Management’s Discussion and Analysis of Financial Condition and Results of Operations
Three and Nine months Ended March 31, 2022
The Company’s operating results are comprised of two primary components:
· Investment income from cash and publicly traded equity securities including current income from dividends, realized and unrealized gains or losses in the value of the securities, and interest earned on money market balances.
· Lease income includes direct finance and interest income earned from leases and loans, as well as other income from sales of leased property, sales of leases and operating lease income.
Through February 26, 2021, the Company operated as a bank holding company and was exempt from registration as an investment company under the 1940 Act. Effective with registering as an investment company in February 2022, the Company’s financial statements and discussion of results are revised to conform to 40 Act requirements, and prior period statements will not be restated.
The Company’s periodic earnings can fluctuate widely due to including gains and losses on equity securities, including unrealized amounts that are determined based on stock prices on the last day of a fiscal quarter. Past performance is no guarantee of future results.
Highlights
For the three months ended March 31, 2022, the Company reported a net loss of $2.23 million, or negative $(0.22) per share. For the nine months ended March 31, 2022, net earnings were $8.30 million, or $0.81 per share. The net asset value per share of $22.64 per share at March 31, 2022 was down 1.0% from $22.86 per share at December 31, 2021 but up 1.1% from $22.39 at June 30, 2021. The total return to shareholders, inclusive of expenses and taxes, was negative .9% for the third quarter but positive 3.6% for the nine months ended March 31, 2022. Third quarter results were obtained during a period that stock indexes suffered their worst performance in two years and certain markets recorded extreme moves.
(in thousands, except per share data) |
Three Months |
|
Nine Months |
|
Ended March 31 |
|
Ended March 31 |
|
|
2022 |
|
|
2021 (1) |
|
|
2022 |
|
|
2021 (1) |
Dividends and interest |
$ |
996 |
|
$ |
857 |
|
$ |
3,028 |
|
$ |
1,995 |
Realized and unrealized securities gain (loss) |
|
(4,363) |
|
|
15,100 |
|
|
7,355 |
|
|
31,665 |
Investment Income (loss) |
|
(3,367) |
|
|
15,957 |
|
|
10,383 |
|
|
33,660 |
Direct finance and loan income |
|
606 |
|
|
1,224 |
|
|
1,968 |
|
|
3,231 |
Other lease income |
|
176 |
|
|
2,708 |
|
|
746 |
|
|
5,232 |
Lease Income |
|
782 |
|
|
3,932 |
|
|
2,714 |
|
|
8,463 |
Operating Expenses (1) |
|
720 |
|
|
1,224 |
|
|
2,265 |
|
|
3,414 |
Income taxes |
|
(1,080) |
|
|
5,276 |
|
|
2,534 |
|
|
8,791 |
Net Income (loss) |
$ |
(2,225) |
|
$ |
13,389 |
|
$ |
8,298 |
|
$ |
29,918 |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Net Asset Value (NAV) per share |
$ |
22.86 |
|
$ |
20.48 |
|
$ |
22.39 |
|
$ |
19.41 |
Net income (loss) per share |
|
(0.22) |
|
|
1.30 |
|
|
0.81 |
|
|
2.91 |
Dividends paid per share |
|
- |
|
|
- |
|
|
0.56 |
|
|
0.54 |
Net Asset Value per share, end of period |
$ |
22.64 |
|
$ |
21.78 |
|
$ |
22.64 |
|
$ |
21.78 |
|
|
|
|
|
|
|
|
|
|
|
|
Total return (2) |
|
|
|
|
|
|
|
|
|
|
|
CFNB, based on NAV |
|
(0.9)% |
|
|
6.4% |
|
|
3.6% |
|
|
15.0% |
S&P 500® Index |
|
(4.6)% |
|
|
6.2% |
|
|
6.5% |
|
|
29.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Interest expense on bank deposits of $5,970 and $39,127 for the three- and nine-months ending March 31, 2021, respectively,
have been added to operating expenses.
(2) Total return for the Company is an after-tax amount. The Standard & Poor’s 500 Total Return Index (the “S&P 500 (TR)”) is
an unmanaged benchmark of large U.S. corporations that assumes reinvestment of all distributions, and includes both capital
gains and distributions from companies in the return calculation.
Investment Operations
The equity securities portfolio produced a negative (0.9)% return in the third quarter ended March 31, 2022, compared to a negative (4.6)% all-in return on the benchmark S&P 500® index. The Company realized gains early in the quarter on certain investments that had been held for some time and whose price had moved significantly over the prior months, including AbbVie Inc and CVS Health Corp. The Company also took advantage of price declines to add new positions and increase holdings in others. Despite the market turmoil caused by the situation in Ukraine, increase in inflation and shift in monetary policy from the FRB, the Company’s investments held up relative to the market.
For the nine months ended March 31, 2022, the equity portfolio had a return of 3.6%, compared to a 6.5% return on the benchmark S&P 500® index for the same 9-month period. The top contributors to nine-month investment returns were Cleveland-Cliffs and Exxon while the largest losses were seen with Alibaba Group Holdings and Skyworks Solutions. Inflation, supply chain issues, rising interest rates, tension between the U.S. and China, and COVID-19 have dominated the news cycle and driven volatility in the equity markets. We view many of the detractors in performance as short-term price swings and opportunities to increase our investment in high-quality companies and not reflective of their long-term prospects.
The following is a summary of investment activity for the three and nine months ended March 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
Months |
|
|
Months |
|
|
Beginning of the period |
|
|
($ in thousands) |
|
|
Cash and money market accounts (MMA) |
|
$ |
12,600 |
|
$ |
37,045 |
|
|
Equity securities |
|
|
201,307 |
|
|
160,125 |
|
|
Beginning investment portfolio, at fair value |
|
$ |
213,907 |
|
$ |
197,170 |
|
|
Equity investments acquired |
|
|
23,104 |
|
|
64,447 |
|
|
Cost of equity investments sold |
|
|
(31,254) |
|
|
(43,266) |
|
|
Gain (loss) on equity securities |
|
|
(4,363) |
|
|
7,355 |
|
|
Net realized gain on equity securities |
|
|
(8,691) |
|
|
(8,559) |
|
|
Increase (decrease) in MMA |
|
|
21,085 |
|
|
(3,360) |
|
|
Ending investments portfolio, at fair value |
|
$ |
213,788 |
|
$ |
213,788 |
|
By industry, oil and gas related stocks contributed the greatest return during the third quarter amid the surge in oil prices and higher inflation expectations. Strong results were also seen from Bristol Myers and a new investment in Cleveland-Cliffs. Offsetting these gains was a pullback in semiconductor-related stocks and Ford Motor Company, both which had outperformed during the first six months through December 2021. The five largest industry positions at March 31, 2022 are as follows:
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
Dividend |
|
|
|
Cost |
|
|
Value |
|
% Assets |
|
Yield |
Semiconductors |
|
$ |
34,017 |
|
$ |
44,983 |
|
18.3% |
|
0.99% |
Oil & Gas |
|
|
11,372 |
|
|
18,609 |
|
7.6% |
|
3.39% |
Internet Content |
|
|
16,137 |
|
|
18,174 |
|
7.4% |
|
0.04% |
Telecom Services |
|
|
15,571 |
|
|
14,049 |
|
5.7% |
|
4.91% |
Drug Manufacturers |
|
|
8,620 |
|
|
11,305 |
|
4.6% |
|
2.96% |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
85,717 |
|
$ |
107,120 |
|
43.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Dividend Income
A key component of the Company’s investment strategy is to generate current income on its investments through dividends, in addition to the opportunity to realize investment returns from appreciation in stock values. Of the 32 stock positions held at March 31, 2022, 23 pay a dividend, accounting for 79% of the fair value of equity securities at March 31, 2022. The following table presents the Company’s average balances and yields earned on investments for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment assets |
|
|
Period Ended: |
|
|
Period Ended: |
|
|
($ in thousands) |
|
|
March 31, 2022 |
|
|
March 31, 2021 |
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Balance |
|
|
Income |
|
Yield |
|
|
Balance |
|
|
Income |
|
Yield (1) |
|
Three Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market and bank deposits |
|
$ |
30,402 |
|
$ |
8 |
|
0.11% |
|
$ |
94,771 |
|
$ |
24 |
|
0.10% |
|
Equity securities (1) |
|
|
181,323 |
|
|
988 |
|
2.18% |
|
|
104,630 |
|
|
833 |
|
3.18% |
|
|
|
$ |
211,725 |
|
$ |
996 |
|
1.88% |
|
$ |
199,401 |
|
$ |
857 |
|
1.72% |
|
Nine Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market and bank deposits |
|
$ |
28,315 |
|
$ |
17 |
|
0.08% |
|
$ |
118,470 |
|
$ |
86 |
|
0.10% |
|
Equity securities (1) |
|
|
177,330 |
|
|
3,011 |
|
2.26% |
|
|
84,078 |
|
|
1,909 |
|
3.03% |
|
|
|
$ |
205,645 |
|
$ |
3,028 |
|
1.96% |
|
$ |
202,548 |
|
$ |
1,995 |
|
1.31% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Equity securities in fiscal 2021 periods include stock owned in the Federal Reserve Bank of San Francisco and the Federal Home Loan Bank of San Francisco that were sold with the bank in March 2021.
Total dividend and interest income for the third quarter ending March 31, 2022 of $996,000 increased 16.2% as a 20.9% or $171,000 increase in dividend income was offset slightly by a $31,600 reduction in interest earned on money market accounts related to a 67.9% decrease in average balances. The increase in dividends to $988,000 for the third quarter of fiscal 2022 included a 73.3% increase in average securities balances to $181.3 million offset by a 101-basis point reduction in average yield to 2.18%.
For the first nine months of fiscal 2022, interest and dividend income from investments increased 51.8% to $3.03 million from $2.0 million for the first nine months of the prior year. Dividend income for the first nine months of fiscal 2022 increased $1.2 million or 63.8% to $3.0 million as average equity security balances were 114.7% higher while the average yield declined by 70 basis points to 2.26%. A $139,400 decrease in interest income for the first nine months of fiscal 2022 was due to a $94.7 million decrease in average balances held in interest earning accounts.
Lease Operations
Third quarter fiscal 2022 lease bookings were minimal, compared to $4.9 million booked during the third quarter of fiscal 2021, as most leases continued to remain in process. Third quarter lease originations of $69.5 million included the brokering of three large leases, leaving the backlog of approved lease commitments of $6.6 million at March 31, 2022, compared to $3.8 million at December 31, 2021 and $5.8 million at June 30, 2021. No new loans were booked in fiscal 2022. Transactions in process of $2.1 million at March 31, 2022 are up from $1.75 million at June 30, 2021.
Finance income of $509,000 for the third quarter was down 52.1% due to a 37.4% decrease in average lease balances to $26.9 million and a 233-basis point decrease in the average yield to 7.56%. The prior year quarter benefitted from accelerated finance income from a large early lease termination that boosted the average yield by 233 basis points. The following table presents the Company’s average lease and loan balances, finance and loan income and related yields earned, presented on an annualized basis.
Lease Operations |
|
|
Period Ended |
|
|
Period Ended: |
|
($ in thousands) |
|
|
March 31, 2022 |
|
|
March 31, 2021 |
|
|
|
|
Average |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Balance |
|
|
Income |
|
Yield |
|
|
Balance |
|
|
Income |
|
Yield |
|
Three Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in leases |
|
$ |
26,937 |
|
$ |
509 |
|
7.56% |
|
$ |
43,020 |
|
$ |
1,064 |
|
9.89% |
|
Commercial loans |
|
|
3,338 |
|
|
32 |
|
3.83% |
|
|
3,685 |
|
|
37 |
|
4.02% |
|
Lease and loan assets |
|
$ |
30,275 |
|
$ |
541 |
|
7.15% |
|
$ |
46,705 |
|
$ |
1,101 |
|
9.43% |
|
Nine Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in leases, net |
|
$ |
29,436 |
|
$ |
1,676 |
|
7.59% |
|
$ |
44,765 |
|
$ |
2,957 |
|
8.81% |
|
Commercial loans |
|
|
3,432 |
|
|
127 |
|
4.93% |
|
|
3,573 |
|
|
101 |
|
3.77% |
|
Lease and loan assets |
|
$ |
32,868 |
|
$ |
1,803 |
|
7.31% |
|
$ |
48,338 |
|
$ |
3,058 |
|
8.44% |
|
Finance income of $1.68 million for the first nine months of fiscal 2022 decreased by 43.3% as the average investment in leases declined 34.2% to $29.4 million and the average yield earned decreased by 122 basis points to 7.59%.
Provision for Credit Losses
The credit portfolio continued to perform well, with no past due or non-accrual credits at March 31, 2022. During the third quarter, the Company released reserves of $65,000 compared to releasing reserves of $122,600 in the 2021 third quarter. For the first nine months of fiscal 2022, the release of $165,000 of reserves compared to a $173,000 release of reserves during the first nine months of fiscal 2021. At March 31, 2022, the allowance for credit losses of $410,600, 1.44% of total leases and loans, is down 34% from $620,000 at June 30, 2021 and reflects the 28% decline in the lease portfolio since June 30, 2021.
Other Lease Income
For the third quarter of fiscal 2022, other lease income of $240,564 compared to $2.8 million for the third quarter of the prior year that included the $2.3 million gain realized on the sale of the bank subsidiary. Other lease income of $910,800 for the first nine months of fiscal 2022 compared to $5.4 million reported in the first nine months of fiscal 2021. Excluding the gain on the sale of the bank, other lease income for the first nine months of fiscal 2022 was down due to a $2.34 million decrease in income from end of term transactions, offset by a $315,400 increase in other income related to employee retention credits.
