CFNB 10-Q Quarter ended Dec. 31, 2015

		December 31, 2015				June 30, 2015
		(Unaudited)
ASSETS
Cash and due from banks		$	66,248			$	60,240
Investments			3,612				3,334
Securities available-for-sale			96,533				81,212
Receivables			1,388				1,174
Property acquired for transactions in process			35,370				31,340
Leases and loans:
Net investment in leases			280,293				301,733
Commercial loans			330,648				246,509
Allowance for credit losses			(6,503	)			(6,456	)
Net investment in leases and loans			604,438				541,786
Net property on operating leases			3,502				773
Income taxes receivable			159				231
Other assets			833				791
Discounted lease rentals assigned to lenders			7,313				10,193
		$	819,396			$	731,074
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Demand and savings deposits		$	84,847			$	70,447
Time certificates of deposit			467,985				401,459
Short-term borrowings			57,000				42,000
Accounts payable			2,114				2,635
Accrued liabilities			2,604				2,278
Lease deposits			1,567				1,900
Non-recourse debt			7,313				10,193
Deferred income taxes, net			9,346				11,944
			632,776				542,856
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 (December 2015) and 10,459,924 (June 2015) issued and outstanding			105				105
Additional paid in capital			3,379				3,376
Retained earnings			183,186				184,506
Accumulated other comprehensive (loss)/income, net of tax			(50	)			231
			186,620				188,218
		$	819,396			$	731,074

3

		Three months ended December 31,								Six months ended December 31,
		2015				2014				2015				2014
Finance and loan income		$	6,055			$	5,370			$	11,831			$	10,315
Investment interest income			515				344				988				656
Total interest income			6,570				5,714				12,819				10,971
Interest expense
Deposits			1,395				900				2,651				1,753
Borrowings			44				11				80				16
Net interest income			5,131				4,803				10,088				9,202
Provision for credit losses			575				400				1,075				675
Net interest income after provision for credit losses			4,556				4,403				9,013				8,527
Non-interest income
Operating and sales-type lease income			110				66				254				200
Gain on sale of leases and leased property			525				1,342				1,212				3,702
Gain on sale of investment securities			-				438				23				438
Other than temporary impairment loss			-				-				-				(91	)
Other income, net			73				2,819				115				2,963
Total non-interest income			708				4,665				1,604				7,212
Non-interest expenses
Compensation and employee benefits			1,942				2,426				3,683				4,351
Occupancy			169				158				338				317
Professional services			195				157				378				305
Other			407				544				844				984
Total non-interest expenses			2,713				3,285				5,243				5,957
Earnings before income taxes			2,551				5,783				5,374				9,782
Income taxes			993				2,226				2,091				3,766
Net earnings		$	1,558			$	3,557			$	3,283			$	6,016
Basic earnings per common share		$	0.15			$	0.34			$	0.31			$	0.58
Diluted earnings per common share		$	0.15			$	0.34			$	0.31			$	0.58
Dividends paid per common share outstanding		$	0.44			$	0.42			$	0.44			$	0.42
Weighted average common shares outstanding			10,460				10,460				10,460				10,460
Diluted common shares outstanding			10,460				10,460				10,460				10,460

4

		Three months ended December 31,								Six months ended December 31,
		2015				2014				2015				2014
Net earnings		$	1,558			$	3,557			$	3,283			$	6,016
Other comprehensive income (loss):
Unrealized (losses)/gains on securities available-for-sale			(1,088	)			344				(437	)			19
Other than temporary impairment loss on securities available-for-sale			-				-				-				91
Reclassification adjustment of realized gain included in net income on securities available-for-sale			-				(438	)			(23	)			(438	)
Tax effect			423				36				179				126
Total other comprehensive (loss)			(665	)			(58	)			(281	)			(202	)
Total comprehensive income		$	893			$	3,499			$	3,002			$	5,814

