CFNB 10-Q Quarterly Report Sept. 30, 2013 | Alphaminr
CALIFORNIA FIRST NATIONAL BANCORP
ALPHAMINR

CFNB 10-Q Quarter ended Sept. 30, 2013

Balance Sheet
Cash Flow
Income Statement
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10-Q 1 f10q_111313.htm FORM 10-Q f10q_111313.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[Mark One]
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No.: 0-15641

California First National Bancorp
(Exact name of registrant as specified in charter)
California 33-0964185
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
28 Executive Park, Suite 300
Irvine, California
92614
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 255-0500

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days .Yes [X] No [   ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X] No [   ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [   ] Accelerated filer [   ] Non-accelerated filer [   ] Smaller Reporting Company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [   ] No [X]

The number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of November 11, 2013 was 10,447,227.
CALIFORNIA FIRST NATIONAL BANCORP

INDEX
PART I. FINANCIAL INFORMATION
PAGE
NUMBER
Item 1. Financial Statements
3
PART II. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS

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

2
CALIFORNIA FIRST NATIONAL BANCORP

(in thousands, except for share amounts)


September 30,
2013
June 30,
2013
(Unaudited)
ASSETS
Cash and due from banks
$ 78,791 $ 75,469
Investments
2,450 2,640
Securities available-for-sale
41,431 45,522
Receivables
2.120 1,395
Property acquired for transactions in process
20,360 11,927
Leases and loans:
Net investment in leases
337,030 345,753
Commercial loans
72,176 75,952
Allowance for credit losses
(5,142 ) (5,136 )
Net investment in leases and loans
404,064 416,569
Net property on operating leases
337 455
Income taxes receivable
376 3,301
Other assets
712 857
Discounted lease rentals assigned to lenders
633 768
$ 551,274 $ 558,903
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accounts payable
$ 5,122 $ 8,849
Accrued liabilities
2,489 2,156
Demand and savings deposits
70,725 71,946
Time certificates of deposit
271,067 274,082
Lease deposits
1,846 1,648
Non-recourse debt
633 768
Deferred income taxes, net
16,732 18,575
368,614 378,024
Commitments and contingencies
Stockholders' equity:
Preferred stock; 2,500,000 shares authorized; none issued
- -
Common stock; $.01 par value; 20,000,000 shares authorized; 10,447,227 (September 2013) and 10,447,227 (June 2013) issued and outstanding
104 104
Additional paid in capital
3,214 3,213
Retained earnings
178,803 176,972
Accumulated other comprehensive income
539 590
182,660 180,879
$ 551,274 $ 558,903
The accompanying notes are an integral part
of these consolidated financial statements.
3
CALIFORNIA FIRST NATIONAL BANCORP

(in thousands, except for per share amounts)

Three Months Ended
September 30,
2013
2012
Direct finance and loan income
$ 4,586 $ 4,706
Investment interest income
426 688
Total direct finance, loan and interest income
5,012 5,394
Interest expense on deposits
792 571
Net direct finance, loan and interest income
4,220 4,823
Provision for credit losses
- 275
Net direct finance, loan and interest income after provision for credit losses
4,220 4,548
Non-interest income
Operating and sales-type lease income
499 544
Gain on sale of leases, loans and leased property
781 313
Other fee income
132 121
Total non-interest income
1,412 978
Non-interest expenses
Compensation and employee benefits
1,747 2,240
Occupancy
205 234
Professional services
156 155
Other general and administrative
551 387
Total non-interest expenses
2,659 3,016
Earnings before income taxes
2,973 2,510
Income taxes
1,142 972
Net earnings
$ 1,831 $ 1,538
Basic earnings per common share
$ 0.18 $ 0.15
Diluted earnings per common share
$ 0.18 $ 0.15
Average common shares outstanding – basic
10,447,227 10,443,738
Average common shares outstanding – diluted
10,450,901 10,450,687
The accompanying notes are an integral part
of these consolidated financial statements.

4
CALIFORNIA FIRST NATIONAL BANCORP

(in thousands)
Three Months Ended
September 30,
2013
2012
Net earnings
$ 1,831 $ 1,538
Other comprehensive income (loss)
Unrealized (losses) gains on securities available-for-sale
(84 ) 964
Tax effect
33 (339 )
Total other comprehensive (loss) income
(51 ) 625
Total comprehensive income
$ 1,780 $ 2,163
The accompanying notes are an integral part
of these consolidated financial statements.
5
CALIFORNIA FIRST NATIONAL BANCORP

(in thousands)

Three Months Ended
September 30,
2013
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings
$ 1,831 $ 1,538
Adjustments to reconcile net earnings to cash flows provided by (used for) operating activities:
Provision for credit losses
- 275
Depreciation and net amortization (accretion)
(45 ) (145 )
Stock-based compensation expense
1 1
Gain on sale of leased property and sales-type lease income
(373 ) (67 )
Deferred income taxes, including income taxes payable
(1,807 ) (324 )
Decrease in income taxes receivable
2,925 681
Net decrease in accounts payable and accrued liabilities
(3,394 ) (592 )
Other, net
(415 ) (2,892 )
Net cash used for operating activities
(1,277 ) (1,525 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in leases, loans and transactions in process
(50,060 ) (65,553 )
Payments received on lease receivables and loans
53,091 50,359
Proceeds from sales of leased property and sales-type leases
1,686 2,096
Pay down on investment securities
3,990 2,158
Net decrease in other assets
128 60
Net cash provided by (used for) investing activities
8,835 (10,880 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in time certificates of deposit
(3,015 ) 2,608
Net decrease in demand and savings deposits
(1,221 ) (1,799 )
Proceeds from exercise of stock options
- 165
Net cash (used for) provided by financing activities
(4,236 ) 974
NET CHANGE IN CASH AND CASH EQUIVALENTS
3,322 (11,431 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
75,469 56,921
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 78,791 $ 45,490
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Decrease in lease rentals assigned to lenders and related non-recourse debt
$ (135 ) $ (843 )
Estimated residual values recorded on leases
$ (856 ) $ (1,101 )
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net cash paid during the three month period for:
Interest
$ 802 $ 577
Income Taxes
$ 24 $ 615
The accompanying notes are an integral part
of these consolidated financial statements.

6
CALIFORNIA FIRST NATIONAL BANCORP

(in thousands, except for share amounts)
Shares
Amount
Additional
Paid in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Three months ended September 30, 2012
Balance, June 30, 2012
10,433,684 $ 104 $ 3,044 $ 192,603 $ 688 $ 196,439
Net earnings
- - - 1,538 - 1,538
Other comprehensive income
- - - - 625 625
Shares issued - Stock options exercised
13,543 - 165 - - 165
Stock based compensation expense
- - 1 - - 1
Balance, September 30, 2012
10,447,227 $ 104 $ 3,210 $ 194,141 $ 1,313 $ 198,768
Three months ended September 30, 2013
Balance, June 30, 2013
10,447,227 $ 104 $ 3,213 $ 176,972 $ 590 $ 180,879
Net earnings
- - - 1,831 - 1,831
Other comprehensive income
- - - - (51 ) (51 )
Stock based compensation expense
- - 1 - - 1
Balance, September 30, 2013
10,447,227 $ 104 $ 3,214 $ 178,803 $ 539 $ 182,660

The accompanying notes are an integral part
of these consolidated financial statements.
7
CALIFORNIA FIRST NATIONAL BANCORP


NOTE 1- BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of California First National Bancorp (the “Company”) and its subsidiaries California First National Bank (“CalFirst Bank” or the “Bank”) and California First Leasing Corporation (“CalFirst Leasing”) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended June 30, 2013. The material under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is written with the presumption that the readers have read or have access to the 2013 Annual Report on Form 10-K, which contains Management’s Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2013 and for the year then ended.

