 to
$3,000,000. The computer systems and network products leased are
manufactured by Apple Computers, Inc. (“Apple”), Cisco Systems, Inc. (“Cisco”),
Dell Inc. (“Dell”), Gateway, Inc. (“Gateway”), Hewlett-Packard Company ("HP"),
International Business Machines Corporation ("IBM"), and Lenova Group, Ltd,
among many others.
Software. Specialized
application software packages and operating system software represent a
significant portion of property leased. These application software packages
typically range in cost from $50,000 to $1,000,000. In addition to
leasing stand-alone software packages, an increasing percentage of the cost of
computer systems and networks consists of operating and application software.
The software leased is acquired from vendors such as Microsoft Corporation,
Oracle Corporation, Jenzabar, Inc., Parametric Technology Corporation, Infor
Global Solutions, MSC Software Corporation, and SAP AG, among many
others.
2
California First National Bancorp and
Subsidiaries
Other Electronic and
Production Equipment. Advances in technology have expanded the scope of
other computer-based equipment utilized by our customer base. Leased
property includes automated manufacturing and distribution management systems
that include complex computer controlled manufacturing and production systems,
printing presses and warehouse distribution systems. Telecommunications systems
include digital private branch equipment and switching equipment and more
recently has expanded toward Voice over Internet Protocol (“VoIP”) systems,
wireless networks and satellite tracking systems. Retail
point-of-sale and inventory tracking systems often integrate computers, scanners
and software. Other electronic equipment leased includes ultrasound and medical
imaging systems, computer-based patient monitoring systems, testing equipment,
and copying equipment.
A wide variety of personal property
in the “non-high technology” area, including machine tools, school buses,
trucks, exercise equipment and office and dormitory furniture are also
leased.
Marketing
Strategy
The
Company’s subsidiaries market through centralized programs and direct delivery
channels, including the telephone, the Internet, facsimile and overnight mail.
The marketing programs include a confidential database of current and potential
users of business property, a training program to introduce new marketing
employees to leasing, and an in-house computer and telecommunications system.
The marketing programs have been augmented through the expanded use of web sites
and email to identify and communicate with potential customers.
The Company believes that a
centralized marketing program is more cost effective than branches or field
sales representatives. Marketing through the telephone or the Internet, rather
than through field sales representatives, has enabled us to limit selling,
general and administrative expenses and allows the Company to offer more
competitive rates to customers.
Potential customers are identified
through a variety of methods. Lists of target market participants and computer
users are purchased from private sources and direct mail. Telephone and email
campaigns are conducted to generate sales leads, and sales professionals
maintain proprietary records of contacts made with potential customers. Prospect
management software is utilized to enhance the productivity of the sales force.
Specific information about potential customers is entered into a confidential
database accessible to sales professionals and their managers. As potential
customers are contacted, the database is updated and supplemented with
information about what computer and other property they are using, related lease
expiration dates and any future system needs or replacement plans. The database
allows sales professionals to efficiently identify the most likely purchaser or
lessee of capital assets and to concentrate efforts on these prospective
customers.
The databases, combined with the
respective prospect management software and an integrated in-house
telecommunications system, permit sales management to monitor account executive
activity, daily prospect status and pricing information. The ability to monitor
account activity and offer immediate assistance in negotiating or pricing a
transaction makes it possible to be responsive to customers and
prospects.
Capital
Leases
Leases are generally for initial
terms ranging from two to five years. Substantially all leases are
non-cancelable "net" leases which contain "hell-or-high-water" provisions under
which the lessee must make all lease payments regardless of any defects in the
property, and which require the lessee to maintain and service the property,
insure the property against casualty loss and pay all property, sales and other
taxes. The Leasing Companies or the Bank retain ownership of the property they
lease, and in the event of default by the lessee, they, or the lender to whom
the lease may have been assigned, may declare the lessee in default, accelerate
all lease payments due under the lease and pursue other available remedies,
including repossession of the property. Upon the expiration of the leases, the
lessee typically has an option, which is dependent upon each lease's defined end
of term options, to either purchase the property at a negotiated price, or in
the case of a "conditional sales contract," at a predetermined minimum price, or
to renew the lease. If the original lessee does not exercise the purchase
option, once the leased property is returned, the Leasing Companies or CalFirst
Bank will seek to sell the leased property. The terms of the software
leases are substantially similar to property leases.
3
California First National Bancorp and
Subsidiaries
The Leasing Companies and CalFirst
Bank conduct their leasing business in a manner designed to minimize risk,
however, they are subject to risks through their investment in lease receivables
held in their own portfolio, lease transactions in process, and residual
investments. The Leasing Companies and CalFirst Bank do not purchase leased
property until they have received a binding non-cancelable lease from the
customer. A portion of the Leasing Companies’ lease originations are
discounted to banks or finance companies, including CalFirst Bank, on a
non-recourse basis at fixed interest rates that reflect the customers' financial
condition. The lender to which a lease has been assigned has no recourse against
the Leasing Companies, unless the Leasing Companies are in default under the
terms of the agreement by which the lease was assigned. The
institution to which a lease has been assigned may take title to the leased
property, but only in the event the lessee fails to make lease payments or
otherwise defaults under the terms of the lease. If this occurs, the Leasing
Companies may not realize their residual investment in the leased
property.
