As filed with the Securities and Exchange Commission on May 13, 2022

1940 Act File No. 811-

 

 

 

 

 

 

 

 

 

 

 

 

 

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CALIFORNIA FIRST LEASING CORPORATION

PROSPECTUS SUMMARY

This prospectus (“Prospectus”) is only a summary and does not contain all of the information that an investor should consider before investing in the Company. Before investing in the Company, an investor should carefully read the more detailed information appearing elsewhere in this Prospectus, which should be retained for future reference by any prospective investor.

 

The Company

California First Leasing Corporation, (“CFNB” or the “Company”), headquartered in Newport Beach, California, is an internally managed non-diversified closed-end investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company was incorporated in California in 1977.  The Company continues the original business of leasing and financing capital assets to businesses. and it has registered as a closed-end management investment company as the Company may meet the definition of an investment company under the 1940 Act as investment securities (exclusive of government securities and cash items) represent 85% of the Company total assets.  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. As of March 31, 2022, the Company had total stockholders’ equity of $232.8 million, 10,284,139 common shares (the “Shares”) outstanding and an estimated 280 shareholders.  California First Leasing Corporation will not be selling any stock in connection with this Prospectus and registration statement. 

 

Management of the Company

The Company’s executive officers are responsible for the day-to-day management of the investment and  lease businesses, and the Board of Directors has overall responsibility for risk oversight with a focus on the most significant risks related to market, credit, liquidity, operational and regulatory risk as well as overall enterprise risk. The Company does not use any external investment adviser. Five of the seven directors are independent directors (the “Independent Directors”), in that they are not “interested persons” (as defined in the 1940 Act) of the Company. With over 60% of the Company’s Common Stock owned by the Chairman and Chief Executive Officer, the Company is a “controlled company” as defined in the 1940 Act.   

 

Business and Investment Objectives and Strategies

The Company’s strategy is to pursue attractive lease and loan opportunities and continue its lease business while using equity investments to maximize current income and generate capital appreciation while preserving capital and liquidity. There can be no assurance that any of these objectives will be achieved.

 

The Company seeks to achieve its investment objectives by investing in equity securities of public companies that trade on established markets. The focus is to invest in fairly valued publicly traded corporations that we expect to generate excess cash flow to support consistent and attractive returns through dividends and appreciation. This approach seeks out companies at reasonable prices, without regard to sector or industry, that demonstrate favorable long-term growth characteristics. Analysis is done to determine the intrinsic value of a company by analyzing a company’s free cash flow generating capabilities, and return on equity and invested capital with a focus on the company’s ability to grow its free cash flow and maintain high returns on invested capital for an extended period. The Company takes a long-term approach to the investment in securities and therefore, the portfolio turnover rate has been relatively low, ranging from 1% to 57% since July 2018, and averaging 33%.

 

The Company makes investments that vary in size based on numerous factors, including market and economic conditions. At March 31, 2022, the Company held 32 equity investments, with an average market value of $5.6 million, and ranging from approximately $500,000 to $14.6 million. Investments are distributed across a spectrum of industry groups, however, from time to time the Company holds significant positions in certain sectors. At March 31, 2022, the equity investments in 5 semiconductor-related companies represented 18% of total assets. The Company generally does not expect to invest more than 10% of its capital in a single target company, but does not have a policy to rebalance the investment portfolio should one or more investments increase in value substantially above that threshold.  The smallest market capitalization of an equity investment was over $3.0 billion. 

 

Adviser or Management Fee and Expenses

The Company does not use an external investment adviser and is internally managed.  As an internally managed investment company, the Company does not pay any external investment advisory fees. The Company bears all expenses incurred in its investment or lease operations and transactions, including, but not limited to, the compensation and routine overhead expenses of personnel of the Company who provide investment management services and originate and manage the lease transactions. 

 

Dividend Policy

Since October 2009, the Company’s dividend policy approved by the Board of Director has provided for one annual dividend payment each year. The Board of Directors reviews the dividend policy on an ongoing basis, taking into consideration a variety of factors and has full authority to reduce or eliminate the dividend at any time. No decision to pay dividends in calendar 2022 or beyond has been made. All dividends paid to shareholders to date have been qualified dividends for tax purposes.

 

 

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Taxes

The Company does not, and does not expect in the near future to,  qualify for taxation as a regulated investment company (“RIC”) under Subchapter M of Chapter 1 of the Internal Revenue Code of 1986 (the ”Code”). To qualify, a corporation must meet certain income, asset diversification and distribution requirements. Since the Company does not expect to qualify as a RIC, the Company will continue to pay state and federal income tax at the Company level, which  reduces reported net income and potentially cash available for paying dividends to shareholders.

 

Leverage

The Company is authorized to incur leverage up to limitations imposed by the 1940 Act. As a result, the Company may borrow money from a bank in amounts of up to 33 1/3% of the value of its total assets at the time of such borrowings. The Company currently does not have any outstanding borrowings or a borrowing arrangement in place that is permissible to use as a registered investment company but it could obtain one in the future. Any borrowings incurred by the Company would generally have complete priority over the Shares upon the distribution of assets.

 

Valuation

Investments in common stocks are valued at the last or closing sale price or, if unavailable, at the closing bid price. Investments in money market funds are valued at net asset value per share. Lease assets  are not measured at fair value on a recurring basis, but capitalized at inception and amortized over time in accordance with accounting rules and, with adjustments for credit impairment, approximate fair value. Other loan or lease assets for which no ready market exists are reported at their net principal amount outstanding or cost, adjusted for any credit impairment. As a C-corporation, the Company maintains deferred tax liabilities and assets related to lease and investment income where the financial statement reporting of income differs from the timing of the ultimate tax obligation and these amounts are a reduction to the value of the Company’s assets to determine net asset value or stockholders’ equity.

 

Custodian

The Company has retained responsibility as Custodian with safekeeping and custody of the Company’s securities  held with Wells Fargo Clearing Services, LLC  (“WFCS”) .in accordance with the requirements of Section 17(f) of the 1940 Act and the rules thereunder.

 

Transfer Agent

Computershare Inc. serves as transfer agent and registrar with respect to Shares of the Company.

 

Legal Counsel for the Company

Sheppard, Mullin, Richter & Hampton, LLP serves as legal counsel to the Company.

 

Independent Auditors

Eide Bailly, LLP serves as the independent registered public accounting firm to the Company.

 

You should read this Prospectus dated May 13, 2022, which contains important information about the Company, before deciding whether to invest in the Shares, and retain it for future reference. A Statement of Additional Information, dated May 13, 2022 (the “SAI”), containing additional information about the Company, has been filed with the Securities and Exchange Commission (the “SEC”) and is incorporated by reference in its entirety into this Prospectus.

Prospective investors should not construe the contents of this Prospectus as legal, tax, financial or other advice. Each investor should consult with their own professional advisers as to the legal, tax, financial or other matters relevant to the suitability of an investment in the Company.

Neither the SEC nor any state securities commission has approved or disapproved these securities or determined whether this Prospectus is truthful or complete, nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense.

Shares are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

Investors should rely only on the information contained in this Prospectus. The Company has not authorized anyone to provide investors with different information. Investors should not assume that the information provided by this Prospectus is accurate as of any date other than the date on the front of this Prospectus. The Company will, however, amend its registration statement to reflect any material changes to this Prospectus.

 

 

 

 

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RISK FACTORS

 

An investment in the Company’s common stock involves certain risks, including the risk of loss. Investors should carefully consider the Company’s objectives and risks that may make an investment in the Company not appropriate for all investors. Before buying the common stock, investors should read this “Risks Factors” section which describes certain risks which may adversely affect the Company’s net asset value per share, trading price, yield, total return and ability to meet its objectives

Industry Risk Factors

The Company’s business and financial results are subject to general business and economic conditions.    Continued or renewed weakness in the economy or in certain sectors could impact the financial performance and condition of customers and investments and negatively affect their market value and repayment of their obligations. 

Uncertain worldwide political and economic conditions, including the recent invasion of Ukraine, economic sanctions, and volatility in the currency and credit markets may negatively impact the Company’s investments and its customers.  The stock market has been volatile since the beginning of calendar 2022 and major indexes have declined between 9.5% and 22.4% % through May 6, 2022, with the S&P 500^®  Index down by 13.5%. Supply chain issues have hurt the results of many businesses, and may impact their ability to meet their obligations.