In the opinion of management, the unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the balance sheet as of September 30, 2013 and the statements of earnings, comprehensive income, cash flows and stockholders’ equity for the three-month periods ended September 30, 2013 and 2012. The results of operations for the three-month period ended September 30, 2013 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending June 30, 2014.

Certain reclassifications have been made to the fiscal 2013 financial statements to conform to the presentation of the fiscal 2014 financial statements.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the FASB issued ASU 2013-02, Other Comprehensive Income (Topic 220), Reporting of Amounts Reclassified out of Other Comprehensive Income ("ASU 2013-02"). The provisions in the ASU supersede and replace the presentation requirements for reclassifications out of AOCI in ASUs 2011-05 and 2011-12. ASU 2013-02 requires entities to disclose additional information about reclassification adjustments, including (1) changes in AOCI balances by component and (2) significant items reclassified out of AOCI. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted ASU 2013-02 for its first quarter of fiscal 2014. Adoption of the new guidance did not have a significant impact on the Company's consolidated financial statements

NOTE 3 – STOCK-BASED COMPENSATION

At September 30, 2013, the Company has one stock option plan, which is more fully described in Note 14 in the Company’s 2013 Annual Report on Form 10-K.  Pursuant to ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”), compensation expense is recognized over the requisite service period using the fair-value based method for all new awards calculated at the grant date.

During the quarters ended September 30, 2013 and 2012, the Company recognized pre-tax stock-based compensation expense of $1,000 in each respective quarter. Such expense related to options granted during fiscal 2013.  The Company has not awarded any new grants in fiscal 2014 and has calculated the stock-based compensation expense based upon the original grant date fair value as allowed under ASC 718.  The valuation variables utilized at the grant dates are discussed in the Company’s 2013 Annual Report on Form 10-K, the year of the original grant.  As of September 30, 2013, approximately $17,000 of total unrecognized compensation expense related to unvested shares is expected to be recognized over the next 46 months.

8
The following table summarizes the stock option activity for the periods indicated:

Three months ended
September 30, 2013
September 30, 2012
Shares
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
Options outstanding at the beginning of period
22,697 $ 13.91 26,240 $ 12.19
Granted
- - 10,000 16.00
Exercised
- - (13,543 ) 12.13
Canceled/expired
- - - -
Options outstanding at end of period
22,697 $ 13.91 22,697 $ 13.91
Options exercisable at end of period
14,697 12,697
As of September 30, 2013
Options Outstanding
Options Exercisable
Range of
Exercise prices
Number
Outstanding
Weighted Average
Remaining Contractual
Life (in years)
Weighted
Average
Exercise Price
Number
Exercisable
Weighted
Average
Exercise Price
$ 9.96 - $ 12.49 12,697 0.29 $ 12.26 12,697 $ 12.26
16.00 - 16.00 10,000 8.83 16.00 2,000 16.00
$ 9.96 - $ 16.00 22,697 4.05 $ 13.91 14,697 $ 12.77

NOTE 4 – FAIR VALUE MEASUREMENT:

ASC Topic 820: “Fair Value Measurements and Disclosures” defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability.  ASC Topic 820 establishes a three-tiered value hierarchy that prioritizes inputs based on the extent to which inputs used are observable in the market and requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs.  If a value is based on inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.  The three levels of inputs are defined as follows:
·
Level 1 - Valuation is based upon unadjusted quoted prices for identical instruments traded in active markets;
·
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market;
·
Level 3 - Valuation is generated from model-based techniques that use inputs not observable in the market and based on the entity’s own judgment.  Level 3 valuation techniques could include the use of option pricing models, discounted cash flow models and similar techniques, and rely on assumptions that market participants would use in pricing the asset or liability.
ASC 820 applies whenever other accounting pronouncements require presentation of fair value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value.  As such, ASC 820 does not apply to the Company’s investment in leases.  The Company’s financial assets measured at fair value on a recurring basis include primarily securities available-for-sale and at September 30, 2013, there were no liabilities subject to ASC 820.
Securities available-for-sale include corporate bonds, municipal bonds, mutual fund and equity investments and generally are reported at fair value utilizing Level 1 and Level 2 inputs.  The fair value of corporate and municipal bonds are obtained from independent quotation bureaus that use computerized valuation formulas to calculate current values based on observable transactions, but not a quoted bid, or are valued using prices obtained from the custodian, who uses third party data service providers (Level 2 input). Mutual funds and equity investments are valued by reference to the market closing or last trade price (Level 1 inputs). In the unlikely event that no trade occurred on the applicable date, an indicative bid or the last trade most proximate to the applicable date would be used (Level 2 input).

9
The following table summarizes the Company’s assets, which are measured at fair value on a recurring basis as of September 30, 2013 and June 30, 2013:
(in thousands)
Description of Assets / Liabilities
Total
Fair Value
Quoted Price in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
As of September 30, 2013
Corporate bonds
$ 39,086 $ - $ 39,086 $ -
Municipal bonds
435 - 435 -
Mutual fund investments
1,187 1,187 - -
Equity investment
723 723 - -
$ 41,431 $ 1,910 $ 39,521 $ -
As of June 30, 2013
Corporate bonds
$ 43,147 $ - $ 43,147 $ -
Municipal bonds
436 - 436 -
Mutual fund investment
1,250 1,250 - -
Equity investment
689 689 - -
$ 45,522 $ 1,939 $ 43,583 $ -

Certain financial instruments, such as impaired loans and unfunded loan commitments, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances, usually if there was evidence of impairment.  The Company had no such assets or liabilities at September 30, 2013 and June 30, 2013.

NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS:

In accordance with ASC 825-50, the following table summarizes the estimated fair value of financial instruments as of September 30, 2013, and June 30, 2013, and includes financial instruments that are not accounted for or carried at fair value.  In accordance with disclosure guidance, certain financial instruments, including all lease related assets and liabilities and all non-financial instruments are excluded from fair value of financial instrument disclosure requirements.  Accordingly, the aggregate of the fair values presented does not represent the total underlying value of the Company.  These fair value estimates are based on relevant market information and data, however, given there is no active market or observable market transactions for certain financial instruments, the Company has made estimates of fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimated values.

For cash and cash equivalents and demand deposits, because of their short-term nature, the carrying amounts approximate the fair value and are classified as Level 1 in the fair value hierarchy.  Values for investments and available-for-sale securities are determined as set forth in Note 4 and 7.  The fair value of loan participations that trade regularly in the secondary market is based upon current bid prices in such market at the measurement date and are classified as Level II in the fair value hierarchy. For other loans, the estimated fair value is calculated based on discounted cashflow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and are classified as Level III in the fair value hierarchy.  These calculations have been adjusted for credit risk based on the Company’s historical credit loss experience.  The fair value of certificates of deposit are estimated based on discounted cash flows using current offered market rates or interest rates for borrowings of similar maturity and are classified as Level III in the fair value hierarchy.

