CFNB 10-Q Quarter ended Sept. 30, 2016

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Registrant's telephone number, including area code: (949) 255-0500

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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 number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of October 27, 2016 was 10,279,807.

California First National Bancorp

INDEX

Forward-Looking Statements

This Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, the information concerning our possible future consolidated results of operations, business and growth strategies, financing plans, our competitive position and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “plan”, “may”, “should”, “will”, “would”, “project” and similar expressions. These forward-looking statements are based on information currently available to us and are subject to inherent risks and uncertainties, and certain factors could cause actual results to differ materially from those anticipated. Particular uncertainties arise from the behavior of financial markets, including fluctuations in interest rates and securities prices, from unanticipated changes in the risk characteristics of the lease and loan portfolio, the level of defaults and a change in the provision for credit losses, and from numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive or regulatory nature. Forward-looking statements speak only as of the date made. The Company undertakes no obligations to update any forward-looking statements. Management does not undertake to update our forward-looking statements to reflect events or circumstances arising after the date on which they are made.

California First National Bancorp

(in thousands, except for share amounts)

The accompanying notes are an integral part

of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

(in thousands, except share and per share amounts)

The accompanying notes are an integral part

of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

(in thousands)

The accompanying notes are an integral part

of these consolidated financial statements.

California First National Bancorp

(in thousands)

The accompanying notes are an integral part

of these consolidated financial statements.

California First National Bancorp

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

(in thousands, except for share amounts)

The accompanying notes are an integral part

of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

cALIFORNIA FIRST NATIONAL BANCORP

General

California First National Bancorp, a California corporation (the “Company”), is a bank holding company headquartered in Orange County, California with a bank subsidiary, California First National Bank (“CalFirst Bank” or the “Bank”) and a leasing subsidiary, California First Leasing Corp (“CalFirst Leasing”). The primary business of the Company is secured financing provided through leasing and financing capital assets, commercial loans acquired through participation in the syndicated commercial loan market, by providing non-recourse loans to third parties secured by leases and equipment, and direct commercial loans. CalFirst Bank, now responsible for substantially all lease and loan origination, has migrated from predominately leasing toward over 50% commercial loans, with a lease and loan portfolio diversified geographically and across industries. The Bank gathers deposits through posting rates on the Internet and conducts all banking and other operations from one central location.

The Company’s finance, loan and interest income includes interest income earned on the Company’s investment in lease receivables and residuals, commercial loans and investment securities. Non-interest income primarily includes gains realized on the sale of leased property and leases, income from sales-type and operating leases, gains and losses realized on investments, and other income. Income from sales-type leases relates to the re-lease of lease property (“lease extensions”) while income from operating leases generally involves lease extensions that are accounted for as an operating lease rather than as a sales-type lease.

The Company's operating results are subject to quarterly fluctuations resulting from a variety of factors, including the size and credit quality of the lease and loan portfolios, the volume and profitability of leased property being re-marketed through re-lease or sale, the interest rate environment, the market for investment securities, the volume of new lease or loan originations, including variations in the mix and funding of such originations, and economic conditions in general. The Company’s principal market risk exposure currently is related to interest rates and the impact the interest rate environment has on its net interest margin. The Company’s current balance sheet structure is short-term in nature, with over 70% of interest-earning assets, $614.5 million, and 83% of interest bearing liabilities, $554.9 million, repricing within one year. The Company’s interest margin is susceptible to the disparate impact of varying movements in market interest rates as many of the Company’s leases, loans and liquid investments are tied to U.S. Treasury rates and Libor that often do not move in step with bank deposit rates. As a result, this can cause a greater change in net interest income than indicated by the repricing asset and liability comparison.

The Company conducts its business in a manner designed to mitigate risks. However, the assumption of risk is a key source of earnings in the leasing and banking industries and the Company is subject to risks through its leases and loans held in its own portfolio, investment securities, lease transactions in process, and residual investments. The Company takes steps to manage risks through the implementation of strict credit management processes and on-going risk management review procedures.

Critical Accounting Policies and Estimates

The preparation of the Company’s financial statements requires management to make certain critical accounting estimates that impact the stated amount of assets and liabilities at a financial statement date and the reported amount of income and expenses during a reporting period. These accounting estimates are based on management’s judgment and are considered to be critical because of their significance to the financial statements and the possibility that future events may differ from current judgments, or that the use of different assumptions could result in materially different estimates. The critical accounting policies and estimates have not changed from and should be read in conjunction with the Company’s Annual Report filed on Form 10-K for the year ended June 30, 2016.

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

Overview of Results and Trends

The following discussion is provided in addition to the required analysis of earnings in order to discuss trends in our business. The Company believes this analysis provides additional meaningful information on a comparative basis.

