CFNB 10-Q Quarterly Report Sept. 30, 2014

CALIFORNIA FIRST NATIONAL BANCORP

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10-Q 1 f10q_111214.htm FORM 10-Q f10q_111214.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, 2014


[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

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		(I.R.S. Employer
	Incorporation or organization)		Identification No.)

	28 Executive Park
	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 þ No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller Reporting Company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No þ

The number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of November 10, 2014 was 10,459,924.

CALIFORNIA FIRST NATIONAL BANCORP

INDEX

		PAGE
PART 1. FINANCIAL INFORMATION		NUMBER

Item 1.	Financial Statements

	Consolidated Balance Sheets -
	September 30, 2014 and June 30, 2014	3

	Consolidated Statements of Earnings -
	Three months ended September 30, 2014 and 2013	4

	Consolidated Statements of Comprehensive Income -
	Three months ended September 30, 2014 and 2013	5

	Consolidated Statements of Cash Flows -
	Three months ended September 30, 2014 and 2013	6

	Consolidated Statement of Stockholders’ Equity -
	Three months ended September 30, 2014 and 2013	7

	Notes to Consolidated Financial Statements	8 - 16

Item 2.	Management's Discussion and Analysis of Financial
	Condition and Results of Operations	17 - 24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24 - 25

Item 4.	Controls and Procedures	25

PART 2. OTHER INFORMATION

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 6.	Exhibits	26

Signature		27

FORWARD-LOOKING STATEMENTS

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

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

(in thousands, except for share amounts)

	September 30, 2014			June 30, 2014
	(Unaudited)
ASSETS

Cash and due from banks	$	46,845		$	40,122
Investments		2,551			2,552
Securities available-for-sale		45,290			26,764
Receivables		1,161			680
Property acquired for transactions in process		25,373			40,567
Leases and loans:
Net investment in leases		333,714			329,935
Commercial loans		157,231			131,158
Allowance for credit losses		(5,574	)		(5,288	)
Net investment in leases and loans		485,371			455,805

Net property on operating leases		1,197			1,991
Income taxes receivable		1,188			1,658
Other assets		1,080			771
Discounted lease rentals assigned to lenders		7,764			8,640
	$	617,820		$	579,550

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Accounts payable	$	13,710		$	4,655
Accrued liabilities		8,136			2,553
Demand and savings deposits		64,642			65,583
Time certificates of deposit		312,114			290,227
Short-term borrowings		6,858			6,858
Lease deposits		2,259			2,005
Non-recourse debt		7,764			8,640
Deferred income taxes, net		16,276			15,284
		431,759			395,805

Commitments and contingencies

Stockholders' equity:
Preferred stock; 2,500,000 shares authorized; none issued		-			-
Common stock; $.01 par value; 20,000,000 shares authorized; 10,459,924 (September 2014) and 10,459,924 (June 2014) issued and outstanding		105			105
Additional paid in capital		3,373			3,372
Retained earnings		182,303			179,844
Accumulated other comprehensive income, net of tax		280			424
		186,061			183,745
	$	617,820		$	579,550

The accompanying notes are an integral part

of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

(in thousands, except share and per share amounts)

	Three Months Ended September 30,
	2014			2013

Direct finance and loan income	$	4,946		$	4,586
Investment interest income		311			426
Total finance, loan and interest income		5,257			5,012

Interest expense
Deposits		853			792
Borrowings		5			-
Net finance, loan and interest income		4,399			4,220
Provision for credit losses		275			-
Net finance, loan and interest income after provision for credit losses		4,124			4,220

Non-interest income
Operating and sales-type lease income		134			499
Gain on sale of leases, loans and leased property		2,360			781
Other than temporary impairment loss		(91	)		-
Other fee income		144			132
Total non-interest income		2,547			1,412

Non-interest expenses
Compensation and employee benefits		1,926			1,747
Occupancy		158			205
Professional services		148			156
Other general and administrative		440			551
Total non-interest expenses		2,672			2,659

Earnings before income taxes		3,999			2,973

Income taxes		1,540			1,142

Net earnings	$	2,459		$	1,831

Basic earnings per common share	$	0.24		$	0.18

Diluted earnings per common share	$	0.24		$	0.18

Average common shares outstanding – basic		10,459,924			10,447,227

Average common shares outstanding – diluted		10,459,924			10,450,901

The accompanying notes are an integral part

of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

	Three months ended September 30,
	2014			2013

Net earnings	$	2,459		$	1,831

Other comprehensive loss:

Unrealized losses on securities available-for-sale		(325	)		(84	)

Other than temporary impairment loss on securities available-for-sale		91			-

		(234	)		(84	)

Tax effect		90			33

Total other comprehensive loss		(144	)		(51	)

Total comprehensive income	$	2,315		$	1,780

The accompanying notes are an integral part

of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Three Months Ended September 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings	$	2,459		$	1,831
Adjustments to reconcile net earnings to cash flows provided by (used for) operating activities:
Provision for credit losses		275			-
Depreciation and net amortization (accretion)		(8	)		(45	)
Gain on sale of leased property and sales-type lease income		(2,048	)		(373	)
Impairment loss on investment securities		91			-
Deferred income taxes, including income taxes payable		1,069			(1,807	)
Decrease in income taxes receivable		470			2,925
Net increase in accounts payable and accrued liabilities		5,583			333
Other, net		383			(414	)
Net cash provided by operating activities		8,274			2,450