10
The estimated fair values of financial instruments were as follows:

September 30, 2013
June 30, 2013
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
(in thousands)
Financial Assets:
Cash and cash equivalents
$ 78,791 $ 78,791 $ 75,469 $ 75,469
Investments
2,450 2,461 2,640 2,659
Securities available-for-sale
41,431 41,431 45,522 45,522
Commercial loan participations
61,305 61,522 64,987 65,226
Other commercial loans
8,899 8,860 8,993 8,935
Financial Liabilities:
Demand and savings deposits
70,725 70,725 71,946 71,946
Time certificate of deposits
$ 271,067 $ 271,332 $ 274,082 $ 274,449

NOTE 6 – INVESTMENTS:

Investments are carried at cost and consist of the following:
September 30, 2013
June 30, 2013
Carrying Cost
Fair Value
Carrying Cost
Fair Value
(in thousands)
Federal Reserve Bank Stock
$ 1,655 $ 1,655 $ 1,655 $ 1,655
Federal Home Loan Bank Stock
671 671 771 771
Mortgage-backed investments
124 135 214 233
$ 2,450 $ 2,461 $ 2,640 $ 2,659

The investment in Federal Home Loan Bank of San Francisco (“FHLB”) stock is a required investment related to CalFirst Bank’s borrowing arrangements with the FHLB. The FHLB obtains its funding primarily through issuance of consolidated obligations of the Federal Home Loan Bank system.  The U.S. Government does not guarantee these obligations, and each of the 12 FHLB’s are generally jointly and severally liable for repayment of each other’s debt.  Therefore, the Company’s investment could be adversely impacted by the financial operations of the FHLB and actions by the Federal Housing Finance Agency.  These investments have no stated maturity.

The mortgage-backed investments consist of a U.S. agency issued security.  The Company has determined that it has the ability to hold this investment until maturity and, given the Company’s intent to do so, anticipates that it will realize the full carrying value of its investment and carries the security at amortized cost.

NOTE 7 – SECURITIES AVAILABLE-FOR-SALE :

The amortized cost, fair value, and carrying value of securities were as follows:

at September 30, 2013
(in thousands)
Amortized
Gross Unrealized
Fair
Cost
Gains
Losses
Value
Corporate bonds
$ 38,433 $ 653 $ - $ 39,086
Municipal bonds
412 23 - 435
Mutual fund investments
1,306 - (119 ) 1,187
Equity investments
422 301 - 723
Total securities available-for-sale
$ 40,573 $ 977 $ (119 ) $ 41,431
at June 30, 2013
Amortized
Gross Unrealized
Fair
Cost
Gains
Losses
Value
Corporate bonds
$ 42,435 $ 712 $ - $ 43,147
Municipal bonds
412 24 - 436
Mutual fund investments
1,306 - (56 ) 1,250
Equity investments
422 267 - 689
Total securities available-for-sale
$ 44,575 $ 1,003 $ (56 ) $ 45,522
11
The amortized cost and estimated fair value of available-for-sale securities at September 30, 2013, by contractual maturity, are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized Cost
Fair Value
(in thousands)
Due in one year or less
$ 27,250 $ 27,515
Due after one year but less than 5 years
11,595 12,006
Due after five years
- -
No stated maturity
1,728 1,910
Total securities available-for-sale
$ 40,573 $ 41,431

As of September 30, 2013 and 2012 the Company had no gross realized gains, losses or other than temporary impairments of available-for-sale securities.

The following table presents the fair value and associated gross unrealized loss on an available-for-sale security with a gross unrealized loss at September 30, 2013 and June 30, 2013.

Less than 12 Months
12 Months or More
Total
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
(in thousands)
At September 30, 2013
Mutual fund investment
$ (119 ) $ 1,187 $ - $ - $ (119 ) $ 1,187
Total
$ (119 ) $ 1,187 $ - $ - $ (119 ) $ 1,187
At June 30, 2013
Mutual fund investment
$ (56 ) $ 1,250 $ - $ - $ (56 ) $ 1,250
Total
$ (56 ) $ 1,250 $ - $ - $ (56 ) $ 1,250

The Company conducts a regular assessment of its investment portfolios to determine whether any securities are other-than-temporarily impaired. In estimating other-than-temporary impairment losses, management considers, among other factors, length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery. As of September 30, 2013, no securities were other than temporarily impaired.

NOTE 8 – NET INVESTMENT IN LEASES

The Company's net investment in leases consists of the following:

September 30, 2013
June 30, 2013
(in thousands)
Minimum lease payments receivable
$ 348,212 $ 357,942
Estimated residual value
13,800 14,087
Less unearned income
(24,982 ) (26,276 )
Net investment in leases before allowances
337,030 345,753
Less allowance for lease losses
(2,919 ) (2,916 )
Less valuation allowance for estimated residual value
(251 ) (248 )
Net investment in leases
$ 333,860 $ 342,589

The minimum lease payments receivable and estimated residual value are discounted using the internal rate of return method related to each specific capital lease.  Unearned income includes the offset of initial direct costs of $2.6 million at September 30, 2013 and at June 30, 2013.
12
NOTE 9 – COMMERCIAL LOANS

The Company’s investment in commercial loans consists of the following:

September 30, 2013
June 30, 2013
(in thousands)
Commercial term loans
$ 62,287 $ 65,094
Commercial real estate loans
9,316 9,411
Revolving lines of credit
948 1,841
Total commercial loans
72,551 76,346
Less unearned income and discounts
(375 ) (394 )
Less allowance for loan losses
(1,972 ) (1,972 )
Net commercial loans
$ 70,204 $ 73,980

Commercial loans are reported at their outstanding unpaid principal balances reduced by the allowance for loan losses and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related commercial loan.
In addition to the amount outstanding on revolving lines of credit set forth above, the Company had additional unused commitments on revolving lines of credit in the amount of $10.0 million at September 30, 2013 and $12.0 million at June 30, 2013. The Company has a recorded liability for unfunded loan commitments of $25,000 at September 30, 2013 and June 30, 2013 related to such commitments.
NOTE 10 – CREDIT QUALITY OF FINANCING RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

The following tables provide information on the credit profile of the components of the portfolio and allowance for credit losses related to “financing receivables” as defined under ASC Topic 310, Receivables.  This disclosure on “financing receivables” covers the Company’s direct finance and sales-type leases and all commercial loans, but does not include operating leases and transactions in process.   The portfolio is disaggregated into segments and classifications appropriate for assessing and monitoring the portfolios’ risk and performance. This disclosure does not encompass all risk assets or the entire allowance for credit losses.