Lease
Portfolio
The Company has pursued a strategy of
retaining lease transactions in its own portfolios. During the fiscal
years ended June 30, 2008, 2007 and 2006, 92%, 97% and 91%, respectively, of the
total dollar amount of new leases completed by the Company’s subsidiaries were
retained in the Company’s portfolios, with 8%, 3% and 9% for fiscal years 2008,
2007 and 2006, respectively, of such leases discounted to unaffiliated financial
institutions. Approximately 40% and 33% of the new leases booked by the Leasing
Companies were assigned to CalFirst Bank during fiscal 2008 and 2007,
respectively.
The Leasing Companies apply a
portfolio management system intended to develop portfolios with different
risk/reward profiles. Each lease transaction held by the Leasing Companies must
meet or exceed certain credit or profitability requirements established, on a
case-by-case basis, by the credit committee for the portfolio. Through the use
of non-recourse financing, the Leasing Companies avoid risks that do not meet
their risk/reward requirements. Certain portfolios hold leases where the credit
profile of the lessee or the value of the underlying leased property is not
acceptable to other financial institutions. At June 30, 2008, 2007,
and 2006, the discounted minimum lease payments receivable related to leases
retained in the Leasing Companies’ portfolio amounted to $85.4 million, $97.2
million and $103.2 million, respectively. Such amounts represented 41%, 44% and
51% of the Company’s total investment in discounted lease payments receivable at
June 30, 2008, 2007 and 2006, respectively.
The Bank’s strategy is to develop a
conservative, diversified portfolio of leases with high credit quality lessees.
The Bank’s credit committee has established underwriting standards and criteria
for the lease portfolio and monitors the portfolio on an ongoing basis. The Bank
performs an independent credit analysis and due diligence on each lease
transaction originated or purchased. The committee applies the same underwriting
standards to all leases, regardless of how they are sourced. At June 30, 2008,
2007 and 2006, the Bank’s net investment in lease payments receivable amounted
to $124.1 million, $124.8 million and $101.1 million or 59%, 56% and 49%,
respectively, of the Company’s total portfolio. Of such amounts,
approximately 62%, 63% and 62%, respectively, represented leases originated
directly by the Bank.
Through its lease purchase
operations, the Bank purchases lease receivables on a non-recourse basis at
fixed interest rates that reflect the proposed lessee's financial condition and
current market conditions. The Bank does not assume any obligations as lessor
for these transactions, and the original lessor retains ownership of any
underlying asset, with the Bank taking a priority first lien position. The Bank
verifies the completeness of all lease documentation prior to purchase, to
confirm that all documentation is correct and held, that liens have been
perfected, and legal documentation has been filed as appropriate. Pursuant to
the Bank’s operating plan approved by regulators, no more than 50% of its lease
and loan portfolio will represent lease receivables purchased from the Leasing
Companies.
4
California First National Bancorp and
Subsidiaries
The Leasing Companies and the Bank
often make payments to purchase leased property prior to the commencement of the
lease. The disbursements for such lease transactions in process are
generally made to facilitate the property implementation schedule of the
lessees. The lessee generally is contractually obligated to make
rental payments during the period that the transaction is in process, and
obligated to reimburse the Leasing Companies or the Bank 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, 2008, 2007, and 2006, the Company’s total investment in property acquired
for transactions in process amounted to $29.0 million, $34.7 million and $41.7
million, respectively. Of such amounts, approximately 70%, 79% and 76%,
respectively, for each year related to the Leasing Companies, with the balance
held by CalFirst Bank.
Commercial
Loans
During fiscal 2008, CalFirst Bank
expanded into commercial loans through a direct origination effort and by
purchasing participations in syndicated transactions originated by other
financial institutions. Direct loan origination is targeted primarily to
existing Bank and Leasing Companies’ relationships. The commercial loans are a
complementary product leveraging existing relationships, extending customer
longevity and providing an additional source for bank deposits from these
customers. Commercial loan products originated directly include lines of credit, term loans and commercial mortgages and generally will
be secured by a first priority filing on the customer’s assets, including
accounts receivable and inventory, capital equipment or commercial real estate,
but unsecured loans or lines of credit will be considered, depending on the
nature of the credit. Commercial loans originated directly have included lines
of credit that renew annually, as well as commercial mortgages with terms from
five to ten years, priced with both fixed or floating rates. Our commercial loans
directly originated as of June 30, 2008 ranged in amount from approximately
$800,000 to $6.5 million.
Syndicated bank loans have structures
ranging from working capital loans secured by accounts receivable and
inventories, term loans secured by fixed assets to leveraged loans based on
operating cash flow and enterprise valuation. Loans are generally priced at
variable rates, and all are made to larger corporations with debt ratings of BB
or Ba, or higher, as rated by Standard & Poors or Moody’s Investors Service, respectively. All
have been purchased from major money-center banking institutions. The syndicated
loan customers are diversified across industries, and the loans have ranged in
size from $1 million to $5 million, with terms from four to six years
remaining.
The Bank’s underwriting standards for
commercial loans have been maintained in accordance with its existing credit
policies. The commercial lending policy requires each loan, regardless of
whether it is directly originated or purchased through syndication, to have
viable repayment sources. The risks associated with loans in which the Bank
participates as part of a syndicate of financial institutions are similar to
those of directly originated commercial loans; however, additional risks may
arise from the Bank’s limited ability to control actions of the syndicate.
Existing staff, including documentation, lien perfection, funding, payments and
collections administer loan operations. The Bank’s current computer systems are
capable of fully processing loans and have the requisite connectivity to the
Company’s accounting, customer service and collections processes.