5

		Six Months Ended December 31,
		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings		$	3,283			$	6,016
Adjustments to reconcile net earnings to cash flows provided by (used for) operating activities:
Provision for credit losses			1,075				675
Depreciation and net amortization (accretion)			(71	)			(136	)
Gain on sale of leased property and sales-type lease income			(128	)			(2,173	)
Net gain recognized on investment securities			(23	)			(438	)
Impairment loss on investment securities			-				91
Deferred income taxes, including income taxes payable			(2,422	)			(1,828	)
Decrease in income taxes receivable			72				1,337
Net increase (decrease) accounts payable and accrued liabilities			326				(57	)
Other, net			(566	)			(629	)
Net cash provided by operating activities			1,546				2,858
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in leases, loans and transactions in process			(201,648	)			(177,733	)
Payments received on lease receivables and loans			117,062				108,828
Proceeds from sales of leased property and sales-type leases			1,812				3,563
Proceeds from sales and assignments of leases			12,123				37,338
Purchase of investment securities			(22,451	)			(34,507	)
Pay down on investment securities			1,561				6,093
Proceeds from sale of investment securities			4,769				808
Net increase in other assets			(89	)			(56	)
Net cash used for investing activities			(86,861	)			(55,666	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in time certificates of deposit			66,526				35,904
Net increase in demand and savings deposits			14,400				11,233
Net increase in short-term borrowings			15,000				20,000
Dividends to stockholders			(4,603	)			(4,393	)
Net cash provided by financing activities			91,323				62,744
NET CHANGE IN CASH AND CASH EQUIVALENTS			6,008				9,936
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			60,240				40,122
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	66,248			$	50,058
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(Decrease) increase in lease rentals assigned to lenders and related non-recourse debt		$	(2,880	)		$	4,232
Estimated residual values recorded on leases		$	(317	)		$	(1,001	)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net cash paid during the six month period for:
Interest		$	2,674			$	1,732
Income Taxes		$	4,441			$	4,257

6

		Shares				Amount				Additional Paid in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total
Six months ended December 31, 2014
Balance, June 30, 2014			10,459,924			$	105			$	3,372			$	179,844			$	424			$	183,745
Net earnings			-				-				-				6,016				-				6,016
Other comprehensive loss			-				-				-				-				(202	)			(202	)
Stock based compensation expense			-				-				2				-				-				2
Dividends declared			-				-				-				(4,393	)			-				(4,393	)
Balance, December 31, 2014			10,459,924			$	105			$	3,374			$	181,467			$	222			$	185,168
Six months ended December 31, 2015
Balance, June 30, 2015			10,459,924			$	105			$	3,376			$	184,506			$	231			$	188,218
Net earnings			-				-				-				3,283				-				3,283
Other comprehensive loss			-				-				-				-				(281	)			(281	)
Stock based compensation expense			-				-				3				-				-				3
Dividends declared			-				-				-				(4,603	)			-				(4,603	)
Balance, December 31, 2015			10,459,924			$	105			$	3,379			$	183,186			$	(50	)		$	186,620

7

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, 2015. 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 2015 Annual Report on Form 10-K, which contains Management’s Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2015 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 December 31, 2015 and the statements of earnings, comprehensive income, cash flows and stockholders’ equity for the periods presented. The results of operations for the three and six month periods ended December 31, 2015 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending June 30, 2016.

Certain reclassifications have been made to the fiscal 2015 financial statements to conform with the presentation of the second quarter of fiscal 2016 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 December 31, 2015, the Company has one stock option plan, which is more fully described in Note 14 in the Company’s 2015 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 quarter and six months ended December 31, 2015, the Company recognized pre-tax stock-based compensation expense of $1,100 and $2,200, respectively. Such expense related to options granted during fiscal 2013. The Company has not awarded any new grants in fiscal 2016 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 December 31, 2015, approximately $7,000 of total unrecognized compensation expense related to unvested shares is expected to be recognized over the next 19 months.

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

Stock options outstanding and exercisable are summarized below:

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 December 31, 2015, 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 Company’s assets, which are measured at fair value on a recurring basis as of December 31, 2015 and June 30, 2015 are summarized as follows:

Certain financial instruments, such as collateral dependent impaired loans, but not impaired leases, 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 December 31, 2015 and June 30, 2015.

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 December 31, 2015, and June 30, 2015, 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 and savings deposits, because of their short-term nature, the carrying amounts approximate the fair value and are classified as Level 1 in the fair value hierarchy. Values for investments and available-for-sale securities are determined as set forth in Note 4, 6 and 7. The fair values of loan participations that trade regularly in the secondary market are 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 cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and are classified as Level 3 in the fair value hierarchy. These calculations have been adjusted for credit risk based on the Company’s historical credit loss experience. The fair value of certificates of deposit and short-term borrowings 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:

NOTE 6 – INVESTMENTS:

Investments are carried at cost and consist of the following:

The investment in Federal Home Loan Bank of San Francisco (“FHLB”) stock is a required investment related to CalFirst Bank’s borrowing relationship 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.

CalFirst Bank is required to hold Federal Reserve Bank stock equal to 6% of its capital surplus, which is defined as additional paid-in capital stock, less any gains (losses) on available for sale securities as of the current period end.

The mortgage-backed investment consists of one 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 and fair value of securities available for sale at December 31, 2015 were as follows:

The amortized cost and fair value of securities available for sale at June 30, 2015 were as follows:

The available-for-sale securities amortized cost and estimated fair value at December 31, 2015, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

For the six months ended December 31, 2015, the Company realized a gain of $23,000 from an early call of a corporate debt security for proceeds of $4.8 million. During the six months ended December 31, 2014, the Company realized a gain of $438,000 from the sale of one equity investment for proceeds of $808,000. The net gain is recognized using the specific identification method and is included in non-interest income. The following table presents the fair value and associated gross unrealized loss on available-for-sale securities with a gross unrealized loss at December 31, 2015 and June 30, 2015.