Operating Expenses
The Company’s operating expenses of $719,800 for the quarter ended March 31, 2022 declined by $503,800 or 41.2% from $1.22 million in the third quarter of fiscal 2021. The decrease included a $442,800, or 48% reduction in compensation costs related to elimination of bank personnel following its sale, as well as other personnel reductions. For the nine months ended March 31, 2022, operating expenses of $2,27 million declined 33.6% from $3.4 million for the same period of the prior year and included a $962,000 or 38.0% reduction in compensation costs and $186,700 decline in all other expenses.
Income Taxes
The Company’s effective income tax rate reflects the benefit of the dividends-received deduction applicable to income from equity securities, and also varies due to changes in the mix of pre-tax earnings, the magnitude of gains or losses included in earnings from investments in equity securities, and underlying income tax rates applicable in various taxing jurisdictions. For the quarter ended March 31, 2022, the net tax benefit of $2.22 million included a provision of $184,000 accrued at 17.4% on lease and dividend income offset by a $1.26 million tax benefit accrued at 28.9% on net equity security losses. For the nine months ended March 31, 2022, the tax provision of $2.5 million reflected a $2.1 million provision on equity gains, and benefited from a credit in the first quarter for a change in state apportionment on the deferred tax liability.
The Company’s components of earnings and taxes are summarized as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
March 31, |
|
March 31, |
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
Pretax earnings excluding securities gain (loss) |
$ |
1,058 |
|
$ |
3,565 |
|
$ |
3,477 |
|
$ |
7,044 |
Pre-tax gain (loss) on securities |
|
(4,363) |
|
|
15,100 |
|
|
7,355 |
|
|
31,665 |
Pretax (loss) earnings |
|
(3,305) |
|
|
18,665 |
|
|
10,832 |
|
|
38,709 |
Income tax expense excluding securities gain (loss) |
|
184 |
|
|
957 |
|
|
447 |
|
|
1,886 |
Income tax expense (benefit) on securities gain (loss) |
|
(1,264) |
|
|
4,319 |
|
|
2,087 |
|
|
9,057 |
Income tax valuation allowance |
|
- |
|
|
- |
|
|
- |
|
|
(2,152) |
Net tax (benefit) expense |
|
(1,080) |
|
|
5,276 |
|
|
2,534 |
|
|
8,791 |
Net earnings excluding securities gain (loss) |
|
874 |
|
|
2,608 |
|
|
3,030 |
|
|
5,158 |
Net equity securities gain (loss) |
|
(3,099) |
|
|
10,781 |
|
|
5,268 |
|
|
24,760 |
Net earnings (loss) |
$ |
(2,225) |
|
$ |
13,389 |
|
$ |
8,298 |
|
$ |
29,918 |
Financial Condition Analysis
Total assets at March 31, 2022 of $245.5 million were down 2.7% from $252.3 million at December 31, 2021 but up 1.1% from $242.9 million at June 30, 2021 and 3.0% from March 31, 2021. The change since June 30, 2021 includes an increase of $20.0 million in the equity portfolio, offset by a $10.9 million decline in the net investment in leases and loans and a $3.4 million decrease in cash and money market deposits.
|
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|
|
2022 |
|
2021 |
|
2021 |
|
2021 |
Cash & money market accounts |
|
$ |
33,685 |
|
$ |
12,600 |
|
$ |
30,847 |
|
$ |
37,045 |
Equity investments |
|
|
180,103 |
|
|
201,307 |
|
|
163,495 |
|
|
160,125 |
Net investment in leases & loans |
|
|
28,089 |
|
|
32,110 |
|
|
33,354 |
|
|
39,030 |
Stockholders' equity |
|
|
232,839 |
|
|
235,064 |
|
|
224,544 |
|
|
230,300 |
Total Assets |
|
$ |
245,541 |
|
$ |
252,269 |
|
$ |
234,801 |
|
$ |
242,917 |
The net investment in leases and loans of $28.1 million at March 31, 2022 was down 28.0% from $39.0 million at June 30, 2021, and 12.5% from $32.1 million at December 31, 2021. During the nine months ended March 31, 2022 and 2020, 100% of the new leases booked were retained in the Company’s portfolio. No commercial loans were booked.
The Company often makes payments to purchase leased property prior to the commencement of a lease. 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 March 31, 2022, the Company’s investment in property acquired for transactions in process of $2.1 million was up from $1.75 million at June 30, 2021. These commitments are binding and generally have expiration dates or termination clauses and are estimated to be completed within one year.
Asset Quality
The Company disaggregates the portfolio into four classes: 1) commercial leases, 2) education, government and non-profit (“EGNP”) leases, 3) commercial and industrial loans and 4) commercial real estate loans. The Company’s also classifies all leases and loans in accordance with a risk rating system under which leases and loans may be rated as “pass”, “special mention”, “substandard”, or “doubtful”. The classification of the Company’s lease and loan portfolios by class is as follows:
(in thousands) |
|
|
|
|
|
|
|
|
Commercial |
|
|
Commercial |
|
|
|
|
|
|
Commercial |
|
|
EGNP |
|
|
& Industrial |
|
|
Real Estate |
|
|
|
As of March 31, 2022: |
|
|
Leases |
|
|
Leases |
|
|
Loans |
|
|
Loans |
|
|
Total |
Pass |
|
$ |
12,501 |
|
$ |
11,142 |
|
$ |
203 |
|
$ |
3,114 |
|
$ |
26,960 |
Special Mention |
|
|
- |
|
|
728 |
|
|
- |
|
|
- |
|
|
728 |
Substandard |
|
|
787 |
|
|
25 |
|
|
- |
|
|
- |
|
|
812 |
Doubtful |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
0 |
|
|
$ |
13,288 |
|
$ |
11,895 |
|
$ |
203 |
|
$ |
3,114 |
|
$ |
28,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
19,250 |
|
$ |
15,152 |
|
$ |
281 |
|
$ |
3,332 |
|
$ |
38,015 |
Special Mention |
|
|
230 |
|
|
- |
|
|
- |
|
|
- |
|
|
230 |
Substandard |
|
|
1,223 |
|
|
182 |
|
|
- |
|
|
- |
|
|
1,405 |
Doubtful |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
$ |
20,703 |
|
$ |
15,334 |
|
$ |
281 |
|
$ |
3,332 |
|
$ |
39,650 |
There were no past due credits at March 31, 2022 or June 30, 2021, and no increase in non-performing assets during the quarter or nine months ended March 31, 2022.
Allowance for Credit Losses
The allowance for credit losses covers probable and estimable 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.
The allowance for credit losses of $411,000 at March 31, 2022 decreased $209,000 when compared to June 30, 2021, and was reduced by $334,000 from $745,000 at March 31, 2021. The Company considers the allowance for credit losses at March 31, 2022 adequate to cover losses specifically identified as well as inherent in the lease and loan portfolios. However, no assurance can be given that the Company will not, in any particular period, sustain credit losses that are sizeable in relation to the amount reserved, or that subsequent evaluations of the lease and loan portfolio, in light of factors then prevailing, will not require significant increases in the allowance for credit losses. Among other factors, economic, and political actions may have an adverse impact on the adequacy of the allowance for credit losses by increasing credit risk and the risk of potential loss even further.
|
|
|
Nine months ended |
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
(dollars in thousands) |
Net investment in leases and loans before allowance |
|
$ |
28,500 |
|
$ |
44,411 |
|
|
|
|
|
|
|
Allowance for credit losses at beginning of period |
|
$ |
620 |
|
$ |
918 |
Charge-off of lease receivables |
|
|
(44) |
|
|
- |
Release of (provision for) reserves for credit losses |
|
|
(165) |
|
|
(173) |
Allowance for credit losses at end of period |
|
$ |
411 |
|
$ |
745 |
|
|
|
|
|
|
|
Components of allowance for credit losses: |
|
|
|
|
|
|
Allowance for lease losses |
|
$ |
366 |
|
$ |
700 |
Residual valuation allowance |
|
|
10 |
|
|
10 |
Allowance for loan losses |
|
|
35 |
|
|
35 |
|
|
$ |
411 |
|
$ |
745 |
Allowance for credit losses as a percent of net investment |
|
|
|
|
|
|
in leases and loans before allowances |
|
|
1.44% |
|
|
1.68% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balances and activity in the allowance by portfolio segment for the nine months ended March 31, 2022 and March 31, 2021 are presented in the following table:
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Commercial |
|
|
|
|
|
|
Commercial |
|
|
EGNP |
|
|
& Industrial |
|
|
Real Estate |
|
|
|
(in thousands) |
|
|
Leases |
|
|
Leases |
|
|
Loans |
|
|
Loans |
|
|
Total |
Nine months ended March 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period |
|
$ |
448 |
|
$ |
137 |
|
$ |
5 |
|
$ |
30 |
|
$ |
620 |
Charge-offs |
|
|
(44) |
|
|
- |
|
|
- |
|
|
- |
|
|
(44) |
Release of reserves |
|
|
(130) |
|
|
(35) |
|
|
- |
|
|
- |
|
|
(165) |
Balance end of period |
|
$ |
274 |
|
$ |
102 |
|
$ |
5 |
|
$ |
30 |
|
$ |
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period |
|
$ |
638 |
|
$ |
219 |
|
$ |
- |
|
$ |
61 |
|
$ |
918 |
Charge-offs |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Provision |
|
|
(100) |
|
|
(47) |
|
|
5 |
|
|
(31) |
|
|
(173) |
Balance end of period |
|
$ |
538 |
|
$ |
172 |
|
$ |
5 |
|
$ |
30 |
|
$ |
745 |
Liquidity and Capital Resources
Following the sale of the bank subsidiary in February 2021, the Company no longer has access to bank deposits as a funding source and will rely on its existing cash and security balances, internally generated funds and non-recourse debt. During the nine months ended March 31, 2022, the equity securities portfolio increased by 12.5% to $180.1 million, while the Company’s cash and cash equivalents decreased slightly from $37.0 million to $33.7 million at March 31, 2022.
An additional source of liquidity comes from selling, participating or assigning certain lease term payments to banks or other financial institutions. The need for cash for operating activities will fluctuate as the Company expands or contracts. The Company believes that existing cash and security balances, cash flow from operations, and cash flows from its financing and investing activities, will be sufficient to meet its foreseeable needs.