Changes in the laws, regulations and policies governing financial services companies could alter the investment and business environment and adversely affect operations.  The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States.  Its fiscal and monetary policies determine in a large part the return that can be earned on leases, loans and investments, which affect the Company’s net interest and dividend income.

 

Cyber security and privacy breaches may hurt our business, damage our reputation, increase our costs, and cause losses.  Our systems and networks store all the Company’s business records as well as information about our customers and employees. We have security systems and information technology infrastructure in place designed to protect against unauthorized access to such information. However, there is still a risk that the security systems and infrastructure that we maintain may not be successful in protecting against all security breaches, employee error, malfeasance, and cyber-attacks. Third parties, including vendors that provide services for our operations, could also be a source of security risk in the event of a failure of their own security systems and infrastructure.

 

Company Risk Factors

The Company is dependent on a few key people.  Investment decisions and all major capital allocation decisions are made by Patrick E. Paddon, Chairman of the Board of Directors and Chief Executive Officer, in consultation with Glen T. Tsuma, Chief Operating Officer and a Director. The loss of the services of these individuals would have a negative impact on the business because of their expertise and years of experience.

The Company’s equity investments may increase the Company’s risk of realized loss in shareholders’ equity.  The Company’s equity investments represents 87% of total assets and 92% of stockholders’ equity at March 31, 2022. These securities may not appreciate in value and may in fact decline in value. The Company may not be able to realize any gains, and any gains may not be sufficient to offset any other losses. A 10% decline in the value of the equity investment portfolio from March 31, 2022 could result in a 5% reduction in the Company’s net asset value per share.

 

The Company’s registration as an investment company subjects it to increased regulatory risk under the Act and additional costs of complying with SEC regulations. The Company has not been subject to SEC oversight since 2017. The investment industry is a heavily regulated environment, and changes to, or non-compliance with, regulations and laws could harm our business.

 

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.

 

The Company may suffer losses in its investment and lease loan portfolios despite its investment and underwriting practices.  The Company seeks to mitigate the risks inherent in the lease and investment business by adhering to sound practices.  Although the Company believes that its criteria are appropriate for the various kinds of investments and leases and loans it acquires, the Company may incur losses on investments and leases that meet these criteria.

 

Larger transactions and concentrations may increase the risk of loss in the event of the deterioration of one of these companies or industries.  At March 31, 2022, an investment of $14.6 million in one company accounted for 5.9% of the Company’s total assets, while investments in five companies in the semiconductor industry represented 18% of total assets. The Company does not have a policy to rebalance the investment portfolio should one or more investments increase in value substantially relative to the rest of the portfolio, and therefore, the portfolio is subject to greater volatility than one with more broadly diversified investments.

 

 

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The Company may hold a significant portion of assets in cash, bank accounts, money market mutual funds, or U.S. government securities, maturing in one year or less. At March 31, 2022, $34 million (13.7% of assets) was held in such accounts.  This liquidity is maintained for many reasons, including, among others, to take advantage of investment or lease opportunities as they arise; market conditions may appear unfavorable at certain times or not finding attractive investment opportunities; defensive position during adverse market or economic conditions, or holding for unfunded lease commitments.

 

The Board of Directors may change the Company’s investment objectives, operating policies and strategies without prior notice or shareholder approval, the effects of which may be adverse. The Board of Directors has not designated any investment policies to be fundamental within the meaning of the 1940 Act.

 

There are limited attractive opportunities for capital asset lease financing at the same time that there is increased competition.  The Company competes with other finance companies as well as commercial banks and other sources of funding.  Some competitors have a lower cost of capital, higher risk tolerances and different risk assessments than we do, and offer better pricing and more flexible structuring than the Company.  Increased competition allows lessees to demand more favorable terms such that we may lose lease opportunities if we do not match our competitors’ pricing, terms and structure.   Limited availability of attractive lease opportunities has caused the low volume of new lease originations in fiscal 2021 and first nine months of fiscal 2022 and furthered a shift to equity securities until market conditions improve.   

 

The Company’s allowance for credit losses may not be adequate to cover actual losses.  The Company maintains an allowance for credit losses to provide for probable and estimable losses that is based on its historical experience, industry data, concentrations and risks within its portfolios, and current economic conditions.  If the credit quality materially decreases, or the reserve for credit losses is not adequate, future provisions for credit losses could adversely affect financial results.

 

The financial services business involves significant operational risks.  Operational risk is the risk of loss resulting from the Company’s operations, including, but not limited to, the risk of fraud by employees or persons outside of the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system, and failure of business continuation and disaster recovery plans.  This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation. 

 

The Company’s reported financial results are subject to certain assumptions and estimates and management’s selection of accounting method.  The Company’s management must exercise judgment in selecting and applying many accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report the Company’s financial condition and results.  In some cases, management may select an accounting policy which might be reasonable under the circumstances yet might result in the Company’s reporting different results than would have been reported under a different alternative.

 

The Company is a C-Corporation and its results include the impact of taxes paid or to be paid by the Company. As a result, the Company’s reported results and return on investments may not be comparable to results of most registered investment companies who do not pay income taxes but only pass through all income to the investors.

 

The Company’s common stock generally has traded at a discount from net asset value and the stock price can be volatile.  The Company’s common stock is not widely held and the limited trading market for the stock can result in fluctuations in prices between trades and make it difficult for stockholders to dispose of their shares. The Company’s stock price can fluctuate widely in response to a variety of factors, including: actual or anticipated variations in the Company’s quarterly operating results and dividend policy; news reports relating to trends, concerns and other issues in the investment and financial services industry, and changes in government regulations. 

 

The Company’s executive officers and Directors may face certain conflicts of interest. The Chief Executive Officer and majority shareholder and other Directors and officers at times may invest in the stock of the same companies that the Company owns, which may give rise to a conflict of interest or perceived conflict of interest. In addition, the officers of the Company are involved in the leasing activities of the Company, which may compete against the time spent on the investment activities of the Company.

 

The Company has no obligation to repurchase stock from shareholders. Shareholders do not have any right to require the Company to repurchase their shares.

 

The Company is a “controlled company” with 63% of the stock held by the Chief Executive Officer, 76% held by two senior executives and fewer than 20 shareholders of record.  As a result, senior management has the ability to exercise significant influence over the Company’s policies and business, and determine the outcome of corporate actions requiring stockholder approval.  These actions may include, for example, the election of directors, the adoption of amendments to corporate documents, the approval of mergers, sales of assets and other corporate actions such as registering or deregistering as an investment company or maintaining eligibility on the OTCQX market or the OTCQX Premier Tier.

 

 

 

 

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Forward-Looking Statements

 

Statements made in this registration statement that are not strictly historical in nature constitute “forward-looking statements.” Forward-looking statements involve management assumptions, risks and uncertainties.  Such statements include, but are not limited to, beliefs regarding investments in equity securities, swings in stock prices and the potential for this to cause significant volatility in reported net earnings, projected changes in lease originations and in the lease and loan portfolio, the credit quality of the lease and loan portfolio, the adequacy of reserves for credit losses, the impact of external events on business activities and opportunities, estimates of expected tax rates applicable to future periods, impact of changes in interest rates and equity and fixed income markets.  Such forward-looking statements involve known and unknown risks and uncertainties and factors that could cause actual results to differ materially include political, economic, business, competitive, market, regulatory and other risks, including the future impact of the novel coronavirus disease (“COVID-19”) outbreak and measures taken in response to it for which future developments are highly uncertain and difficult to predict. Consequently, if management assumptions prove to be incorrect or such risks or uncertainties materialize, the Company’s actual results could differ materially from the results forecast in the forward-looking statements.  All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this information to reflect events or circumstances arising after the date hereof.