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in leases, loans and transactions in process		(70,446	)		(53,787	)
Payments received on lease receivables and loans		60,327			52,856
Proceeds from sales of leased property and sales-type leases		2,820			1,686
Proceeds from sales and assignments of leases		4,019			235
Purchase of investment securities		(23,887	)		-
Pay down on investment securities		5,001			3,990
Net (increase) decrease in other assets		(331	)		128
Net cash (used for) provided by investing activities		(22,497	)		5,108

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in time certificates of deposit		21,887			(3,015	)
Net decrease in demand and savings deposits		(941	)		(1,221	)
Net cash provided by (used for) financing activities		20,946			(4,236	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		6,723			3,322
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		40,122			75,469
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	46,845		$	78,791

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Decrease in lease rentals assigned to lenders and related non-recourse debt	$	(876	)	$	(135	)
Estimated residual values recorded on leases	$	(569	)	$	(856	)

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net cash paid during the three month period for:
Interest	$	842		$	802
Income Taxes	$	1		$	24

The accompanying notes are an integral part

of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

(in thousands, except for share amounts)

	Shares		Amount		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Income			Total

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


Three months ended September 30, 2014

Balance, June 30, 2014		10,459,924	$	105	$	3,372	$	179,844	$	424		$	183,745

Net earnings		-		-		-		2,459		-			2,459
Other comprehensive income		-		-		-		-		(144	)		(144	)

Stock based compensation expense		-		-		1		-		-			1

Balance, September 30, 2014		10,459,924	$	105	$	3,373	$	182,303	$	280		$	186,061

The accompanying notes are an integral part

of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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, 2014. 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 2014 Annual Report on Form 10-K, which contains Management’s Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2014 and for the year then ended.

In the opinion of management, the unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the consolidated balance sheet as of September 30, 2014 and the statements of earnings, comprehensive income, cash flows and stockholders’ equity for the three-month periods ended September 30, 2014 and 2013. The results of operations for the three-month period ended September 30, 2014 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending June 30, 2015.

Certain reclassifications have been made to the fiscal 2014 financial statements to conform to the presentation of the fiscal 2015 financial statements.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The ASU is a converged standard between the FASB and the International Accounting Standards Board that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The new accounting guidance clarifies the principles for recognizing revenue from contracts with customers. The new accounting guidance, which does not apply to financial instruments, is effective for interim and annual reporting periods beginning after December 15, 2016. The Company does not expect the new guidance to have a material impact on its consolidated financial position or results of operations.

NOTE 3 – STOCK-BASED COMPENSATION

At September 30, 2014, the Company has one stock option plan, which is more fully described in Note 14 in the Company’s 2014 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, 2014 and 2013, 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 2015 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 2014 Annual Report on Form 10-K. As of September 30, 2014, approximately $13,000 of total unrecognized compensation expense related to unvested shares is expected to be recognized over the next 34 months.

Stock option activity for the periods indicated is summarized in the following table:

	For the three months ended
	September 30, 2014					September 30, 2013
	Shares		Weighted Average Exercise Price			Shares		Weighted Average Exercise Price
Options outstanding at beginning of period		10,000		$	16.00		22,297		$	13.91
Exercised		-			-		-			-
Granted		-			-		-			-
Options outstanding at end of period		10,000		$	16.00		22,697		$	13.91
Options exercisable at end of period		4,000					14,697

Stock options outstanding and exercisable are summarized below:

		As of September 30, 2014
		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

$16.00	-	$16.00	10,000	7.83	$ 16.00	4,000	$ 16.00

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, 2014, there were no liabilities subject to ASC 820.

Securities available-for-sale include U.S. Treasury Notes, corporate bonds, municipal bonds, U.S. government agency (“Agency”) mortgaged-backed securities (“MBS”), 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 and the MBS 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). U.S. Treasury Notes, 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).

The following table summarizes the Company’s assets, which are measured at fair value on a recurring basis as of September 30, 2014 and June 30, 2014:

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)
	(in thousands)
As of September 30, 2014
Corporate debt securities	$	11,133	$	-	$	11,133	$	-
Securities of state and political subdivisions		424		-		424		-
U.S. Treasury notes		26,817		26,817		-		-
Agency MBS		4,958		-		4,958		-
Mutual fund investment		1,216		1,216		-		-
Equity investments		742		742		-		-
	$	45,290	$	28,775	$	16,515	$	-

As of June 30, 2014
Corporate debt securities	$	16,310	$	-	$	16,310	$	-
Securities of state and political subdivisions		427		-		427		-
U.S. Treasury notes		7,973		7,973		-		-
Mutual fund investment		1,261		1,261		-		-
Equity investment		793		793		-		-
	$	26,764	$	10,027	$	16,737	$	-

Certain financial instruments, such as impaired loans, 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 is evidence of impairment. The Company had no such assets or liabilities at September 30, 2014 and June 30, 2014.

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, 2014, and June 30, 2014, 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 2 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 3 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 3 in the fair value hierarchy.