Portfolio segments identified by the Company include leases and loans.  These segments have been disaggregated into four classes: 1) commercial leases, 2) education, government and non-profit leases, 3) commercial and industrial loans and 4) commercial real estate loans.  Relevant risk characteristics for establishing these portfolio classes generally include the nature of the borrower, structure of the transaction and collateral type. The Company’s credit process includes a policy of classifying all leases and loans in accordance with a risk rating classification system consistent with regulatory models under which leases and loans may be rated as “pass”, “special mention”, “substandard”, or “doubtful”. These risk categories reflect an assessment of the ability of the borrowers to service their obligation based on current financial position, historical payment experience, and collateral adequacy, among other factors.  The Company uses the following definitions for risk ratings:

Pass – Includes credits of the highest quality as well as credits with positive primary repayment source but one or more characteristics that are of higher than average risk.

Special Mention – Have a potential weakness that if left uncorrected may result in deterioration of the repayment prospects for the lease or loan or of the Company’s credit position at some future date.

Substandard – Are inadequately protected by the paying capacity of the obligor or of the collateral, if any. Substandard credits have a well-defined weakness that jeopardize the liquidation of the debt or indicate the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Based on current information and events, collection of all amounts due according to the contractual terms of the lease or loan agreement is considered highly questionable and improbable.
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The risk classification of financing receivables by portfolio class is as follows:

(in thousands)
Commercial
Leases
Education
Government
Non-profit
Leases
Commercial
& Industrial
Loans
Commercial
Real Estate
Loans
Total
Financing
Receivable
As of September 30, 2013:
Pass
$ 252,001 $ 78,407 $ 60,677 $ 3,577 $ 394,662
Special Mention
4,281 143 2,189 - 6,613
Substandard
1,499 616 - 5,733 7,848
Doubtful
73 10 - - 83
$ 257,854 $ 79,176 $ 62,866 $ 9,310 $ 409,206
Non-accrual
$ 1,591 $ 10 $ - $ - $ 1,601
As of June 30, 2013:
Pass
$ 256,360 $ 81,730 $ 64,366 $ 3,616 $ 406,072
Special Mention
5,264 200 2,182 - 7,646
Substandard
1,499 615 - 5,788 7,902
Doubtful
73 12 - - 85
$ 263,196 $ 82,557 $ 66,548 $ 9,404 $ 421,705
Non-accrual
$ 1,591 $ 23 $ - $ - $ 1,614

The accrual of interest income on leases and loans will be discontinued when the customer becomes ninety days or more past due on its lease or loan payments with the Company, unless the Company believes the investment is otherwise recoverable.  Leases and loans may be placed on non-accrual earlier if the Company has significant doubt about the ability of the customer to meet its lease or loan obligations, as evidenced by consistent delinquency, deterioration in the customer’s financial condition or other relevant factors. Payments received while on non-accrual are applied to reduce the Company’s recorded value.

The following table presents the aging of the financing receivables by portfolio class:

(in thousands)
30-89
Days
Greater
Than
90 Days
Total
Past Due
Current
Total
Financing
Receivable
Over 90
Days &
Accruing
As of September 30, 2013:
Commercial Leases
$ 442 $ 105 $ 547 $ 257,307 $ 257,854 $ 105
Education, Government, Non-profit Leases
- - - 79,176 79,176 -
Commercial and Industrial Loans
- - - 62,866 62,866 -
Commercial Real Estate Loans
- - - 9,310 9,310 -
$ 442 $ 105 $ 547 $ 408,659 $ 409,206 $ -
As of June 30, 2013:
Commercial Leases
$ 113 $ - $ 113 $ 263,083 $ 263,196 $ -
Education, Government, Non-profit Leases
- - - 82,557 82,557 -
Commercial and Industrial Loans
- - - 66,548 66,548 -
Commercial Real Estate Loans
- - - 9,404 9,404 -
$ 113 $ - $ 113 $ 421,592 $ 421,705 $ -

The commercial lease greater than 90 days past due and still accruing related to procedural issues with one lease schedule that was brought current in early October 2013.

14
The following table presents the allowance balances and activity in the allowance related to financing receivables, along with the recorded investment and allowance determined based on impairment method as of September 30, 2013 and June 30, 2013:

(in thousands)
Commercial
Leases
Education
Government
Non-profit
Leases
Commercial
& Industrial
Loans
Commercial
Real Estate
Loans
Total
Financing
Receivable
As of September 30, 2013:
Allowance for lease and loan losses
Balance beginning of period
$ 2,546 $ 618 $ 1,561 $ 411 $ 5,136
Charge-offs
(8 ) - - - (8 )
Recoveries
14 - - - 14
Provision
- - - - -
Balance end of period
$ 2,552 $ 618 $ 1,561 $ 411 $ 5,142
Individually evaluated for impairment
$ 371 $ 102 $ - $ - $ 473
Collectively evaluated for impairment
2,181 516 1,561 411 4,669
Total ending allowance balance
$ 2,552 $ 618 $ 1,561 $ 411 $ 5,142
Finance receivables
Individually evaluated for impairment
$ 2,811 $ 626 $ - $ - $ 3,437
Collectively evaluated for impairment
255,043 78,550 62,866 9,310 405,769
$ 257,854 $ 79,176 $ 62,866 $ 9,310 $ 409,206
As of June 30, 2013:
Allowance for lease and loan losses
Balance beginning of period
$ 2,236 $ 897 $ 1,561 $ 511 $ 5,205
Charge-offs
(71 ) (279 ) - - (350 )
Recoveries
6 - - - 6
Provision
375 - - (100 ) 275
Balance end of period
$ 2,546 $ 618 $ 1,561 $ 411 $ 5,136
Individually evaluated for impairment
$ 330 $ 111 $ - $ - $ 441
Collectively evaluated for impairment
2,216 507 1,561 411 4,695
Total ending allowance balance
$ 2,546 $ 618 $ 1,561 $ 411 $ 5,136
Finance receivables
Individually evaluated for impairment
$ 1,926 $ 627 $ - $ - $ 2,553
Collectively evaluated for impairment
261,270 81,930 66,548 9,404 419,152
Total ending finance receivable balance
$ 263,196 $ 82,557 $ 66,548 $ 9,404 $ 421,705

NOTE 11 – BORROWINGS

At September 30, 2013, CalFirst Leasing had a $10 million line of credit with a bank.  The purpose of the line is to provide resources as needed for investment in transactions-in-process and leases.  The agreement provides for borrowings based on Libor, requires a commitment fee on the unused line balance and allows for advances through March 31, 2014.  The line is unsecured, however, the Company guarantees CalFirst Leasing’s obligations.  Under provisions of the agreement, CalFirst Leasing must maintain a minimum net worth and profitability. At June 30 and September 30, 2013, CalFirst Leasing did not meet the profitability requirement, which has been waived by the bank.   No borrowings have been made under this line of credit over the past five years.