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. The $450,000 unrealized losses at December 31, 2015 are related to fluctuations in interest rates during the period, and not credit quality. 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 December 31, 2015.

In September 2014, the Company recorded a pre-tax impairment charge of $91,000 related to the mutual fund investment. While the Company had 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.

At December 31, 2015 and at June 30, 2015, U.S. Treasury notes and Agency MBS with an amortized cost of $81.8 million and $66.1 million, respectively, were pledged to secure borrowings from the FHLB (see Note 11).

NOTE 8 – NET INVESTMENT IN LEASES

Net investment in leases consists of the following:

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 $2.4 million at December 31, 2015 and June 30, 2015.

NOTE 9 – COMMERCIAL LOANS

Commercial loans consist of the following:

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 $3.3 million at December 31, 2015 and $7.4 million at June 30, 2015. The Company has a recorded liability for unfunded loan commitments of $50,000 at December 31, 2015 and at June 30, 2015 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:

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

The aging of financing receivables by portfolio class is as follows:

The allowance balances and activity in the allowance related to financing receivables, by portfolio segment for the three and six months ended December 31, 2015 and 2014 are presented in the following table:

The following table presents the recorded investment in loans and leases and the related allowance based on impairment method as of December 31, 2015 and June 30, 2015 by portfolio segment.

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 December 31, 2015 and June 30, 2015 were as follows:

At December 31, 2015, there was available borrowing capacity from the FHLB of $22.1 million related to qualifying real estate loans of $2.1 million and securities pledged with an amortized cost of $81.8 million. There were no borrowings from the FRB, leaving availability of approximately $103.9 million secured by $140.3 million of lease receivables.

16

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 and six months ended December 31, 2015 and 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 secured financing provided through leasing and financing capital assets, commercial loans acquired through participation in the syndicated commercial loan market, by providing non-recourse loans to third parties secured by leases and equipment, and direct commercial loans. CalFirst Bank, responsible for substantially all lease and loan origination and purchases, gathers deposits through posting rates on the Internet and conducts all banking and other operations 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 bookings, including variations in the mix and funding of such bookings, 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 67% 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, 2015.

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 of $1.6 million for the second quarter ended December 31, 2015 decreased 56.2% from net earnings of $3.6 million for the second quarter of fiscal 2015 primarily due to a $4.0 million decrease in non-interest income offset only partly by a $328,000 increase in net interest income and a $572,400 decrease in non-interest expenses. The decrease in non-interest income reflects the pre-tax recovery of $2.7 million from the settlement of claims filed in a TFT-LCD (thin-film transistor liquid display) products antitrust case during the second quarter of the prior year.

During the second quarter of fiscal 2016, commercial loans booked of $62.2 million increased 34.4% from $46.3 million booked during the second quarter of fiscal 2015, while commercial loan bookings of $128.3 million for the first six months of fiscal 2016 were up 78.9% compared to the same prior year period. Lease bookings of $45.1 million for the second quarter of fiscal 2016 were 14.6% below $52.8 million booked during the second quarter of fiscal 2015, while lease bookings of $70.7 million for the first six months of fiscal 2016 were down 40.2% compared to the first six months of fiscal 2015. With total lease and loan bookings for the first six months of fiscal 2016 of $199.0 million up 4.8% from the same period of fiscal 2015, the Company’s net investment in leases and loans of $604.4 million was up 11.6% from $541.8 million at June 30, 2015 and 20.4% greater than at December 31, 2014.

The Company’s portfolio of investment securities increased to $100.1 million at December 31, 2015 from $84.5 million at June 30, 2015. The increase during the first six months of fiscal 2016 primarily related to the acquisition of US Agency mortgaged-backed securities.

Consolidated Statement of Earnings Analysis

Summary – For the second quarter ended December 31, 2015, net earnings of $1.6 million decreased $2.0 million, or 56.2%, from $3.6 million for the second quarter ended December 31, 2014. For the six months ended December 31, 2015, net earnings decreased $2.7 million, or 45.4% to $3.3 million from $6.0 million for the first six months of fiscal 2015. Diluted earnings per share of $0.15 per share for the second quarter of fiscal 2016 were down 56.2% from the $0.34 per share for the second quarter of fiscal 2015. For the six months ended December 31, 2015, diluted earnings per share of $0.31 decreased 45.4%, compared to $0.58 per share for the same prior year period.