CalFirst Bank began actively pursuing
commercial loans during the last half of fiscal 2007, although no loans were
closed during fiscal 2007. The first meaningful loans were boarded during the
first quarter of fiscal 2008. The volume of commercial loan
transactions funded during fiscal 2008 was $44.3 million, of which $32.0 million
were purchased under syndication. Yields earned on commercial loans tend to be
lower than yields earned on lease transactions, but the average life or duration
of the investment is longer.
Credit Risk
Management
The Company’s strategy for credit
risk management includes stringent credit authority centered at the most senior
levels of management. The strategy also emphasizes diversification on both a
geographic and customer level, and spreading risk across a breadth of leases and
loans while minimizing the risk to any one area. The credit process includes a
policy of classifying all leases and loans in accordance with a risk rating
classification system, monitoring changes in the risk ratings of lessees,
identification of problem leases and loans and special procedures for the
collection of problem leases and loans. The lease and loans classification
system is consistent with regulatory models under which leases and loans may be
rated as “pass”, “special mention”, “substandard”, “doubtful” or
“loss”.
5
California First National Bancorp and
Subsidiaries
The day-to-day management and
oversight of the Leasing Companies’ portfolios is conducted by an Asset
Management (“AM”) group that reports directly to the Chief Financial Officer.
The AM group monitors the performance of all leases held in the Leasing
Companies’ portfolio, transactions in process as well as lease transactions
assigned to lenders, if the Leasing Companies retain a residual investment in
the leased property subject to the lease. The AM group conducts an ongoing
review of all leases 10 or more days delinquent. The AM group contacts the
lessee directly and generally sends the lessee a notice of non-payment within 15
days after the due date. In the event that payment is not then received, senior
management becomes involved. Delinquent leases are coded in the AM tracking
system in order to provide management visibility, periodic reporting, and
appropriate reserves. Legal recourse is considered and promptly undertaken if
alternative resolutions are not obtained. At 90 days past due, leases
will be placed on non-accrual status such that interest income related to the
lease no longer accretes into income.
The Bank internally funds all Bank
originations and lease and loan purchases, and consequently, the Bank retains
the credit risk on such leases and loans. The AM group at the Leasing
Companies provides servicing to the Bank on its lease portfolio and, as
servicer, maintains a delinquency reporting and monitoring system to identify
potential problems in the Bank’s portfolio early, and provide Bank management
with information in a timely manner. The Bank utilizes strategies
similar to those used on the Leasing Companies’ portfolio.
Allowance for Credit
Losses
The allowance for credit losses is an
estimate of probable and assessable losses in the Company’s lease and loan
portfolios applying the
principles of 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 recorded is based on a quarterly review of all
leases and loans outstanding 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 portfolios. The primary
responsibility for setting reserves resides with the Chief Financial Officer,
who reports quarterly to the Company’s Audit Committee and Board of Directors
regarding overall asset quality, problem leases and loans and the adequacy of
valuation allowances.
The Company individually analyzes the
net book value of each non-performing or problem lease and loan to determine
whether the carrying value is less than or equal to the expected recovery
anticipated to be derived from lease or loan payments, additional collateral or
residual realization. The amount estimated as unrecoverable is recognized as a
reserve specifically identified for the lease or loan. An analysis of the
remaining portfolio is conducted, taking into account recent loss experience,
known and inherent risks in the portfolio, levels of delinquencies, adverse
situations that may affect the customer’s ability to repay, trends in
volume and current and anticipated economic conditions in the market. This
portfolio analysis includes a stratification of the lease and loan portfolio by
risk classification and estimation of potential losses based on risk
classification. The composition of the portfolio based on risk ratings is
monitored, and changes in the overall risk profile of the portfolio is factored
into the evaluation of inherent risks in the portfolio. Regardless of the extent
of the Company's analysis of customer performance or portfolio evaluation,
certain inherent but undetected losses are probable within the lease and loan
portfolio. This is due to several factors including inherent delays in obtaining
information regarding a customer’s financial condition or change in business
conditions; the judgmental nature of individual credit evaluations and
classification, and the interpretation of economic trends; volatility of
economic or customer-specific conditions affecting the identification and
estimation of losses and the sensitivity of assumptions utilized to establish
allowances for losses, among other factors. Therefore, an estimated inherent
loss not based directly on the specific problem assets is recorded as an
unallocated allowance. The level of such unallocated allowance is
determined based on a review of prior years’ loss experience, and may vary
depending on general market conditions. The aggregate allowance in any one
period is apportioned between allowance for doubtful accounts and allowance for
valuation of residual value.
Bank management reports monthly to
the Bank’s Board of Directors regarding overall asset quality, the adequacy of
valuation allowances and adherence to policies and procedures regarding asset
classification and valuation. A key component to the evaluation is the internal
lease and loan classification process. The Bank's classification of
its assets and the amount of its valuation allowances are subject to review by
regulators who can order the establishment of additional loss
allowances.
6
California First National Bancorp and
Subsidiaries
Banking Operations
The Bank is focused on gathering
deposits from depositors nationwide for the primary purpose of funding its
investment in capital leases and loans. The Bank’s strategy is to be a low cost
producer through marketing its products and services directly to end-users. The
Bank believes that its operating costs generally will be lower than those of
traditional "bricks and mortar" banks because it does not have the expense of a
traditional branch network to generate deposits and conduct
operations.