CalFirst Bank is a member of the Federal Home Loan Bank of San Francisco (“FHLB”) and can take advantage of FHLB programs for overnight and term advances at published daily rates.  Under terms of a blanket collateral agreement, advances from the FHLB are collateralized by qualifying real estate loans and investment securities.  The Bank also has authority to borrow from the Federal Reserve Bank (“FRB”) discount window amounts secured by certain lease receivables.  At September 30, 2013, there were no borrowings from the FHLB, leaving available borrowing capacity of $2.4 million related to qualifying real estate loans of $3.6 million, and no borrowings from the FRB with borrowing availability of approximately $93.6 million secured by $123.8 million of lease receivables.
15
NOTE 12 – SEGMENT REPORTING

The Company’s two subsidiaries, CalFirst Bank, an FDIC-insured national bank, and CalFirst Leasing are considered to be two different business segments. Below is a summary of each segment’s financial results for the quarters ended September 30, 2013 and 2012:

CalFirst
Bank
CalFirst
Leasing
Bancorp and
Eliminating
Entries
Consolidated
(in thousands)
Quarter ended September 30, 2013
Total direct finance and interest income
$ 4,259 $ 753 $ - $ 5,012
Net direct, loan and interest income after provision for credit losses
3,467 753 - 4,220
Other income
377 1,035 - 1,412
Net income
1,331 753 (253 ) 1,831
Total assets at September 30, 2013
$ 464,757 $ 89,171 $ (2,654 ) $ 551,274
Quarter ended September 30, 2012
Total direct finance and interest income
$ 4,114 $ 1,277 $ 3 $ 5,394
Net direct, loan and interest income after provision for credit losses
3,247 1,298 3 4,548
Other income
310 668 - 978
Net income
974 694 (130 ) 1,538
Total assets at September 30, 2012
$ 380,879 $ 129,181 $ (21,964 ) $ 488,096
NOTE 13 – SUBSEQUENT EVENT
On November 11, 2013, the Company’s Board of Directors declared an annual dividend in the amount of forty cents ($0.40) per share. The dividend will be payable on December 13, 2013 to all stockholders of record at the close of business on November 29, 2013.
No other significant events occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Consolidated Financial Statements.
16
CALIFORNIA FIRST NATIONAL BANCORP

GENERAL

California First National Bancorp, a California corporation (the “Company”), is a bank holding company headquartered in Orange County, California with a bank subsidiary, California First National Bank (“CalFirst Bank” or the “Bank”) and leasing subsidiary, California First Leasing Corp (“CalFirst Leasing”).  The primary business of the Company is leasing and financing capital assets, while CalFirst Bank also participates in the syndicated commercial loan market, provides business loans to fund the purchase of assets leased by third parties and offers commercial loans directly to businesses.  CalFirst Bank gathers deposits from a centralized location primarily through posting rates on the Internet.  All banking and other operations are conducted from one central location.

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

The Company's operating results are subject to quarterly fluctuations resulting from a variety of factors, including the size and credit quality of the lease and loan portfolios, the interest rate environment, the volume and profitability of leased property being re-marketed through re-lease or sale, the market for investment securities, the volume of new lease or loan originations, including variations in the mix and funding of such originations, and economic conditions in general. Net interest income is the largest source of income and the Company’s principal market risk exposure currently is related to the absolute level of interest rates and the differences in the repricing characteristics of interest-earning assets and interest-bearing liabilities. The FRB began decreasing interest rates in 2007 and has maintained historically low market interest rates from 2009 to 2013. The Company’s current balance sheet structure is short-term in nature, with over 56% of interest-earning assets and 77% of interest bearing liabilities repricing within one year. The Company’s interest margin is susceptible to timing lags related to varying movements in market interest rates as many of the Company’s leases, loans and liquid investments are tied to U.S. treasury rates and Libor that often do not move in step with bank deposit rates.  As a result, this can cause a greater change in net interest income than indicated by the repricing asset and liability comparison.

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

Critical Accounting Policies and Estimates

The preparation of the Company’s financial statements requires management to make certain critical accounting estimates that impact the stated amount of assets and liabilities at a financial statement date and the reported amount of income and expenses during a reporting period.  These accounting estimates are based on management’s judgment and are considered to be critical because of their significance to the financial statements and the possibility that future events may differ from current judgments, or that the use of different assumptions could result in materially different estimates.  The critical accounting policies and estimates have not changed from and should be read in conjunction with the Company’s Annual Report filed on Form 10-K for the year ended June 30, 2013.
The Company's estimates are reviewed continuously to ensure reasonableness.  However, the amounts the Company may ultimately realize could differ from such estimated amounts.

Overview of Results and Trends

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

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Net earnings for the first quarter ended September 30, 2013 of $1.8 million were up 19% from the $1.5 million earned during the first quarter of fiscal 2013.  The increase in net earnings from the first quarter of the prior year is largely due to a 44% increase in non-interest income and 12% decrease in non-interest expenses that offset a 12.5% decrease in net interest income.
New lease bookings of $40.5 million for the first quarter of fiscal 2014 were down 21% from the first quarter of fiscal 2013, and with no commercial loans booked during the quarter, total first quarter loan and lease bookings decreased by 33% to $40.5 million from $60.8 million booked during the first quarter of the prior year.  The net investment in leases and loans of $404.1 million at September 30, 2013 was down 3% from June 30, 2013, but increased 16% from $349.5 million at September 30, 2012.  In addition, new lease and loan originations during the first quarter of fiscal 2014 were up 89% from the first quarter of fiscal 2013 and the backlog of approved lease and loan commitments of $104 million is just 3% below the level of a year ago.

Consolidated Statement of Earnings Analysis

Summary -- For the first quarter ended September 30, 2013, net earnings of $1.8 million increased 19% compared to the first quarter ended September 30, 2012.  Diluted earnings per share of $0.18 for the first quarter of fiscal 2014 increased 19% from $0.15 for the first quarter of fiscal 2013.
Net Direct Finance, Loan and Interest Income -- Net direct finance, loan and interest income is the difference between interest earned on the investment in leases, loans, securities and other interest earning assets and interest paid on deposits. Net direct finance, loan and interest income is affected by changes in the volume and mix of interest earning assets, the movement of interest rates, and funding and pricing strategies.
Net direct finance, loan and interest income was $4.2 million for the quarter ended September 30, 2013, a $603,000, or 12.5% decrease compared to the same quarter of the prior year.  Total direct finance, loan and interest income for the first quarter ended September 30, 2013 decreased 7.1% to $5.0 million from $5.4 million earned during the first quarter of fiscal 2013.  This decrease includes a $276,000 reduction in commercial loan income and $262,000 decrease in investment income that were offset in part by a $156,000 increase in direct finance income. The decline in commercial loan income reflected a 50 basis point decline in average yields on average balances that fell 18% to $71.4 million from $86.9 million a year earlier. The increase in direct finance income was due to a 33% increase in average balances to $335.4 million that offset a 124 basis point decline in the average yield. The average yield on all leases and loans held in the Company’s portfolio decreased 104 basis points to 4.51%. The average yield on cash and investments of 1.3% was down 97 basis points from the first quarter of fiscal 2013 as average cash balances increased by 54% to $82.9 million and investments declined 31% to $45 million. Interest expense paid increased 39% to $792,000 due to a 37.5% increase in the average balance of deposits to $344.4 million and 1 basis point increase in average rate paid to 0.92%.
The average yield on all interest-earning assets for the first quarter of fiscal 2014 decreased to 3.8% from 4.7% for the first quarter ended September 30, 2012, while the average rate paid on all interest-bearing liabilities increased by one point to 0.92%. As a result, the net interest margin decreased to 3.2% in the first quarter of fiscal 2014 from 4.2% in the first quarter of fiscal 2013. The sustained period of low interest rates has allowed the continued run off of higher yielding leases and securities that have been replaced with leases and variable rate loans negotiated in the current historically low interest rate and competitive pricing environment, and the Bank is limited in its ability to lower deposit rates in tandem.