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

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

		Quarter ended												Six Months ended
		December 31, 2015 vs 2014												December 31, 2015 vs 2014
		Volume				Rate				Total				Volume				Rate				Total
		(in thousands)
Interest income
Net investment in leases		$	(552	)		$	18			$	(534	)		$	(856	)		$	78			$	(778	)
Commercial loans			1,195				24				1,219				2,289				5				2,294
Investment securities			273				(124	)			149				581				(276	)			305
Interest-earning deposits with banks			8				14				22				16				11				27
			924				(68	)			856				2,030				(182	)			1,848
Interest expense
Demand and savings deposits			6				(1	)			5				11				(2	)			9
Time deposits			344				146				490				616				273				889
Borrowings			25				8				33				48				16				64
			375				153				528				675				287				962
Net interest income		$	549			$	(221	)		$	328			$	1,355			$	(469	)		$	886

Net interest income was $5.1 million for the quarter ended December 31, 2015, a $328,500, or a 6.8% increase compared to the same quarter of the prior year. Total interest income for the second quarter of fiscal 2016 increased 15.0% to $6.6 million from $5.7 million during the second quarter of the prior year. This increase includes a $1.2 million, or 76.5%, increase in commercial loan income that reflected a 74.9% increase in average loan balances to $305.3 million and a 4 basis point increase in average rates earned to 3.69%. Finance income decreased by $533,400 or 14.1%, as a 14.6% decrease in the average investment in leases to $271.9 million offset a 3 basis point increase in the average yield to 4.77%. Investment income increased by 49.6%, or $170,900, as average cash and investment balances increased 62.5% to $159.8 million and offset the decline in average yield by 11 basis points to 1.29%. Interest expense paid on deposits and borrowings during the second quarter of fiscal 2016 increased by $527,500, or 57.9%, reflecting a 43.2% increase in average balances to $568.4 million while the average rate paid increased 9 basis points from 0.92% to 1.01%. The average rate paid during the second quarter benefitted from increased borrowings from the Federal Home Loan Bank Board (FHLB) at an average rate of 0.36% that offset an increase in average deposit costs from 0.94% to 1.07%.

		Quarter ended												Quarter ended
(dollars in thousands)		December 31, 2015												December 31, 2014
		Average								Yield/				Average								Yield/
Assets		Balance (1)				Interest				Rate				Balance (1)				Interest				Rate
Interest-earning assets
Interest-earning deposits with banks		$	68,228			$	41				0.24	%		$	48,563			$	19				0.16	%
Investment securities			91,575				474				2.07	%			49,778				325				2.61	%
Commercial loans			305,256				2,813				3.69	%			174,507				1,594				3.65	%
Net investment in leases			271,927				3,242				4.77	%			318,479				3,776				4.74	%
Total interest-earning assets			736,986				6,570				3.57	%			591,327				5,714				3.87	%
Other assets			52,052												38,586
		$	789,038											$	629,913
Liabilities and Shareholders' Equity
Interest-bearing liabilities
Demand and savings deposits		$	68,837				85				0.49	%		$	64,084			$	80				0.50	%
Time deposits			451,336				1,310				1.16	%			318,038				820				1.03	%
Other borrowings			48,250				44				0.36	%			14,793				11				0.30	%
Total interest-bearing liabilities			568,423				1,439				1.01	%			396,915				911				0.92	%
Non-interest bearing demand deposits			2,242												1,991
Other liabilities			30,974												45,895
Shareholders' equity			187,399												185,112
		$	789,038											$	629,913
Net interest income						$	5,131											$	4,803
Net interest spread (2)											2.55	%											2.95	%
Net interest margin (3)											2.78	%											3.25	%
Average interest earning assets over average interest bearing liabilities											129.7	%											149.0	%

(1)   Average balances are based on month-end balances, include non-accrual leases, and are presented net of unearned income. (2)   Net interest spread is the difference between the average rates on interest-earning assets and interest-bearing liabilities. (3)   Net interest margin represents net interest income as a percent of average interest earning assets.

Net interest income for the six months ended December 31, 2015 was $10.1 million, an $886,300, or a 9.6% increase compared to $9.2 million for the six months ended December 31, 2014. Total interest income for the first six months of fiscal 2016 increased 16.9% to $12.8 million from $11.0 million for first six months of the prior year as a result of a $2.3 million increase in commercial loan income that reflected a 80.7% increase in average loan balances to $282.3 million, while average rates earned remained flat at 3.63%. For the first six months of fiscal 2016, finance income decreased $777,300, or 10.4%, to $6.7 million as the average investment in leases declined 11.4% to $279.7 million while the average yield earned increased by 6 basis points to 4.79%. Investment income increased by 50.7%, or $332,600, to $988,400 as average cash and investment balances increased 64.1% to $155.7 million but average yields declined by 11 basis points to 1.27%. Over the past year, maturing corporate securities were replaced by U.S. treasuries and U.S. Agency mortgaged-backed securities yielding substantially less, reducing average investment yields for the first six months of fiscal 2016 to 2.10% from 2.73% for the first six months of fiscal 2015. For the six months ended December 31, 2015, interest expense on deposits and borrowings increased by $962,500, or 54.4%, to $2.7 million on a 41.2% increase in average deposits and borrowings to $546.1 million compared to the first six months of the prior year. The average rate paid increased from 0.91% to 1.00% as FHLB borrowings at 0.36% helped offset the increase in average deposit costs from 0.93% to 1.06%.

