CFNB 10-Q Quarter ended Dec. 31, 2016

		December 31, 2016				June 30, 2016
		(Unaudited)
ASSETS
Cash and due from banks		$	91,071			$	105,094
Securities available-for-sale			90,040				95,844
Investments			3,955				3,957
Receivables			1,463				1,333
Property acquired for transactions in process			34,388				30,932
Leases and loans:
Net investment in leases			204,514				239,964
Commercial loans			455,639				408,308
Allowance for credit losses			(7,765	)			(6,862	)
Net investment in leases and loans			652,388				641,410
Net property on operating leases			2,617				2,928
Income taxes receivable			98				121
Other assets			2,483				2,108
Discounted lease rentals assigned to lenders			1,841				4,449
Total Assets		$	880,344			$	888,176
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Demand and savings deposits		$	101,646			$	81,989
Time certificates of deposit			531,466				551,158
Short-term borrowings			40,000				40,000
Accounts payable			2,166				1,697
Accrued liabilities			2,588				3,622
Lease deposits			1,636				1,565
Non-recourse debt			1,841				4,449
Deferred income taxes, net			7,997				12,674
Total Liabilities			689,340				697,154
Commitments and contingencies
Stockholders' equity:
Preferred stock; 2,500,000 shares authorized; none issued			-				-
Common stock; $.01 par value; 20,000,000 shares authorized; 10,279,807 (December 2016) and 10,279,807 (June 2016) issued and outstanding			103				103
Additional paid in capital			2,242				2,240
Retained earnings			188,754				187,334
Accumulated other comprehensive (loss)/income, net of tax			(95	)			1,345
Total Stockholders’ Equity			191,004				191,022
Total Liabilities and Stockholders’ Equity		$	880,344			$	888,176

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		Three months ended December 31,								Six months ended December 31,
		2016				2015				2016				2015
Finance and loan income		$	7,846			$	6,055			$	14,429			$	11,831
Investment interest income			707				515				1,368				988
Total interest income			8,553				6,570				15,797				12,819
Interest expense
Deposits			1,896				1,395				3,792				2,651
Borrowings			52				44				94				80
Net interest income			6,605				5,131				11,911				10,088
Provision for credit losses			600				575				900				1,075
Net interest income after provision for credit losses			6,005				4,556				11,011				9,013
Non-interest income
Operating and sales-type lease income			855				110				1,439				254
Gain on sale of leases and leased property			2,464				525				2,698				1,212
Gain on sale of investment securities			-				-				-				23
Other income, net			86				73				183				115
Total non-interest income			3,405				708				4,320				1,604
Non-interest expenses
Compensation and employee benefits			1,769				1,942				3,656				3,683
Occupancy			174				169				348				338
Professional and IT services			205				281				493				544
FDIC and regulatory fees			118				127				272				245
Other general and administrative			218				194				400				433
Total non-interest expenses			2,484				2,713				5,169				5,243
Earnings before income taxes			6,926				2,551				10,162				5,374
Income taxes			2,736				993				4,014				2,091
Net earnings		$	4,190			$	1,558			$	6,148			$	3,283
Basic earnings per common share		$	0.41			$	0.15			$	0.60			$	0.31
Diluted earnings per common share		$	0.41			$	0.15			$	0.60			$	0.31
Dividends paid per common share outstanding		$	0.46			$	0.44			$	0.46			$	0.44
Weighted average common shares outstanding			10,280				10,460				10,280				10,460
Diluted common shares outstanding			10,280				10,460				10,280				10,460

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		Three months ended December 31,								Six months ended December 31,
		2016				2015				2016				2015
Net earnings		$	4,190			$	1,558			$	6,148			$	3,283
Other comprehensive income (loss):
Unrealized (losses)/gains on securities available-for-sale			(2,049	)			(1,088	)			(2,379	)			(437	)
Reclassification adjustment of realized gain included in net income on securities available-for-sale			-				-				-				(23	)
Tax effect			809				423				939				179
Total other comprehensive (loss)/income			(1,240	)			(665	)			(1,440	)			(281	)
Total comprehensive income		$	2,950			$	893			$	4,708			$	3,002

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		Six Months Ended December 31,
		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings		$	6,148			$	3,283
Adjustments to reconcile net earnings to cash flows provided by (used for) operating activities:
Provision for credit losses			900				1,075
Depreciation and net amortization (accretion)			(140	)			(71	)
Gain on sale of leased property and sales-type lease income			(1,613	)			(128	)
Net gain recognized on investment securities			-				(23	)
Deferred income taxes, including income taxes payable			(3,758	)			(2,422	)
Decrease in income taxes receivable			23				72
Net (decrease) increase in accounts payable and accrued liabilities			(1,034	)			326
Other, net			5				(566	)
Net cash provided by operating activities			531				1,546
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in leases, loans and transactions in process			(171,836	)			(201,648	)
Payments received on lease receivables and loans			126,370				117,062
Proceeds from sales of leased property and sales-type leases			5,036				1,812
Proceeds from sales and assignments of leases			27,746				12,123
Purchase of investment securities			-				(22,451	)
Pay down on investment securities			3,316				1,561
Proceeds from sale of investment securities			-				4,769
Net increase in other assets			(424	)			(89	)
Net cash used for investing activities			(9,792	)			(86,861	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in time certificates of deposit			(19,692	)			66,526
Net increase in demand and savings deposits			19,658				14,400
Net increase in short-term borrowings			-				15,000
Dividends to stockholders			(4,728	)			(4,603	)
Net cash (used for) provided by financing activities			(4,762	)			91,323
NET CHANGE IN CASH AND CASH EQUIVALENTS			(14,023	)			6,008
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			105,094				60,240
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	91,071			$	66,248
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Decrease in lease rentals assigned to lenders and related non-recourse debt		$	(2,608	)		$	(2,880	)
Estimated residual values recorded on leases		$	(254	)		$	(317	)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net cash paid during the six month period for:
Interest		$	3,861			$	2,674
Income Taxes		$	7,749			$	4,441