The estimated fair values of financial instruments were as follows:

	September 30, 2014				June 30, 2014
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in thousands)
Financial Assets:
Cash and cash equivalents	$	46,845	$	46,845	$	40,122	$	40,122
Investments		2,551		2,566		2,552		2,567
Securities available-for-sale		45,290		45,290		26,764		26,764
Commercial loan participations		137,765		137,360		111,472		111,691
Other loans		17,419		17,306		17,714		17,929
Financial Liabilities:
Demand and savings deposits		64,642		64,642		65,583		65,583
Time certificate of deposits		312,114		312,044		290,227		290,044
Short-term borrowings	$	6,858	$	6,855	$	6,858	$	6,858

NOTE 6 – INVESTMENTS:

Investments are carried at cost and consist of the following:

	September 30, 2014				June 30, 2014
	Carrying Cost		Fair Value		Carrying Cost		Fair Value
	(in thousands)
Federal Reserve Bank Stock	$	1,955	$	1,955	$	1,955	$	1,955
Federal Home Loan Bank Stock		475		475		475		475
Mortgage-backed investment		121		136		122		137
	$	2,551	$	2,566	$	2,552	$	2,567

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 twelve 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 investment consists of an 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, 2014
(in thousands)	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Corporate debt securities	$	10,975	$	158	$	-		$	11,133
Securities of state and political subdivisions		409		15		-			424
U.S. Treasury notes		26,865		-		(48	)		26,817
Agency MBS		4,958		-		-			4,958
Mutual fund investment		1,215		1		-			1,216
Equity investments		422		320		-			742
Total securities available-for-sale	$	44,844	$	494	$	(48	)	$	45,290

	at June 30, 2014
(in thousands)	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Corporate debt securities	$	16,030	$	280	$	-		$	16,310
Securities of state and political subdivisions		409		18		-			427
U.S. Treasury notes		7,930		43		-			7,973
Mutual fund investments		1,306		-		(45	)		1,261
Equity investment		422		371		-			793
Total securities available-for-sale	$	26,097	$	712	$	(45	)	$	26,764

The amortized cost and estimated fair value of available-for-sale securities at September 30, 2014, 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 three months or less	$	-	$	-
Due after three months to one year		5,239		5,306
Due after one year to five years		33,010		33,068
Due after five years		4,958		4,958
No stated maturity		1,637		1,958
Total securities available-for-sale	$	44,844	$	45,290

For the quarters ended September 30, 2014 and 2013, the Company had no realized gains or losses on securities. The following table presents the fair value and associated gross unrealized loss on an available-for-sale securities with a gross unrealized loss at September 30, 2014 and June 30, 2014.

	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, 2014
U.S Treasury Notes	$	(48	)	$	26,817	$	-		$	-	$	(48	)	$	26,817
Total	$	(48	)	$	26,817	$	-		$	-	$	(48	)	$	26,817

At June 30, 2014
Mutual fund investment	$	-		$	-	$	(45	)	$	1,261	$	(45	)	$	1,261
Total	$	-		$	-	$	(45	)	$	1,261	$	(45	)	$	1,261

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. In September 2014, the Company recorded a pre-tax impairment charge of $91,000 related to the mutual fund investment which had a $45,000 unrealized loss at June 30, 2014. While the Company has the ability and intent to retain this investment, given that the fund lowered its dividend by 11% in May 2014 and had traded below its recorded cost for over twelve months, the Company determined that an other than temporary impairment had occurred. The $48,000 unrealized losses at September 30, 2014 are related to fluctuations in interest rates during the period, and not credit quality. Because the Company has the intent to hold these securities and more likely than not will not need to sell them, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2014.

At September 30, 2014, securities with carrying values of $26.8 million were pledged to secure borrowings from the FHLB (see Note 11). At June 30, 2014, securities with carrying values of $8.0 million were pledged to secure the borrowing from the FHLB.

NOTE 8 – NET INVESTMENT IN LEASES

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

	September 30,			June 30,
	2014			2014
	(in thousands)
Minimum lease payments receivable	$	348,762		$	340,211
Estimated residual value		12,805			12,996
Less unearned income		(27,853	)		(23,272	)
Net investment in leases before allowances		333,714			329,935
Less allowance for lease losses		(3,447	)		(3,236	)
Less valuation allowance for estimated residual value		(80	)		(80	)
Net investment in leases	$	330,187		$	326,619

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 $2.5 million at September 30, 2014 and at June 30, 2014.

NOTE 9 – COMMERCIAL LOANS

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

	September 30,			June 30,
	2014			2014
	(in thousands)
Commercial term loans	$	147,987		$	121,236
Commercial real estate loans		7,826			7,920
Revolving lines of credit		1,918			2,471
Total commercial loans		157,731			131,627
Less unearned income and discounts		(500	)		(469	)
Less allowance for loan losses		(2,047	)		(1,972	)
Net commercial loans	$	155,184		$	129,186

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 $13.9 million at September 30, 2014 and $13.3 million at June 30, 2014. The Company has a recorded liability for unfunded loan commitments of $50,000 at September 30, 2014 and $25,000 at June 30, 2014 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.

The risk classification of financing receivables by portfolio class is as follows:

(dollars in thousands)	Commercial Leases		Education Government Non-profit Leases		Commercial & Industrial Loans		Commercial Real Estate Loans		Total Financing Receivable
As of September 30, 2014:
Pass	$	255,622	$	71,472	$	134,650	$	7,814	$	469,558
Special Mention		5,342		18		9,858		-		15,218
Substandard		117		1,119		4,909		-		6,145
Doubtful		20		4		0		-		24
	$	261,101	$	72,613	$	149,417	$	7,814	$	490,945
Non-accrual	$	43	$	4	$	-	$	-	$	47

As of June 30, 2014:
Pass	$	245,360	$	76,569	$	108,453	$	2,344	$	432,726
Special Mention		6,440		566		9,881		-		16,887
Substandard		4		972		4,917		5,563		11,456
Doubtful		20		4		-		-		24
	$	251,824	$	78,111	$	123,251	$	7,907	$	461,093
Non-accrual	$	43	$	4	$	-	$	-	$	47