		Six months ended												Six months ended
		December 31, 2015												December 31, 2014
		Average								Yield/				Average								Yield/
Assets		Balance (1)				Interest				Rate				Balance (1)				Interest				Rate
Interest-earning assets
Interest-earning deposits with banks		$	68,584			$	73				0.21	%		$	50,202			$	45				0.18	%
Investment securities			87,161				915				2.10	%			44,682				611				2.73	%
Commercial loans			282,264				5,130				3.63	%			156,221				2,836				3.63	%
Net investment in leases			279,658				6,701				4.79	%			315,768				7,479				4.74	%
Total interest-earning assets			717,667				12,819				3.57	%			566,873				10,971				3.87	%
Other assets			50,691												47,192
		$	768,358											$	614,065
Liabilities and Shareholders' Equity
Interest-bearing liabilities
Demand and savings deposits		$	68,443				168				0.49	%		$	63,927			$	159				0.50	%
Time deposits			432,577				2,483				1.15	%			312,069				1,594				1.02	%
Other borrowings			45,125				80				0.36	%			10,925				16				0.29	%
Total interest bearing liabilities			546,145				2,731				1.00	%			386,921				1,769				0.91	%
Non-interest bearing demand deposits			2,243												2,100
Other liabilities			31,939												40,078
Shareholders' equity			188,031												184,966
		$	768,358											$	614,065
Net interest income						$	10,088											$	9,202
Net interest spread (2)											2.57	%											2.96	%
Net interest margin (3)											2.81	%											3.25	%
Average interest earning assets over average interest bearing liabilities											131.4	%											146.5	%

(1)   Average balances are based on month-end balances, include non-accrual leases, and are presented net of unearned income. (2)   Net interest spread is the difference between the average rates on interest-earning assets and interest-bearing liabilities. (3)   Net interest margin represents net interest income as a percent of average interest earning assets.

For the first six months of fiscal 2016, the average yield on all interest earning assets decreased by 30 basis points to 3.57% from 3.87% while the average rate paid on all interest-bearing liabilities increased by 9 basis points to 1.00%. As a result, the net interest margin decreased to 2.81% in the first six months of fiscal 2016 from 3.25% for the first six months of fiscal 2015. The decline in net interest spread and margin in fiscal 2016 is largely due to the increase in lower yielding commercial loans to 39% of interest earning assets from 28% for the first six months of fiscal 2015, and also reflects higher rates paid on deposits. The average yield on interest earnings assets can fluctuate from quarter to quarter due to relative growth and transaction activity in both the lease and loan portfolio.

Provision for Credit Losses – The Company made a $575,000 provision for credit losses during the second quarter of fiscal 2016, which compared to a $400,000 provision made during the second quarter ending December 31, 2014. The second quarter 2016 provision related to the growth in the loan portfolio during the quarter. During the first six months of fiscal 2016, the Company made a provision for credit losses of $1.075 million, compared to a $675,000 provision recorded during the first six months of fiscal 2015. The provision in fiscal 2016 supports the 34% growth in the loan portfolio since June 2015 and covered the $1.0 million write-down related to one lease in bankruptcy during the second quarter of fiscal 2016.

Non-interest Income – Total non-interest income of $708,100 for the second quarter of fiscal 2016 was down 84.8% from $4.7 million for the same period of the prior year. The decline reflects the comparison to the prior year quarter that benefitted from a $2.7 million recovery from the settlement of claims filed in antitrust litigation against certain manufacturers of thin-film transistor liquid display panels (“LCD Litigation”). Excluding that income, second quarter non-interest income for fiscal 2016 was still down by 63% as a $322,800 gain on the sale of leases was down from $1.2 million recognized in the second quarter of fiscal 2015 which also included $437,700 of gains realized on investment securities.

Total non-interest income of $1.6 million for the first six months of fiscal 2016 was down 77.8% from $7.2 million reported for the first six months of fiscal 2015. The decrease includes a $1.7 million decline in income recognized on leases reaching the end of term, a $736,300 decline in the gain on sale of leases from $1.3 million to $575,200 and the $2.7 million recovery from the settlement of claims discussed above.