18
The following table presents the components of the increases (decreases) in net direct finance, loan and interest income before provision for credit losses by volume and rate:
Quarter ended
September 30, 2013 vs 2012
Volume
Rate
Total
(in thousands)
Interest income
Net investment in leases
$ 1,201 $ (1,045 ) $ 156
Commercial loans
(187 ) (89 ) (276 )
Investment securities
(207 ) (61 ) (268 )
Interest-bearing deposits with banks
14 (8 ) 6
821 (1,203 ) (382 )
Interest expense
Demand and savings deposits
(6 ) - (6 )
Time deposits
270 (43 ) 227
264 (43 ) 221
Net direct finance, loan and interest income
$ 557 $ (1,160 ) $ (603 )
The following table presents the Company’s average balances, direct finance and loan income and interest earned or interest paid, the related yields and rates on major categories of the Company’s interest-earning assets and interest-bearing liabilities. Yields/rates are presented on an annualized basis.

(dollars in thousands)
Quarter ended
September 30, 2013
Quarter ended
September 30, 2012
Assets
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
Interest-earning assets
Interest-bearing deposits with banks
$ 82,855 $ 33 0.2 % $ 53,977 $ 27 0.2 %
Investment securities
45,052 393 3.5 % 65,586 661 4.0 %
Commercial loans
71,419 772 4.3 % 86,872 1,048 4.8 %
Net investment in leases
335,399 3,814 4.5 % 252,513 3,658 5.8 %
Total interest-earning assets
534,725 5,012 3.8 % 458,948 5,394 4.7 %
Other assets
23,408 27,781
$ 558,133 $ 486,729
Liabilities and Shareholders' Equity
Interest-bearing liabilities
Demand and savings deposits
$ 70,296 87 0.5 % $ 75,550 93 0.5 %
Time deposits
274,076 705 1.0 % 174,917 478 1.1 %
Total interest bearing liabilities
344,372 792 0.9 % 250,467 571 0.9 %
Non-interest bearing demand deposits
1,795 2,203
Other liabilities
30,255 36,395
Shareholders' equity
181,711 197,664
$ 558,133 $ 486,729
Net interest income
$ 4,220 $ 4,823
Net interest spread (2)
2.8 % 3.8 %
Net interest margin (3)
3.2 % 4.2 %
Average interest earning assets over average interest bearing liabilities
155.3 % 183.2 %
(1)
Average balance is based on month-end balances, includes non-accrual leases, and is presented net of unearned income.
(2)
Net interest spread is equal to the difference between the average yield on interest earning assets and the average rate paid on interest-bearing liabilities.
(3)
Net interest margin represents net direct finance and interest income as a percent of average interest earning assets.

19
Provision for Credit Losses -- The Company did not record a provision for credit losses for the quarter ended September 30, 2013 compared to a provision of $275,000 in the first quarter of fiscal 2013. No provision was required in the current quarter due to a slight decline in total risk assets from the level at June 30, 2013 and a stable credit profile of the portfolios. The provision in the first quarter of fiscal 2013 related primarily to the deterioration in the credit of one large lease position during that period.
Non-interest Income -- Total non-interest income for the first quarter ended September 30, 2013 increased by $434,000, or 44.3%, to $1.4 million, compared to $978,000 for the same quarter of the prior fiscal year primarily due to higher gains realized on the sale of leased property.
Non-interest Expenses -- The Company’s non-interest expenses reported for the quarter ended September 30, 2013 decreased $357,000, or 11.8%, to $2.7 million compared to $3.0 million for the first quarter of fiscal 2013.  The decrease in non-interest expenses included a $493,000 decrease in salaries and benefits that were offset in part by a $164,000 increase in other general and administrative expenses. Included in the quarter expenses are an estimated $150,000 of one-time expenses related to the Company’s move to a new office in August 2013. Lower occupancy expense related to the new office began to be realized September 1, 2013.
Income Taxes -- Income taxes were accrued at a tax rate of 38.41% and 38.75% for the first quarter ended September 30, 2013 and 2012, respectively, representing the estimated annual tax rate for the fiscal years ending June 30, 2014 and 2013, respectively.

Financial Condition Analysis

Consolidated total assets at September 30, 2013 of $551.3 million compared to $558.9 million at June 30, 2013.  The change in total assets includes a decrease of $8.7 million in the net investment in leases, a $3.8 million decrease in the commercial loan portfolio and a $4.1 million decrease in securities available-for-sale, offset by increases of $8.4 million in property acquired for transaction in process and $3.3 million in cash and due from banks.

Lease Portfolio

During the first three months ended September 30, 2013 and 2012, 100% of the new leases booked by the Company were held in its own portfolios. Of the new leases booked, 28% related to leases assigned to the Company by third parties compared to no leases purchased from third parties during the prior year first quarter.  The Company’s net investment in leases at September 30, 2013 was $333.9 million, compared to $342.6 million at June 30, 2013.  The $8.7 million decrease in the net investment in leases during the quarter is due to payments received and leases terminating that exceeded the volume of new leases being booked during the period.
The Company often makes payments to purchase leased property prior to the commencement of the lease.  The disbursements for these lease transactions in process are generally made to facilitate the lessees’ property implementation schedule. The lessee is contractually obligated by the lease to make rental payments directly to the Company during the period that the transaction is in process, and the lessee generally is obligated to reimburse the Company for all disbursements under certain circumstances.  Income is not recognized while a transaction is in process and prior to the commencement of the lease. At September 30, 2013, the Company’s investment in property acquired for transactions in process of $20.4 million increased from $11.9 million at June 30, 2013, and was also up from $18.9 million at September 30, 2012.  The increase in transactions in process is related to the increased volume of originations over the prior six months and the delay in completion of certain of these transactions.

Commercial Loan Portfolio

The Company’s commercial loan portfolio decreased $3.8 million during the first quarter of fiscal 2014 to $70.2 million compared to $74.0 million at June 30, 2013.  The decrease in the Company’s commercial loan portfolio reflected repayments aggregating to $3.8 million with no new commercial loans booked during the quarter.  New loan commitments of $14.6 million were made during the quarter but not funded, and at September 30, 2013 unfunded commercial loan commitments of $24.6 million were up from $12.4 million at June 30, 2013.
20
The Company monitors the performance of all leases and loans held in its own portfolio, transactions in process, as well as lease transactions assigned to lenders, if the Company retains a residual investment in the leased property subject to those leases. An ongoing review of all leases and loans ten or more day’s delinquent is conducted. Leases and loans that are delinquent with the Company or an assignee are coded in the Company’s accounting and tracking systems in order to provide management visibility, periodic reporting, and appropriate reserves. The accrual of interest income on leases and loans generally will be discontinued when the lease or loan becomes ninety days or more past due on its payments with the Company, unless the Company believes the investment is otherwise recoverable. Leases and loans may be placed on non-accrual earlier if the Company has significant doubts about the ability of the customer to meet its obligations, as evidenced by consistent delinquency, deterioration in the customer’s financial condition or other relevant factors.