 

 

 

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THE COMPANY

 

 

California First Leasing Corporation, (“CFNB” or the “Company”), headquartered in Newport Beach, California, is an internally managed non-diversified closed-end investment company registered under the 1940 Act. The Company was incorporated  in California in 1977, and has been involved in leasing capital assets for over 40 years. In May 2001, CFNB reorganized as a bank holding company and operated as such until February 26, 2021 when, faced with restrictions imposed by the bank’s primary regulator, it sold all interest in the bank while retaining the lease and loan portfolio and business previously operated by the bank.  The original business of the Company is secured financing provided through leasing and financing capital assets to businesses and other commercial or non-profit organizations throughout the United States. Since 2017, as the loan portfolio had to be liquidated to comply with regulatory requirements and opportunities to grow the leasing business and portfolio declined while the Federal Reserve Board (FRB) kept interest rates uneconomically low, the Company migrated capital to investing in publicly traded equity securities that offered the potential to generate attractive returns.   

 

On February 26, 2022, the Company registered as a closed-end management investment company as the Company may meet the definition of an investment company under the 1940 Act. Section 3 (a)(1)(C) of the 1940 Act defines an investment company as one that owns investment securities having  an aggregate value exceeding 40 per centum of the value of such issuer’s total assets (exclusive of government securities and cash items). At March 31, 2022, the Company’s equity securities of $180.1 million represented 85% of the Company’s total assets (exclusive of government securities and cash items) while the investment in lease assets of $30.2 million represented 14.5% of such assets.   

 

The Company is overseen by a Board of Directors, the majority of whom are “not interested”  as defined under the 1940 Act, and managed by its officers with no involvement of any external investment adviser. At March 31, 2022, the Company has 13 employees, most of whom are engaged with the lease business but also handle the accounting and reporting for the investment portfolio. As an internally managed investment company,  CFNB does not pay any external investment advisory fees, but instead incurs the personnel and operating costs of its employees that includes the Company’s two largest shareholders that together own 75% of the Company’s stock.  For  tax purposes, the Company is taxed as a C-Corporation and is not eligible to be treated as a regulated investment company (“RIC”) under the Code as long as less than 90% of its income is earned from investments. The only income directly taxable to shareholders is any dividends paid.

 

The Company completed an initial public offering on NASDAQ Stock Market (“NASDAQ”) in April 1987 and traded there until October 2017 when the Company voluntarily deregistered its common stock with the SEC and delisted its common stock from NASDAQ. Since October 2017, the Company has traded on and been subject to the listing standards of the OTCQX Premier Market and has not been subject to the reporting requirements of the SEC since such time.  The Company holds a California Finance Lenders License issued by the California Department of Financial Protection and Innovation (“DFPI”) that regulates businesses providing financial services in California. As a registered investment company, the Company will be subject to the rules, regulations and reporting requirements of the SEC, including filing semiannual reports required under the 1940 Act, rather than quarterly reports.

 

The Company’s common stock is quoted and trades on the OTCQX Market under the symbol “CFNB”.  CFNB will not be issuing or selling any stock in connection with this registration statement.  The last reported closing price for the common stock on May 12, 2022 was $18.00 per share, representing a 20.5% discount to the net value of stockholders’ equity per share of $22.64 as of March 31, 2022. The Company’s common stock is not widely held and the limited public float results in a limited trading market for the stock that can cause fluctuations in prices between trades and make it difficult for stockholders to dispose of their shares. The common stock has generally traded at a discount to the Company net book value per share.

 

For fiscal periods from September 2017 through December 31, 2021, CFNB annual, quarterly, proxy statements and other information have been filed with the OTCQX Market place and can be accessed through www.otcmarkets.com/stock/CFNB/disclosure. Following this registration, the Company will file  financial and other information with the SEC and it will be available through their website at www.sec.gov. You may also obtain free copies of annual and periodic reports by contacting investor relations at California First Leasing Corporation, 5000 Birch Street, Suite 500, Newport Beach, CA 92660 or by email at invest@calfirstlease.com. CFNB maintains a website at www.calfirstlease.com  and makes all annual and interim reports, proxy statements and other publicly filed information available free of charge on or through such website.

 

 

 

 

 

 

 

 

 

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California First Leasing Corporation

 

Part B: Statement of Additional Information

 

California First Leasing Corporation, (“CFNB” or the “Company”), headquartered in Newport Beach, California, is an internally managed non-diversified closed-end investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company’s strategy is to pursue attractive lease opportunities and continue its lease business while using equity investments to maximize current income and generate capital appreciation while preserving capital and liquidity. See “Business and Investment Objectives and Strategies” in the Prospectus (as defined below). There is no assurance that the Company will achieve its investment objective.

 

This Statement of Additional Information (“SAI”) relating to the shares of common stock of the Company (the “Shares”) is not a prospectus, but should be read in conjunction with the prospectus for the Company dated  May 13, 2022 (the “Prospectus”). This SAI does not include all information that a prospective investor should consider before purchasing any Shares. Investors should obtain and read the Prospectus prior to purchasing such Shares. A copy of the Prospectus may be obtained without charge by contacting investor relations at California First Leasing Corporation, 5000 Birch Street, Suite 500, Newport Beach, CA 92660.

 

The Prospectus and this SAI omit certain of the information contained in the registration statement filed with the Securities and Exchange Commission (“SEC”), Washington, D.C. The registration statement may be obtained from the SEC upon payment of the fee prescribed, or inspected at the SEC’s office or via its website (www.sec.gov) at no charge. Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus.

 

Business History and Objectives

 

At March 31, 2022, the Company had total assets of $245.5 million, with equity securities of $180.1 million representing 73% of total assets and lease assets of $30.2 million representing 12.3% of total assets. CFNB has been involved in leasing capital assets for over 40 years, including 20 years prior to becoming a bank holding company in 2001. Beginning in January 2017, the Company started winding down a syndicated loan business and agreed to sell the bank with the sale closing at the end of February 2021. This transition occurred in the midst of the Covid-19 outbreak, when  the volume of new leases booked and the portfolio declined significantly. With limited lease demand at attractive rates relative to risk, the Company experienced a surge in liquidity from lease payments and loan sales. Pending the return of better lease opportunities, and with Federal Reserve actions keeping interest rates uneconomically low, management took steps to preserve capital by investing the growing liquidity in large to mid-size capitalization, dividend paying stocks.

 

It is the intent of the Company to pursue attractive lease and loan opportunities and continue the lease business that has been its foundation since its founding in 1977. At the same time, it believes it can use equity investments to maximize current income and generate capital appreciation while preserving capital and liquidity. There are no assurances that the Company will achieve its objectives. The transition from leases and syndicated loans into equity investments started in March 2017 and the investment portfolio has only represented over 40% of total assets (excluding cash and government securities) since the first quarter of fiscal 2021, when it still operated as a bank holding company. The focus of the investment strategy is to invest in fairly valued publicly traded corporations that we expect to generate excess cash flow to support consistent and attractive returns through dividends and appreciation. The Company does not specialize in any specific industry and both the equity investment and lease portfolios are distributed across a spectrum of industry groups, however, from time to time the Company holds significant positions in certain sectors. At March 31, 2022, the equity investments in 5 semiconductor-related companies represented 18% of total assets and approximately 33% of the lease portfolio is with public and private colleges and universities.

 

Investment Business

 

The Company’s investment portfolio currently consists primarily of publicly traded common stocks of U.S. and non-U.S. companies that are listed on stock exchanges or traded over the counter in the United States, with the balance held in cash and short term, liquid money market funds and accounts.  The Company is authorized to invest in the stock of companies of all capitalization ranges, as well as to invest in U.S. Treasuries, high-quality United States agency obligations, mortgage-backed securities, U.S. and foreign corporate and municipal debt securities. The Company may also invest in foreign securities, either directly or through depositary receipts. The Company may shift its investments from one asset class to another based on an assessment of the best opportunities at a given time, and it is expected that investments in fixed income securities may increase as interest rates increase from historically low levels of the past few years. The current investment objectives and policies of the Company are not considered fundamental policies and therefore may be changed at the discretion of the Board and do not require shareholder approval.

 

The Company’s objectives for its investment portfolio are to maximize current income and generate capital appreciation while preserving capital and liquidity. There can be no assurance that any of these objectives will be achieved. The Company may employ leverage pursuant to the 1940 Act through borrowings by the Company not to exceed 33 1∕3% of total assets. While the use of leverage may provide the Company with greater flexibility in making investments and providing greater returns to shareholders, the use of leverage can also increase the risk of loss to the Company and reduce stockholder equity. The Company currently does not have any outstanding borrowings or a borrowing arrangement in place that is permissible to use as a registered investment company but it could obtain one in the future.