Item 24. Financial Statements
(1) Interim financial statements for the nine-month period ended March 31, 2022 and 2021
BALANCE SHEETS
(in thousands, except for share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
Percent |
|
|
|
|
2022 |
|
|
2021 |
|
Change |
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
$ |
33,685 |
|
$ |
37,045 |
|
(9.1) |
% |
|
Equity investments |
|
180,103 |
|
|
160,125 |
|
12.5 |
% |
|
Leases and loans: |
|
|
|
|
|
|
|
|
|
Net investment in leases |
|
25,183 |
|
|
36,037 |
|
(30.1) |
% |
|
Commercial loans |
|
3,317 |
|
|
3,613 |
|
(8.2) |
% |
|
Allowance for credit losses |
|
(411) |
|
|
(620) |
|
(33.7) |
% |
|
Net investment in leases and loans |
|
28,089 |
|
|
39,030 |
|
(28.0) |
% |
|
|
|
|
|
|
|
|
|
|
|
Property acquired for transactions in process |
|
2,106 |
|
|
1,751 |
|
20.3 |
% |
|
Net property on operating leases |
|
48 |
|
|
28 |
|
71.4 |
% |
|
Income taxes receivable |
|
313 |
|
|
2,857 |
|
(89.0) |
% |
|
Other assets |
|
504 |
|
|
853 |
|
(40.9) |
% |
|
Discounted lease rentals assigned to lenders |
|
693 |
|
|
1,228 |
|
(43.6) |
% |
|
Total Assets |
$ |
245,541 |
|
$ |
242,917 |
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
$ |
1,960 |
|
$ |
628 |
|
212.1 |
% |
|
Accrued liabilities |
|
983 |
|
|
1,264 |
|
(22.2) |
% |
|
Lease deposits |
|
153 |
|
|
188 |
|
(18.6) |
% |
|
Non-recourse debt |
|
693 |
|
|
1,228 |
|
(43.6) |
% |
|
Deferred income taxes, net |
|
8,913 |
|
|
9,309 |
|
(4.3) |
% |
|
Total Liabilities |
|
12,702 |
|
|
12,617 |
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
- |
|
|
- |
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
|
Preferred stock; 2,500,000 shares authorized; none issued |
|
- |
|
|
- |
|
n/a |
|
|
Common stock; $.01 par value; 20,000,000 shares authorized; |
|
|
|
|
|
|
|
|
|
10,284,139 issued and outstanding both periods |
|
103 |
|
|
103 |
|
0.0 |
% |
|
Additional paid in capital |
|
2,314 |
|
|
2,314 |
|
0.0 |
% |
|
Retained earnings |
|
230,422 |
|
|
227,883 |
|
1.1 |
% |
|
Accumulated other comprehensive income, net of tax |
|
- |
|
|
- |
|
0.0 |
% |
|
Total Stockholders’ Equity |
|
232,839 |
|
|
230,300 |
|
1.1 |
% |
|
Total Liabilities and Stockholders’ Equity |
$ |
245,541 |
|
$ |
242,917 |
|
1.1 |
% |
|
STATEMENTS OF OPERATIONS *
(in thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
March 31, |
|
Percent |
|
March 31, |
|
Percent |
|
|
|
2022 |
|
2021 |
|
Change |
|
2022 |
|
2021 |
|
Change |
|
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income |
|
$ |
988 |
|
$ |
833 |
|
18.6 |
% |
|
$ |
3,011 |
|
$ |
1,909 |
|
57.7 |
% |
|
Interest income |
|
|
8 |
|
|
24 |
|
(66.7) |
% |
|
|
17 |
|
|
86 |
|
(80.2) |
% |
|
Gain (loss) on equity securities |
|
|
(4,363) |
|
|
15,100 |
|
(128.9) |
% |
|
|
7,355 |
|
|
31,665 |
|
(76.8) |
% |
|
Total investment income |
|
|
(3,367) |
|
|
15,957 |
|
(121.1) |
% |
|
|
10,383 |
|
|
33,660 |
|
(69.2) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and loan income |
|
|
541 |
|
|
1,101 |
|
(50.9) |
% |
|
|
1,803 |
|
|
3,058 |
|
(41.0) |
% |
|
Release of (provision for) reserves for credit losses |
|
|
65 |
|
|
123 |
|
(47.2) |
% |
|
|
165 |
|
|
173 |
|
(4.6) |
% |
|
Operating and sales-type leases |
|
|
33 |
|
|
114 |
|
(71.1) |
% |
|
|
143 |
|
|
452 |
|
(68.4) |
% |
|
Gain on sale of leases, loans and leased property |
|
|
29 |
|
|
167 |
|
(82.6) |
% |
|
|
173 |
|
|
2,323 |
|
(92.6) |
% |
|
Other fee income |
|
|
114 |
|
|
84 |
|
35.7 |
% |
|
|
430 |
|
|
114 |
|
|
|
|
Gain on sale of bank subsidiary |
|
|
0 |
|
|
2,343 |
|
(100.0) |
% |
|
|
- |
|
|
2,343 |
|
(100.0) |
% |
|
Total lease income |
|
|
782 |
|
|
3,932 |
|
(80.1) |
% |
|
|
2,714 |
|
|
8,463 |
|
(67.9) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits |
|
|
475 |
|
|
918 |
|
(48.3) |
% |
|
|
1,571 |
|
|
2,533 |
|
(38.0) |
% |
|
Occupancy |
|
|
26 |
|
|
50 |
|
(48.0) |
% |
|
|
78 |
|
|
150 |
|
(48.0) |
% |
|
Professional and IT services |
|
|
160 |
|
|
129 |
|
24.0 |
% |
|
|
430 |
|
|
492 |
|
(12.6) |
% |
|
Other general and administrative |
|
|
59 |
|
|
127 |
|
(53.5) |
% |
|
|
186 |
|
|
239 |
|
(22.2) |
% |
|
Total operating expenses |
|
|
720 |
|
|
1,224 |
|
(41.2) |
% |
|
|
2,265 |
|
|
3,414 |
|
(33.7) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
(3,305) |
|
|
18,665 |
|
(117.7) |
% |
|
|
10,832 |
|
|
38,709 |
|
(72.0) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
(1,080) |
|
|
5,276 |
|
(120.5) |
% |
|
|
2,534 |
|
|
8,791 |
|
(71.2) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
(2,225) |
|
$ |
13,389 |
|
(116.6) |
% |
|
$ |
8,298 |
|
$ |
29,918 |
|
(72.3) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
(0.22) |
|
$ |
1.30 |
|
(116.6) |
% |
|
$ |
0.81 |
|
$ |
2.91 |
|
(72.3) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENT OF STOCKHOLDERS' EQUITY *
(Unaudited, in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid in |
|
Retained |
|
|
|
|
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
|
Total |
|
|
Nine months ended March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020 |
10,284,139 |
|
$ |
103 |
|
$ |
2,314 |
|
$ |
197,206 |
|
$ |
199,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
- |
|
|
- |
|
|
- |
|
|
4,963 |
|
|
4,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
- |
|
|
- |
|
|
- |
|
|
(5,553) |
|
|
(5,553) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2021 |
10,284,139 |
|
$ |
103 |
|
$ |
2,314 |
|
$ |
221,571 |
|
$ |
223,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021 |
10,284,139 |
|
$ |
103 |
|
$ |
2,314 |
|
$ |
227,883 |
|
$ |
230,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
- |
|
|
- |
|
|
- |
|
|
8,298 |
|
|
8,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
- |
|
|
- |
|
|
- |
|
|
(5,759) |
|
|
(5,759) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2022 |
10,284,139 |
|
$ |
103 |
|
$ |
2,314 |
|
$ |
230,422 |
|
$ |
232,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* For periods prior to February 26, 2021, financial statements represent the consolidation of California First
National Bancorp and subsidiaries, California First National Bank and California First Leasing.
STATEMENTS OF CASH FLOWS *
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
|
|
2022 |
|
|
2021 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
Net Earnings |
|
$ |
8,298 |
|
$ |
29,918 |
|
Adjustments to reconcile net earnings to cash flows |
|
|
|
|
|
|
|
provided by (used for) operating activities: |
|
|
|
|
|
|
|
(Release of) provision for credit losses |
|
|
(165) |
|
|
(173) |
|
Depreciation and net amortization |
|
|
46 |
|
|
97 |
|
Gain on sale of leased property and sales-type lease income |
|
|
(161) |
|
|
(2,114) |
|
Gain on equity securities, net |
|
|
(7,355) |
|
|
(31,665) |
|
Gain on sale of bank subsidiary |
|
|
- |
|
|
(2,343) |
|
Deferred income taxes, including income taxes payable |
|
|
(396) |
|
|
7,815 |
|
Decrease in income taxes receivable |
|
|
2,545 |
|
|
- |
|
Net decrease in accounts payable and accrued liabilities |
|
|
(280) |
|
|
(820) |
|
Other, net |
|
|
32 |
|
|
178 |
|
Net cash provided by operating activities |
|
|
2,564 |
|
|
893 |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
Investment in leases, loans and transactions in process |
|
|
(4,394) |
|
|
(28,847) |
|
Payments received on lease receivables and loans |
|
|
16,362 |
|
|
32,346 |
|
Proceeds from sales of leased property and sales-type leases |
|
|
439 |
|
|
2,518 |
|
Proceeds from sales and assignments of leases |
|
|
- |
|
|
4,725 |
|
Purchase of equity securities |
|
|
(64,447) |
|
|
(52,664) |
|
Pay down on investments |
|
|
- |
|
|
452 |
|
Proceeds from sale of equity securities |
|
|
51,824 |
|
|
28,776 |
|
Proceeds from sale of bank subsidiary |
|
|
- |
|
|
4,523 |
|
Net decrease (increase) in other assets |
|
|
51 |
|
|
(121) |
|
Net cash used for investing activities |
|
|
(165) |
|
|
(8,292) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
Net decrease in time certificates of deposit |
|
|
- |
|
|
(22,259) |
|
Net decrease in demand and savings deposits |
|
|
- |
|
|
(34,548) |
|
Dividends to stockholders |
|
|
(5,759) |
|
|
(5,554) |
|
Net cash used for financing activities |
|
|
(5,759) |
|
|
(62,361) |
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
(3,360) |
|
|
(69,760) |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
37,045 |
|
|
153,742 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
33,685 |
|
$ |
83,982 |
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
Decrease in lease rentals assigned to lenders and related |
|
|
|
|
|
|
|
related non-recourse debt |
|
$ |
(535) |
|
$ |
(535) |
|
Estimated residual values recorded on leases |
|
$ |
(19) |
|
$ |
(716) |
|
Interest paid on deposits and borrowed funds |
|
$ |
- |
|
$ |
43 |
|
Income taxes paid |
|
$ |
385 |
|
$ |
976 |
|
Addition to ROU assets from new operating lease liabilities |
|
$ |
- |
|
$ |
336 |
|
Remaining bank equity capital paid at sale closing |
|
$ |
- |
|
$ |
12,524 |
|
|
|
|
|
|
|
|
|
* For periods prior to February 26, 2021, financial statements represent the consolidation of California First National Bancorp and subsidiaries, California First National Bank and California First Leasing.
NOTES TO FINANCIAL STATEMENTS
NOTE 1- BASIS OF PRESENTATION
The accompanying unaudited financial statements of California First Leasing Corporation (the “Company,” or “CalFirst Leasing” or “CFNB”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report for the year ended June 30, 2021.
In the opinion of management, the unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the balance sheet as of March 31, 2022 and the statements of earnings, cash flows and stockholders’ equity for the periods presented. The results of operations for the three and nine-month periods ended March 31, 2022 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending June 30, 2022.
Certain reclassifications have been made to the fiscal 2021 financial statements to conform to the presentation of the fiscal 2022 financial statements.
NOTE 2 – FAIR VALUE MEASUREMENT
ASC Topic 820: “Fair Value Measurements and Disclosures” defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. ASC Topic 820 establishes a three-tiered value hierarchy that prioritizes inputs based on the extent to which inputs used are observable in the market and requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. If a value is based on inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. The three levels of inputs are defined as follows:
- Level 1 - Valuation is based upon unadjusted quoted prices for identical instruments traded in active markets;
- Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market;
- Level 3 - Valuation is generated from model-based techniques that use inputs not observable in the market and based on the entity’s own judgment. Level 3 valuation techniques could include the use of option pricing models, discounted cash flow models and similar techniques, and rely on assumptions that market participants would use in pricing the asset or liability.
ASC 820 applies whenever other accounting pronouncements require presentation of fair value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value. As such, ASC 820 does not apply to the Company’s investment in leases. The Company’s financial assets measured at fair value on a recurring basis include equity securities and a mutual fund investment at March 31, 2022 and June 30, 2021; there were no liabilities subject to ASC 820.
Equity securities and a mutual fund investment generally are reported at fair value utilizing Level 1 and Level 2 inputs by reference to the market closing or last trade price (Level 1 inputs). In the unlikely event that no trade occurred on the applicable date, an indicative bid or the last trade most proximate to the applicable date would be used (Level 2 inputs).
The Company’s assets, which are measured at fair value on a recurring basis as of March 31, 2022 and June 30, 2021 are summarized as follows:
|
|
|
|
|
Quoted Price in |
|
|
|
|
Significant |
|
|
|
|
|
Active Markets for |
|
Significant Other |
|
Unobservable |
|
|
|
Total |
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
Description (in thousands) |
|
|
Fair Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
As of March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
178,996 |
|
$ |
178,996 |
|
$ |
- |
|
$ |
- |
Mutual fund investment |
|
|
1,107 |
|
|
1,107 |
|
|
- |
|
|
- |
|
|
$ |
180,103 |
|
$ |
180,103 |
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Price in |
|
|
|
|
Significant |
|
|
|
|
|
Active Markets for |
|
Significant Other |
|
Unobservable |
|
|
|
Total |
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
Description (in thousands) |
|
|
Fair Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
As of June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
158,730 |
|
$ |
158,730 |
|
$ |
- |
|
$ |
- |
Mutual fund investment |
|
|
1,395 |
|
|
1,395 |
|
|
- |
|
|
- |
|
|
$ |
160,125 |
|
$ |
160,125 |
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3 – fair value of Financial Instruments
In accordance with ASC 825-50, the following table summarizes the estimated fair value of financial instruments as of March 31, 2022, and June 30, 2021, and includes financial instruments that are not accounted for or carried at fair value. In accordance with disclosure guidance, certain financial instruments, including all lease related assets and liabilities and all non-financial instruments are excluded from fair value of financial instrument disclosure requirements. Accordingly, the aggregate of the fair values presented does not represent the total underlying value of the Company. These fair value estimates are based on relevant market information and data, however, given there is no active market or observable market transactions for certain financial instruments, the Company has made estimates of fair values which are subjective in nature, involve uncertainties and judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values.
For cash and cash equivalents and demand and savings deposits, because of their short-term nature, the carrying amounts approximate the fair value and are classified as Level 1 in the fair value hierarchy. Values for equity investments securities are determined as set forth in Note 4. For loans, the estimated fair value is calculated based on discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and are classified as Level 3 in the fair value hierarchy. The estimated fair values of financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
June 30, 2021 |
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
Financial Assets |
|
(in thousands) |
Cash and cash equivalents |
|
$ |
33,685 |
|
$ |
33,685 |
|
$ |
37,045 |
|
$ |
37,045 |
Equity securities |
|
|
180,103 |
|
|
180,103 |
|
|
160,125 |
|
|
160,125 |
Loans |
|
|
3,282 |
|
|
3,194 |
|
|
3,578 |
|
|
3,675 |
|
|
$ |
217,070 |
|
$ |
216,982 |
|
$ |
200,748 |
|
$ |
200,845 |
NOTE 4 – EQUITY SECURITIES:
Investments in equity securities as of March 31, 2022 and June 30, 2021 consist of holdings of public companies with readily available market values and are carried at fair value. Gains and losses arising from changes in the fair values of equity securities based on stock prices on the last day of the fiscal period are recorded as part of investment income. The Company’s equity portfolio is summarized in four broad industry groups in the tables below.
(in thousands) |
|
|
|
|
Unrealized |
|
|
|
|
|
|
Cost Basis |
|
|
Gains |
|
|
(Losses) |
|
|
FMV |
as of March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial / Industrial |
|
$ |
78,700 |
|
$ |
24,854 |
|
$ |
(2,699) |
|
$ |
100,855 |
Consumer |
|
|
42,578 |
|
|
2,608 |
|
|
(4,389) |
|
|
40,797 |
Financial |
|
|
15,191 |
|
|
3,543 |
|
|
(216) |
|
|
18,518 |
Healthcare |
|
|
16,092 |
|
|
3,841 |
|
|
0 |
|
|
19,933 |
|
|
$ |
152,561 |
|
$ |
34,846 |
|
$ |
(7,304) |
|
$ |
180,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
as of June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial / Industrial |
|
$ |
53,950 |
|
$ |
15,661 |
|
$ |
(435) |
|
$ |
69,176 |
Consumer |
|
|
39,576 |
|
|
3,038 |
|
|
(16) |
|
|
42,598 |
Financial |
|
|
10,966 |
|
|
4,552 |
|
|
- |
|
|
15,518 |
Healthcare |
|
|
26,888 |
|
|
5,945 |
|
|
- |
|
|
32,833 |
|
|
$ |
131,380 |
|
$ |
29,196 |
|
$ |
(451) |
|
$ |
160,125 |
NOTE 5 – LEASES:
Net investment in leases consists of the following:
|
|
March 31, |
|
June 30, |
|
|
|
2022 |
|
2021 |
|
|
|
(in thousands) |
|
Minimum lease payments receivable |
|
$ |
24,761 |
|
$ |
36,417 |
|
Estimated residual value |
|
|
2,538 |
|
|
2,798 |
|
Less unearned income |
|
|
(2,116) |
|
|
(3,178) |
|
Net investment in leases before allowances |
|
|
25,183 |
|
|
36,037 |
|
Less allowance for lease losses |
|
|
(366) |
|
|
(575) |
|
Less valuation allowance for estimated residual value |
|
|
(10) |
|
|
(10) |
|
Net investment in leases |
|
$ |
24,807 |
|
$ |
35,452 |
|
|
|
|
|
|
|
|
|
The minimum lease payments receivable and estimated residual value are discounted using the internal rate of return method related to each specific lease.