Deposit
Products
The Bank’s deposits have been
gathered primarily through the Internet. Other strategies to identify depositors
are through direct mail, telephone campaigns, purchase of leads from private
sources and more extensive print advertisements. The Bank offers two types of
interest-bearing checking accounts, savings accounts and three (3) month to
three (3) year certificates of deposit (“CDs”) to taxable and IRA depositors.
CDs are offered with varying maturities in order to achieve a fair approximation
or match of the average life of the Bank’s lease and loan
portfolio. With leases generally providing for fixed rental rates, a
matching fixed rate CD book is intended to allow the Bank to minimize interest
rate fluctuation risk. Most of the Bank’s commercial loans are floating rate.
The Bank generally offers interest rates on deposit accounts that are higher
than the national average.
To open a new account, a customer can
complete an on-line enrollment form on the Bank’s Web site, or can call the
Bank’s toll-free customer service number and open an account telephonically.
Signature cards and deposits are then mailed to the Bank. Customers can make
deposits by wire transfer, via direct deposit programs, or by mail. No teller
line is maintained. The Bank’s customers have 24-hour access to account
information. Customers can view their banking records and current balances, and
transfer funds between accounts through the use of personal
computers. They can also pay bills on-line. Each customer
automatically receives a free ATM card upon opening an account. In order to
obtain cash, the Bank’s customers use other banks’ automated teller machines
that are affiliated with the Plusä system. The Bank generally
will reimburse customers for some portion of any ATM fees charged by other
financial institutions. The Bank believes that any inconvenience resulting from
the Bank not maintaining automated teller machines or a local branch office will
be offset by the Bank’s higher investment yields and lower banking
fees.
As part of the Bank’s entry into
broader services for commercial customers, CalFirst Bank has undertaken a plan
to provide on-line cash management services for its commercial loan customers.
Leveraging on its existing Internet banking platform, the Bank has the ability
to implement remote deposit capture systems at selected customer sites.
Customers will be provided with a desktop scanner that will allow the customer
to scan items for deposit and electronically send images of the items securely
to the Bank’s electronic banking system. These systems are attractive
to commercial customers who will be able to perform more banking functions
on-site, avoid courier and other costs and enhance cash flow through faster
access to payments received. The Bank believes this innovative service will
provide an advantage in growing the commercial loan and deposit
base. The first remote deposit capture systems were installed during
the third quarter of fiscal 2008.
Operations
The Bank’s operations have been
developed by outsourcing certain principal operational functions to leading bank
industry service providers and by sharing established systems utilized by the
Leasing Companies or the Company. Outsourced systems include the Bank’s core
processing and electronic banking system, electronic bill payment systems and
depositary services, including item processing. The Bank believes it
benefits from the service provider's expertise and investments in developing
technology. A critical element to the Bank’s success is the ability to provide
secure transmission of confidential information over the Internet. The Bank’s
service providers utilize sophisticated technology to provide maximum security.
All banking transactions are encrypted and all transactions are routed from the
Internet server through a "firewall" that limits access to the Bank’s and
service provider’s systems. Systems are in place to detect attempts by third
parties to access other users' accounts and feature a high degree of physical
security, secure modem access, service continuity and transaction monitoring.
The Bank has implemented the two-factor authentication security to its Internet
banking procedures and platform.
7
California First National Bancorp and
Subsidiaries
The
Leasing Companies provide certain services to the Bank pursuant to formal
agreements, including servicing the Bank’s lease portfolio on the Bank’s
behalf.
Investments
In addition to leases, the Company
had total investment securities of $78.2 million at June 30, 2008 compared to
$48.7 million at June 30, 2007. The investment portfolio primarily consisted of
short-term money market securities and federal funds sold, but also includes
interest-earning deposits with banks, Federal Reserve Bank and Federal Home Loan
Bank stock and other investments. The Company is authorized to invest
in high-quality United States agency obligations, mortgage backed securities,
investment grade corporate bonds and municipal securities and selected preferred
and equity securities.
Customers
Leasing and loan customers are
primarily middle-market companies, subsidiaries and divisions of Fortune 1000
companies, private and state-related educational institutions, municipalities
and other not-for-profit organizations and institutions located throughout the
United States. The Company does not believe the loss of any one customer would
have a material adverse effect on its operations taken as a whole.
The Bank’s deposit customers are
individuals from across the nation who place a substantial portion of their
savings in safe, government-insured investments and businesses that spread their
liquid investments among a breadth of banks in order to ensure that they are
government insured. Such depositors are seeking to maximize their interest
income and, therefore, are more inclined to move their investments to a bank
that offers the highest yield regardless of the geographic location of the
depository.
Competition
The Company competes for the lease
and loan financing of capital assets with other independent leasing companies,
commercial finance companies, banks and other financial institutions, credit
companies affiliated with equipment manufacturers, such as IBM, Dell, and HP,
and equipment brokers and dealers. Many of the Company's competitors have
substantially greater resources, capital, and more extensive and diversified
operations than the Company. The Company believes that the principal competitive
factors are rate, responsiveness to customer needs, flexibility in structuring
lease financing and loans, financial technical proficiency and the offering of a
broad range of financing options. The level of competition varies depending upon
market and economic conditions, the interest rate environment, and availability
of capital. Competition has increased in recent years as developments in the
capital markets have increased access to capital to certain lenders that offer
aggressive rates. Competition has also been heightened as credit companies
affiliated with manufacturers have become more aggressive with respect to the
financing terms offered.