 

The identification of securities to buy or sell and overall direction of the  portfolio is led by Patrick E. Paddon, the Company’s Chief Executive Officer and majority shareholder. In addition to over 40-years of experience evaluating businesses for purposes of extending lease and loan credit, Mr. Paddon has been actively investing in equity securities for over 15 years. The investment committee also includes Glen Tsuma, Chief Operating Officer for over 30 years, and Leslie Jewett,  Chief Financial Officer (“CFO”) for over 25 years, both with long histories as members of the credit committee that approves all lease transactions. Mr. Paddon has individual authority to execute purchases and sales of equity securities, but other members of the committee are involved in the review process,  receive notice of all investment transactions and the CFO approves all trade confirmations. The Statement of Additional Information that is incorporated by reference into this Prospectus provides additional information concerning investment committee members’ compensation and ownership of stock  in the Company. None of the investment committee members currently manage any other registered investment companies, pooled investment vehicles or other accounts.

 

The investment approach seeks out companies trading at fair prices that demonstrate favorable long-term growth characteristics, without regard to sector or industry. Analysis is done to determine the intrinsic value of a company by analyzing a company’s free cash flow generating capabilities, and return on equity and invested capital with a focus on the company’s ability to grow its free cash flow and maintain high returns on invested capital for an extended period. The Company takes a long-term approach to the investment in securities and therefore, the portfolio turnover rate  has been relatively low, ranging from 1% to  57% since July 2018, and averaging 33%.

 

 

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The Company makes investments that vary in size based on numerous factors, including market and economic conditions. Investments are distributed across a spectrum of industry groups, however, from time to time the Company holds significant positions in certain sectors. At March 31, 2022, the equity investments in 5 semiconductor-related companies represented 18% of total assets. The Company generally does not expect to invest more than 10% of its capital in a single target company, but does not have a policy to rebalance the investment portfolio should one or more investments increase in value substantially above that threshold.  The smallest market capitalization of any equity investment was over $3.0 billion.  The following is a summary of the equity securities held by the Company as of March 31, 2022.

 

Distribution of Equity Securities*	March 31, 2022
($000)
US Large Cap	$ 138,774	77%
US Mid Cap	21,141	12%
US Small Caps	1,458	3%
Developed Markets, Non-US	10,346	6%
Emerging Markets Equities	3,175	2%
Fixed income Fund	1,107	1%
	$ 180,103	100%

                *Market capitalization classification is based on information from WFCS.

 

Over 75% of the investment portfolio is invested in U.S. large capitalization equities, but the Company can and has invested in foreign securities, including investments in American depositary receipts (“ADRs”) and direct investments in securities of foreign issuers that are traded on a U.S. securities exchange or over the counter. These investments involve risks not associated with investments in the United States, including not being subject to the accounting, auditing and financial reporting requirements of comparable U.S. companies, less timely information, changes in currency rates, government policies, relations between nations and political and economic instability.

 

Equity Investment Portfolio

The equity securities portfolio at March 31, 2022 consisted of common stock holdings in 31 public companies and 1 investment fund, all with readily available stock prices, compared to 32 public companies at June 30, 2021 and 22 companies at June 30, 2020. During the first nine months of fiscal 2022, the Company invested $64.4 million in 15 existing holdings and 12 new positions. It also sold 19 positions for $51.8 million, realizing a net gain of $8.6 million. The aggregate fair market value of the equity securities of $180.1 million at March 31, 2022 included approximately $27.5 million of net unrealized gains.

 

The investment in equity securities as of nine months ended March 31, 2022, and fiscal years ended June 30, 2021 and 2020 is summarized in four industry groups below, with Level 1 fair value based on unadjusted quoted prices for identical securities.

 

(in thousands)					Unrealized
			Cost Basis			Gains			(Losses)			Fair Value
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			-			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
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
		$	59,255		$	2,852		$	(10,768)		$	51,339

 

 

 

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Schedule of Investments at March 31, 2022

Industry	Company	Symbol	CUSIP	Shares	Fair Value
Auto Manufacturers	Ford Motor Company	F	345370860	597,300	10,100,343
Banks - Diversified	Bank of America Corporation	BAC	060505104	117,500	4,843,350
	Citigroup Inc.	C	172967424	16,700	891,780
Banks - Global	Wells Fargo & Co	WFC	949746101	100,400	4,865,384
Capital Markets	Goldman Sachs	GS	38141G104	18,600	6,139,860
Credit Services	Credit Acceptance Corporation	CACC	225310101	1,220	671,451
Drug Manufacturers	Bristol Myers Squibb	BMY	110122108	154,800	11,305,044
Entertainment	Comcast Corporation	CMCSA	20030N101	38,935	1,822,937
	Discovery Communications	DISCA	25470F104	180,600	4,500,552
	Netflix.com Inc.	NFLX	64110L106	1,420	531,918
Financial	Pimco Muni Income Fund III	PMX	72201A103	106,754	1,107,039
Healthcare Plans	Cigna Corp New	CI	125523100	30,710	7,358,423
	United Health Group	UNH	91324P102	2,489	1,269,315
Internet Content & Information	Alphabet Inc.	GOOGL	02079K305	5,255	14,615,994
	Autohome Inc.	ATHM	05278C107	15,300	465,273
	Meta Platforms Inc	FB	30303M102	13,907	3,092,361
Internet Retail	Alibaba Grp Hldg	BABA	01609W102	17,653	1,920,646
	JD.Com Inc.	JD	47215P106	12,100	700,227
Oil & Gas Equipment & Services	Schlumberger LTD	SLB	806857108	129,000	5,328,990
Oil & Gas Integrated	Exxon Mobil	XOM	30231G102	160,800	13,280,472
Recreational Vehicles	Thor Industries	THO	885160101	17,900	1,408,730
Scientific & Technical Instruments	Sensata Technologies	ST	G8060N102	85,000	4,322,250
Semiconductor Equipment & Materials	Applied Materials	AMAT	038222105	102,000	13,443,600
Semiconductors	Marvell Technology Group	MRVL	573874104	129,500	9,286,445
	Micron Technology Inc	MU	595112103	81,300	6,332,457
	Qualcomm Inc	QCOM	747525103	66,850	10,216,017
	Skyworks Solutions Inc.	SWKS	83088M102	42,800	5,704,384
Specialty Chemicals	Dupont De Nemours	DD	26614N102	96,040	7,066,623
Steel	Cleveland-Cliffs Inc.	CLF	185899101	239,000	7,698,190
Telecom Services	AT & T Inc.	T	00206R102	220,000	5,198,600
Telecom Services	Verizon Communications	VZ	92343V104	173,750	8,850,825
Tobacco	British American Tobacco	BTI	110448107	136,700	5,763,272
Equity Securities					$ 180,102,753
Bank deposits	California First National Bank				$     5,638,506
Money Market fund	JPMorgan Prime Mmkt 3605				28,046,358
					$   33,684,864
	Total Investments				$ 213,787,616

 

Lease and Loan Business

 

The Company’s strategy for the lease business includes stringent credit authority centered at the most senior levels of management  and emphasizes diversification on both a geographic and customer level, spreading risk across a breadth of leases while managing the risk to any one area.  The Company leases and finances most capital assets used by businesses and other commercial or non-profit organizations, with a focus on high technology systems and other mission critical assets. The UniversityLease unit focuses on the financing needs of colleges and universities. In addition to computer systems, software and networks, property includes manufacturing and warehouse systems, medical and office equipment, machine tools, school buses, trucks, and office and dormitory furniture. The mix of property will vary from year to year.

 

The Company generally holds title to the underlying property being leased which then secures the leases. The average size transaction booked during the year ended June 30, 2021 was $1.2 million, with three credits accounting for 65% of the property cost of leases booked.  This compared to an average lease size of $2.2 million during fiscal 2020, when two credits accounted for 74%  of the property cost of leases booked. At March 31, 2022 and June 30, 2021, one customer accounted for 17.0% and 18.5%, respectively, of the Company’s net investment in leases, compared to one customer accounting for 10.4% of the Company’s net investment in leases at June 30, 2020.

The lease and loan portfolio is geographically diverse. The following table shows the geographic distribution of the Company’s net investment in leases and loans (before valuation allowances and initial direct costs) at March 31, 2022 and June 30, 2021 and 2020.