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:

(dollars in thousands)	31-89 Days		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivable		Over 90 Days & Accruing

As of September 30, 2014:
Commercial Leases	$	-	$	43	$	43	$	261,058	$	261,101	$	-
Education, Government, Non-profit Leases		662		4		666		71,947		72,613		-
Commercial and Industrial Loans		-		-		-		149,417		149,417		-
Commercial Real Estate Loans		-		-		-		7,814		7,814		-
	$	662	$	47	$	709	$	490,236	$	490,945	$	-

As of June 30, 2014:
Commercial Leases	$	-	$	43	$	43	$	251,781	$	251,824	$	-
Education, Government, Non-profit Leases		-		4		4		78,107		78,111		-
Commercial and Industrial Loans		-		-		-		123,251		123,251		-
Commercial Real Estate Loans		-		-		-		7,907		7,907		-
	$	-	$	47	$	47	$	461,046	$	461,093	$	-

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, 2014 and June 30, 2014:

(dollars in thousands)	Commercial Leases			Education Government Non-profit Leases			Commercial & Industrial Loans		Commercial Real Estate Loans			Total Financing Receivable
As of September 30, 2014:
Allowance for lease and loan losses
Balance beginning of period	$	2,510		$	817		$	1,761	$	211		$	5,299
Charge-offs		-			-			-		-			-
Recoveries		-			-			-		-			-
Provision		200			-			175		(100	)		275
Balance end of period	$	2,710		$	817		$	1,936	$	111		$	5,574

Individually evaluated for impairment	$	41		$	200		$	-	$	-		$	241
Collectively evaluated for impairment		2,669			617			1,936		111			5,333
Total ending allowance balance	$	2,710		$	817		$	1,936	$	111		$	5,574

Finance receivables
Individually evaluated for impairment	$	137		$	1,123		$	-	$	-		$	1,260
Collectively evaluated for impairment		260,964			71,490			149,417		7,814			489,685
Total ending finance receivable balance	$	261,101		$	72,613		$	149,417	$	7,814		$	490,945

As of June 30, 2014:
Allowance for lease and loan losses
Balance beginning of period	$	2,557		$	618		$	1,561	$	411		$	5,147
Charge-offs		(61	)		(1	)		-		-			(62	)
Recoveries		14			-			-		-			14
Provision		-			200			200		(200	)		200
Balance end of period	$	2,510		$	817		$	1,761	$	211		$	5,299

Individually evaluated for impairment	$	27		$	191		$	-	$	-		$	218
Collectively evaluated for impairment		2,483			626			1,761		211			5,081
Total ending allowance balance	$	2,510		$	817		$	1,761	$	211		$	5,299

Finance receivables
Individually evaluated for impairment	$	73		$	976		$	-	$	-		$	1,049
Collectively evaluated for impairment		251,751			77,135			123,251		7,907			460,044
Total ending finance receivable balance	$	251,824		$	78,111		$	123,251	$	7,907		$	461,093

NOTE 11 – BORROWINGS

CalFirst Bank is a member of the Federal Home Loan Bank of San Francisco 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. Borrowing capacity from the FHLB or FRB may fluctuate based upon the acceptability and risk rating of securities, loan and lease collateral and both the FRB and FHLB could adjust advance rates applied to such collateral at their discretion.

The borrowings from the FHLB and weighted average interest rates at September 30, 2014 and June 30, 2014 were as follows:

	September 30, 2014			June 30, 2014
(dollars in thousands)	Amount		Weighted Average Rate	Amount		Weighted Average Rate

Short-term borrowings
FHLB advances	$	6,858	0.27%	$	6,858	0.27%

At September 30, 2014, there was available borrowing capacity from the FHLB of $23.8 million related to qualifying real estate loans of $7.0 million and securities pledged with a carrying value of $26.8 million. There were no borrowings from the FRB, leaving availability of approximately $98.4 million secured by $126.1 million of lease receivables.

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, 2014 and 2013:

	CalFirst Bank		CalFirst Leasing		Bancorp and Eliminating Entries			Consolidated
	(in thousands)
Quarter ended September 30, 2014
Total finance and interest income	$	4,706	$	551	$	-		$	5,257
Net finance, loan and interest income after provision for credit losses		3,548		576		-			4,124
Other income		466		2,081		-			2,547
Net income	$	1,179	$	1,515	$	(235	)	$	2,459

Quarter ended September 30, 2013
Total finance and interest income	$	4,259	$	753	$	-		$	5,012
Net finance, 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, 2014	$	542,704	$	100,262	$	(25,146	)	$	617,820
Total assets at September 30, 2013	$	464,757	$	89,171	$	(2,654	)	$	551,274

NOTE 13 – SUBSEQUENT EVENT

On October 21, 2014, the Company’s Board of Directors declared an annual dividend in the amount of forty-two cents ($0.42) per share. The dividend will be payable on December 16, 2014 to all stockholders of record at the close of business on December 1, 2014.

On October 30, 2014, the Company received payment of $2.7 million related to claims filed in a product antitrust case. The amount recovered will be recognized in “Other Income” in the second quarter ending December 31, 2014.