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

September 30, 2013
June 30, 2013
Non-performing Leases and Loans
(dollars in thousands)
Non-accrual leases & loans
$ 1,601 $ 1,614
Restructured leases
- -
Leases past due 90 days (other than above)
105 -
Total non-performing leases and loans
$ 1,706 $ 1,614
Non-performing assets as % of net investment in leases and loans before allowances
0.4 % 0.4 %

The increase in non-performing assets at September 30, 2013 as compared to June 30, 2013 reflects a lease that was 90 days past due at September 30, 2013 that has subsequently returned to current status.  In addition to the non-performing leases and loans identified above, there was $6.5 million of investment in leases and loans at September 30, 2013 classified as substandard or with credits that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future. This amount compared to $6.5 million at June 30, 2013 and $10.8 million at September 30, 2012. Although these credits have been identified as potential problems, they may never become non-performing. These potential problem leases and loans are considered in the determination of the allowance for credit losses.

Allowance for Credit Losses

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

Three months ended
September 30,
2013
2012
(dollars in thousands)
Property acquired for transactions in process before allowance
$ 20,371 $ 18,885
Net investment in leases and loans before allowance
409,206 354,947
Net investment in “risk assets”
$ 429,577 $ 373,832
Allowance for credit losses at beginning of period
$ 5,147 $ 5,216
Charge-off of lease receivables
(8 ) (14 )
Recovery of amounts previously written off
14 -
Provision for credit losses
- 275
Allowance for credit losses at end of period
$ 5,153 $ 5,477
Components of allowance for credit losses:
Allowance for lease and loan losses
$ 5,142 $ 5,466
Allowance for transactions in process
11 11
$ 5,153 $ 5,477
Allowance for credit losses as a percent of net investment in leases and loans before allowances
1.3 % 1.5 %
Allowance for credit losses as a percent of net investment in “risk assets”
1.2 % 1.5 %
21
The allowance for credit losses increased $6,000 to $5.2 million (1.3% of net investment in leases and loans before allowances) at September 30, 2013 from $5.1 million (1.2% of net investment in leases and loans before allowances) at June 30, 2013. This allowance consisted of $459,000 allocated to specific accounts that were identified as problems and $4.7 million that was available to cover losses inherent in the portfolio. This compared to $473,000 allocated to specific accounts at June 30, 2013 and $4.7 million available for losses inherent in the portfolio at that time.  The decrease in the specific allowance at September 30, 2013 primarily relates to the payments received on accounts offset by the addition of one new problem account.  The Company considers the allowance for credit losses of $5.2 million at September 30, 2013 adequate to cover losses specifically identified as well as inherent in the lease and loan portfolios. However, no assurance can be given that the Company will not, in any particular period, sustain lease and loan losses that are sizeable in relation to the amount reserved, or that subsequent evaluations of the lease and loan portfolio, in light of factors then prevailing, including economic conditions and the on-going credit review process, will not require significant increases in the allowance for credit losses. Among other factors, economic and political events may have an adverse impact on the adequacy of the allowance for credit losses by increasing credit risk and the risk of potential loss even further.

Securities Available-for-sale

Total securities available-for-sale was $41.4 million as of September 30, 2013, compared with $45.5 million at June 30, 2013.  The amortized cost and fair value of the Company’s securities portfolio available-for-sale at September 30, 2013 and June 30, 2013 are as follows:

As of September 30, 2013
As of June 30, 2013
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Available-for-sale
Corporate bonds
$ 38,433 $ 39,086 $ 42,435 $ 43,147
Municipal bonds
412 435 412 436
Mutual fund investments
1,306 1,187 1,306 1,250
Equity investments
422 723 422 689
Total securities available-for-sale
$ 40,573 $ 41,431 $ 44,575 $ 45,522

During the first quarter of fiscal 2014, the Company’s portfolio of securities available-for-sale decreased $4.1 million primarily due to a maturing bond.  At September 30, 2013, the weighted average maturity of the portfolio is less than one year and the corresponding weighted average yield was 3.30%.

Liquidity and Capital Resources

The Company funds its operating activities through internally generated funds, bank deposits and non-recourse debt. At September 30, 2013 and June 30, 2013, the Company’s cash and cash equivalents were $78.8 million and $75.5 million, respectively.  Stockholders’ equity at September 30, 2013 was $182.7 million, or 33.1% of total assets, compared to $180.9 million, or 32.4% of total assets, at June 30, 2013.  At September 30, 2013, the Company and the Bank exceed their regulatory capital requirements and are considered “well-capitalized” under guidelines established by the FRB and OCC.
Deposits at CalFirst Bank totaled $341.8 million at September 30, 2013 compared to $254.1 million at September 30, 2012 and $346.0 million at June 30, 2013. The $87.7 million increase from September 30, 2012 was used to fund the growth in the Bank’s lease portfolio and maintain liquidity.  The following table presents the ending balances, average balances and average rates paid on deposits for the quarters ended September 30, 2013 and 2012:

Three months ended September 30,
2013
2012
Ending
Balance
Average
Balance
Average
Rate Paid
Ending
Balance
Average
Balance
Average
Rate Paid
(in thousands)
Non-interest bearing demand deposits
$ 1,494 $ 1,795 n/a $ 4,344 $ 2,203 n/a
Interest-bearing demand deposits
1,990 2,050 0.20 % 2,375 2,486 0.20 %
Money market deposits
67,241 68,246 0.50 % 70,639 73,064 0.50 %
Time deposits, less than $100,000
51,816 52,607 1.02 % 44,206 44,497 1.13 %
Time deposits, $100,000 or more
$ 219,251 $ 221,469 1.07 % $ 132,542 $ 130,420 1.07 %
22
The following table shows the maturities of certificates of deposits at September 30, 2013:

Less Than
$250,000
Greater Than
$250,000
(in thousands)
Under 3 months
$ 39,915 $ 12,699
3 – 6 months
46,034 13,179
7 – 12 months
67,985 12,837
13 – 24 months
42,468 7,662
25 – 36 months
18,223 10,065
$ 214,625 $ 56,442

The Bank has borrowing agreements with the Federal Home Loan Bank of San Francisco and as such, can take advantage of FHLB programs for overnight and term advances at published daily rates.  The Bank had no outstanding balance at September 30, 2013.  Under terms of the blanket collateral agreement, advances from the FHLB are collateralized by qualifying securities and real estate loans, with $2.4 million available under the agreement as of September 30, 2013.  The Bank also has the authority to borrow from the Federal Reserve Bank (“FRB”) discount window amounts secured by certain lease receivables with unused borrowing availability of approximately $93.6 million.
Capital expenditures for leased property purchases are sometimes financed by assigning certain lease term payments to banks or other financial institutions.  The assigned lease payments are discounted at fixed rates such that the lease payments are sufficient to fully amortize the aggregate outstanding debt. At September 30, 2013, the Company had outstanding non-recourse debt aggregating $633,000 relating to discounted lease rentals assigned to unaffiliated lenders. In the past, the Company has been able to obtain adequate non-recourse funding commitments, and the Company believes it will be able to do so in the future.
At September 30, 2013, CalFirst Leasing has a $10 million line of credit with a bank.  The purpose of the line is to provide resources as needed for investment in transactions-in-process and leases.  The agreement provides for borrowings based on Libor, requires a commitment fee on the unused line balance and allows for advances through March 31, 2014.  The line is unsecured, however, the Company guarantees CalFirst Leasing’s obligations.  At June 30 and September 30, 2013, CalFirst Leasing did not meet a profitability covenant , which has been waived by the bank.  No borrowings have been made under this line of credit as of September 30, 2013.