 

 

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(dollars in thousands)	Leases & Loans
	March 31, 2022				June 30, 2021				June 30, 2020
State		Balance	Percent			Balance	Percent			Balance	Percent
Michigan	$	5,060	17.8%		$	7,102	17.9%		$	1,002	1.9%
New York		3,097	10.9%			5,706	14.4%			8,984	17.1%
California		3,061	10.8%			4,223	10.7%			7,583	14.4%
Rhode Island		2,724	9.6%			2,120	5.4%			2,486	4.7%
Louisiana		2,143	7.5%			2,488	6.3%			246	0.5%
Pennsylvania		1,775	6.2%			1,613	4.1%			2,462	4.7%
Virginia		1,566	5.5%			1,397	3.5%			1,321	2.5%
Florida, Maryland, Georgia, Kentucky, Texas		3,184	11.2%			5,118	12.9%			11,185	21.3%
DC, New Jersey, Connecticut, Massachusetts		2,230	7.8%			3,447	8.7%			3,254	6.2%
South Dakota, Wisconsin, Illinois, Minnesota, Indiana		1,716	6.0%			3,151	8.0%			5,079	9.7%
Hawaii, Colorado		1,355	4.8%			2,224	5.6%			2,380	4.5%
All other states (no state greater than 1.0%)		557	2.0%			1,003	2.5%			6,622	12.6%
	$	28,469	100.0%		$	39,593	100.0%		$	52,605	100.0%

 

The lease and loan portfolio is also distributed across a spectrum of industry groups as shown below:

(dollars in thousands)	Leases & Loans
	March 31, 2022				June 30, 2021				June 30, 2020
Industry		Balance	Percent			Balance	Percent			Balance	Percent
Educational services	$	9,327	32.8%		$	11,939	30.2%		$	14,278	27.1%
Manufacturing - automotive		4,834	17.0%			6,670	16.8%			1,064	2.0%
Public administration		3,280	11.5%			2,722	6.9%			3,806	7.2%
Agriculture and food products		3,114	10.9%			3,507	8.9%			4,494	8.5%
Healthcare and social services		2,110	7.4%			5,265	13.3%			10,618	20.2%
Retail Trade		1,933	6.8%			2,353	5.9%			3,902	7.4%
Wholesale distribution		1,058	3.7%			2,152	5.4%			5,287	10.1%
Arts, entertainment and recreation		628	2.2%			1,339	3.4%			3,874	7.4%
Transportation		595	2.1%			1,168	3.0%			2,092	4.0%
Manufacturing - industrial		576	2.0%			838	2.1%			1,767	3.4%
Manufacturing - chemicals & materials		343	1.2%			702	1.8%			953	1.8%
Other		671	2.4%			938	2.4%			469	0.9%
	$	28,469	100%		$	39,593	100%		$	52,604	100%

The Company uses North American Industry Classification System (NAICS) codes for classifying lease customers. Most of the industry groups identified above include customers identified by different industry codes that may not be directly comparable or considered a concentration.  However, at March 31, 2022, approximately 32.2% of the portfolio was with public and private colleges and universities, up from 29.1% at June 30, 2021, while automotive parts manufacturing was 16.9% related to one lease booked with one lessee in  fiscal 2021. Approximately 11.5% of the portfolio consists of tax-exempt leases with municipalities,   up from 6.9% at June 30, 2021. The higher share in the education field reflects the reduced size of the portfolio and the continued importance of this market to the Company’s objectives. The universities and colleges are located throughout the United States, and at March 31, 2022 the group includes over 50 leases with 30 different institutions and no university represents more than 8% of the portfolio.

 

Leases are originated directly by CFNB employees’ contact with the customer. Leases generally are for initial terms ranging from two to five years and are structured individually to accommodate a variety of customers’ objectives.  Substantially all leases are non-cancelable "net" leases which contain "hell-or-high-water" provisions under which the lessee must make all lease payments regardless of any defects in the property, and which require the lessee to maintain and service the property, insure the property against casualty loss and pay all property, sales and other taxes.  CFNB retains ownership of the property on leases we originate, and in the event of default by the lessee, may declare the lessee in default, accelerate all lease payments due under the lease and pursue other available remedies, including repossession of the property.  Upon the expiration of the lease term, the lessee typically has an option, dependent upon each lease's defined end of term options, to either purchase the property at a negotiated price, or in the case of a "conditional sales contract," at a predetermined minimum price, or to renew the lease.  If the original lessee does not exercise the purchase option, once the leased property is returned, CFNB will seek to sell the leased property. 

 

 

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The Company conducts the leasing business in a manner designed to minimize risk, however, we are subject to risks through the investment in lease receivables held in our own portfolios, lease transactions-in-process, and residual investments.  The credit process primarily focuses on a customer’s ability to repay the lease through their cash flow, with the collateral securing a transaction as a secondary source of repayment.  The credit process includes a policy of classifying all leases and loans in accordance with a risk rating classification system, monitoring changes in the risk ratings of lessees, identification of problem  credits and special procedures for the collection of problem accounts. We do not purchase leased property until we have received a binding non-cancelable lease from the customer.  A portion of lease originations are discounted to banks or finance companies on a non-recourse basis at fixed interest rates that reflect the customers' financial condition. The lender to which a lease has been assigned has no recourse against the Company unless we are in default under the terms of the agreement by which the lease was assigned.  The institution to which a lease has been assigned may take title to the leased property, but only in the event the lessee fails to make lease payments or otherwise defaults under the terms of the lease.  If this occurs, the Company may not realize our residual investment in the leased property.

 

The Company has three commercial loans outstanding amounting to $3.32 million at March 31, 2022. The loans consists of two real estate loans with two subsidiaries of one corporate guarantor and one participation in a Main Street term loan.

 

Operating Structure and Regulation

At March 31, 2022, the Company had 13 employees, including three executive officers with overall responsibility for the investment and lease operations and the Company’s compliance with the 1940 Act. There are five professionals involved in originating, credit analysis and funding of leases, with one also engaged in analysis of companies in the investment portfolio. Five employees handle accounting and administrative functions, receivables management, including lease and general ledger accounting, tax accounting and filing, preparation of financial statements and reports, maintaining required financial records and general information and office system support. The Company operates from a 4,098 square foot corporate office in Newport Beach subject to an operating lease with an unrelated party that commenced February 1, 2021 for a term of 40 months ending in July 2024.  

 

From May 2001 to February 2021, the Company operated as a bank holding company and was regulated and examined by the FRB.  Following the sale of the bank in February 2021, the Company renewed the California Finance Lenders License issued by the California Department of Financial Protection and Innovation (“DFPI”) that regulates businesses providing financial services in California. Following registration as an investment company with the SEC in February 2022, the Company is subject to the rules and reporting requirements of the 1940 Act. Among other regulations, the 1940 Act permits the Company to borrow or issue debt up to one-third of total assets (approximately $81 million at March 31, 2022), but prohibits the Company 1) from purchasing securities on margin, or 2) investing 25% or more of the market value of its assets in the securities of companies in any one industry, provided that, if securities in a given industry come to constitute more than 25% of total assets by reason of changes in value of either the concentrated securities or total assets, the excess need not be sold. The Company will also be subject to the reporting requirements of the SEC, including filing semiannual reports required under the Act, rather than quarterly reports.

 

Customers

Leasing and loan customers include large corporations and middle-market companies, subsidiaries and divisions of Fortune 1000 companies, private and state-related educational institutions, municipalities and other not-for-profit organizations and institutions located throughout the United States.  The Company does not believe the loss of any one customer would have a material adverse effect on its operations taken as a whole.

 

Competition

The Company competes for the lease and loan financing of capital assets with banks, commercial finance companies, and other financial institutions, independent leasing companies, credit companies affiliated with equipment manufacturers, and equipment brokers and dealers.  Many of the Company's competitors have substantially greater resources, capital, and more extensive and diversified operations than the Company.  The Company believes that the principal competitive factors are rate, responsiveness to customer needs, flexibility in structuring lease financing and loans, financial technical proficiency and the offering of a broad range of financing options.  The level of competition varies depending upon market and economic conditions, the interest rate environment, and availability of capital. 