NOTE 6 – COMMERCIAL LOANS
Commercial loans consist of the following:
|
|
March 31, |
|
June 30, |
|
|
|
2022 |
|
2021 |
|
|
|
(in thousands) |
|
Commercial real estate loans |
|
$ |
3,114 |
|
$ |
3,332 |
|
Commercial term loan participations |
|
|
223 |
|
|
323 |
|
Total commercial loans |
|
|
3,337 |
|
|
3,655 |
|
Less unearned income and discounts |
|
|
(20) |
|
|
(42) |
|
Less allowance for loan losses |
|
|
(35) |
|
|
(35) |
|
Net commercial loans |
|
$ |
3,282 |
|
$ |
3,578 |
|
|
|
|
|
|
|
|
|
Commercial loans are reported at their outstanding unpaid principal balances reduced by the allowance for loan losses and net of any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related commercial loan.
NOTE 7 – CREDIT QUALITY OF FINANCING RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
The following tables provide information on the credit profile of the components of the portfolio and allowance for credit losses related to “financing receivables” as defined under ASC Topic 310, Receivables. This disclosure on “financing receivables” covers the Company’s direct finance and sales-type leases and all commercial loans, but does not include operating leases and transactions in process. The portfolio is disaggregated into segments and classifications appropriate for assessing and monitoring the portfolios’ risk and performance. This disclosure does not encompass all risk assets or the entire allowance for credit losses.
Portfolio segments identified by the Company include leases and loans. These segments have been disaggregated into four classes: 1) commercial leases, 2) education, government and non-profit (“EGNP”) leases, 3) commercial and industrial loans and 4) commercial real estate loans. Relevant risk characteristics for establishing these portfolio classes include the nature of the borrower, structure of the transaction and collateral type. The Company’s credit process includes a policy of classifying all leases and loans as “pass”, “special mention”, “substandard”, or “doubtful”. These risk categories reflect an assessment of the ability of the customer to service their obligation based on current financial position, historical payment experience, and collateral adequacy, among other factors. The Company uses the following definitions for risk ratings:
Pass – Includes credits of the highest quality as well as credits with positive primary repayment source but one or more characteristics that are of higher than average risk.
Special Mention – Have a potential weakness that if left uncorrected may result in deterioration of the repayment prospects for the lease or loan or of the Company’s credit position at some future date.
Substandard – Are inadequately protected by the paying capacity of the obligor or the collateral, if any. Substandard credits have a well-defined weakness that jeopardize the liquidation of the debt or indicate the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – Based on current information and events, collection of all amounts due according to the contractual terms of the lease or loan agreement is considered highly questionable and improbable.
The risk classification of financing receivables by portfolio class is as follows:
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Commercial |
|
|
Total |
(dollars in thousands) |
|
|
Commercial |
|
|
EGNP |
|
|
& Industrial |
|
|
Real Estate |
|
|
Financing |
|
|
|
Leases |
|
|
Leases |
|
|
Loans |
|
|
Loans |
|
|
Receivable |
As of March 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
12,501 |
|
$ |
11,142 |
|
$ |
203 |
|
$ |
3,114 |
|
$ |
26,960 |
Special Mention |
|
|
- |
|
|
728 |
|
|
- |
|
|
- |
|
|
728 |
Substandard |
|
|
787 |
|
|
25 |
|
|
- |
|
|
- |
|
|
812 |
Doubtful |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
$ |
13,288 |
|
$ |
11,895 |
|
$ |
203 |
|
$ |
3,114 |
|
$ |
28,500 |
Non-accrual |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
19,250 |
|
$ |
15,152 |
|
$ |
281 |
|
$ |
3,332 |
|
$ |
38,015 |
Special Mention |
|
|
230 |
|
|
- |
|
|
- |
|
|
- |
|
|
230 |
Substandard |
|
|
1,223 |
|
|
182 |
|
|
- |
|
|
- |
|
|
1,405 |
Doubtful |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
$ |
20,703 |
|
$ |
15,334 |
|
$ |
281 |
|
$ |
3,332 |
|
$ |
39,650 |
Non-accrual |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
The accrual of interest income on leases and loans will be discontinued when the customer becomes ninety days or more past due on its lease or loan payments with the Company, unless the Company believes the investment is otherwise recoverable. Leases and loans may be placed on non-accrual earlier if the Company has significant doubt about the ability of the customer to meet its lease or loan obligations, as evidenced by consistent delinquency, deterioration in the customer’s financial condition or other relevant factors. Payments received while on non-accrual are applied to reduce the Company’s recorded value.
The aging of financing receivables by portfolio class is as follows:
|
|
|
|
|
|
Greater |
|
|
|
|
|
|
|
|
Total |
|
|
Over 90 |
(dollars in thousands) |
|
|
31-89 |
|
|
Than |
|
|
Total |
|
|
|
|
|
Financing |
|
|
Days & |
As of March 31, 2022: |
|
|
Days |
|
|
90 Days |
|
|
Past Due |
|
|
Current |
|
|
Receivable |
|
|
Accruing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Leases |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
13,288 |
|
$ |
13,288 |
|
$ |
- |
Education, Government, Non-profit Leases |
|
|
- |
|
|
- |
|
|
- |
|
|
11,895 |
|
|
11,895 |
|
|
- |
Commercial and Industrial Loans |
|
|
- |
|
|
- |
|
|
- |
|
|
203 |
|
|
203 |
|
|
- |
Commercial Real Estate Loans |
|
|
- |
|
|
- |
|
|
- |
|
|
3,114 |
|
|
3,114 |
|
|
- |
|
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
28,500 |
|
$ |
28,500 |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Leases |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
20,703 |
|
$ |
20,703 |
|
$ |
- |
Education, Government, Non-profit Leases |
|
|
- |
|
|
- |
|
|
- |
|
|
15,334 |
|
|
15,334 |
|
|
- |
Commercial and Industrial Loans |
|
|
- |
|
|
- |
|
|
- |
|
|
281 |
|
|
281 |
|
|
- |
Commercial Real Estate Loans |
|
|
- |
|
|
- |
|
|
- |
|
|
3,332 |
|
|
3,332 |
|
|
- |
|
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
39,650 |
|
$ |
39,650 |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance balances and activity in the allowance related to financing receivables, by portfolio segment for the three and nine months ended March 31, 2022 and 2021 are presented in the following table:
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Commercial |
|
|
|
|
|
|
Commercial |
|
|
EGNP |
|
|
& Industrial |
|
|
Real Estate |
|
|
Total |
(dollars in thousands) |
|
|
Leases |
|
|
Leases |
|
|
Loans |
|
|
Loans |
|
|
Allowance |
For the three months ended March 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period |
|
$ |
329 |
|
$ |
112 |
|
$ |
5 |
|
$ |
30 |
|
$ |
476 |
Charge-offs |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Recoveries |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Provision |
|
|
(55) |
|
|
(10) |
|
|
- |
|
|
- |
|
|
(65) |
Balance end of period |
|
$ |
274 |
|
$ |
102 |
|
$ |
5 |
|
$ |
30 |
|
$ |
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Commercial |
|
|
|
|
|
|
Commercial |
|
|
EGNP |
|
|
& Industrial |
|
|
Real Estate |
|
|
Total |
(dollars in thousands) |
|
|
Leases |
|
|
Leases |
|
|
Loans |
|
|
Loans |
|
|
Allowance |
For the three months ended March 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period |
|
$ |
588 |
|
$ |
219 |
|
$ |
- |
|
$ |
61 |
|
$ |
868 |
Charge-offs |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Recoveries |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Provision |
|
|
(50) |
|
|
(47) |
|
|
5 |
|
|
(31) |
|
|
(123) |
Balance end of period |
|
$ |
538 |
|
$ |
172 |
|
$ |
5 |
|
$ |
30 |
|
$ |
745 |
For the nine months ended March 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period |
|
$ |
448 |
|
$ |
137 |
|
$ |
5 |
|
$ |
30 |
|
$ |
620 |
Charge-offs |
|
|
(44) |
|
|
- |
|
|
- |
|
|
- |
|
|
(44) |
Recoveries |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Provision |
|
|
(130) |
|
|
(35) |
|
|
- |
|
|
- |
|
|
(165) |
Balance end of period |
|
$ |
274 |
|
$ |
102 |
|
$ |
5 |
|
$ |
30 |
|
$ |
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended March 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period |
|
$ |
638 |
|
$ |
219 |
|
$ |
- |
|
$ |
61 |
|
$ |
918 |
Charge-offs |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Recoveries |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Provision |
|
|
(100) |
|
|
(47) |
|
|
5 |
|
|
(31) |
|
|
(173) |
Balance end of period |
|
$ |
538 |
|
$ |
172 |
|
$ |
5 |
|
$ |
30 |
|
$ |
745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the recorded investment in loans and leases and the related allowance based on impairment method as of March 31, 2022 and June 30, 2021 by portfolio segment.
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Commercial |
|
|
Total |
|
|
|
Commercial |
|
|
EGNP |
|
|
& Industrial |
|
|
Real Estate |
|
|
Financing |
(dollars in thousands) |
|
|
Leases |
|
|
Leases |
|
|
Loans |
|
|
Loans |
|
|
Receivable |
As of March 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for lease and loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
79 |
|
$ |
40 |
|
$ |
- |
|
$ |
- |
|
$ |
119 |
Collectively evaluated for impairment |
|
|
195 |
|
|
62 |
|
|
5 |
|
|
30 |
|
|
292 |
Total ending allowance balance |
|
$ |
274 |
|
$ |
102 |
|
$ |
5 |
|
$ |
30 |
|
$ |
411 |
Finance receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
787 |
|
$ |
753 |
|
$ |
- |
|
$ |
- |
|
$ |
1,540 |
Collectively evaluated for impairment |
|
|
12,501 |
|
|
11,142 |
|
|
203 |
|
|
3,114 |
|
|
26,960 |
Total ending finance receivable balance |
|
$ |
13,288 |
|
$ |
11,895 |
|
$ |
203 |
|
$ |
3,114 |
|
$ |
28,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for lease and loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
134 |
|
$ |
19 |
|
$ |
- |
|
$ |
- |
|
$ |
153 |
Collectively evaluated for impairment |
|
|
314 |
|
|
118 |
|
|
5 |
|
|
30 |
|
|
467 |
Total ending allowance balance |
|
$ |
448 |
|
$ |
137 |
|
$ |
5 |
|
$ |
30 |
|
$ |
620 |
Finance receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
1,453 |
|
$ |
182 |
|
$ |
- |
|
$ |
- |
|
$ |
1,635 |
Collectively evaluated for impairment |
|
|
19,250 |
|
|
15,152 |
|
|
281 |
|
|
3,332 |
|
|
38,015 |
Total ending finance receivable balance |
|
$ |
20,703 |
|
$ |
15,334 |
|
$ |
281 |
|
$ |
3,332 |
|
$ |
39,650 |
(2) Audited Financial Statements for the fiscal years ended June 30, 2021 and 2020
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors
California First Leasing Corporation
Newport Beach, California
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of California First Leasing Corporation, which comprise the balance sheets as of June 30, 2021 and 2020, and the related statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of California First Leasing Corporation as of June 30, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Laguna Hills, California
September 21, 2021
What inspires you, inspires us. | eidebailly.com
25231 Paseo De Alicia, Ste. 100 | Laguna Hills, CA 92653-4615 | T 949.768.0833 | F 949.768.8408 | EOE
BALANCE SHEETS
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
June 30, |
|
June 30, |
|
|
|
2021 |
|
|
2020 * |
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
$ |
37,045 |
|
$ |
153,083 |
|
|
Federal funds sold |
|
- |
|
|
1,040 |
|
|
Equity investments |
|
160,125 |
|
|
51,339 |
|
|
Investments |
|
- |
|
|
2,102 |
|
|
Property acquired for transactions-in-process |
|
1,751 |
|
|
4,031 |
|
|
Leases and loans: |
|
|
|
|
|
|
|
Net investment in leases |
|
36,037 |
|
|
49,273 |
|
|
Commercial loans |
|
3,613 |
|
|
3,607 |
|
|
Allowance for credit losses |
|
(620) |
|
|
(918) |
|
|
Net investment in leases and loans |
|
39,030 |
|
|
51,962 |
|
|
|
|
|
|
|
|
|
|
Property on operating leases, less accumulated depreciation |
|
|
|
|
|
|
|
of $0 (2021) and $2,561 (2020) |
|
28 |
|
|
867 |
|
|
Income tax receivable |
|
2,857 |
|
|
376 |
|
|
Other assets |
|
853 |
|
|
1,019 |
|
|
Discounted lease rentals assigned to lenders |
|
1,228 |
|
|
1,941 |
|
|
Total Assets |
$ |
242,917 |
|
$ |
267,760 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
Demand and savings deposits |
$ |
- |
|
$ |
34,548 |
|
|
Time certificates of deposit |
|
- |
|
|
22,259 |
|
|
Accounts payable |
|
628 |
|
|
3,266 |
|
|
Accrued liabilities |
|
1,264 |
|
|
2,116 |
|
|
Lease deposits |
|
188 |
|
|
802 |
|
|
Non-recourse debt |
|
1,228 |
|
|
1,941 |
|
|
Deferred income taxes, net |
|
9,309 |
|
|
3,205 |
|
|
|
|
12,617 |
|
|
68,137 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
Preferred stock; 2,500,000 shares authorized; none issued |
|
- |
|
|
- |
|
|
Common stock; $.01 par value; 20,000,000 shares authorized; 10,284,139 |
|
|
|
|
|
|
|
June 2021 and 2020 issued and outstanding |
|
103 |
|
|
103 |
|
|
Additional paid in capital |
|
2,314 |
|
|
2,314 |
|
|
Retained earnings |
|
227,883 |
|
|
197,206 |
|
|
Total Stockholders’ Equity |
|
230,300 |
|
|
199,623 |
|
|
Total Liabilities and Stockholders’ Equity |
$ |
242,917 |
|
$ |
267,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
* For periods prior to February 26, 2021, financial statements represent the consolidation of California First National Bancorp and subsidiaries, California First National Bank and California First Leasing.