CALIFORNIA FIRST NATIONAL BANCORP

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 volume and profitability of leased property being re-marketed through re-lease or sale, the interest rate environment, the market for investment securities, the volume of new lease or loan originations, including variations in the mix and funding of such originations, and economic conditions in general. The Company’s principal market risk exposure currently is related to interest rates and the impact the interest rate environment has on its net interest margin. The Company’s current balance sheet structure is short-term in nature, with over 54% of interest-earning assets and 83% of interest bearing liabilities repricing within one year. The Company’s interest margin is susceptible to the disparate impact of varying movements in market interest rates as many of the Company’s leases, loans and liquid investments are tied to U.S. Treasury rates and Libor that often do not move in step with bank deposit rates. As a result, this can cause a greater change in net interest income than indicated by the repricing asset and liability comparison.

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

Critical Accounting Policies and Estimates

The preparation of the Company’s financial statements requires management to make certain critical accounting estimates that impact the stated amount of assets and liabilities at a financial statement date and the reported amount of income and expenses during a reporting period. These accounting estimates are based on management’s judgment and are considered to be critical because of their significance to the financial statements and the possibility that future events may differ from current judgments, or that the use of different assumptions could result in materially different estimates. The critical accounting policies and estimates have not changed from and should be read in conjunction with the Company’s Annual Report filed on Form 10-K for the year ended June 30, 2014.

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.

Net earnings for the first quarter ended September 30, 2014 of $2.5 million were up 34.3% largely due to an 80.4% increase in non-interest income and included the first quarterly increase in total interest income in three years. The large gains realized as non-interest income during the first quarter of fiscal 2015 illustrate the quarterly variability that can occur due to the timing of leases maturing during the year.

New lease bookings of $65.6 million for the first quarter of fiscal 2015 were up 61.7% from the first quarter of fiscal 2014, and with $25.4 million of commercial loans booked during the quarter, total first quarter lease and loan bookings increased by 124.3% to $91.0 million from $40.6 million booked during the first quarter of the prior year. The net investment in leases and loans of $485.4 million at September 30, 2014 was up 6.5% from June 30, 2014, and 20.1% from $404.1 million at September 30, 2013. New lease and loan originations during the first quarter of fiscal 2015 were down 9.4% from the first quarter of fiscal 2014, but the backlog of approved lease and loan commitments of $140.7 million is up 35.8% from the level of a year ago.

The Company’s portfolio of investment securities increased to $47.8 million at September 30, 2014 from $29.3 million at June 30, 2014. The increase during the first quarter of fiscal 2015 primarily related to the acquisition of US Treasury notes.

Consolidated Statement of Earnings Analysis

Summary -- For the first quarter ended September 30, 2014, net earnings of $2.5 million increased 34.3% from $1.8 million earned during the first quarter ended September 30, 2013. Diluted earnings per share of $0.24 for the first quarter of fiscal 2015 increased 34.2% from $0.18 for the first quarter of fiscal 2014.

Net Finance, Loan and Interest Income -- Net 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 and borrowings. Net 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 finance, loan and interest income was $4.4 million for the quarter ended September 30, 2014, a $179,000, or 4.2% increase compared to the same quarter of the prior year. Total finance, loan and interest income for the first quarter ending September 30, 2014 increased 4.9% to $5.3 million from $5.0 million for the first quarter of fiscal 2014. This increase includes a $470,300, or 60.9%, increase in commercial loan income offset by a $114,700, or 26.9% decrease in investment income and $110,800, or 2.9% decrease in finance income. The growth in commercial loan income reflected a 92.8% increase in average loan balances to $137.7 million from $71.4 million, which was offset in part by a 71 basis point decline in average loan yield. The decrease in finance income was due to a 5.6% decrease in average lease balances to $316.7 million that offset a 13 basis point improvement in the average yield. The average yield on all leases and loans in the Company’s portfolio declined by 15 basis points during the first quarter of 2015 to 4.35% on an average portfolio that increased 11.7% to $454.3 million. For the first quarter of fiscal 2015, the average yield on cash and investments of 1.36% was up 3 basis points from the first quarter of fiscal 2014 as average cash balances declined by 38.4% to $51.0 million and investments declined 10.4% to $40.4 million. Interest expense paid increased 8% to $858,000, reflecting a 9.4% increase in the average balance of deposits and borrowings to $376.7 million and 1 basis point decrease in average rate paid to 0.91%.

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

	Quarter ended
	September 30, 2014 vs 2013
	Volume			Rate			Total
Finance, loan and interest income
Net investment in leases	$	(213	)	$	102		$	(111	)
Commercial loans		717			(246	)		471
Investment securities		(41	)		(66	)		(107	)
Interest-earning deposits with banks		(13	)		5			(8	)
Total finance, loan and interest income		450			(205	)		245

Interest expense
Demand and savings deposits		(8	)		-			(8	)
Time deposits		83			(14	)		69
Short and long term borrowings		-			5			5
Total interest expense		75			(9	)		66
Net finance, loan and interest income	$	375		$	(196	)	$	179

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

	Quarter ended					Quarter ended
(dollars in thousands)	September 30, 2014					September 30, 2013
	Average				Yield/	Average				Yield/
Assets	Balance		Interest		Rate	Balance		Interest		Rate
Interest-earning assets
Interest-earning deposits with banks	$	51,003	$	25	0.20%	$	82,855	$	33	0.16%
Investment securities		40,377		286	2.83%		45,052		393	3.49%
Commercial loans		137,676		1,243	3.61%		71,419		772	4.32%
Net investment in leases		316,662		3,703	4.68%		335,399		3,814	4.55%
Total interest-earning assets		545,718		5,257	3.85%		534,725		5,012	3.75%
Other assets		53,440					23,408
	$	599,158				$	558,133

Liabilities and Shareholders' Equity
Interest-bearing liabilities
Demand and savings deposits		63,771		79	0.50%		70,296		87	0.50%
Time deposits		306,100		774	1.01%		274,076		705	1.03%
Other borrowings		6,858		5	0.27%		0		0	0.00%
Total interest bearing liabilities		376,729		858	0.91%		344,372		792	0.92%
Non-interest bearing demand deposits		2,209					1,795
Other liabilities		35,127					30,255
Shareholders' equity		185,093					181,711
	$	599,158				$	558,133
Net interest income			$	4,399				$	4,220
Net interest spread (2)					2.94%					2.83%
Net interest margin (3)					3.22%					3.16%
Average interest earning assets over
average interest bearing liabilities					144.9%					155.3%

(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.