 

          Operating Expenses

The Company bears all expenses incurred in its investment and leasing business operations. Expenses borne by the Company (and thus indirectly by shareholders) include, but are not limited to, the following:

·       compensation and benefit expenses of all Company executive officers and personnel engaged in the lease and investment operations, including accounting, and administrative personnel;

·       fees and disbursements for attorneys engaged related to preparing this registration statement, and accountants engaged to conduct the annual audit and preparation of tax returns;

·       fees and expenses of Board members who are not “interested persons”, including errors and omission liability insurance;

·       costs and expenses related to the day-to-day administration of the Company, including rent and operating costs for the Company’s headquarters, brokerage commissions, office supplies, internet and communication providers and services, mailing expenses, fidelity bond and property insurance expenses;

·       fees paid to the transfer agent, and costs of preparing, printing  and mailing reports to shareholders;

·       any extraordinary expenses that may arise related to enforcing the Company’s rights in respect to the Company’s lease transactions or defending the Company against legal claims.

 

 

 

 

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Determination of Net Asset Value

 

The Company’s assets consist primarily of equity securities, cash and cash equivalents and lease and loan assets. Equity securities are carried at fair value in the Company’s financial statements, with  subsequent changes in fair values recognized in earnings as equity securities gains or losses. Investments in common stocks are valued at the last or closing sale price or, if unavailable, at the closing bid price. Investments in money market funds are valued at net asset value per share.

 

Most lease transactions are structured as direct financing leases with the net investment in leases calculated as the aggregate lease payments receivable and estimated residual value, if any, recorded net of unearned income and adjusted for any credit impairment. The re-lease of property that comes off lease may be accounted for as a sales-type lease or as an operating lease. Loans are reported at their principal amount outstanding, net of discounts and costs associated with their origination and any adjustment for credit impairment. Property acquired for transactions-in-process represents property which  lessees have accepted on in-process lease transactions.  Such amounts are stated at cost, net of any lessee payments related to the property. These lease assets are not measured at fair value on a recurring basis, but capitalized at inception, amortized over time in accordance with accounting rules and, with adjustments for credit impairment, approximate fair value. Other loan or lease assets for which no ready market exists are reported at their net principal amount outstanding or cost, adjusted for any credit impairment, and approximate fair value. The determination of fair value involves subjective judgments.

 

As a C-corporation, the Company maintains deferred tax liabilities and assets related to lease and investment income where the financial statement reporting of income differs from the timing of the ultimate tax obligation. Given the nature of the Company’s assets and taxation as a C-Corporation, the calculation of stockholders’ equity differs from most investment companies or funds that pass through all income to their investors and have no income tax liabilities. Net asset value for the Company at March 31, 2022 includes the fair market of equity securities (86%) and lease assets (13%) at carrying cost estimated to approximate fair value , minus tax liabilities (6%) capitalized on the balance sheet.                   

 

Market for Common Stock and Related Stockholder Matters

 

At March 31, 2022, there were 10,284,139 shares of the Company's Common Stock outstanding. There were approximately 12 stockholders of record and an estimated 280 beneficial owners as of April 30, 2022.          

                                               

 

Shareholders do not have any redemption, preemptive or other subscription rights. The Company is currently authorized to issue 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. The Company has never issued and presently has no intention to issue any preferred shares. The Company does have one stockholder-approved stock option plan, but there have been no option grants awarded since fiscal year end June 30, 2013, and there are no stock options outstanding or exercisable.

 

Dividend Policy

Since October 2009, the Company’s dividend policy approved by the Board of Director has provided for one annual dividend payment each year. The Board of Directors reviews the dividend policy on an ongoing basis, taking into consideration a variety of factors including the business, economic and tax environment. No decision or commitment to pay dividends in calendar 2022 or beyond has been made. All dividends paid to shareholders to date have been qualified dividends for tax purposes.

 

The common stock of the Company  trades on the OTCQX Premier Market under the symbol CFNB.  The following table sets forth for the quarters indicated: 1) the high and low prices per share of the common stock; 2) the net asset value per share at the end of the period; 3) the premium or discount to net asset value per share of such prices as a percentage of net asset value, and 4) dividends paid.

																	Premium or (Discount)
Quarter			Net Asset Value*						Market Price										as % of NAV						Dividend
Ended			("NAV") / Shr						High						Low				High		Low				Paid
3/31/22		$	22.64					$	18.25					$	17.80				(19.4)%		(21.4)%
12/31/21			22.86						18.25						18.10				(20.2)%		(20.8)%				$0.56
9/30/21			21.83						18.50						18.00				(15.3)%		(17.6)%
6/30/21		$	22.39					$	18.40					$	17.32				(17.8)%		(22.7)%
3/31/21			21.78						17.95						15.05				(17.6)%		(30.9)%
12/31/20			20.48						16.99						14.86				(17.0)%		(27.4)%				$0.54
9/30/20			19.55						15.75						15.33				(19.4)%		(21.6)%
6/30/20		$	19.41					$	15.30					$	13.41				(21.2)%		(30.9)%
3/31/20			18.08						16.76						13.26				(7.3)%		(26.6)%
12/31/19			20.75						17.64						16.42				(15.0)%		(20.9)%				$0.52
9/30/19			20.45						18.85						17.10				(7.8)%		(16.4)%

*       Net Asset Value per share is stockholders’ equity as reported divided by the number of shares outstanding, and includes all equity securities at fair value with all lease assets and liabilities, including tax liabilities, that are not subject to fair value accounting, at their carrying value, which approximates fair value.

 

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In April 2001, the Board of Directors authorized management, at its discretion, to repurchase up to 1,000,000 shares of common stock.  This authorization has no termination date, but the Board of Directors reviews the authorization to repurchase common stock from time to time.  No shares have been repurchased since the Company repurchased 180,117 shares of common stock under this authorization during the year ended June 30, 2016.  As of March 31, 2022, 188,237 shares remain available to be repurchased under this authorization.                               ,

                                               

Brokerage, Custodian and Transfer Agent

The Company has processed all purchases and sales of equity securities through Wells Fargo Advisors Financial Network, LLC (”WFAFN”) and  fees paid to WFAFN related to purchases and sales of securities during the two fiscal years ended June 30, 2020 and 2021 were $42,955 and $111,136, respectively, and were $86,070 for the nine months ended March 31, 2022. The Company has sought competitive trade execution costs, but may not necessarily pay the lowest spread or commission available, but, in accordance with Section 28(e) under the Exchange Act, believes in good faith that such commissions are reasonable in relation to the services provided. 

 

The Company, in accordance with Section 17(f)(1)(C) of the 40 Act, has retained responsibility as Custodian with safekeeping and custody of the Company’s securities  with Wells Fargo Clearing Services, LLC (“WFCS”), 1 North Jefferson, St. Louis, MO, 63103, or legally held for safe-keeping in a depository's account. WFCS collects dividends, and proceeds from sales, provides statements of activity, including continuous online access to reports on  the portfolio. All transaction recording and portfolio accounting responsibilities are handled by the Company’s accounting professionals, subject to audit by the Company’s independent accounting firm. All lease and loan assets are maintained by the Company at its headquarters, 5000 Birch Street, Suite 500, Newport Beach, CA 92660.

 

The Company’s transfer and dividend paying agent is Computershare Inc., 462 South 4th Street, Suite 1600, Louisville, KY 40202. The transfer agent maintains all shareholder accounts of record and will furnish written confirmation of all shareholder transactions, including information needed by shareholders for personal and tax records. 

 

          Performance Graph

The graph compares the performance of our common stock compared with that of the Standard & Poor’s 500 Index (“S&P 500^® ”) and the OTCQX Index of Dividend Paying stocks (“OTCQX Dividend”).

 

 

Principal Shareholders, Directors and Management

The following table sets forth certain information as to the shares of the Common Stock beneficially owned as of December 31, 2021 by the 1) Company's Executive Officers, 2) each member of the Board of Directors, 3) all executive officers and directors as a group, and 4) each person known by the Company to beneficially own 5% or more of the outstanding stock. Mr. Paddon’s and all Directors’ holdings were unchanged at April 30, 2022.