Non-interest Expenses – During the second quarter of fiscal 2016, non-interest expenses of $2.7 million were down 17.4% from $3.3 million for second quarter of fiscal 2015. For the six months ended December 31, 2015, non-interest expenses of $5.2 million decreased 12.0% from $6.0 million for the same period of the prior year. The decrease in expenses during both periods is due primarily to lower compensation expense and lower general and administrative expenses related to a smaller and transitioning sales organization.

Taxes – Income taxes were accrued at a tax rate of 38.91% for the three and six months ended December 31, 2015, compared to 38.5% for the same periods of the prior year, representing the estimated annual tax rate at the end of each respective period.

Financial Condition Analysis

Consolidated total assets at December 31, 2015 of $819.4 million increased 12.1% from $731.1 million at June 30, 2015. The growth in total assets is due to an increase of $83.4 million in the commercial loan portfolio, a $15.3 million increase in securities available-for-sale, a $6.0 million increase in cash and due from banks and a $4.0 million increase property acquired for transaction in process offset by a decrease of $21.4 million in the net investment in leases.

Lease Portfolio

During the first six months of fiscal 2016, 96.2% of the direct leases booked by the Company were held in its own portfolios, with 3.8% sold to other financial institutions. Total lease bookings during the first six months of fiscal 2016 were $70.7 million compared to $118.2 million booked during the same period of the prior year. As a result, the Company’s net investment in leases at December 31, 2015 of $277.6 million was down 6.9% from $298.3 million at June 30, 2015, a reduction of $20.7 million, but up 2.3% from $271.4 million at September 30, 2015.

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 December 31, 2015, the Company’s investment in property acquired for transactions in process of $35.4 million was up 12.9% from $31.3 million at June 30, 2015, and up 33.1% from $26.6 million at December 31, 2014.

Commercial Loan Portfolio

The Company’s commercial loan portfolio increased by $83.4 million, or 34.2%, to $326.8 million at December 31, 2015 from $243.5 million at June 30, 2015. The increase in the Company’s commercial loan portfolio included the investment of $128.3 million in new commercial loan participations offset by loan payoffs and repayments aggregating to $44.9 million. In addition, at December 31, 2015 the Company had unfunded commercial loan commitments of $34.3 million compared to $35.4 million at June 30, 2015.

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.

		December 31,				June 30,
		2015				2015
Non-performing Leases and Loans		(dollars in thousands)
Non-accrual leases		$	1,733			$	41
Restructured leases			-				-
Leases past due 90 days (other than above)			-				-
Total non-performing leases and loans		$	1,733			$	41
Non-performing assets as % of net investment in leases and loans before allowances			0.28	%			0.01	%

The change in non-performing assets at December 31, 2015 as compared to June 30, 2015 reflects the placing of a $2.7 million lease with a customer in bankruptcy on non-accrual during the first quarter of fiscal 2016 and then writing that lease down to $1.7 million during the second quarter. In addition to the non-performing leases identified above, there was $4.7 million of investment in leases at December 31, 2015 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 $5.6 million at June 30, 2015 and $8.8 million at December 31, 2014. Although these credits have been identified as potential problems, they may never become non-performing. These potential problem leases are considered in the determination of the allowance for credit losses.

Allowance for Credit Losses

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

		Six months ended
		December 31,
		2015				2014
		(dollars in thousands)
Property acquired for transactions in process before allowance		$	35,370			$	26,568
Net investment in leases and loans before allowance			610,941				507,945
Net investment in “risk assets”		$	646,311			$	534,513
Allowance for credit losses at beginning of period		$	6,456			$	5,299
Charge-off of lease receivables			(1,029	)			-
Recovery of amounts previously written off			1				1
Provision for credit losses			1,075				675
Allowance for credit losses at end of period		$	6,503			$	5,975
Components of allowance for credit losses:
Allowance for lease losses		$	2,611			$	3,348
Residual valuation allowance			70				80
Allowance for loan losses			3,822				2,547
		$	6,503			$	5,975
Allowance for credit losses as a percent of net investment in leases and loans before allowances			1.06	%			1.18	%
Allowance for credit losses as a percent of net investment in “risk assets”			1.01	%			1.12	%

The allowance for credit losses increased $47,000 to $6.50 million (1.06% of net investment in leases and loans before allowances) at December 31, 2015 from $6.46 million (1.18% of net investment in leases and loans before allowances) at June 30, 2015. This allowance consisted of $256,600 allocated to specific accounts that were identified as problems and $6.25 million that was available to cover losses inherent in the portfolio. This compared to $645,000 allocated to specific accounts at June 30, 2015 and $5.8 million available for losses inherent in the portfolio at that time. The decrease in the specific allowance at December 31, 2015 primarily relates to a charge-off of over $1.0 million against a lease individually evaluated for impairment offset by new specific problems identified. The Company considers the allowance for credit losses of $6.50 million at December 31, 2015 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.