Net earnings for the first quarter ended September 30, 2016 of $1.96 million were up 13.6% from the first quarter of fiscal 2016 as the result of a 16% increase in interest income and lower provision for credit losses that was offset in part by a 50% increase in interest expense. The increased interest income in fiscal 2017 related to a 57% increase in the average loan portfolio from September 2015 while higher interest expense reflected higher deposit balances and rates paid.

New loan bookings of $51.5 million for the first quarter of fiscal 2017 were down 21.9% from $66.0 million during the first quarter of fiscal 2016, while new lease bookings of $30.5 million were up 18.8% from $25.6 million booked in the comparable quarter. Combined, total lease and loan bookings of $82.0 million were 11% below the $91.7 million booked the prior year. The net investment in leases and loans of $646.8 million at September 30, 2016 was up less than 1% from June 30, 2016 but increased 17.1% from $552.1 million at September 30, 2015.

New lease and loan originations during the first quarter of fiscal 2017, while 21% below the first quarter of fiscal 2016 which was an historic peak quarter for the Company, exceeded the last three quarters of fiscal 2016. As a result, the backlog of approved lease and loan commitments of $117.4 million at September 30, 2016 is down 7% from the level of a year ago but up 31.3% from June 30, 2016.

The Company’s portfolio of investment securities decreased 2.2% to $97.6 million at September 30, 2016 related to the payments received on certain securities and lower unrealized gains related to rising interest rates during the period. Total assets decreased 0.5% to $884.1 million, with net worth at $192.8 million and a common equity tier 1 capital of 24.8%.

Consolidated Statement of Earnings Analysis

Summary -- For the first quarter ended September 30, 2016, net earnings of $1.96 million increased $234,000, or 13.6% from $1.72 million earned during the first quarter ended September 30, 2015. Diluted earnings per share of $0.19 for the first quarter of fiscal 2017 increased 15.6% from $0.16 for the first quarter of fiscal 2016. The 2017 earnings per share benefitted from a reduction in average shares outstanding.

Net Interest Income -- Net interest income is the difference between interest earned on the investment in leases, loans, securities and other interest earning assets and interest paid on deposits and borrowings. Net interest income is affected by changes in the volume and mix of interest earning assets, the movement of interest rates, and funding and pricing strategies.

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

Net interest income was $5.3 million for the quarter ended September 30, 2016, a $349,000, or 7.0% increase compared to the same quarter of the prior year. Total interest income for the first quarter ending September 30, 2016 increased 15.9% to $7.2 million from $6.2 million for the first quarter of fiscal 2016. This increase includes a $1.5 million, or 63.5%, increase in commercial loan income and a $187,900, or 39.7% increase in investment income offset by a $664,300, or 19.2% decrease in finance income. The growth in commercial loan income reflected a 56.7% increase in average loan balances to $405.7 million from $258.9 million, and a 15 basis point increase in average loan yield. The decrease in finance income was due to a 21.7% decrease in average lease balances to $223.5 million that offset a 15 basis point improvement in the average yield that benefited from accelerated finance income from early terminated leases, Without that boost, the average lease yield in the quarter would have been down by 17 basis points. For the first quarter of fiscal 2017, the average yield on cash and investments of 1.26% was unchanged from the first quarter of fiscal 2016 as investments increased 20.1% to $97.1 million, but at average yields that declined 9 basis points to 2.10%, while average cash balances increased by 62.5% to $113.4 million with an average yield up 35 basis points. Interest expense paid increased 49.9% to $1.9 million, reflecting a 28.2% increase in the average balance of deposits and borrowings to $671.3 million and a 17 basis point increase in average rate paid to 1.15%. The increased interest cost is largely due to a 16 basis points increase in average cost of deposits to 1.20% on a $149.5 million increase in average deposits, with the total funding cost increase tempered by a 8 basis point increase average rate of borrowings to 0.43%.

The following table presents the Company’s average balances, finance and loan income and interest earned or interest paid, the related yields and rates on major categories of the Company’s interest-earning assets and interest-bearing liabilities. Yields/rates are presented on an annualized basis.

The average yield on all interest-earning assets for the first quarter of fiscal 2017 decreased to 3.45% from 3.60% for the first quarter ended September 30, 2015, while the average rate paid on all interest-bearing liabilities increased by 17 basis points to 1.15%. As a result, the net interest margin decreased to 2.53% in the first quarter of fiscal 2017 from 2.85% in the first quarter of fiscal 2016. The decline in net interest spread and margin in fiscal 2017 is largely due to the increase in lower yielding commercial loans to 48% of average interest earning assets from 37% during the first quarter of fiscal 2016, and this is compounded by higher rates paid on deposits. The average yield on interest earning assets can fluctuate from quarter to quarter due to transaction activity in both the lease and loan portfolio.

Provision for Credit Losses -- The Company recorded a $300,000 provision for credit losses during the first quarter of fiscal 2017, compared to a $500,000 provision made during the quarter ending September 30, 2015. The first quarter 2017 provision related to the growth in the loan portfolio since June 30, 2016 while the overall credit profile of the portfolios remained stable.