 

Name of Beneficial Owners			Amount of  Common Stock Beneficially Owned		Percent of  Common Stock Beneficially Owned		Dollar Range of Common Stock Beneficially Owned
Executive Officers
Patrick E. Paddon			6,427,200	62.5%		Over $100,000
Glen T. Tsuma			1,344,422	13.1%		Over $100,000
	S. Leslie Jewett		147,582	1.4%		Over $100,000
Independent Directors
		Michael H. Lowry	21,336	*		Over $100,000
		Harris Ravine	14,200	*		Over $100,000
		Danilo Cacciamatta	39,063	*		Over $100,000
		Robert W. Kelley	4,061	*		$50,001 - $100,000
		Directors and Executive Officers (as group, 7)	7,997,864	77.8%

                                                                                                                                               *  Less than one percent

 

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Interested Directors:

Patrick E. Paddon, age 71, founded the Company in 1977, has served as the President and a Director of the Company since its inception and has been Chief Executive Officer since 1990. From October 2013 to February 2021, Mr. Paddon served as a director of California First National Bank (“CalFirst Bank”), and served as Chief Executive Officer of CalFirst Bank from October 2015 until it was sold in February 2021. Mr. Paddon is the spouse of Ms. Jewett.

 

Glen T. Tsuma, age 68, joined the Company in May 1981, has been Chief Operating Officer since August 1989 and Secretary since October 1991. From June 2011 to February 2021, Mr. Tsuma was Vice Chairman of CalFirst Bank. Prior to joining the Company, he was an audit manager with Arthur Young & Company.

 

Independent Directors:

Michael H. Lowry, age 77, was elected to the Board of Directors in August 1992. From May 2011 to February 2021, Mr. Lowry also served as a director of CalFirst Bank. From 1994 until he retired in December 2010, Mr. Lowry was a Managing Director of Nomura Securities North America, LLC, an investment banking firm. Prior to joining Nomura Securities, Mr. Lowry had been employed by the investment banking firm of Bear Stearns & Co., Inc. from 1991 to 1993 and by the investment banking firm of Kidder, Peabody & Co. Incorporated from 1970 to 1990.

 

Harris Ravine, age 78, was elected to the Board of Directors in February 1994, and served as Chairman of the Board of CalFirst Bank from May 2001 to February 2021. Mr. Ravine was Chief Operating Officer from March 2009 through June 2017 for Rocky Mountain Public Broadcasting, Inc., the holder and operator of five public broadcasting licenses in the State of Colorado. Prior to that, he was Managing Director with The Ravine Group, an advisory services and investment firm.

 

Danilo Cacciamatta, age 76, was elected to the Board of Directors in June 2001 and served as a director of CalFirst Bank from May 2001 to February 2021. Mr. Cacciamatta was the Chief Executive Officer of Cacciamatta Accountancy Corporation until May 2010, a position he held for more than ten years. As a result of Mr. Cacciamatta’s years of experience in public accounting, which included sixteen years with KPMG Peat Marwick, the Board has determined that Mr. Cacciamatta qualifies as an “audit committee financial expert.”

 

Robert W. Kelley, age 83, was elected to the Board of Directors in December 2020 and  served as a director of CalFirst Bank from May 2001 to February 2021. From 1965 through 1995, Mr. Kelley was employed by the Office of the Comptroller of the Currency (“OCC”) as Senior National Bank Examiner, including serving as Examiner-in-Charge of the Los Angeles and Orange subregions.  After retiring from the OCC, Mr. Kelley served as an independent consultant to large and small financial institutions.

 

Officers:

  S. Leslie Jewett, age 66, joined the Company in September 1991 as Vice President - Finance.  In April 1994, Ms. Jewett was named Chief Financial Officer of the Company. From May 2001 to February 2021, Ms. Jewett served as a director of CalFirst Bank, and from October 2011 thru October 2015, she also served as President of CalFirst Bank. In February 2022 she was appointed Compliance Officer of the Company. From 1981 to 1990, she held various positions in the Corporate Finance group at Kidder, Peabody & Co. Incorporated. Ms. Jewett has a BA from Swarthmore College and an MBA from Stanford University.  Ms. Jewett is the spouse of Mr. Paddon.

 

Corporate Governance Policies and Practices

 

With over 60% of the Company’s Common Stock owned by Patrick Paddon, Chairman and Chief Executive Officer, the Company is a “controlled company”.  Section 2(a)(9) of the 1940 Act establishes a presumption of control if a person owns beneficially more than 25 per centum of the voting securities of a company. Notwithstanding such control, a majority of the Directors are considered to be “independent directors” in accordance with guidelines established by the OTCQX Market, not “interested persons” as defined in Section 2(a)(19) of the 1940 Act, and none of them has a material relationship with the Company that would impair their independence from management or otherwise compromise their ability to act as an Independent Director.

 

The position of Chairman of the Board of Directors and Chief Executive Officer are both held by Mr. Paddon. As founder of the Company and majority shareholder, the Board of Directors believes this leadership structure is appropriate for the Company. Mr. Paddon has extensive knowledge of the Company’s strategy and challenges, operations and financial condition, and is best situated to set agendas and lead discussions on matters affecting the Company’s business.

 

The Company’s management is responsible for the day-to-day management of the lease and investment businesses and the risks that the Company faces, while the Board of Directors has overall responsibility for risk oversight with a focus on the most significant risks related to market, credit, liquidity, operational and regulatory risk as well as overall enterprise risk.  The Board has established an Audit Committee.

 

The Audit Committee of the Board of Directors is made up of only the Independent Directors identified above. The Board of Directors has determined that each Audit Committee member has sufficient knowledge in financial and auditing matters to serve on the committee, and further that Mr. Cacciamatta is an “audit committee financial expert” as that term is defined in regulations issued by national securities exchanges and the 1940 Act. The Audit Committee has responsibility for oversight of: (a) the financial reports and other financial information provided by the Company to any governmental or regulatory body, the public or other users thereof, (b) the Company's systems of internal accounting and financial controls, and (c) the annual audit of the Company's financial statements. The Audit Committee has the sole authority and responsibility for selecting the firm of independent public accountants to be retained by the Company to perform the audit, and a shareholder vote on such selection is not required as long as the audit committee is composed solely of independent directors. The Audit Committee has authority to engage legal counsel or other experts or consultants, as it deems appropriate to carry out its responsibilities. The Board of Directors adopted an Audit Committee Charter in June 2000, amended it in August 2002 and October 2004 and subsequently amended and restated it in May 2021.  The Audit Committee met three times during the fiscal year 2021.

 

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Code of Ethics

It is the intent of the Company to conduct its business operations in accordance with the highest degree of integrity and ethical standards. Apart from service as an executive officer or on the Board of Directors, there are no additional relationships between the Company and any Related Person, nor are there any related party transactions between any Related Persons and the Company. A "Related Person" is any director or executive officer of the Company, any shareholder owning in excess of 5% of the total equity of the Company, and any "immediate family member" of any such person.

 

The Company holds its employees, officers and directors to an explicit Code of Ethics and requires reporting of conflicts with or breaches of this code. Such Code of Ethics conforms to Rule 17j-1 under the 1940 Act that makes it unlawful for Company employees and other Related Persons to engage in “fraudulent, deceptive or manipulative” practices in connection with their personal transactions in securities when those securities are held or to be acquired by the Company. Under the Code of Ethics, Related Persons may engage in personal securities transactions, but are required to report certain securities transactions for monitoring purposes.  In addition, the Ethics Code is available on the Company’s website under Investor Relations/Corporate Governance at www.calfirstlease.com.  The codes of ethics are also available on the EDGAR Database on the SEC’s website (http://www.sec.gov), and copies of these codes may be obtained, after paying a duplicating fee, by electronic request to the SEC.

 

                Privacy Policy 

The Company has systems in place to safeguard shareholder privacy, with access to all information limited to a need to know basis. Through our transfer agent, Computershare Trust Company, the Company has access to nonpublic shareholder information such as name, address, tax identification number and the shares held that is used to send annual reports, proxy statements, tax statements or other information required by law. This information is not shared with any non-affiliated third party except pursuant to contracts to perform transaction processing, servicing or maintaining shareholder accounts. These companies are required to protect information and use it solely for the purpose for which they received it.

 

Compliance Policies and Procedures

The Company has written policies and procedures that it believes are reasonably designed to prevent violation of the federal securities laws and requires the review of these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation. The Compliance Officer is responsible for administering these policies and procedures.