The Bank competes with other banks
and financial institutions to attract deposits. The Bank faces competition from
established local and regional banks and savings and loan institutions. Many of
them have larger customer bases, greater name recognition and brand awareness,
greater financial and other resources and longer operating histories. The market for
Internet banking has seen increased competition over the past several years as
large national banks have deployed and aggressively promoted their own on-line
banking platforms. These competitors have improved the functionality, dropped
the fees and increased rates offered on on-line deposit accounts. Additionally,
new competitors and competitive factors are likely to emerge with the continued
development of Internet banking.
Supervision and
Regulation
The
Company is a bank holding company within the meaning of the Bank Holding Company
Act of 1956, as amended, and is registered with, regulated and examined by the
Board of Governors of the Federal Reserve System (the “FRB”). In addition to the
regulation of the Company, the Bank is subject to extensive regulation and
periodic examination, principally by the Office of the Comptroller of the
Currency (“OCC”). The Bank’s deposits are insured up to $100,000 by the Federal
Deposit Insurance Corporation (“FDIC”) and the Bank is a member bank within the
San Francisco Federal Reserve district.
8
California First National Bancorp and
Subsidiaries
The
Bank Holding Company Act, the Federal Reserve Act, and the Federal Deposit
Insurance Act subject the Company and the Bank to a number of laws and
regulations. The primary concern of banking regulation is “Safety and Soundness”
with an emphasis on asset quality and capital adequacy. These laws and
regulations also encompasses a broad range of other regulatory concerns
including insider transactions, the adequacy of the allowance for credit
losses, inter-company transactions, regulatory reporting, adequacy of systems of
internal controls and limitations on permissible activities. The
federal banking agencies possess broad powers to take corrective action as
deemed appropriate for an insured depository institution and its holding
company. The FRB routinely examines the Company, which exam includes the Leasing
Companies. The OCC, which has primary supervisory authority over the
Bank, regularly examines banks in such areas as reserves, loans, investments,
management practices, and other aspects of operations. These examinations are
designed for the protection of the Bank’s depositors rather than the Company’s
shareholders. The Bank must furnish annual and quarterly reports to the OCC,
which has the authority under the Financial Institutions Supervisory Act to
prevent a national bank from engaging in an unsafe or unsound practice in
conducting its business. Many of these laws and regulations have undergone
significant change in recent years. Future changes to these laws and
regulations, and other new financial services laws and regulations are likely,
and cannot be predicted with certainty.
Under FRB policy, the Company is
expected to serve as a source of financial and managerial strength to the Bank
and, under appropriate circumstances, to commit resources to support the Bank.
Certain loans by the Company to the Bank would be subordinate in right of
payment to deposits in, and certain other indebtedness of, the
Bank.
Among the regulations that affect the
Company and the Bank are provisions of Section 23A of the Federal Reserve Act.
Section 23A places limits on the amount of loans or extensions of credit the
Bank may make to affiliates and the amount of assets purchased from affiliates,
except for transactions exempted by the FRB. The aggregate of all of the above
transactions is limited in amount, as to any one affiliate, to 10% of a bank’s
capital and surplus and, as to all affiliates combined, to 20% of a bank's
capital and surplus. The Bank and the Company must also comply with certain
provisions designed to avoid the Bank buying low-quality assets. The Company and
the Bank are also subject to the provisions of Section 23B of the Federal
Reserve Act which, among other things, prohibits an institution from engaging in
transactions with affiliates unless the transactions are on terms substantially
the same, or at least as favorable to the institution as those prevailing at the
time for comparable transactions with non-affiliated companies. All services
provided by the Company or its subsidiaries to the Bank are in accordance with
this provision.
In December 2002, the FRB approved
Regulation W (“Reg. W”), which implements, interprets and applies statutory
provision in sections 23A and 23B, and became effective April 1, 2003. Under
Reg. W, a bank does not have to comply with the quantitative limits of Section
23A when making a loan or extension of credit to an affiliate if 1) the
extension of credit was originated by the affiliate; 2) the bank makes an
independent evaluation of the creditworthiness of the borrower and commits to
purchase the extension of credit before the affiliate makes or commits to make
the extension of credit; 3) the bank does not make a blanket advance commitment
to purchase loans from the affiliate and 4) the dollar amount of all purchases
over any 12 month period by the bank from an affiliate does not represent more
than 50% of that affiliate’s credit extensions during such period. The Company
believes the Bank’s purchase of lease receivables from the Leasing Companies
conform to the requirements of Reg. W. In addition, the Company has agreed with
the FRB that the Bank’s purchase of leases from the Leasing Companies will not
exceed 50% of the Bank’s lease portfolio.
At the time that Reg. W was published
in December 2002, the FRB proposed for public comment an amendment to Reg. W
that would limit the amount of extensions of credit that a bank could purchase
from an affiliate to 100% of the bank’s capital and surplus. If Reg. W is
amended in accordance with this proposal, the ability of the Bank to purchase
lease receivables from the Leasing Companies would be impacted. The final
structure of Reg. W cannot be determined at this time, and there are no
assurances that future regulations or interpretations from the FRB will not
limit further or prohibit the Bank’s purchases of leases from the Leasing
Companies.