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF OPERATIONS *
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
|
2021 |
|
2020 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Finance & loan income |
|
$ |
3,858 |
|
$ |
6,162 |
|
$ |
10,189 |
|
Investment interest and dividend income |
|
|
2,845 |
|
|
3,788 |
|
|
4,001 |
|
Total interest and dividend income |
|
|
6,703 |
|
|
9,950 |
|
|
14,190 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on deposits |
|
|
39 |
|
|
373 |
|
|
1,599 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
6,664 |
|
|
9,577 |
|
|
12,591 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision (release) of reserves for credit losses |
|
|
(298) |
|
|
(582) |
|
|
(1,100) |
|
Net interest income after provision for credit losses |
|
|
6,962 |
|
|
10,159 |
|
|
13,691 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
|
|
|
|
|
|
|
|
Operating & sales-type lease income |
|
|
533 |
|
|
1,406 |
|
|
1,388 |
|
Gain on sale of leases, loans & leased property |
|
|
2,481 |
|
|
3,229 |
|
|
1,839 |
|
Gain (loss) on equity securities |
|
|
38,770 |
|
|
(9,892) |
|
|
(607) |
|
Gain on sale of bank subsidiary |
|
|
2,343 |
|
|
- |
|
|
- |
|
Other fee income |
|
|
267 |
|
|
42 |
|
|
129 |
|
Total non-interest income (loss) |
|
|
44,394 |
|
|
(5,215) |
|
|
2,749 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses |
|
|
|
|
|
|
|
|
|
|
Compensation & employee benefits |
|
|
3,137 |
|
|
3,720 |
|
|
4,892 |
|
Occupancy |
|
|
177 |
|
|
227 |
|
|
508 |
|
Professional and IT services |
|
|
636 |
|
|
784 |
|
|
926 |
|
FDIC and regulatory fees |
|
|
(66) |
|
|
56 |
|
|
146 |
|
Other general & administrative |
|
|
350 |
|
|
447 |
|
|
601 |
|
Total non-interest expenses |
|
|
4,234 |
|
|
5,234 |
|
|
7,073 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
|
47,122 |
|
|
(290) |
|
|
9,367 |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
10,891 |
|
|
2,073 |
|
|
2,033 |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
36,231 |
|
$ |
(2,363) |
|
$ |
7,334 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
3.52 |
|
$ |
(0.23) |
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.54 |
|
$ |
0.52 |
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
10,284,139 |
|
|
10,284,139 |
|
|
10,284,139 |
|
* For periods prior to February 26, 2021, financial statements represent the consolidation of California First National Bancorp and subsidiaries, California First National Bank and California First Leasing.
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) *
(in thousands)
|
|
Years ended June 30, |
|
|
2021 |
|
2020 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
36,231 |
|
$ |
(2,363) |
|
$ |
7,334 |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
Unrealized gains/(losses) on securities available-for-sale |
|
|
- |
|
|
35 |
|
|
206 |
Tax effect |
|
|
- |
|
|
(5) |
|
|
(57) |
Total other comprehensive income |
|
|
- |
|
|
30 |
|
|
149 |
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
36,231 |
|
$ |
(2,333) |
|
$ |
7,483 |
|
|
|
|
|
|
|
|
|
|
STATEMENTS OF STOCKHOLDERS' EQUITY *
(in thousands, except for share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
Accumulated |
|
|
|
|
Common Stock |
|
Paid in |
|
Retained |
|
Comprehensive |
|
|
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Income (Loss) |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018 |
10,284,139 |
|
$ |
103 |
|
$ |
2,314 |
|
|
201,210 |
|
$ |
1,336 |
|
$ |
204,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
- |
|
|
- |
|
|
- |
|
|
7,334 |
|
|
|
|
|
7,334 |
Other comprehensive income |
- |
|
|
- |
|
|
- |
|
|
- |
|
|
149 |
|
|
149 |
Adoption of new accounting standard (1) |
- |
|
|
- |
|
|
- |
|
|
1,515 |
|
|
(1,515) |
|
|
- |
Dividends paid |
- |
|
|
- |
|
|
- |
|
|
(5,142) |
|
|
- |
|
|
(5,142) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019 |
10,284,139 |
|
|
103 |
|
|
2,314 |
|
|
204,917 |
|
|
(30) |
|
|
207,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
- |
|
|
- |
|
|
- |
|
|
(2,363) |
|
|
- |
|
|
(2,363) |
Other comprehensive income |
- |
|
|
- |
|
|
- |
|
|
- |
|
|
30 |
|
|
30 |
Dividends paid |
- |
|
|
- |
|
|
- |
|
|
(5,348) |
|
|
- |
|
|
(5,348) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020 |
10,284,139 |
|
|
103 |
|
|
2,314 |
|
|
197,206 |
|
|
- |
|
|
199,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
- |
|
|
- |
|
|
- |
|
|
36,231 |
|
|
- |
|
|
36,231 |
Dividends paid |
- |
|
|
- |
|
|
- |
|
|
(5,554) |
|
|
- |
|
|
(5,554) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021 |
10,284,139 |
|
$ |
103 |
|
$ |
2,314 |
|
$ |
227,883 |
|
$ |
- |
|
$ |
230,300 |
(1) Represents the impact of Accounting Standards Update (“ASU”) 2016-01, net of taxes.
* For periods prior to February 26, 2021, financial statements represent the consolidation of California First National Bancorp and subsidiaries, California First National Bank and California First Leasing.
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS *
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30, |
|
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
36,231 |
|
$ |
(2,363) |
|
$ |
7,334 |
Adjustments to reconcile net earnings to cash flows |
|
|
|
|
|
|
|
|
|
provided by (used for) operating activities: |
|
|
|
|
|
|
|
|
|
Release of reserves for credit losses |
|
|
(298) |
|
|
(582) |
|
|
(1,100) |
Depreciation and net amortization |
|
|
111 |
|
|
489 |
|
|
379 |
Gain on sale of loans held for sale |
|
|
- |
|
|
(19) |
|
|
(94) |
Proceeds from sales of loans held for sale |
|
|
- |
|
|
14,605 |
|
|
50,030 |
Gain on sale of leased property and sales-type lease income |
|
|
(2,215) |
|
|
(635) |
|
|
(364) |
(Gain) loss on equity securities, net |
|
|
(38,770) |
|
|
9,892 |
|
|
607 |
Gain on sale of bank subsidiary |
|
|
(2,343) |
|
|
- |
|
|
- |
Deferred income taxes, including income taxes payable |
|
|
6,104 |
|
|
(528) |
|
|
(2,066) |
(Increase) decrease in income taxes receivable |
|
|
(2,481) |
|
|
(120) |
|
|
2,404 |
Net (decrease) increase in accounts payable and accrued liabilities |
|
|
(852) |
|
|
848 |
|
|
(362) |
Other, net |
|
|
69 |
|
|
875 |
|
|
(274) |
Net cash (used for) provided by operating activities |
|
|
(4,444) |
|
|
22,462 |
|
|
56,494 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Investment in leases, loans and transactions in process |
|
|
(30,891) |
|
|
(70,491) |
|
|
(49,772) |
Payments received on lease receivables and loans |
|
|
38,688 |
|
|
69,777 |
|
|
93,226 |
Proceeds from sales of leased property and sales-type leases |
|
|
2,769 |
|
|
1,104 |
|
|
2,393 |
Proceeds from sales and assignments of leases |
|
|
4,725 |
|
|
57,298 |
|
|
16,261 |
Net decrease (increase) in Fed funds sold |
|
|
660 |
|
|
1,717 |
|
|
(2,757) |
Purchase of equity securities |
|
|
(115,413) |
|
|
(21,344) |
|
|
(38,208) |
Proceeds from sale of equity securities |
|
|
45,396 |
|
|
36,057 |
|
|
548 |
Pay down on or sales of fixed-income securities |
|
|
- |
|
|
24,000 |
|
|
13,000 |
Pay down on investments |
|
|
452 |
|
|
631 |
|
|
821 |
Proceeds from sale of bank subsidiary |
|
|
4,523 |
|
|
- |
|
|
- |
Net (increase) decrease in other assets |
|
|
(142) |
|
|
(691) |
|
|
358 |
Net cash (used for) provided by investing activities |
|
|
(49,233) |
|
|
98,058 |
|
|
35,870 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Net decrease in time certificates of deposit |
|
|
(22,259) |
|
|
(24,298) |
|
|
(58,945) |
Net decrease in demand and savings deposits |
|
|
(34,548) |
|
|
(6,640) |
|
|
(22,735) |
Dividends to stockholders |
|
|
(5,554) |
|
|
(5,348) |
|
|
(5,142) |
Net cash used for financing activities |
|
|
(62,361) |
|
|
(36,286) |
|
|
(86,822) |
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
(116,038) |
|
|
84,234 |
|
|
5,542 |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
153,083 |
|
|
68,849 |
|
|
63,307 |
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
37,045 |
|
$ |
153,083 |
|
$ |
68,849 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
(Decrease) increase in lease rentals assigned to lenders and |
|
|
|
|
|
|
|
|
|
related non-recourse debt |
|
$ |
(713) |
|
$ |
(714) |
|
$ |
(713) |
Estimated residual values recorded on leases |
|
$ |
(716) |
|
$ |
(229) |
|
$ |
(216) |
Interest paid on deposits and borrowed funds |
|
$ |
43 |
|
$ |
395 |
|
$ |
1,638 |
Income taxes paid |
|
$ |
7,267 |
|
$ |
2,720 |
|
$ |
1,696 |
Transfers from loans held for investment to loans held-for-sale |
|
$ |
- |
|
$ |
14,599 |
|
$ |
50,220 |
Addition to ROU assets from new operating lease liabilities |
|
$ |
336 |
|
$ |
- |
|
$ |
- |
Remaining bank equity capital at sale closing |
|
$ |
12,524 |
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
* For periods prior to February 26, 2021, financial statements represent the consolidation of California First National Bancorp and subsidiaries, California First National Bank and California First Leasing.
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies:
Nature of Operations
Effective February 26, 2021, California First National Bancorp, a California corporation (“Bancorp”) completed the sale of the stock in California First National Bank (“Bank”) while retaining all leases and loans. Following the sale, a bank holding company structure was no longer required and Bancorp merged its wholly-owned subsidiary, California First Leasing Corporation, into Bancorp and changed its name to California First Leasing Corporation (“CalFirstLease” or the “Company”). For periods prior to February 26, 2021, financial statements represent the consolidation of Bancorp with Bank and California First Leasing.
The Company leases and finances capital assets from one central location to businesses and other commercial or non-profit organizations throughout the United States, while its UniversityLease business focuses on the needs of colleges and universities. The credit portfolio is diversified geographically and across industries. The Company also actively invests retained earnings in equity securities.
Basis of Presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting estimates particularly susceptible to change include the allowance for credit losses, residual values and taxes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash in demand deposit accounts in banks and money market accounts, all of which have initial maturities of less than ninety days. The Company had cash in interest-bearing accounts of $36.6 million and $153.2 million at June 30, 2021 and 2020, respectively, with $36.5 million at June 30, 2021 not subject to FDIC insurance.
Equity Securities
The Company carries all of the investments in equity securities at fair value and records the subsequent changes in fair values in the Statement of Operations as a component of equity securities gains and losses.
Leases-
Capital Leases
New lease transactions are generally structured as direct financing leases that are non-cancelable "net" leases, 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, service and insure the property against casualty loss and pay all property, sales and other taxes. The re-lease of property that has come off lease may be accounted for as a sales-type lease or as an operating lease, depending on the terms of the re-lease. Leased property that comes off lease and is re-marketed through a sale to the lessee or a third party is accounted for as sale of leased property.
For leases that qualify as direct financing leases, the aggregate lease payments receivable and estimated residual value, if any, are recorded net of unearned income as net investment in leases. The unearned income is recognized as direct finance income on an internal rate of return method calculated to achieve a level yield on the Company’s investment over the lease term. There are no costs or expenses related to direct financing leases since lease income is recorded on a net basis.
For leases that qualify as sales-type leases, the Company recognizes profit or loss at lease inception to the extent the fair value of the property leased differs from the Company's carrying value. The difference between the discounted value of the aggregate lease payments receivable and the property cost, less the discounted value of the residual, if any, and any initial direct costs is recorded as sales-type lease income. For balance sheet purposes, the aggregate lease payments receivable and estimated residual value, if any, are recorded net of unearned income as net investment in leases. Unearned income is recognized as direct finance income over the lease term on an internal rate of return method.
The residual value is an estimate for accounting purposes of the fair value of the lease property at lease termination. The estimates are reviewed periodically to ensure reasonableness, however, the amounts the Company may ultimately realize could differ from the estimated amounts.