Investment Securities Available-for-sale

Total available-for-sale investment securities were $96.5 million as of December 31, 2015, compared with $81.2 million at June 30, 2015. The amortized cost and fair value of the Company’s securities portfolio available-for-sale at December 31, 2015 and June 30, 2015 are as follows:

		As of December 31, 2015								As of June 30, 2015
(in thousands)		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Available-for-sale
U.S. Treasury Notes		$	47,321			$	47,563			$	47,286			$	47,770
Corporate debt securities			13,364				13,230				13,165				13,152
Agency MBS			34,510				34,227				18,765				18,669
Securities of state and political subdivisions			205				206				406				412
Mutual fund investment			1,215				1,307				1,215				1,209
Total securities available-for-sale		$	96,615			$	96,533			$	80,837			$	81,212

During the first six months of fiscal 2016, the Company’s portfolio of securities available-for-sale increased $15.3 million through new purchases of $21.6 million offset by maturities, pay downs, and an early call of securities of $7.1 million. At December 31, 2015, the weighted average maturity of the portfolio is 6.6 years and the corresponding weighted average yield was 1.92%.

Liquidity and Capital Resources

The Company funds its operating activities through internally generated funds, bank deposits, FHLB borrowings and non-recourse debt. At December 31, 2015 and June 30, 2015, the Company’s cash and due from banks were $66.2 million and $60.2 million, respectively.

Deposits at CalFirst Bank totaled $552.8 million at December 31, 2015 compared to $402.9 million at December 31, 2014 and $471.9 million at June 30, 2015. The $149.9 million increase from December 31, 2014 was used primarily to fund the growth in the Bank’s loan and securities portfolios and maintain liquidity. The following table presents average balances and average rates paid on deposits for the six months ended December 31, 2015 and 2014:

		Six months ended December 31,
		2015												2014
		Ending				Average				Average				Ending				Average				Average
		Balance				Balance				Rate Paid				Balance				Balance				Rate Paid
		(in thousands)
Non-interest bearing demand deposits		$	5,081			$	2,243				n/a			$	2,837			$	2,100				n/a
Interest-bearing demand deposits			2,702				2,698				0.20	%			3,593				1,104				0.20	%
Money market deposits			77,063				65,745				0.50	%			70,386				62,823				0.50	%
Time deposits, less than $100,000			80,882				74,887				1.15	%			59,368				56,615				1.03	%
Time deposits, $100,000 or more		$	387,103			$	357,690				1.15	%		$	266,763			$	255,454				1.02	%

The following table shows the maturities of certificates of deposits at December 31, 2015:

			$ 250,000				More than
			or less				$ 250,000
			(in thousands)
Under 3 months		$	81,633			$	31,012
3 – 6 months			87,764				25,651
7 – 12 months			128,945				31,851
13 – 24 months			54,787				10,325
25 – 36 months			11,870				4,147
		$	364,999			$	102,986

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 had short-term borrowings outstanding of $57.0 million at December 31, 2015 at an average rate of 0.36% and an outstanding balance of $26.9 million at December 31, 2014 at an average rate of 0.30%. Under terms of the blanket collateral agreement, advances from the FHLB are collateralized by qualifying securities and real estate loans, with $22.1 million available under the agreement as of December 31, 2015. 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 December 31, 2015 of approximately $103.9 million.

An additional source of liquidity for financing and managing the lease portfolio comes from selling, participating or assigning certain lease term payments to banks or other financial institutions. If the transaction is characterized as a sale of the financial asset or meets the parameters of a participating interest, the lease is removed from the balance sheet and a resulting gain or loss recognized. If the Company retains a controlling 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 December 31, 2015, the Company had outstanding non-recourse debt aggregating $7.3 million relating to discounted lease rentals assigned to unaffiliated lenders, down from $10.2 million at June 30, 2015 and $12.9 million at December 31, 2014. 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.

The following table presents capital and capital ratio information for the Company and CalFirst Bank as of December 31, 2015 and June 30, 2015. Information for both periods reflects the transition to the Basel III capital standard from previous regulatory capital adequacy guidelines under the Basel I framework. The Basel III capital standard phases in through 2019 and revises the definition of capital, increases minimum capital ratios, introduces regulatory capital buffers above those minimums, introduces a common equity Tier 1 capital ratio and revises the rules for calculating risk-weighted assets. Under Basel III, the Bank could make a one-time election to opt out of the requirement to include components of accumulated other comprehensive income (loss) in common equity Tier 1 capital. The Bank has elected to opt-out of the accumulated other comprehensive income (loss) requirement. The adoption of the new capital standard had an immaterial impact on capital levels and related ratios and the Company and Bank continue to exceed regulatory capital requirements and are considered “well-capitalized” under guidelines established by the FRB and OCC.