9
California First National Bancorp and
Subsidiaries
In
connection with its approval of the Company’s purchase of the stock of the Bank,
the FRB and the OCC required the Company and the Bank to make certain
commitments with respect to the operation of the Bank. During fiscal 2006, in
light of the Bank’s achievement of profitability, the commitments were modified
to include the following on an on-going basis: (i) the Bank and the Company have
entered into a binding written agreement setting forth the Company’s obligations
to provide capital maintenance and liquidity support to the Bank, if and when
necessary; (ii) the Bank must obtain prior approval from the OCC before
implementing any significant deviation or change from its original operating
plan; and (iii) the Company must comply with Reg. W.
Bank
holding companies are subject to risk-based capital guidelines adopted by the
FRB. The Company currently is required to maintain (i) Tier 1 capital
equal to at least six percent of its risk-weighted assets and (ii) total capital
(the sum of Tier 1 and Tier 2 capital) equal to ten percent of risk-weighted
assets. The FRB also requires the Company to maintain a minimum Tier 1 "leverage
ratio" (measuring Tier 1 capital as a percentage of adjusted total assets) of at
least five percent. At June 30, 2008 and 2007, the Company exceeded all these
requirements. The Company is not required to and does not intend to comply with
revised capital adequacy regulations and standards based on an accord of the
Basel Committee on Banking Supervision (“BIS II”).
The Bank is also subject to
risk-based and leverage capital requirements mandated by the OCC. In general,
banks are required to maintain a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risk-based guidelines, banks are
generally required to maintain a minimum ratio of Tier 1 capital to adjusted
total assets, referred to as the leverage ratio, of 4%. At June 30, 2008 and
2007, the Bank had capital in excess of all minimum risk-based and leverage
capital requirements.
Under the Community Reinvestment Act
(“CRA”), the Bank has a continuing and affirmative obligation, consistent with
safe and sound operation, to help meet the credit needs of their entire
communities, including low- and moderate-income neighborhoods. CalFirst Bank is
designated as a wholesale institution for CRA purposes. To evaluate the CRA
performance of banks with this designation, regulatory agencies use the
community development test. This includes an assessment of the level and nature
of the Bank’s community development lending, investments and services. The CRA
requires the OCC, in connection with its examination of the Bank, to assess and
assign one of four ratings to the Bank’s record of meeting the credit needs of
its community. The CRA also requires that the Bank publicly disclose their CRA
ratings. During fiscal 2008, CalFirst Bank was subjected to a CRA examination
and received a “satisfactory” rating on the CRA performance
evaluation.
The Bank is a member of the Deposit
Insurance Fund (“DIF”) maintained by the FDIC. Through the DIF, the FDIC
insures the deposits of the Bank up to prescribed limits for each depositor. The
FDIC utilizes a risk-based assessment system that imposes insurance premiums
based upon a risk matrix that takes into account a bank’s capital level and
supervisory rating. As of January 1, 2007, there are four risk categories, which
are distinguished by capital levels and supervisory ratings. The three capital
categories are “well capitalized,” “adequately capitalized,” and
“undercapitalized.” Under the regulations, assessment rates for calendar 2008
will range from 5 to 7 basis points per $100 of deposits for banks in Risk
Category I, to 43 basis points for banks assigned to Risk Category IV. The FDIC
may increase or decrease the assessment rate schedule quarterly. Any
increase in insurance assessments could have an adverse impact on the earnings
of insured institutions, including the Bank.
The Bank also is required to make
payments for the servicing of obligations of the Financing Corporation (“FICO”)
issued in connection with the resolution of savings and loan associations, so
long as such obligations remain outstanding. The FICO annual assessment rate for
2008 is 1.14 cents per $100 of deposits.
The FDIC can terminate insurance of
the Bank’s deposits upon a finding that the Bank has engaged in unsafe and
unsound practices, is in an unsafe or unsound condition to continue operations,
or has violated any applicable law, regulation, rule, order, or condition
imposed by the OCC. The termination of deposit insurance could have a material
adverse effect on our earnings.
The principal source of cash flow to
the Company, including cash flow to pay dividends on its common shares, is
dividends from its subsidiaries and fees for services rendered to its
subsidiaries. Various statutory and regulatory provisions limit the amount of
dividends or fees that may be paid to the Company by the Bank. The Company does
not depend on the Bank for such amounts, and believes the Leasing Companies have
sufficient cash flow and assets to meet the Company’s requirements.
10
California First National Bancorp and
Subsidiaries
On November 12, 1999, the
Gramm-Leach-Bliley Act (“Gramm-Leach”) became law. Gramm-Leach significantly
changed the regulatory structure and oversight of the financial services
industry. Most importantly for the Company and the Bank, Gramm-Leach established
new requirements for financial institutions to provide new privacy protections
to consumers. In June of 2000, the federal banking agencies jointly adopted a
final regulation providing for the implementation of these protections. It
requires a financial institution to provide notice to customers about its
privacy policies and practices, describes under what conditions a financial
institution may disclose nonpublic personal information about consumers to
non-affiliated third parties, and provides an "opt-out" method for consumers to
prevent the financial institution from disclosing that information to
non-affiliated third parties. Financial institutions were required to be in
compliance with the final regulation by July 1, 2001, and the Bank and the
Company believe that they were in compliance at such date, and continue to be in
compliance.
On
October 26, 2001, the USA Patriot Act became law. The United States Treasury
Department has issued a number of implementing regulations, which apply various
requirements of the USA Patriot Act to financial institutions such as CalFirst
Bank. These regulations impose obligations to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering and
terrorist financing and to verify the identity of customers. Failure of a
financial institution to maintain and implement adequate programs to combat
money laundering and terrorist financing, or to comply with all of the relevant
laws or regulations, could have serious legal and reputational consequences.