In some instances, the Company assigns on a nonrecourse basis or participates out the lease payments receivable related to direct financing leases to unaffiliated financial institutions at fixed interest rates. The accounting for the participation or sale of lease receivables is governed by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 860 Transfer and Servicing, which establishes a framework for determining which transactions should be treated as a sale of the financial asset by the Company or a secured borrowing through retention of the lease as an asset and reporting of non-recourse debt. For lease receivables accounted for as a sale, the Company derecognizes the lease receivable and the unearned income related to the lease is recognized as a gain from the sale of lease receivable in the period in which the lease receivable has been sold. For lease receivables accounted for as a secured borrowing, the minimum lease payments receivable is re-categorized on the balance sheet as discounted lease rentals assigned to lenders. The related obligations resulting from the discounting of the leases are recorded as non-recourse debt. The unearned income related to the lease is reduced by the interest expense from the non-recourse debt. In the event of default by a lessee, the participant or lender has a first lien against the underlying leased property with no further recourse against the Company. If this occurs, the Company may not realize its residual investment in the leased property.
Upon adoption of ASU 2016-02, Leases on July 1, 2019, incremental direct costs directly related to lease origination activity, previously eligible for capitalization, are now expensed. Prior to such adoption, a portion of the Company's non-interest expenses that would not have been incurred had the lease not been executed were deferred through a reduction to non-interest expense recognized in the period, with the deferred costs amortized over the lease term as a reduction to direct finance income utilizing the effective interest method. ASU 2016-02, Leases has a narrower definition of initial direct costs that may be capitalized and limits the types of direct lease origination costs that are able to be deferred.
Operating Leases
Lease contracts which do not meet the criteria of capital leases are accounted for as operating leases. Property on operating leases is recorded at the lower of cost or fair value and depreciated on a straight-line basis over the lease term to the estimated residual value at the termination of the lease. Most operating leases involve the re-lease of off-lease property for terms of less than 12 months, and the associated cost is the Company’s estimated residual. Rental income is recorded on a straight-line basis over the lease term.
Loans
Loans are reported at their principal amount outstanding, net of unearned discounts and unamortized nonrefundable fees and direct costs associated with their origination or acquisition. Interest earned on loans without discounts is credited to income based on loan principal amounts outstanding at appropriate interest rates. Material origination and other nonrefundable fees net of direct costs and discounts on loans are credited to income over the terms of the loans using a method that approximates an effective yield.
Loans held-for-sale are carried at the lower of cost or fair value as determined by quoted prices, and are reported as level 2 inputs. Any amount by which cost exceeds fair value is accounted for as a charge against the allowance for credit losses when transferred to held-for-sale and subsequently reflected in the gain or loss when sold.
Allowance for Credit Losses
The allowance for credit losses is an estimate based on management’s judgment applying the principles of ASC Topic 450, “Contingencies,” and ASC Topic 310-35, “Loan Impairment.” The determination of the adequacy of the allowance is based on an assessment of the inherent loss potential in the lease and loan portfolios given the conditions at the time and are continuously reviewed for adequacy considering levels of past due payments and non-performing assets, customers’ financial condition, leased property values as well as general economic conditions and credit quality indicators. The need for reserves is subject to future events, which by their nature are uncertain. Therefore, changes in economic conditions or other events may necessitate additions or deductions to the allowance for credit losses or the residual valuation allowance. The allowance is maintained at a level believed to be adequate to absorb probable losses inherent in the portfolios.
The allowance for credit losses includes specific and general reserves. Specific reserves relate to leases and loans that are individually classified as problems or impaired. Leases are individually evaluated for impairment under ASC Topic 450, while loans are evaluated under ASC 310-35, which does not apply to leases. A lease or loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect amounts due according to the contractual terms. Factors considered in determining impairment include payment status, collateral value and the probability of collecting all amounts when due. The net book value of each non-performing or problem lease is evaluated to determine whether the carrying value is less than or equal to the expected recovery anticipated to be derived from lease payments, additional collateral or residual realization. Measurement of impairment of a loan is based on expected future cash flows of the impaired loan, which are to be discounted at the loan’s effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis. The amount estimated as unrecoverable is recognized as a reserve individually identified for the lease or impaired loan.
General reserves are an estimate of probable or inherent losses related to the remaining portfolio. An ongoing review of all leases and loans is conducted, considering recent loss experience, known and inherent risks in the portfolio, levels of delinquencies, adverse situations that may affect customers’ ability to repay, trends in volume and other factors, including regulatory guidance and current and anticipated economic conditions. This portfolio analysis includes a stratification of the portfolio by the risk classifications and segments and estimation of potential losses based on risk classification or segment. The composition of the portfolio based on risk ratings is monitored, and changes in the overall risk profile of the portfolio are also factored into the evaluation of inherent risks. Based on the foregoing, an estimated inherent loss not based directly on specific problem assets is recorded as a collective allowance. Lease receivables and loans are charged off when they are deemed completely uncollectible. Subsequent recoveries, if any, are credited to the allowance.
Property Acquired for Transactions-in-process
Property acquired for transactions-in-process represents partial deliveries of property which the lessee has accepted on in-process lease transactions. Such amounts are stated at cost, net of any lessee payments related to the property. Income is not recognized while a transaction is in process and prior to the commencement of the lease. At lease commencement, any pre-commencement payments are included in minimum lease payments receivable and the unearned income is recognized as direct finance income over the lease term.
Income Taxes
Income tax expense is the total of the current year income tax due and the change in deferred tax assets and liabilities. The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is established if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. The tax effects of an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities.
Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of unrealized gains and losses on available-for-sale securities.
Earnings Per Share
Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. The Company has had no stock options outstanding since December 2017.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company continues to evaluate the extent of the potential impact of ASU 2016-13 on its financial statements.
Subsequent events
The Company has evaluated subsequent events for recognition and disclosure through September 21, 2021, which is the date the financial statements were available to be issued.
Reclassifications
Certain reclassifications have been made to the fiscal 2020 financial statements to conform to the presentation of the fiscal 2021 financial statements.
Note 2 – Sale of Bank
On February 26, 2021, Bancorp completed the sale of the stock of California First National Bank to DMG Bancshares, Inc. (“DMG”). Pursuant to the terms of the sale agreement, 1) DMG paid a purchase price equal to the Bank’s equity capital ($12.6 million on February 26, 2021) plus $2.5 million, and 2) the leasing business and lease portfolio of Bank were transferred to CalFirstLease. The Company also retained certain assets and liabilities related to the lease business. The Company recognized a gain of $2.34 million on the sale of the stock of the Bank to DMG.
Prior to completing the sale of the Bank, in January 2021 the Bank distributed its lease portfolio as a dividend recorded as a reduction in the Company’s investment in the Bank based on the net value of the investment in leases of $47.3 million. In accordance with Internal Revenue Code (IRC) Section 311, the difference in the fair value relative to the tax basis is recognized by the Company as an ordinary gain for tax purposes. On a prospective basis, CalFirstLease receives a step-up in tax-basis that will be amortized as a reduction to future taxable income over five years or the remaining life of each lease. The fair value attributed to the leases transferred was based on assumptions and other information compiled by management that utilized established valuation techniques. The taxable gain was estimated to be $15.0 million and increased taxes due in fiscal 2021 by $4.2 million.
Management determined that the sale of the Bank did not meet the criteria to be classified as discontinued operations.
The following table summarizes the effects of the sale of the Bank on the consolidated Balance Sheet at February 26, 2021:
|
|
|
|
|
Eliminating |
|
|
CalFirst |
Assets |
|
Bancorp |
|
|
Entries |
|
|
Leasing |
Cash and due from banks |
$ |
126,642 |
|
$ |
(44,310) |
|
$ |
82,332 |
Investment securities |
|
1,650 |
|
|
(1,650) |
|
|
- |
Equity investments |
|
102,423 |
|
|
- |
|
|
102,423 |
Lease transactions in process |
|
643 |
|
|
- |
|
|
643 |
Net Investment in Leases |
|
43,673 |
|
|
- |
|
|
43,673 |
Commercial loans |
|
3,698 |
|
|
- |
|
|
3,698 |
|
|
|
|
|
|
|
|
|
Other assets |
|
2,961 |
|
|
(73) |
|
|
2,888 |
Total Assets |
$ |
281,690 |
|
$ |
(46,033) |
|
$ |
235,658 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Demand and time deposits |
$ |
48,521 |
|
$ |
(48,521) |
|
$ |
- |
Deferred taxes |
|
8,786 |
|
|
715 |
|
|
9,501 |
Non-recourse debt |
|
1,466 |
|
|
- |
|
|
1,466 |
Other liabilities |
|
2,369 |
|
|
(12) |
|
|
2,358 |
Total Liabilities |
$ |
61,143 |
|
$ |
(47,818) |
|
$ |
13,325 |
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity |
|
220,548 |
|
|
1,785 |
|
|
222,333 |
Total Liabilities & Stockholders |
$ |
281,690 |
|
$ |
(46,033) |
|
$ |
235,658 |
|
|
|
|
|
|
|
|
|
Note 3 – Investments
The investment portfolio at June 30, 2020 only included holdings of the Bank that were transferred with the sale of the Bank. Investments carried at cost at June 30, 2020 were as follows:
|
|
June 30, 2020 |
|
(in thousands) |
|
Carrying Cost |
|
|
Fair Value |
|
Federal Reserve Bank Stock |
$ |
1,955 |
|
$ |
1,955 |
|
Federal Home Loan Bank Stock |
|
44 |
|
|
44 |
|
Mortgage-backed investment |
|
103 |
|
|
114 |
|
|
$ |
2,102 |
|
$ |
2,113 |
|
Note 4 – Equity Securities:
Investments in equity securities as of June 30, 2021 and 2020 consist of holdings of public companies with readily available market values and are carried at fair value. Gains and losses arising from changes in the fair values of equity securities based on stock prices on the last day of the fiscal period are recorded as part of non-interest income.
The Company’s equity portfolio based on the primary industry sector is summarized in the table below.
(in thousands) |
|
|
|
|
Unrealized |
|
|
|
|
|
|
Cost Basis |
|
|
Gains |
|
|
(Losses) |
|
|
FMV |
as of June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial / Industrial |
|
$ |
53,950 |
|
$ |
15,661 |
|
$ |
(435) |
|
$ |
69,176 |
Consumer |
|
|
39,576 |
|
|
3,038 |
|
|
(16) |
|
|
42,598 |
Financial |
|
|
10,966 |
|
|
4,552 |
|
|
- |
|
|
15,518 |
Healthcare |
|
|
26,888 |
|
|
5,945 |
|
|
- |
|
|
32,833 |
|
|
$ |
131,380 |
|
$ |
29,196 |
|
$ |
(451) |
|
$ |
160,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
as of June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial / Industrial |
|
$ |
21,238 |
|
$ |
1,136 |
|
$ |
(4,444) |
|
$ |
17,930 |
Consumer |
|
|
13,218 |
|
|
235 |
|
|
(1,798) |
|
|
11,655 |
Financial |
|
|
15,534 |
|
|
90 |
|
|
(4,194) |
|
|
11,430 |
Healthcare |
|
|
9,265 |
|
|
1,391 |
|
|
(332) |
|
|
10,324 |
Total equity securities |
|
$ |
59,255 |
|
$ |
2,852 |
|
$ |
(10,768) |
|
$ |
51,339 |
Note 5 – Leases:
The Company’s lease income consists of the following:
|
|
June 30, |
|
|
2021 |
|
2020 |
|
|
(in thousands) |
Rental income on operating leases |
|
$ |
622 |
|
$ |
1,910 |
Interest income - sales type and direct financing leases |
|
|
3,737 |
|
|
6,215 |
Total lease income |
|
$ |
4,359 |
|
$ |
8,125 |
The Company's net investment in leases consists of the following:
|
|
June 30, |
|
|
2021 |
|
2020 |
|
|
(in thousands) |
Minimum lease payments receivable |
|
$ |
36,417 |
|
$ |
50,568 |
Estimated residual value |
|
|
2,798 |
|
|
2,453 |
Less unearned income |
|
|
(3,178) |
|
|
(3,748) |
Net investment in leases before allowances |
|
|
36,037 |
|
|
49,273 |
Less allowance for lease losses |
|
|
(575) |
|
|
(832) |
Less valuation allowance for estimated residual value |
|
|
(10) |
|
|
(25) |
Net investment in leases |
|
$ |
35,452 |
|
$ |
48,416 |
The minimum lease payments receivable and estimated residual value are discounted using the internal rate of return method related to each specific lease.
At June 30, 2021, a summary of the installments due on minimum lease payments receivable, and the expected maturity of the Company's estimated residual value are as follows:
|
|
|
Lease |
|
|
Estimated |
|
|
|
Years ending June 30, |
|
|
Receivable |
|
|
Residual Value |
|
|
Total |
|
|
(in thousands) |
2022 |
|
$ |
20,070 |
|
$ |
755 |
|
$ |
20,825 |
2023 |
|
|
10,169 |
|
|
873 |
|
|
11,042 |
2024 |
|
|
4,049 |
|
|
1,108 |
|
|
5,157 |
2025 |
|
|
1,663 |
|
|
62 |
|
|
1,725 |
2026 |
|
|
466 |
|
|
- |
|
|
466 |
|
|
|
36,417 |
|
|
2,798 |
|
|
39,215 |
Less unearned income |
|
|
(2,834) |
|
|
(344) |
|
|
(3,178) |
Less allowances |
|
|
(575) |
|
|
(10) |
|
|
(585) |
|
|
$ |
33,008 |
|
$ |
2,444 |
|
$ |
35,452 |
Contractual rental obligations on operating leases due after June 30, 2021 extend for only 90 days from such date and aggregate to $81,000.