The 1940 Act requires investment companies to disclose how they vote proxies relating to securities owned, including the policies and procedures used to determine how to vote proxies relating to portfolio securities. Going forward, the Company will be required to file with the SEC and make available to shareholders the specific proxy votes cast in shareholder meetings of securities owned by the Company. The Board delegated the responsibility for voting proxies to the Company’s Compliance Officer, subject to the Board’s continuing oversight and in a manner consistent with the best interests of the Company and its shareholders. The Compliance Officer will review on a case-by-case basis each proposal submitted for a shareholder vote to determine its impact on the portfolio securities held by the Company. Although the Compliance Officer will generally vote against proposals that may have a negative impact on its  portfolio securities, it may vote for such a proposal if there exists compelling long-term reasons to do so.   The Compliance Officer may also determine to abstain from voting in certain circumstances when consistent with the best interests of the Company.

 

Officer and Director Compensation

Each non-employee director is paid an annual retainer of $36,000 plus expenses for service on the Company’s Board.  Directors who are employees of the Company do not receive any fees for their services as directors.

 

The following summary compensation table discloses compensation paid by the Company to the Executive Officers for the fiscal years ended June 30, 2021 and 2020, respectively.  No executive officer receives any incentive compensation related to the performance of the investment or lease portfolios.

 

Name and Principal Position	Year	Salary	Bonus	All Other Compensation (1)		Total
Patrick Paddon    President. Chief Executive Officer	2021	$180,000	-		$6,712	$186,712
	2020	$180,000	-		$7,124	$187,124
Glen T. Tsuma    Chief Operating Officer	2021	$180,000	-		$5,237	$185,237
	2020	$180,000	-		$6,632	$186,632
S. Leslie Jewett    Chief Financial Officer	2021	$250,000	-		$4,100	$254,100
	2020	$250,000	-		$4,033	$254,033

                                                               

(1)     Includes contribution under the Company's 401(k) Plan, certain professional fees, and club memberships.

 

The Company has not entered into any employment agreements with any of the Executive Officers and all officers are considered “at will” employees. The Company has no commitments for payments to be made or benefits provided in the event the employment of the Executive Officer is terminated. The Company does not maintain or make contributions to a defined benefit plan for any employees.  The Company indemnifies each of the executive officers to the fullest extent permitted under California law against expenses and, in certain cases, judgments, settlements or other payments incurred by the officer or director in suits brought by the Company, derivative actions brought by shareholders and suits brought by other third parties related to the officer’s or director’s service to the Company.  The 1940 Act prohibits the protection of any officer or director against any liability arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

 

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Taxes

 

The following is a summary of certain U.S. federal income tax considerations relevant to the acquisition, holding and disposition of Shares by U.S. shareholders. This summary is based upon existing U.S. federal income tax law, which is subject to change, possibly with retroactive effect. This summary does not discuss all aspects of U.S. federal income taxation which may be important to particular investors in light of their individual investment circumstances, including investors subject to special tax rules, such as U.S. financial institutions, insurance companies, broker-dealers, traders in securities that elect to mark-to-market their securities holdings, tax-exempt organizations, partnerships, shareholders who are not United States persons (as defined in the Code), shareholders liable for the alternative minimum tax, persons holding Shares through partnerships or other pass-through entities, or investors that have a functional currency other than the U.S. dollar, all of whom may be subject to tax rules that differ significantly from those summarized below.  This summary assumes that investors have acquired and will hold their Shares as “capital assets” (generally, property held for investment) for U.S. federal income tax purposes. Prospective shareholders are urged to consult their own tax advisors regarding the non-U.S. and U.S. federal, state, and local income and other tax considerations that may be relevant to an investment in the Company.

 

Taxation of the Company: In General

The Company does not, and does not expect in the near future to,  qualify for taxation as a regulated investment company (“RIC”) under Subchapter M of Chapter 1 of the Code. To qualify, a corporation must meet certain income, asset diversification and distribution requirements. Since the Company does not expect to qualify as a RIC, the Company will continue to pay state and federal income tax at the Company level, which  reduces reported net income and potentially cash available for paying dividends to shareholders.

 

Dividends paid by Company

For federal income tax purposes, dividends paid by the Company are categorized as “qualified” dividends as they are paid out of retained earnings. The Company expects its dividends to continue to be treated as qualified dividend income, and generally taxed at reduced rates for non-corporate shareholders. By February 15 of each year, the Company’s Transfer agent will send to shareholders a statement showing the tax status of dividends paid for the prior year. For shareholders that are non-U.S. persons, dividends paid by the Company will generally be subject to withholding of U.S. federal income tax at the rate of 30%, or any lower rate provided by an applicable tax treaty.

 

The Company may be required in certain circumstances to apply backup withholding to dividends payable to non-corporate shareholders who fail to provide the Company with their correct taxpayer identification numbers or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. The backup withholding rate is currently 28%. Backup withholding is not an additional tax and any amount withheld may be credited against a shareholder’s U.S. federal income tax liabilities. Backup withholding will not be applied to payments that have already been subject to the 30% withholding tax described above.

 

Disposition  of Shares by Shareholders

The sale of Shares by a shareholder may give rise to a taxable gain or loss. In general, any gain or loss realized upon a taxable disposition of Shares will be treated as long-term capital gain or loss if the Shares have been held for more than 12 months. Otherwise the gain or loss will generally be treated as short-term capital gain or loss. The 30% withholding tax generally will not apply to the proceeds of Share sales. A repurchase of its Shares by the Company generally is expected to be treated as a sale of the Shares by the shareholder. If, however, the shareholder continues to own Shares of the Company after the repurchase (including Shares owned by attribution), and if the repurchase does not otherwise qualify as a redemption under the Code, some or all of the amounts received by such shareholder in the repurchase may be recharacterized as a distribution taxable as a dividend. There is also a risk that shareholders who do not participate in the repurchase may be deemed to have received such a dividend as a result of their proportionate increase in the ownership of the Company. Except to the extent characterized as a dividend in the context of a redemption, the 30% withholding tax generally will not apply to the proceeds of Share sales.

 

State and Local Taxes

In addition to the U.S. federal income tax consequences summarized above, investors should consider the potential state and local tax consequences of an investment in the Company.

 

Medicare Tax

Company dividends and gains on the sale of Company Shares will generally be included in the computation of net investment income for purposes of the 3.8% Medicare contribution tax, which applies to individuals with income exceeding specified thresholds and to certain estates and trusts.

 

Under legislation enacted in March 2010 known as “FATCA” (the Foreign Account Tax Compliance Act), withholding will be imposed on all Company dividends payable to certain shareholders that fail to meet prescribed information reporting or certification requirements. In general, no such withholding will occur with respect to a U.S. person or non-U.S. individual that timely provides a valid IRS Form W-9 or W-8, respectively. Shareholders potentially subject to withholding include foreign financial institutions (“FFIs”), such as non-U.S. investment funds, and non-financial foreign entities (“NFFEs”). To avoid withholding under FATCA, an FFI generally must enter into an information sharing agreement with the Internal Revenue Service (“IRS”) in which it agrees to report certain identifying information with respect to its U.S. account holders (which, in the case of an entity shareholder, will include its direct and indirect U.S. owners), and an NFFE generally must identify itself and, in certain circumstances, provide information regarding its substantial U.S. owners, if any. A non-U.S. shareholder resident or doing business in a country that has entered into an intergovernmental agreement with the U.S. to implement FATCA will be exempt from FATCA withholding provided that the shareholder and the applicable foreign government comply with the terms of such agreement.

 

Other Taxes

The foregoing is a summary of some of the tax rules and considerations affecting shareholders and does not purport to be a complete analysis of all relevant tax rules and considerations, nor does it purport to be a complete listing of all potential tax risks inherent in making an investment in the Company. Non-U.S. investors are urged to consult with their own tax advisers regarding any proposed investment in the Company. A shareholder may be subject to other taxes, including but not limited to, state and local taxes, estate and inheritance taxes, and intangible property taxes that may be imposed by various jurisdictions. It is the responsibility of each shareholder to file all appropriate tax returns that may be required. Each prospective shareholder is urged to consult with his or her tax adviser with respect to any investment in the Company.

 

 

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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.

 

 

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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.

 

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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.

 

 

 

 

 

 

 

 

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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.