With its existing systems and controls required as an Internet bank, the Bank
believes it complies with the USA Patriot Act.
The commercial banking business is
also influenced by the monetary and fiscal policies of the federal government
and the policies of the FRB. The FRB implements national monetary policies
through its management of the discount rate, the money supply, and reserve
requirements on bank deposits. Indirectly, such policies and actions may impact
the ability of non-bank financial institutions to compete with the Bank.
Monetary policies of the FRB have had, and will continue to have, a significant
effect on the operating results of financial institutions. The nature
and impact of any future changes in monetary or other policies of the FRB cannot
be predicted.
The laws, regulations and policies
affecting financial services businesses are continually under review by Congress
and state legislatures and federal and state regulatory agencies. From time to
time, legislation is enacted which has the effect of increasing the cost of
doing business, limiting or expanding permissible activities or affecting the
competitive balance between banks and other financial intermediaries. Proposals
to change the laws and regulations governing the operations and taxation of
banks, bank holding companies and other financial intermediaries are frequently
made in Congress, in the California legislature and before various bank
regulatory agencies and other professional agencies. Changes in the laws,
regulations or policies that impact the Company cannot necessarily be predicted,
and they may have a material effect on the business and earnings of the
Company.
Employees
The Company and its subsidiaries had
178 employees as of June 30, 2008, including 112 sales managers and account
executives and 25 professionals engaged in finance and credit. None
of the Company's employees are represented by a labor union. The Company
believes that its relations with its employees are satisfactory.
Available
Information
Our Internet address is
www.calfirstbancorp.com. There we make available, by link to the SEC, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and any amendments to those reports, as soon as reasonably practical after we
electronically file such material with, or furnish it to, the SEC. Our SEC
reports can be accessed through the Investor Information section of our Internet
site. Our Corporate Governance Guidelines and our Code of Ethics for Senior
Financial Management are available for viewing and printing under the Corporate
Governance section of our Internet site. The information found on our Internet
site is not part of this or any other report we file with or furnish to the SEC
and is not incorporated herein by reference.
11
California
First National Bancorp and Subsidiaries
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. An economic downturn could result in a
deterioration of credit quality of lessees, a change in the allowance for credit losses, or 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 could 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.
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 have retained over 90% of lease transactions in their own
portfolios, which has increased the exposure 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.
12
California First National Bancorp and
Subsidiaries
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 may be adversely affected
by significant changes in the bank deposit market and interest
rates. CalFirst Bank has grown to represent 56% of the
Company’s assets, and bank deposits now exceed $150 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, 2008 totaled $93 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. 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 business continuation and disaster recovery. 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.
13
California First National Bancorp and
Subsidiaries
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”.
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.
14
California First National Bancorp and
Subsidiaries
The Company relies on dividends from
its subsidiaries for its liquidity needs. The Company is a separate and
distinct legal entity from the Leasing Companies and the Bank. The Company
receives substantially all of its cash from dividends paid by the Leasing
Companies. 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 60% of the stock held by the Chief Executive
Officer, over 75% 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.
None.
At June 30, 2008, the Company and its
subsidiaries occupied approximately 49,000 square feet of office space in
Irvine, California leased from an unaffiliated party. The lease provides for
monthly rental payments that average $92,708 from July 2008 through August
2008. Commencing September 2008, the lease term was extended for a
period of sixty months ending in August 2013, with the space reduced to 43,000
square feet of office space and monthly base rental payments during the extended
term averaging $75,302.
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.
None.
15
California First National Bancorp and
Subsidiaries
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.
|
For
the years ended
|
||||||||||||||||
|
June
30, 2008
|
June
30, 2007
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
First
Quarter
|
$ | 13.92 | $ | 12.22 | $ | 16.00 | $ | 13.96 | ||||||||
|
Second
Quarter
|
13.68 | 9.53 | 14.90 | 13.40 | ||||||||||||
|
Third
Quarter
|
11.31 | 8.51 | 14.15 | 12.89 | ||||||||||||
|
Fourth
Quarter
|
$ | 11.66 | $ | 9.14 | $ | 15.42 | $ | 12.60 | ||||||||
The Company had approximately 28
stockholders of record and in excess of 400 beneficial owners as of September 1,
2008.
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 $.10 to $.11 per share in January 2006, and in January 2007,
approved an increase in the quarterly dividend to $.12 per share. For
the fiscal years ended June 30, 2008, 2007, and 2006, the Company declared cash
dividends totaling $.48, $.46 and $.42, 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, 2008, the Company repurchased
75,000 shares of common stock. During the year ended June 30, 2007,
the Company repurchased 108,621 and during the year ended June 30, 2006 the
Company did not repurchase any common stock. As of September 1, 2008,
429,335 shares remain available under this authorization. The
following table summarizes share repurchase activity for the quarter ended June
30, 2008:
|
Total
number
|
Maximum
number of
|
|||||
|
of
shares
|
Average
price
|
shares
that may yet be
|
||||
|
Period
|
Purchased
|
paid
per share
|
Purchased
under the plan
|
|||
|
April
1, 2008 - April 30, 2008
|
-
|
$ -
|
429,335
|
|||
|
May
1, 2008 - May 31, 2008
|
-
|
$ -
|
429,335
|
|||
|
June
1, 2008 - June 30, 2008
|
-
|
$ -
|
429,335
|
|||
|
-
|
$ -
|
16
California First National Bancorp and
Subsidiaries
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.