Contractual Obligations and Commitments

The following table summarizes various contractual obligations as of September 30, 2013. Commitments to purchase property for leases are binding and generally have fixed expiration dates or other termination clauses. Commercial loan commitments are agreements to lend to a customer or purchase a participation provided there is no violation of any condition in the contract.  These commitments generally have fixed expiration dates or other termination clauses. Since the Company expects some of the commitments to expire without being funded, the total amounts do not necessarily represent the Company’s future liquidity requirements.

Due by Period
Contractual Obligations
Total
Less Than
1 Year
1-5 Years
After
5 Years
(dollars in thousands)
Commercial loan and lease purchase commitments
$ 28,268 $ 28,268 $ - $ -
Lease property purchases (1)
54,137 54,137 - -
Operating lease rental expense
3,168 506 2,662
Total contractual commitments
$ 85,573 $ 82,911 $ 2,662 $ -
___________________________________
(1) Disbursements to purchase property on approved leases are estimated to be completed within one year, but it is likely that some portion could be deferred to later periods.

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

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

23

Market risk is the risk of loss in a financial instrument arising from changes in market indices such as interest rates and equity prices.  The Company’s principal market risk exposure is interest rate risk, which is the exposure due to differences in the repricing characteristics of interest-earning assets and interest-bearing liabilities.  Market risk also arises from the impact that fluctuations in interest rates may have on security prices that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for at fair value.  As the banking operations of the Company have grown and securities and deposits represent a greater portion of the Company’s assets and liabilities, the Company is subject to increased market risk.  The Bank has an Asset/Liability Management Committee and policies established to manage its interest rate and market risk.
At September 30, 2013, the Company had $80.7 million of cash or invested in securities of very short duration, with another $27.5 million of securities that mature within twelve months.  The Company’s gross investment in lease payments receivable and loan principal of $434.6 million consists of leases with fixed rates and loans with fixed and variable rates, however, $202.8 million of such investments reprice within one year of September 30, 2013. This compares to the Bank’s interest bearing deposit liabilities of $340.3 million, of which 77.0%, or $261.9 million, reprice within one year.  CalFirst Leasing has no interest-bearing debt, and non-recourse debt does not represent an interest rate risk to the Company because it is fully amortized through direct payments from lessees to the purchaser of the lease receivable.  Based on the foregoing, at September 30, 2013 the Company had assets of $311.1 million subject to changes in interest rates over the next twelve months, compared to repricing liabilities of $261.9 million.
The consolidated gap analysis below sets forth the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities for selected time bands.  The mismatch between repricings or maturities within a time band is commonly referred to as the “gap” for that period.  A positive gap (asset sensitive) where interest rate sensitive assets exceed interest rate sensitive liabilities generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment.  A negative gap (liability sensitive) will generally have the opposite result on the net interest margin.  However, the traditional gap analysis does not assess the relative sensitivity of assets and liabilities to changes in interest rates and other factors that could have an impact on interest rate sensitivity or net interest income.  Sudden and substantial increase or decrease in interest rates may adversely impact our income to the extent that the interest rates associated with the assets and liabilities do not change at the same speed, to the same extent, or on the same basis.

(in thousands)
3 Months
or Less
Over 3 to
12 Months
Over 1
Through
5 years
Over
5 years
Non-rate
Sensitive
Total
Rate Sensitive Assets (RSA):
Cash due from banks
$ 78,791 $ - $ - $ - $ - $ 78,791
Investment securities
1,911 27,514 12,006 2,450 - 43,881
Net investment in leases
33,128 106,480 205,155 17,249 (28,152 ) 333,860
Commercial loans
63,235 - 9,316 - (2,347 ) 70,204
Non-interest earning assets
- - - - 24,538 24,538
Totals
177,065 133,994 226,477 19,699 (5,961 ) $ 551,274
Cumulative total for RSA
$ 177,065 $ 311,059 $ 537,536 $ 557,235
Rate Sensitive Liabilities (RSL):
Demand and savings deposits
$ 69,231 $ - $ - $ - $ 1,494 $ 70,725
Time deposits
52,615 140,035 78,417 - - 271,067
Borrowings
- - - - - -
Non-interest bearing liabilities
- - - - 26,822 26,822
Stockholders' equity
- - - - 182,660 182,660
Totals
$ 121,846 $ 140,035 $ 78,417 $ - $ 210,976 $ 551,274
Cumulative total for RSL
$ 121,846 $ 261,881 $ 340,298 $ 340,298
Interest rate sensitivity gap
$ 55,219 $ (6,041 ) $ 148,060 $ 19,699
Cumulative GAP
$ 55,219 $ 49,178 $ 197,238 $ 216,937
RSA divided by RSL (cumulative)
145.32 % 118.78 % 157.96 % 163.75 %
Cumulative GAP / total assets
10.02 % 8.92 % 35.78 % 39.35 %
24
In addition to the consolidated gap analysis, the Bank measures its asset/liability position through duration measures and sensitivity analysis, and calculates the potential effect on earnings using maturity gap analysis.  The interest rate sensitivity modeling includes the creation of prospective twelve month "baseline" and "rate shocked" net interest income simulations.  After a "baseline" net interest income is determined, using assumptions that the Bank deems reasonable, market interest rates are raised or lowered by 100 to 300 basis points instantaneously, parallel across the entire yield curve, and a "rate shocked" simulation is run.  Interest rate sensitivity is then measured as the difference between calculated "baseline" and "rate shocked" net interest income.


Evaluation of disclosure controls and procedures.

As of the end of the period covered by this report, the Company's management, including its principal executive officer and its principal financial officer, evaluated the effectiveness of the Company's disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Company’s Chief Executive Officer and Executive Vice President concluded that the Company's disclosure controls and procedures were effective as of September 30, 2013 to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes made during the most recent fiscal quarter to the Company's internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION
There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.


The following table summarizes share repurchase activity for the quarter ended September 30, 2013:

Period
Total number
of shares
purchased
Average price
paid per share
Maximum number
of shares that may
yet be purchased
under the plan (1)
July 1, 2013 - July 31, 2013
- $ - 368,354
August 1, 2013 - August 31, 2013
- $ - 368,354
September 1, 2013 - September 30, 2013
- $ - 368,354
- $ -

1)
In April 2001, the Board of Directors authorized management, at its discretion, to repurchase up to 1,000,000 shares of common stock.

ITEM 6.
(a) Exhibits Page
31.1
Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
27
31.2
Rule 13a-14(a)/15d-14(a) Certifications of Principal Financial Officer
28
32.1
Section 1350 Certifications by Principal Executive Officer and Principal Financial Officer 29
25
CALIFORNIA FIRST NATIONAL BANCORP



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


California First National Bancorp
Registrant
DATE:
November 13, 2013
BY: /s/ S. Leslie Jewett
S. Leslie Jewett
Executive Vice President
(Principal Financial and Accounting Officer)
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