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		Shares				Amount				Additional Paid in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total
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
Six months ended December 31, 2016
Balance, June 30, 2016			10,279,807			$	103			$	2,240			$	187,334			$	1,345			$	191,022
Net earnings			-				-				-				6,148				-				6,148
Other comprehensive loss			-				-				-				-				(1,440	)			(1,440	)
Stock based compensation expense			-				-				2				-				-				2
Dividends declared			-				-				-				(4,728	)			-				(4,728	)
Balance, December 31, 2016			10,279,807			$	103			$	2,242			$	188,754			$	(95	)		$	191,004

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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 U.S. generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended June 30, 2016. 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 2016 Annual Report on Form 10-K, which contains Management’s Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2016 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, 2016 and the statements of earnings, comprehensive income, cash flows and stockholders’ equity for the six-month periods ended December 31, 2016 and 2015. The results of operations for the three and six month periods ended December 31, 2016 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending June 30, 2017.

Certain reclassifications have been made to the fiscal 2016 financial statements to conform to the presentation of the fiscal 2017 financial statements.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 addresses diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact of this new requirement on the cash flows of the Company.

NOTE 3 – STOCK-BASED COMPENSATION

At December 31, 2016, the Company has one stock option plan, which is more fully described in Note 14 in the Company’s 2016 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, 2016, 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 since fiscal 2013 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, 2016, approximately $2,600 of total unrecognized compensation expense related to unvested shares is expected to be recognized over the next 7 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, 2016 and June 30, 2016, there were no liabilities subject to ASC 820.

Securities available-for-sale include U.S. Treasury notes, corporate bonds, U.S. government agency (“Agency”) mortgaged-backed securities (“MBS”), and a mutual fund investment and generally are reported at fair value utilizing Level 1 and Level 2 inputs. The fair value of corporate bonds and the Agency 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 inputs). U.S. Treasury notes and the mutual fund 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 inputs).

The Company’s assets, which are measured at fair value on a recurring basis as of December 31, 2016 and June 30, 2016 are summarized as follows:

Certain financial assets, such as collateral dependent impaired loans and repossessed or returned assets are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. During the year ended June 30, 2016, the equipment subject to a lease rejected in bankruptcy was transferred from lease receivables and recorded as repossessed equipment in other assets.

The fair value of repossessed equipment is based on available market information, including independent appraisal and sales results, less estimated selling costs. The equipment repossessed was initially recorded at the estimated fair value less estimated selling costs at the time of transfer to repossessed assets and subsequently written down based on an updated appraisal.

The following table summarizes the Company’s assets which are measured at fair value on a non-recurring basis as of December 31, 2016 and June 30, 2016.

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, 2016, and June 30, 2016, 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.

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NOTE 7 – SECURITIES AVAILABLE FOR SALE :

The amortized cost and fair value of securities available for sale at December 31, 2016 were as follows:

The amortized cost and fair value of securities available for sale at June 30, 2016 were as follows:

The available-for-sale securities amortized cost and estimated fair value at December 31, 2016, 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, 2016, the Company had no realized gains or losses from the sale of available-for-sale securities. During 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. The following table presents the fair value and associated gross unrealized loss on available-for-sale securities at December 31, 2016 and June 30, 2016.

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, the intent of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery and whether it is more likely than not the Company will be required to sell the security before recovery to its amortized cost. The $606,000 unrealized losses at December 31, 2016 are related to changes in interest rates and not credit quality. The Company has the intent and the ability to hold these securities to recovery or maturity and more likely than not, will not need to sell them. The Company does not consider these securities to be other-than-temporarily impaired at December 31, 2016 or June 30, 2016.

At December 31, 2016 and at June 30, 2016, U.S. Treasury notes and Agency MBS with an amortized cost of $75.8 million and $79.1 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 $2.6 million at December 31, 2016 and at June 30, 2016.

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 $2.7 million at December 31, 2016 and $524,000 at June 30, 2016. The Company has a recorded liability for unfunded loan commitments of $50,000 at December 31, 2016 and at June 30, 2016 related to such commitments.

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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 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, 2016 and 2015 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, 2016 and June 30, 2016 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 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, 2016 and June 30, 2016 were as follows:

At December 31, 2016, there was available borrowing capacity from the FHLB of $33.0 million related to qualifying real estate loans of $6.5 million and securities pledged with an amortized cost of $75.8 million. There were no borrowings from the FRB at December 31, 2016 and 2015. Borrowing availability from the FRB at December 31, 2016 was approximately $89.7 million secured by $115.6 million of lease receivables.

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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, 2016 and 2015:

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