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 25, 2008, the
Company announced that it accepted for 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 impact of the self-tender offer will be
reflected in the financial statements for the first quarter of fiscal
2009.
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, 2008.
|
Plan
category
|
Number
of shares of common
stock
to be issued upon exercise
of outstanding options
(1)
|
Weighted
average
exercise
price of
outstanding
options
|
Number
of shares of common stock
remaining
available for future
issuance
under equity
compensation
plans
(excluding shares in
first column)
|
|||||||||
|
Equity
compensation plans
approved
by shareholders
|
451,374
|
$ |
9.18
|
1,318,202
|
||||||||
| Equity
compensation plans
not
approved by shareholders
|
None
|
N/A
|
N/A
|
|||||||||
|
Total
|
451,374
|
$ |
9.18
|
1,318,202
|
(1) | |||||||
|
(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.
|
17
California First National Bancorp
and Subsidiaries
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.
|
INCOME
STATEMENT DATA
|
YEARS
ENDED JUNE 30,
|
|||||||||||||||||||
|
(in
thousands, except per share amounts)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Direct
finance and loan income
|
$ | 25,927 | $ | 24,846 | $ | 18,861 | $ | 15,496 | $ | 14,813 | ||||||||||
|
Interest
and investment income
|
1,914 | 2,057 | 1,329 | 1,009 | 578 | |||||||||||||||
|
Total
direct finance, loan and interest income
|
27,841 | 26,903 | 20,190 | 16,505 | 15,391 | |||||||||||||||
|
Interest
expense on deposits
|
5,735 | 4,706 | 2,593 | 1,054 | 430 | |||||||||||||||
|
Provision
for credit losses
|
1,165 | -120 | 482 | 359 | 164 | |||||||||||||||
|
Net
direct finance, loan and interest income
|
||||||||||||||||||||
|
after provision for credit losses
|
20,941 | 22,317 | 17,115 | 15,092 | 14,797 | |||||||||||||||
|
Operating
and sales-type lease income
|
2,810 | 4,430 | 4,498 | 4,379 | 5,255 | |||||||||||||||
|
Gain
on sale of leases and leased property
|
3,366 | 3,561 | 10,390 | 8,961 | 9,625 | |||||||||||||||
|
Other
income (loss)
|
(59 | ) | 1,171 | 780 | 1,091 | 930 | ||||||||||||||
|
Total
other income
|
6,117 | 9,162 | 15,668 | 14,431 | 15,810 | |||||||||||||||
|
Gross
profit
|
27,058 | 31,479 | 32,783 | 29,523 | 30,607 | |||||||||||||||
|
Selling,
general and administrative expenses
|
15,888 | 15,466 | 15,278 | 16,039 | 15,388 | |||||||||||||||
|
Earnings
before income taxes
|
11,170 | 16,013 | 17,505 | 13,484 | 15,219 | |||||||||||||||
|
Income
taxes
|
4,189 | 6,125 | 6,783 | 5,057 | 5,859 | |||||||||||||||
|
Net
earnings
|
$ | 6,981 | $ | 9,888 | $ | 10,722 | $ | 8,427 | $ | 9,360 | ||||||||||
|
Diluted
earnings per share
|
$ | 0.61 | $ | 0.86 | $ | 0.94 | $ | 0.74 | $ | 0.84 | ||||||||||
|
Diluted
common shares outstanding
|
11,507 | 11,534 | 11,461 | 11,340 | 11,190 | |||||||||||||||
|
Cash
dividends per share
|
$ | 0.48 | $ | 0.46 | $ | 0.42 | $ | 2.30 | $ | 0.40 | ||||||||||
|
Dividend
payout ratio
|
77.5 | % | 52.1 | % | 43.6 | % | 302.6 | % | 46.9 | % | ||||||||||
|
Return
on average assets
|
2.0 | % | 3.1 | % | 3.7 | % | 3.1 | % | 3.4 | % | ||||||||||
|
Return
on average equity
|
3.5 | % | 5.1 | % | 5.7 | % | 4.3 | % | 4.7 | % | ||||||||||
|
BALANCE
SHEET DATA
|
AS
OF JUNE 30,
|
|||||||||||||||||||
|
(in
thousands, except per share amounts)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Cash
and liquid securities
|
$ | 77,056 | $ | 47,630 | $ | 41,277 | $ | 44,226 | $ | 68,275 | ||||||||||
|
Net
investment in leases and loans
|
262,375 | 231,830 | 213,956 | 187,432 | 153,075 | |||||||||||||||
|
Total
assets
|
386,594 | 329,187 | 314,355 | 278,492 | 273,814 | |||||||||||||||
|
Demand,
savings and time deposits
|
156,239 | 105,470 | 89,166 | 54,098 | 24,600 | |||||||||||||||
|
Non-recourse
debt
|
9,274 | 6,239 | 8,424 | 8,405 | 17,541 | |||||||||||||||
|
Stockholders'
equity
|
$ | 202,455 | $ | 197,667 | $ | 193,527 | $ | 186,738 | $ | 203,399 | ||||||||||
| Equity to total assets ratio | 52.4 | % | 60.1 | % | 61.6 | % | 67.1 | % | 74.3 | % | ||||||||||
| Book value per common share | $ | 17.70 | $ | 17.75 | $ | 17.34 | $ | 16.83 | $ | 18.43 | ||||||||||