		December 31,								June 30,
		2015								2015
		(dollars in thousands)
California First National Bancorp		Amount				Ratio				Amount				Ratio
Common equity Tier 1 capital		$	186,670				26.16	%		$	187,987				29.17	%
Tier 1 risk-based capital		$	186,670				26.16	%		$	187,987				29.17	%
Total risk-based capital		$	193,223				27.07	%		$	194,493				30.18	%
Tier 1 leverage capital		$	186,670				23.60	%		$	187,987				26.79	%
California First National Bank
Common equity Tier 1 capital		$	111,979				16.24	%		$	109,147				17.65	%
Tier 1 risk-based capital		$	111,979				16.24	%		$	109,147				17.65	%
Total risk-based capital		$	118,309				17.16	%		$	115,306				18.65	%
Tier 1 leverage capital		$	111,979				15.19	%		$	109,147				17.10	%

Contractual Obligations and Commitments

The following table summarizes various contractual obligations as of December 31, 2015. 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)		$	37,642			$	37,642			$	-			$	-
Commercial loan and lease purchase commitments			33,123				33,123				-				-
FHLB Borrowings			57,000				57,000				-				-
Operating lease rental payments			1,860				672				1,188				-
Total contractual commitments		$	129,625			$	128,437			$	1,188			$	-

_____________________________________________

(1)

Disbursements to purchase property on approved lease 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 is increasing as the Company expands its portfolios. 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 of value in a financial instrument arising from changes in market indices such as interest rates, credit spreads and securities 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 CalFirst Bank’s deposits have increased significantly, the Company is subject to greater interest rate risk. The Bank has an Asset/Liability Management Committee and policies established to manage its interest rate risk. 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.

At December 31, 2015, the Company had $67.8 million of cash or invested in securities of very short duration. The Company’s investment in gross lease payments receivable and commercial loans of $632.9 million consists of leases with fixed rates and loans with variable rates, however, $445.2 million of such investment matures or reprices within one year of December 31, 2015. Of the $100.1 million investment in securities, $1.5 million mature within twelve months. This compares to interest bearing deposit and borrowing liabilities of $604.8 million, of which $523.6 million, or 86.6%, mature within one year. Based on the foregoing, at December 31, 2015 the Company had assets of $513.0 million subject to changes in interest rates over the next twelve months, compared to repricing liabilities of $523.6 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.

Consolidated Interest Rate Sensitivity

										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		$	66,248			$	-			$	-			$	-			$	0			$	66,248
Investment securities			1,513				-				60,793				37,839				0				100,145
Net investment in leases			28,498				94,369				175,064				3,663				(23,982	)			277,612
Commercial loans			321,324				1,024				8,965				-				(4,486	)			326,826
Non-interest earning assets			-				-				-				-				48,565				48,565
Totals			417,582				95,393				244,822				41,502				20,097			$	819,396
Cumulative total for RSA		$	417,582			$	512,975			$	757,797			$	799,299
Rate Sensitive Liabilities (RSL):
Demand and savings deposits		$	79,766			$	-			$	-			$	-			$	5,081			$	84,847
Time deposits			112,645				274,211				81,129				-				-				467,985
Borrowings			50,000				7,000				-				-				-				57,000
Non-interest bearing liabilities			-				-				-				-				22,944				22,944
Stockholders' equity			-				-				-				-				186,620				186,620
Totals		$	242,411			$	281,211			$	81,129			$	-			$	214,645			$	819,396
Cumulative total for RSL		$	242,411			$	523,622			$	604,751			$	604,751
Interest rate sensitivity gap		$	175,171			$	(185,818	)		$	163,693			$	41,502
Cumulative GAP		$	175,171			$	(10,647	)		$	153,046			$	194,548
RSA divided by RSL (cumulative)			172.26	%			97.97	%			125.31	%			132.17	%
Cumulative GAP / total assets			21.38	%			-1.30	%			18.68	%			23.74	%

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 December 31, 2015 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, 2015.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes share repurchase activity for the quarter ended December 31, 2015:

										Maximum Number
		Total number								of shares that may
		of shares				Average price				yet be purchased
Period		Purchased				paid per share				under the plan (1)
October 1, 2015 - October 31, 2015			-			$	-				368,354
November 1, 2015 - November 30, 2015			-			$	-				368,354
December 1, 2015 - December 31, 2015			-			$	-				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	30
	31.2	Rule 13a-14(a)/15d-14(a) Certifications of Principal Financial Officer	31
	32.1	Section 1350 Certifications by Principal Executive Officer and Principal Financial Officer	32

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:	January 28, 2016		BY:	/s/ S. Leslie Jewett
				S. Leslie Jewett Executive Vice President (Principal Financial and Accounting Officer)

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