Non-interest Income -- Total non-interest income for the first quarter of fiscal 2017 increased by 2.1% to $915,000 from $896,000 in the first quarter of the prior year reflecting a 39% increase in income from end of term transactions and $240,000 decline in gains on sale of leases. Operating and sales-type lease income related to end-of-term transactions increased by $440,600 and offset a decline in gains realized on the sale of leases and leased property of $454,000.

Non-interest Expenses -- The Company’s non-interest expenses of $2.7 million reported for the quarter ended September 30, 2016 increased by $154,000 or 6.1% from $2.5 million in the first quarter of fiscal 2016. The increase reflected higher compensation expense recognized during the period.

Income Taxes -- Income taxes were accrued at a tax rate of 39.50% and 38.91% for the first quarter ended September 30, 2016 and 2015, respectively, representing the estimated annual tax rate at the end of each respective first quarter. The increase in the fiscal 2017 tax rate relates primarily to state apportionment changes.

Financial Condition Analysis

Consolidated total assets at September 30, 2016 of $884.1 million decreased 0.5% from $888.2 million at June 30, 2016 but increased 16.3% from September 30, 2015. The change since June 30, 2016 reflects a $18.8 million increase in the commercial loan portfolio offset by declines in the net investment in leases of $13.4 million, $4.4 million in cash and due from banks, $2.2 million in securities available-for-sale and $2.0 million of property acquired for transactions in process.

Lease Portfolio

During the three months ended September 30, 2016 and 2015, 100% and 96.4%, respectively, of the new leases booked by the Company were held in its own portfolios. Of the new leases booked during the first quarter of fiscal 2017, 100% were originated directly by the Company compared to 94% during the prior year first quarter. The Company’s net investment in leases at September 30, 2016 of $224.3 million compared to $237.7 million at June 30, 2016. The $13.4 million decrease in the net investment in leases during the quarter is due to the volume of new leases being booked during the period not exceeding payments received and leases terminating.

The Company often makes payments to purchase leased property prior to the commencement of the lease. The disbursements for these lease transactions in process are generally made to facilitate the lessees’ property implementation schedule. The lessee generally is obligated by the lease to make rental payments directly to the Company during the period that the transaction is in process, and contractually obligated to reimburse the Company for all disbursements under certain circumstances. Income is not recognized while a transaction is in process and prior to the commencement of the lease. At September 30, 2016, the Company’s investment in property acquired for transactions in process of $28.9 million was down from $30.9 million at June 30, 2016, and from $40.8 million at September 30, 2015.

Commercial Loan Portfolio

The Company’s net commercial loan portfolio increased $18.8 million during the first quarter of fiscal 2017 to $422.5 million compared to $403.7 million at June 30, 2016. The increase in the Company’s commercial loan portfolio reflected new commercial loans booked of $51.5 million offset by repayments aggregating to $32.6 million during the quarter. Additional loan commitments of $22.0 million were made during the quarter but not funded, and at September 30, 2016 unfunded commercial loan commitments of $29.0 million were up from $15.3 million at June 30, 2016.

Asset Quality

The Company monitors the performance of all leases and loans held in its own portfolio, transactions in process, as well as lease transactions assigned to lenders, if the Company retains a residual investment in the leased property subject to those leases. An ongoing review of all leases and loans ten or more days delinquent is conducted. Leases and loans that are delinquent with the Company or an assignee are coded in the Company’s accounting and tracking systems in order to provide management visibility, periodic reporting, and appropriate reserves. The accrual of interest income on leases and loans generally will be discontinued when the lease or loan becomes ninety days or more past due on its payments with the Company, unless the Company believes the investment is otherwise recoverable. Leases and loans may be placed on non-accrual earlier if the Company has significant doubts about the ability of the customer to meet its obligations, as evidenced by consistent delinquency, deterioration in the customer’s financial condition or other relevant factors.

The following table summarizes the Company’s non-performing leases and loans.

There was no change in non-performing assets at September 30, 2016 as compared to June 30, 2016. In addition to the non-performing leases identified above, there was $3.93 million of investment in leases at September 30, 2016 classified as substandard or with credits that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future. This amount compared to $3.96 million at June 30, 2016 and $271,000 at September 30, 2015. Although these credits have been identified as potential problems, they may never become non-performing. These potential problem leases are considered in the determination of the allowance for credit losses.

Allowance for Credit Losses

The allowance for credit losses provides coverage for probable and estimatable losses in the Company’s lease and loan portfolios. The allowance recorded is based on a quarterly review of all leases and loans outstanding and transactions in process. Lease receivables, loans or residuals are charged off when they are deemed completely uncollectible. The determination of the appropriate amount of any provision is based on management’s judgment at that time and takes into consideration all known relevant internal and external factors that may affect the portfolios.