The average yield on all interest-earning assets for the first quarter of fiscal 2015 increased to 3.85% from 3.75% for the first quarter ended September 30, 2013, while the average rate paid on all interest-bearing liabilities decreased by one point to 0.91%. As a result, the net interest margin increased to 3.22% in the first quarter of fiscal 2015 from 3.16% in the first quarter of fiscal 2014. The higher yield and net interest margin during the quarter ended September 30, 2015 includes the benefit of accelerated finance income from early terminated leases which boosted the yield on leases by almost 50 basis points and offset the decline in average yield on commercial loans and securities. The average yield on interest earnings assets can fluctuate from quarter to quarter due to transaction activity in both the lease and loan portfolio.

Provision for Credit Losses -- The Company recorded a $275,000 provision for credit losses during the first quarter of fiscal 2015, which compared to no provision made during the quarter ending September 30, 2013. The first quarter 2015 provision related to the growth in the credit portfolio since June 30, 2014 and did not reflect any deterioration in the credit profile of the portfolios.

Non-interest Income -- Total non-interest income for the first quarter of fiscal 2015 increased by 80.4% to $2.5 million from $1.4 million in the first quarter of the prior year, primarily due to a $1.5 million increase in income realized on the sale of leased property. A gain of $2.1 million from the sale of property on one large transaction reaching the end of term during the quarter accounted for 80.9% of non-interest income for the period. Other income for the first quarter of fiscal 2015 included a charge of $91,000 related to the impairment of a mutual fund investment. This investment fund lowered its dividend by 11% in May 2014 and had traded below its recorded cost for over twelve months, thus the Company determined that an other than temporary impairment had occurred and recorded a valuation adjustment in the first quarter of fiscal 2015.

Non-interest Expenses -- The Company’s non-interest expenses of $2.7 million reported for the quarter ended September 30, 2014 remained flat compared the first quarter of fiscal 2014. A 10.2% increase in compensation and employee benefits was offset by lower occupancy and general expenses.

Income Taxes -- Income taxes were accrued at a tax rate of 38.51% and 38.41% for the first quarter ended September 30, 2014 and 2013, respectively, representing the estimated annual tax rate at the end of each respective first quarter.

Financial Condition Analysis

Consolidated total assets at September 30, 2014 of $617.8 million increased 6.6% from $579.6 million at June 30, 2014. The growth in total assets is due to an increase of $26.0 million in the commercial loan portfolio, an $18.5 million increase in securities available-for-sale and $6.7 million increase in cash and due from banks, offset by a decrease of $15.2 million in property acquired for transaction in process.

Lease Portfolio

During the first three months ended September 30, 2014 and 2013, 100% of the new leases booked by the Company were held in its own portfolios. Of the new leases booked during the first quarter of fiscal 2015, 96% related to leases originated directly by Company compared to 73% during the prior year first quarter. The Company’s net investment in leases at September 30, 2014 of $330.2 million compared to $326.6 million at June 30, 2014. The $3.6 million increase in the net investment in leases during the quarter is due to the volume of new leases being booked during the period exceeding payments received and leases terminating.

The Company often makes payments to purchase leased property prior to the commencement of the lease. The disbursements for these lease transactions in process are generally made to facilitate the lessees’ property implementation schedule. The lessee generally is obligated by the lease to make rental payments directly to the Company during the period that the transaction is in process, and contractually obligated to reimburse the Company for all disbursements under certain circumstances. Income is not recognized while a transaction is in process and prior to the commencement of the lease. At September 30, 2014, the Company’s investment in property acquired for transactions in process of $25.4 million decreased from $40.6 million at June 30, 2014, but was up from $20.4 million at September 30, 2013. The decrease in transactions in process from June 30, 2014 is largely related to the booking of a $30 million lease transaction that had been included at June 30, 2014, and was replaced only in part by other new transactions during the quarter.

Commercial Loan Portfolio

The Company’s commercial loan portfolio increased $26.0 million during the first quarter of fiscal 2015 to $155.2 million compared to $129.2 million at June 30, 2014. The increase in the Company’s commercial loan portfolio reflected new commercial loans booked of $31.2 million offset by repayments aggregating to $5.1 million during the quarter. Additional loan commitments of $16.0 million were made during the quarter but not funded, and at September 30, 2014 unfunded commercial loan commitments of $29.9 million were up from $14.8 million at June 30, 2014.