Non-recourse debt, which relates to the discounting of lease receivables, bears interest at rates from 4.68% to 4.70%. Maturities of such obligations at June 30, 2021 are as follows:
|
|
|
Non-recourse |
Years ending June 30, |
|
|
Debt |
|
|
|
(in thousands) |
2022 |
|
$ |
673 |
2023 |
|
|
493 |
Total non-recourse debt |
|
|
1,166 |
Deferred interest expense |
|
|
62 |
Discounted lease rentals assigned to lenders |
|
$ |
1,228 |
Deferred interest expense of $62,000 at June 30, 2021 will be amortized against direct finance income related to the Company's discounted lease rentals assigned to lenders of $1.2 million using the effective yield method over the applicable lease term.
Note 6 – Commercial Loans:
The Company’s investment in commercial loans consists of the following:
|
|
June 30, |
(in thousands) |
|
2021 |
|
2020 |
Commercial real estate loans |
|
$ |
3,332 |
|
$ |
3,607 |
Commercial term loan participations |
|
|
323 |
|
|
- |
Total commercial loans |
|
|
3,655 |
|
|
3,607 |
Less unearned income and discounts |
|
|
(42) |
|
|
- |
Less allowance for loan losses |
|
|
(35) |
|
|
(61) |
Net commercial loans |
|
$ |
3,578 |
|
$ |
3,546 |
Note 7 – Allowance for Credit Losses:
The allowance for credit losses includes amounts to cover losses related to the net investment in leases, commercial loans, and transactions-in-process. A summary of the allocation of the allowance for credit losses and selected statistics is as follows:
|
|
|
June 30, |
(dollars in thousands) |
|
|
2021 |
|
|
2020 |
Allowance for credit losses at beginning of year |
|
$ |
918 |
|
$ |
1,504 |
Charge-off of leases |
|
|
- |
|
|
(3) |
Loans transferred to held-for-sale |
|
|
- |
|
|
(17) |
Recovery of lease amounts previously written off |
|
|
- |
|
|
16 |
Provision (release) of reserves for credit losses |
|
|
(298) |
|
|
(582) |
Allowance for credit losses at end of year |
|
$ |
620 |
|
$ |
918 |
Allowance for credit losses as percent of net |
|
|
|
|
|
|
investment in leases and loans before allowances |
|
|
1.56% |
|
|
1.74% |
|
|
|
|
|
|
|
Net recoveries (charge-offs) as percent of average leases and loans |
|
|
0.00% |
|
|
(0.01)% |
Note 8 – Credit Quality of Financing Receivables:
The following tables provide information related to “financing receivables” as defined under Topic 310, Receivables. “Financing receivables” include direct finance and sales-type leases and all commercial loans, but does not include operating leases and transactions in process.
The portfolio is disaggregated into two segments of leases and loans and four classes: 1) commercial leases, 2) education, government and non-profit leases, 3) commercial and industrial loans and 4) commercial real estate loans. Relevant risk characteristics for establishing these portfolio classes generally include the nature of the borrower, structure of the transaction and collateral type. The Company’s credit process includes a policy of classifying all leases and loans in accordance with a classification system consistent with regulatory models under which leases and loans may be rated as “pass”, “special mention”, “substandard”, or “doubtful”. These risk categories reflect an assessment of the ability of the borrowers to service their obligation based on current financial position, historical payment experience, and collateral adequacy, among other factors.
The Company uses the following definitions for risk ratings:
Pass – Includes credits of the highest quality as well as credits with positive primary repayment source but one or more characteristics that are of higher than average risk.
Special Mention – Have a potential weakness that if left uncorrected may result in deterioration of the repayment prospects for the lease or loan or of the Company’s credit position at some future date.
Substandard – Are inadequately protected by the paying capacity of the obligor or of the collateral, if any. Substandard credits have a well-defined weakness that jeopardize the liquidation of the debt or indicate the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – Based on current information and events, collection of all amounts due according to the contractual terms of the lease or loan agreement is considered highly questionable and improbable.
The risk classification of financing receivables by portfolio class is as follows:
|
|
|
|
|
|
Education |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government |
|
|
Commercial |
|
|
Commercial |
|
|
Total |
(in thousands) |
|
|
Commercial |
|
|
Non-profit |
|
|
& Industrial |
|
|
Real Estate |
|
|
Financing |
|
|
|
Leases |
|
|
Leases |
|
|
Loans |
|
|
Loans |
|
|
Receivable |
As of June 30, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
19,250 |
|
$ |
15,152 |
|
$ |
281 |
|
$ |
3,332 |
|
$ |
38,015 |
Special Mention |
|
|
230 |
|
|
- |
|
|
- |
|
|
- |
|
|
230 |
Substandard |
|
|
1,223 |
|
|
182 |
|
|
- |
|
|
- |
|
|
1,405 |
Doubtful |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
$ |
20,703 |
|
$ |
15,334 |
|
$ |
281 |
|
$ |
3,332 |
|
$ |
39,650 |
Non-accrual |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020: |
|
Pass |
|
$ |
27,038 |
|
$ |
17,456 |
|
$ |
- |
|
$ |
3,607 |
|
$ |
48,101 |
Special Mention |
|
|
3,312 |
|
|
1,298 |
|
|
- |
|
|
- |
|
|
4,610 |
Substandard |
|
|
- |
|
|
169 |
|
|
- |
|
|
- |
|
|
169 |
Doubtful |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
$ |
30,350 |
|
$ |
18,923 |
|
$ |
- |
|
$ |
3,607 |
|
$ |
52,880 |
Non-accrual |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accrual of interest income on leases and loans will be discontinued when the customer becomes ninety days or more past due on its lease or loan payments with the Company, unless the Company believes the investment is otherwise recoverable. Leases and loans may be placed on non-accrual earlier if the Company has significant doubt about the ability of the customer to meet its lease or loan obligations, as evidenced by consistent delinquency, deterioration in the customer’s financial condition or other relevant factors. Payments received while on non-accrual are applied to reduce the Company’s recorded value.
The following table presents the aging of the financing receivables by portfolio class:
|
|
|
|
|
|
Greater |
|
|
|
|
|
|
|
|
Total |
|
|
Over 90 |
(in thousands) |
|
|
31-89 |
|
|
Than |
|
|
Total |
|
|
|
|
|
Financing |
|
|
Days & |
|
|
|
Days |
|
|
90 Days |
|
|
Past Due |
|
|
Current |
|
|
Receivable |
|
|
Accruing |
As of June 30, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Leases |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
20,703 |
|
$ |
20,703 |
|
$ |
- |
Education, Government, Non-profit Leases |
|
|
- |
|
|
- |
|
|
- |
|
|
15,334 |
|
|
15,334 |
|
|
- |
Commercial and Industrial Loans |
|
|
- |
|
|
- |
|
|
- |
|
|
281 |
|
|
281 |
|
|
- |
Commercial Real Estate Loans |
|
|
- |
|
|
- |
|
|
- |
|
|
3,332 |
|
|
3,332 |
|
|
- |
|
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
39,650 |
|
$ |
39,650 |
|
$ |
- |
As of June 30, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Leases |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
30,350 |
|
$ |
30,350 |
|
$ |
- |
Education, Government, Non-profit Leases |
|
|
- |
|
|
- |
|
|
- |
|
|
18,923 |
|
|
18,923 |
|
|
- |
Commercial and Industrial Loans |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Commercial Real Estate Loans |
|
|
- |
|
|
- |
|
|
- |
|
|
3,607 |
|
|
3,607 |
|
|
- |
|
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
52,880 |
|
$ |
52,880 |
|
$ |
- |
The following table presents the allowance balances and activity in the allowance related to financing receivables, along with the recorded investment and allowance determined based on impairment method as of June 30, 2021 and 2020:
|
|
|
|
|
|
Education |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Government |
|
|
Commercial |
|
|
Commercial |
|
|
Total |
|
|
|
Commercial |
|
|
Non-profit |
|
|
& Industrial |
|
|
Real Estate |
|
|
Financing |
As of June 30, 2021: |
|
|
Leases |
|
|
Leases |
|
|
Loans |
|
|
Loans |
|
|
Receivable |
Allowance for lease and loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period |
|
$ |
638 |
|
$ |
219 |
|
$ |
- |
|
$ |
61 |
|
$ |
918 |
Charge-offs |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Transfer of loans to held-for-sale |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Recoveries |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Provision |
|
|
(190) |
|
|
(82) |
|
|
5 |
|
|
(31) |
|
|
(298) |
Balance end of period |
|
$ |
448 |
|
$ |
137 |
|
$ |
5 |
|
$ |
30 |
|
$ |
620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
134 |
|
$ |
19 |
|
$ |
- |
|
$ |
- |
|
$ |
153 |
Collectively evaluated for impairment |
|
|
314 |
|
|
118 |
|
|
5 |
|
|
30 |
|
|
467 |
Total ending allowance balance |
|
$ |
448 |
|
$ |
137 |
|
$ |
5 |
|
$ |
30 |
|
$ |
620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
1,453 |
|
$ |
182 |
|
$ |
- |
|
$ |
- |
|
$ |
1,635 |
Collectively evaluated for impairment |
|
|
19,250 |
|
|
15,152 |
|
|
281 |
|
|
3,332 |
|
|
38,015 |
Total ending finance receivable balance |
|
$ |
20,703 |
|
$ |
15,334 |
|
$ |
281 |
|
$ |
3,332 |
|
$ |
39,650 |
As of June 30, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for lease and loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period |
|
$ |
872 |
|
$ |
242 |
|
$ |
329 |
|
$ |
61 |
|
$ |
1,504 |
Charge-offs |
|
|
- |
|
|
(3) |
|
|
- |
|
|
- |
|
|
(3) |
Transfer of loans to held-for-sale |
|
|
- |
|
|
- |
|
|
(17) |
|
|
- |
|
|
(17) |
Recoveries |
|
|
16 |
|
|
- |
|
|
- |
|
|
- |
|
|
16 |
Provision |
|
|
(250) |
|
|
(20) |
|
|
(312) |
|
|
- |
|
|
(582) |
Balance end of period |
|
$ |
638 |
|
$ |
219 |
|
$ |
- |
|
$ |
61 |
|
$ |
918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
133 |
|
$ |
92 |
|
$ |
- |
|
$ |
- |
|
$ |
225 |
Collectively evaluated for impairment |
|
|
505 |
|
|
127 |
|
|
- |
|
|
61 |
|
|
693 |
Total ending allowance balance |
|
$ |
638 |
|
$ |
219 |
|
$ |
- |
|
$ |
61 |
|
$ |
918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
3,331 |
|
$ |
2,075 |
|
$ |
- |
|
$ |
- |
|
$ |
5,406 |
Collectively evaluated for impairment |
|
|
27,019 |
|
|
16,848 |
|
|
- |
|
|
3,607 |
|
|
47,474 |
Total ending finance receivable balance |
|
$ |
30,350 |
|
$ |
18,923 |
|
$ |
- |
|
$ |
3,607 |
|
$ |
52,880 |
Note 9 – Office Lease Obligations
The Company accounts for its leases in accordance with ASC 842 which was implemented on July 1, 2019 and requires the Company to recognize lease arrangements as right-of-use ("ROU") assets and operating lease liabilities based on the present value of lease payments over the lease terms discounted at the Company’s incremental borrowing rate. Lease expense is recognized on a straight-line basis over the lease term, with lease and non-lease components as a single lease component.
During fiscal 2021, the Company entered into an operating lease with an unrelated party for its current 4,098 square foot corporate office in Newport Beach that commenced February 1, 2021 for a term of 40 months ending in July 2024. In conjunction with the sale of the Bank in February 2021, the Company sublet its prior office space to DMG who is fully obligated for all remaining lease obligations through August 2022. The new lease for current space was recorded as a ROU asset of $335,800 and a related lease liability of $540,800 based on discount rate of 2.82%. The sublet is recorded using the net presentation approach to offset rental expense with the rental income received. As of June 30, 2021, ROU assets of $509,900 and related lease liabilities of $701,300 are recorded on the balance sheet as part of other assets and accrued liabilities, respectively.
The future undiscounted lease payments due are as follows:
Year ending June 30, |
|
|
(in thousands) |
2022 |
|
$ |
352 |
|
2023 |
|
|
195 |
|
2024 |
|
|
168 |
|
2025 |
|
|
14 |
|
|
|
|
729 |
|
Less: Imputed interest |
|
|
(28) |
|
Present value of future minimum payments |
|
$ |
701 |
|
Rent expense was $177,400 (2021) and $227,400 (2020) and rental income in 2021 was $62,300.
Note 10 – Deposits:
All deposit accounts and balances at June 30, 2020 were held at the Bank and were transferred to the buyer of the stock of the Bank as of February 26, 2021. The composition of deposits at June 30, 2020 was as follows:
|
|
|
June 30, 2020 |
|
|
|
|
(dollars in thousands) |
|
Non-interest-bearing deposits |
|
|
|
|
|
|
Demand deposits |
|
$ |
1,188 |
|
2.1% |
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
|
|
|
|
Demand |
|
|
9,197 |
|
16.2% |
|
Savings and money market |
|
|
24,163 |
|
42.5% |
|
Time certificates of deposits |
|
|
22,259 |
|
39.2% |
|
Total Deposits |
|
$ |
56,807 |
|
100.0% |
|
Note 11 – Fair Value Measurement:
ASC Topic 820: “Fair Value Measurements and Disclosures” defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. ASC Topic 820 establishes a three-tiered value hierarchy that prioritizes inputs based on the extent to which inputs used are observable in the market and requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. If a value is based on inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. The three levels of inputs are defined as follows:
· Level 1 - Valuation is based upon unadjusted quoted prices for identical instruments traded in active markets;
· Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market;
· Level 3 - Valuation is generated from model-based techniques that use inputs not observable in the market and based on the entity’s own judgment. Level 3 valuation techniques could include the use of option pricing models, discounted cash flow models and similar techniques, and rely on assumptions that market participants would use in pricing the asset or liability.
ASC 820 applies whenever other accounting pronouncements require presentation of fair value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value. As such, ASC 820 does not apply to the Company’s investment in leases. The Company’s financial assets measured at fair value on a recurring basis are primarily equity securities and mutual fund investments and at June 30, 2021 there were no liabilities subject to ASC 820.
The Company classifies financial assets and liabilities within the fair value hierarchy based on the availability of observable market information. Equity and the mutual fund investment generally are reported at fair value utilizing Level 1 inputs by reference to the market closing or last trade price. In the unlikely event that no trade occurred on the applicable date, an indicative bid or the last trade most proximate to the applicable date would be used (Level 2 input). Changes in markets, economic conditions or the Company valuation model may require the transfer of financial instruments from one level to another. Such transfer, if any, would be recorded at the fair value as of the beginning of the period in which the transfer occurred. The Company has had no transfers in fiscal 2021 and 2020.
The following table summarizes the Company’s assets, which are measured at fair value on a recurring basis as of June 30, 2021 and 2020:
|
|
|
|
|
Quoted Price in |
|
|
|
|
Significant |
|
|
|
|
|
Active Markets for |
|
Significant Other |
|
Unobservable |
|
|
|
Total |
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
Description of Assets |
|
|
Fair Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
(in thousands) |
As of June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
155,939 |
|
$ |
155,939 |
|
$ |
- |
|
$ |
- |
Investment funds |
|
|
4,186 |
|
|
4,186 |
|
|
|
|
|
|
|
|
$ |
160,125 |
|
|
160,125 |
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
50,034 |
|
$ |
50,034 |
|
$ |
- |
|
$ |
- |
Investment fund |
|
|
1,305 |
|
|
1,305 |
|
|
- |
|
|
- |
|
|
$ |
51,339 |
|
$ |
51,339 |
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain financial assets, such as collateral dependent impaired loans or returned assets are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances.
Note 12 – Fair Value of Financial Instruments:
In accordance with ASC 825-50, the following table summarizes the estimated fair value of financial instruments as of June 30, 2021 and June 30, 2020, and includes financial instruments that are not accounted for or carried at fair value. Certain financial instruments, including all lease related assets and liabilities and all non-financial instruments are excluded from fair value disclosure requirements. These fair value estimates are based on relevant market information and data, however, given there are no active market or observable market transactions for certain financial instruments, the Company has made estimates of fair values which are subjective in nature, involve uncertainties and matters of significant judgment and cannot be determined with precision. Changes in assumptions could significantly affect the estimated values.
For cash and cash equivalents and demand and savings deposits, because of their short-term nature, the carrying amounts approximate the fair value and are classified as Level 1 in the fair value hierarchy. Values for equity and investment funds are determined as set forth in Note 4 and 11. For loans, the estimated fair value is calculated based on discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and are classified as Level 3 in the fair value hierarchy. Loan fair values are based on an exit value and have been adjusted for credit risk. The fair value of certificates of deposit were estimated based on discounted cash flows using market rates or interest rates for deposits of similar maturity and are classified as Level 3 in the fair value hierarchy.
The estimated fair values of financial instruments were as follows:
|
|
|
June 30, 2021 |
|
|
June 30, 2020 |
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
|
(in thousands) |
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
37,045 |
|
$ |
37,045 |
|
$ |
154,123 |
|
$ |
154,123 |
Equity securities and investment funds |
|
|
160,125 |
|
|
160,125 |
|
|
51,339 |
|
|
51,339 |
Investments |
|
|
- |
|
|
- |
|
|
2,102 |
|
|
2,113 |
Commercial loans |
|
|
3,578 |
|
|
3,675 |
|
|
3,546 |
|
|
3,722 |
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand and savings deposits |
|
|
- |
|
|
- |
|
|
34,548 |
|
|
34,548 |
Time certificate of deposits |
|
$ |
- |
|
$ |
- |
|
$ |
22,259 |
|
$ |
22,275 |
Note 13 – Income Taxes:
The Company accounts for its income taxes under ASC 740, “Income Taxes.” Among other provisions, this standard requires deferred tax balances to be determined using the enacted income tax rate for the years in which taxes will be paid or refunds received. The Company is subject to U.S. Federal income tax as well as multiple state and local jurisdictions as a result of doing business in most states.
The provision for income taxes is summarized as follows:
|
|
June 30, |
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
|
(in thousands) |
Current tax (benefit) expense: |
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
3,805 |
|
$ |
2,072 |
|
$ |
2,656 |
State |
|
|
1,172 |
|
|
968 |
|
|
1,080 |
|
|
|
4,977 |
|
|
3,040 |
|
|
3,736 |
Deferred tax (benefit) expense: |
|
|
|
|
|
|
|
|
|
Federal |
|
|
5,926 |
|
|
(2,130) |
|
|
(1,190) |
State |
|
|
2,140 |
|
|
(989) |
|
|
(513) |
Tax valuation allowance |
|
|
(2,152) |
|
|
2,152 |
|
|
- |
|
|
|
2,173 |
|
|
(967) |
|
|
(1,703) |
Total income tax provision |
|
$ |
10,891 |
|
$ |
2,073 |
|
$ |
2,033 |
At June 30, 2021 and 2020, income taxes receivable balances were $2,857,000 and $376,000 respectively.
Deferred taxes result principally from the method of recording lease income on capital leases and depreciation methods for tax reporting, which differ from financial statement reporting, and the inclusion of unrealized gains and losses on securities in operating income that are not currently taxable or deductible. Deferred income tax liabilities (assets) are comprised of the following:
|
|
|
June 30, |
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
(in thousands) |
|
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
|
Tax operating leases |
|
$ |
5,107 |
|
$ |
3,721 |
|
|
|
Deferred selling expenses |
|
|
- |
|
|
41 |
|
|
|
Depreciation |
|
|
- |
|
|
180 |
|
|
|
Equity securities |
|
|
8,015 |
|
|
- |
|
|
|
Total liabilities |
|
|
13,122 |
|
|
3,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
(3,362) |
|
|
- |
|
|
|
Other investments |
|
|
- |
|
|
(2,410) |
|
|
|
Allowances and reserves |
|
|
(230) |
|
|
(291) |
|
|
|
State income taxes |
|
|
(221) |
|
|
(188) |
|
|
|
Total assets |
|
|
(3,813) |
|
|
(2,889) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax valuation allowance |
|
|
- |
|
|
2,152 |
|
|
|
Net deferred income tax liabilities |
|
$ |
9,309 |
|
$ |
3,205 |
|
|
|
The tax valuation allowance of $2.15 million as of June 30, 2020 offset tax benefits estimated on unrealized losses on equity securities as future appreciation of the equity portfolio required to realize future capital gains and the tax benefit could not be assured.
The differences between the federal statutory income tax rate and the Company's effective tax rate are as follows:
|
|
Years Ended June 30, |
|
|
2021 |
|
2020 |
|
2019 |
Federal statutory rate |
|
21.00% |
|
21.00% |
|
21.00% |
State tax, net of Federal benefit |
|
7.31 |
|
7.05 |
|
7.20 |
Incremental adjustments due to Tax Act |
|
- |
|
- |
|
(5.49) |
Dividends received deduction |
|
(0.60) |
|
88.88 |
|
(1.72) |
Other adjustments and tax-exempt leases |
|
(0.03) |
|
(89.74) |
|
0.72 |
Tax valuation allowance |
|
(4.57) |
|
(742.07) |
|
- |
Effective rate |
|
23.11% |
|
(714.88)% |
|
21.71% |
At June 30, 2021, the liability for uncertain tax positions and unrecognized tax benefits of $311,000 reflects additional state tax liability relating to apportionment fluctuations, all of which, if recognized would affect the effective tax rate. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons, including additions related to current year provisions, the expiration of the statute of limitation for open tax years, the status of examinations and changes in management judgment. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2021, accrued penalties and interest on unrecognized tax benefits are estimated to be $55,000.
The following table sets forth the change in unrecognized tax benefits:
|
|
|
Years ended June 30, |
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
(in thousands) |
|
|
|
Balance, beginning of period |
|
$ |
311 |
|
$ |
311 |
|
|
|
Increase for tax positions in current year |
|
|
38 |
|
|
43 |
|
|
|
Decrease for tax positions taken in prior years |
|
|
(36) |
|
|
(44) |
|
|
|
(Decrease) Increase for interest and penalties |
|
|
(2) |
|
|
1 |
|
|
|
Balance, end of period |
|
$ |
311 |
|
$ |
311 |
|
|
|
The Company’s Federal tax returns remain subject to examination from 2018 forward, while state income tax returns are generally open from 2017 forward, and vary by individual state statute of limitation. The Company believes that its accrual for income taxes is adequate for adjustments, if any, which may result from these examinations.
At June 30, 2021, there were no material changes to the liability for uncertain tax positions and unrecognized tax benefits. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons; including additions related to current year tax provisions, the expiration of the statute of limitations on open tax years, the status of examinations and changes in management judgment.
Note 14 – Capital Structure and Stock-based Compensation:
At June 30, 2021, the Company has 20,000,000 authorized shares of common stock and is authorized to issue 2,500,000 shares of preferred stock in one or more series, fix the voting powers, designations, preferences and the relative participation, optional or other rights, if any, of any wholly unissued series of preferred stock.
In November 1995, the Company’s stockholders approved the 1995 Equity Participation Plan (the “1995 Plan”). The 1995 Plan provides for the granting of options, restricted stock and stock appreciation rights (“SARs”) to key employees, directors and consultants of the Company. Under the 1995 Plan, the maximum number of shares of common stock that can be issued increases by an amount equal to 1% of the total number of issued and outstanding shares of common stock as of June 30 of each fiscal year. Shares available for issuance for the years ending June 30, 2021 and 2020 are 2,739,672 and 2,636,831, respectively.
There have been no option grants awarded since fiscal 2013, and at June 30, 2021 there were no options outstanding or exercisable and no stock-based compensation expense was recognized in the year ended June 30, 2021.
Note 15 – Regulatory Capital:
On February 26, 2021, Bancorp sold the stock owned in the Bank to DMG. Bancorp‘s capital investment in the Bank of $57.4 million at June 30, 2020 was recovered through 1) a distribution received on January 1, 2021 consisting of 100% of the Bank’s lease portfolio valued at $47.3 million; and 2) a $15.2 million payment on February 26 from DMG to purchase the capital stock.
During the year ended June 30, 2020, the Bank paid total dividends of $15.0 million to Bancorp that were in excess of net retained earnings and represented a return of capital. The following table presents capital and capital ratio information for the Bank as of June 30, 2020. The Bank exceeded regulatory capital requirements and was considered “well-capitalized” under guidelines established by federal regulators.
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
|
|
|
|
Amount |
|
Ratio |
|
|
|
June 30, 2020 |
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
California First National Bank |
|
|
|
|
|
|
|
|
Common equity Tier 1 capital |
|
$ |
57,388 |
|
90.72% |
|
|
|
Tier 1 risk-based capital |
|
$ |
57,388 |
|
90.72% |
|
|
|
Total risk-based capital |
|
$ |
58,180 |
|
91.97% |
|
|
|
Tier 1 leverage capital |
|
$ |
57,388 |
|
48.13% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16 – Commitments and Contingencies:
The Company has commitments to extend credit provided there is no violation of any condition in the terms of the approval or agreement. At June 30, 2021 and 2020, the Company had unfunded lease commitments of $3.6 million and $16.5 million, respectively.
Litigation
From time to time, the Company is party to legal actions and administrative proceedings and subject to various claims arising out of the Company’s normal business activities. Management does not expect the outcome of any of these matters, individually and in the aggregate, to have a material adverse effect on the financial condition and results of operations of the Company.
401(k) Plan
Employees of the Company may participate in a voluntary defined contribution plan (the "401K Plan") qualified under Section 401(k) of the Internal Revenue Code of 1986. Under the 401K Plan, employees who have met certain age and service requirements may contribute up to a certain percentage of their compensation. The Company has made contributions of $22,800 (2021) and $38,700 (2020).
Note 17 – Selected Quarterly Financial Data (Unaudited):
Summarized quarterly financial data for the fiscal years ended June 30, 2021 and 2020 is as follows:
|
|
Three Months Ended |
|
|
|
September 30, |
|
December 31, |
|
March 31, |
|
June 30, |
|
|
|
(dollars in thousands, except per share amounts) |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income |
|
$ |
1,366 |
|
$ |
1,729 |
|
$ |
1,958 |
|
$ |
1,650 |
|
Net interest income after provision for credit losses |
|
|
1,245 |
|
|
1,867 |
|
|
2,075 |
|
|
1,775 |
|
Non-interest income |
|
|
1,906 |
|
|
17,183 |
|
|
17,808 |
|
|
7,497 |
|
Net earnings (loss) |
|
$ |
1,438 |
|
$ |
15,091 |
|
$ |
13,389 |
|
$ |
6,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
0.14 |
|
$ |
1.47 |
|
$ |
1.30 |
|
$ |
0.61 |
|
Dividends declared per common share |
|
$ |
- |
|
$ |
0.54 |
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income |
|
$ |
2,968 |
|
$ |
2,677 |
|
$ |
2,596 |
|
$ |
1,710 |
|
Net interest income after provision for credit losses |
|
|
2,798 |
|
|
2,968 |
|
|
2,382 |
|
|
2,011 |
|
Non-interest income |
|
|
2,760 |
|
|
9,965 |
|
|
(31,563) |
|
|
13,624 |
|
Net earnings (loss) |
|
$ |
2,981 |
|
$ |
8,479 |
|
$ |
(27,556) |
|
$ |
13,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
0.29 |
|
$ |
0.82 |
|
$ |
(2.68) |
|
$ |
1.34 |
|
Dividends declared per common share |
|
$ |
- |
|
$ |
0.52 |
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|