Asset Quality

The Company monitors the performance of all leases and loans held in its own portfolio, transactions in process, as well as lease transactions assigned to lenders, if the Company retains a residual investment in the leased property subject to those leases. An ongoing review of all leases and loans ten or more 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,			June 30,
	2014			2014
Non-performing Leases and Loans	(dollars in thousands)
Non-accrual leases and loans	$	47		$	47
Restructured leases		-			-
Leases past due 90 days (other than above)		-			-
Total non-performing leases and loans	$	47		$	47
Non-performing assets as % of net investment
in leases and loans before allowances		0.01	%		0.01	%

There was no change in non-performing assets at September 30, 2014 as compared to June 30, 2014. In addition to the non-performing leases and loans identified above, there was $6.0 million of investment in leases and loans at September 30, 2014 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 $6.6 million at June 30, 2014 and $6.5 million at September 30, 2013. 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,
	2014			2013
	(dollars in thousands)

Property acquired for transactions in process before allowance	$	25,373		$	20,371
Net investment in leases and loans before allowance		490,945			409,206
Net investment in “risk assets”	$	516,318		$	429,577

Allowance for credit losses at beginning of period	$	5,299		$	5,147
Charge-off of lease receivables		-			(8	)
Recovery of amounts previously written off		-			14
Provision for credit losses		275			-
Allowance for credit losses at end of period	$	5,574		$	5,153

Components of allowance for credit losses:
Allowance for lease losses	$	3,447		$	2,930
Residual valuation allowance		80			251
Allowance for loan losses		2,047			1,972
	$	5,574		$	5,153
Allowance for credit losses as a percent of net investment
in leases and loans before allowances		1.10	%		1.26	%
Allowance for credit losses as a percent of net investment in “risk assets”		1.01	%		1.20	%

The allowance for credit losses increased $275,000 to $5.6 million (1.10% of net investment in leases and loans before allowances) at September 30, 2014 from $5.3 million (1.15% of net investment in leases and loans before allowances) at June 30, 2014. The allowance at September 30, 2014 consisted of $273,000 allocated to specific accounts that were identified as problems and $5.3 million that was available to cover losses inherent in the portfolio. This compared to $250,000 allocated to specific accounts at June 30, 2014 and $5.0 million available for losses inherent in the portfolio at that time. The increase in the specific allowance at September 30, 2014 primarily relates to the addition of one downgraded credit offset by payments received on accounts. The Company considers the allowance for credit losses of $5.6 million at September 30, 2014 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 $45.3 million as of September 30, 2014, compared with $26.8 million at June 30, 2014. The amortized cost and fair value of the Company’s securities portfolio available-for-sale at September 30, 2014 and June 30, 2014 are as follows:

	As of September 30, 2014				As of June 30, 2014
(in thousands)	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Available-for-sale
Corporate debt securities	$	10,975	$	11,133	$	16,030	$	16,310
Securities of state and political subdivisions		409		424		409		427
U.S. Treasury notes		26,865		26,817		7,930		7,973
Agency MBS		4,958		4,958		-		-
Mutual fund investment		1,215		1,216		1,306		1,261
Equity investments		422		742		422		793
Total securities available-for-sale	$	44,844	$	45,290	$	26,097	$	26,764

In September 2014, the Company recorded a pre-tax impairment charge of $91,000 related to a mutual fund investment held in the securities available-for-sale portfolio. While the Company intends to retain this investment for a sufficient time to recover its investment, the investment fund lowered its dividend by 11% in May 2014 and had traded below its recorded cost for over twelve months, thus the Company determined that an other than temporary impairment had occurred and recorded a valuation adjustment in the first quarter of fiscal 2015.

During the first quarter of fiscal 2015, the Company’s portfolio of securities available-for-sale increased $18.5 million through new purchases of $23.9 million offset by maturities, pay downs and the impairment charge totaling $5.4 million. At September 30, 2014, the weighted average maturity of the portfolio is 4.9 years and the corresponding weighted average yield was 2.38%.

Liquidity and Capital Resources

The Company funds its operating activities through internally generated funds, bank deposits and borrowings, and non-recourse debt. At September 30, 2014 and June 30, 2014, the Company’s cash and cash equivalents were $46.8 million and $40.1 million, respectively. Stockholders’ equity at September 30, 2014 was $186.1 million, or 30.1% of total assets, compared to $183.7 million, or 31.7% of total assets at June 30, 2014. At September 30, 2014, 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 $376.8 million at September 30, 2014 compared to $341.8 million at September 30, 2013 and $355.8 million at June 30, 2014. The $35.0 million increase from September 30, 2013 was used to fund the growth in the Bank’s portfolios and maintain liquidity. The following table presents the ending balances, average balances and average rates paid on deposits for the quarters ended September 30, 2014 and 2013:

	Three months ended September 30,
	2014					2013
	Ending		Average		Average	Ending		Average		Average
	Balance		Balance		Rate Paid	Balance		Balance		Rate Paid
	(in thousands)
Non-interest bearing demand deposits	$	1,949	$	2,209	n/a	$	1,494	$	1,795	n/a
Interest-bearing demand deposits		926		1,039	0.20%		1,990		2,050	0.20%
Money market deposits		61,767		62,732	0.50%		67,241		68,246	0.50%
Time deposits, less than $100,000		56,776		55,141	1.01%		51,816		52,607	1.02%
Time deposits, $100,000 or more	$	255,338	$	250,959	1.00%	$	219,251	$	221,469	1.07%

The following table shows the maturities of certificates of deposits at September 30, 2014:

	$250,000		More Than
	or less		$ 250,000
	(in thousands)
Under 3 months	$	44,167	$	12,416
3 – 6 months		58,264		11,048
7 – 12 months		106,042		15,369
13 – 24 months		46,684		8,895
25 – 36 months		7,988		1,241
	$	263,145	$	48,969

The Bank has borrowing agreements with the Federal Home Loan Bank of San Francisco (“FHLB”) and as such, can take advantage of FHLB programs for overnight and term advances at published daily rates. The Bank has a short-term borrowing outstanding of $6.9 million at September 30, 2014 at an average rate of 0.27% and 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 $23.8 million available under the agreement as of September 30, 2014. 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 at September 30, 2014 of approximately $98.4 million.

The Company periodically funds certain leases by selling or assigning certain lease term payments to banks or other financial institutions. If the lease receivables are characterized as a sale of the financial asset, the lease is removed from the balance sheet and a resulting gain or loss recognized. If the Company retains an interest in the lease, the assignment is considered a secured borrowing with the associated financing characterized as non-recourse debt. 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, 2014, the Company had outstanding non-recourse debt aggregating $7.8 million 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.

Contractual Obligations and Commitments

The following table summarizes various contractual obligations as of September 30, 2014. 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
				Less Than				After
Contractual Obligations		Total		1 Year		1-5 Years		5 Years
	(in thousands)
Lease property purchases (1)		$	80,819	$	80,819	$	-	$	-
Commercial loan and lease purchase commitments			33,504		33,504		-		-
FHLB Borrowings			6,858		6,858		-		-
Operating lease rental payments			2,662		637		2,025		-
Total contractual commitments		$	123,843	$	121,818	$	2,025	$	-

(1)	Disbursements to purchase property on approved lease or loan commitments are estimated to be completed within one year, but it is likely that some portion could be deferred or never funded.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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, 2014, the Company had $48.8 million of cash or invested in securities of very short duration, with another $5.3 million of securities that mature within twelve months. The Company’s gross investment in lease payments receivable and loan principal of $519.3 million consists of leases with fixed rates and loans with fixed and variable rates, however, $280.1 million of such investments reprice within one year of September 30, 2014. This compares to the Bank’s interest bearing deposit and borrowing liabilities of $381.7 million, of which 83.0%, or $316.9 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, 2014 the Company had assets of $334.2 million subject to changes in interest rates over the next twelve months, compared to repricing liabilities of $316.9 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.

							Over 1
	3 Months			Over 3 to			Through			Over			Non-rate
(in thousands)	or Less			12 Months			5 years			5 years			Sensitive			Total

Rate Sensitive Assets (RSA):
Cash due from banks	$	46,845		$	-		$	-		$	-		$	-		$	46,845
Investment securities		1,958			5,306			33,068			7,509			-			47,841
Net investment in leases		30,800			107,878			206,176			16,714			(31,381	)		330,187
Commercial loans		140,505			900			16,326			-			(2,547	)		155,184
Non-interest earning assets		-			-			-			-			37,763			37,763
Totals		220,108			114,084			255,570			24,223			3,835		$	617,820
Cumulative total for RSA	$	220,108		$	334,192		$	589,762		$	613,985

Rate Sensitive Liabilities (RSL):
Demand and savings deposits	$	62,693		$	-		$	-		$	-		$	1,949		$	64,642
Time deposits		56,584			190,722			64,808			-			-			312,114
Borrowings		-			6,858			-			-			-			6,858
Non-interest bearing liabilities		-			-			-			-			48,145			48,145
Stockholders' equity		-			-			-			-			186,061			186,061
Totals	$	119,277		$	197,580		$	64,808		$	-		$	236,155		$	617,820
Cumulative total for RSL	$	119,277		$	316,857		$	381,665		$	381,665

Interest rate sensitivity gap	$	100,831		$	(83,496	)	$	190,762		$	24,223
Cumulative GAP	$	100,831		$	17,335		$	208,097		$	232,320

RSA divided by RSL (cumulative)		184.54	%		105.47	%		154.52	%		160.87	%
Cumulative GAP / total assets		16.32	%		2.81	%		33.68	%		37.60	%

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.

ITEM 4. CONTROLS AND PROCEDURES

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, 2014 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

ITEM 1A. RISK FACTORS.

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, 2014.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes share repurchase activity for the quarter ended September 30, 2014:

				Maximum number
	Total number			of shares that may
	of shares	Average price		yet be purchased
Period	purchased	paid per share		under the plan (1)

July 1 - July 31, 2014	-	$	-	368,354
August 1 - August 31, 2014	-	$	-	368,354
September 1 - September 30, 2014	-	$	-	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. EXHIBITS

(a)	Exhibits		Page

	31.1	Rule 13a-14(a)/15d-14(a) Certifications of Principal Executive Officer	28

	31.2	Rule 13a-14(a)/15d-14(a) Certifications of Principal Financial Officer	29

	32.1	Section 1350 Certifications by Principal Executive Officer and Principal Financial Officer	30

CALIFORNIA FIRST NATIONAL BANCORP

SIGNATURE

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 12, 2014	BY:	/s/ S. Leslie Jewett
			S. Leslie Jewett Executive Vice President (Principal Financial and Accounting Officer)

TABLE OF CONTENTS

Note 1- Basis Of Presentation Note 2 Recent Accounting Pronouncements Note 3 Stock-based Compensation Note 4 Fair Value Measurement:Note 5 Fair Value Of Financial Instruments:Note 6 Investments:Note 7 Securities Available-for-sale :Note 7 Securities Available-for-sale Note 8 Net Investment in Leases Note 9 Commercial Loans Note 10 Credit Quality Of Financing Receivables and Allowance For Credit Losses Note 11 Borrowings Note 12 Segment Reporting Note 13 Subsequent Event Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 2. Management's Discussion and Analysis Of Financial Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II - Other Information Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 6. Exhibits

CFNB 10-Q Quarter ended Sept. 30, 2014