CALIFORNIA FIRST LEASING CORP - Quarter Report: 2013 December (Form 10-Q)

f10q_021014.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2013

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

For the transition period from ________________ to ________________

Commission File No.: 0-15641

California First National Bancorp

(Exact name of registrant as specified in charter)

	California		33-0964185
	(State or other jurisdiction of		(I.R.S. Employer
	Incorporation or organization)		Identification No.)

	28 Executive Park
	Irvine, California		92614
	(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (949) 255-0500

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes þ No o

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller Reporting Company þ

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

Yes o No þ

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

CALIFORNIA FIRST NATIONAL BANCORP

INDEX

		PAGE
PART 1. FINANCIAL INFORMATION		NUMBER

Item 1.	Financial Statements

	Consolidated Balance Sheets - December 31, 2013 and June 30, 2013	3

	Consolidated Statements of Earnings - Three and six months ended December 31, 2013 and 2012	4

	Consolidated Statements of Comprehensive Income - Three and six months ended December 31, 2013 and 2012	5

	Consolidated Statements of Cash Flows - Six months ended December 31, 2013 and 2012	6

	Consolidated Statement of Stockholders’ Equity - Six months ended December 31, 2013 and 2012	7

	Notes to Consolidated Financial Statements	8-16

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17 - 25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25 – 26

Item 4.	Controls and Procedures	27

PART 2. OTHER INFORMATION

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 6.	Exhibits	27

Signature		28

FORWARD-LOOKING STATEMENTS

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

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

(thousands, except for share amounts)

	December 31, 2013			June 30, 2013
	(Unaudited)
ASSETS

Cash and due from banks	$	50,098		$	75,469
Investments		2,628			2,640
Securities available-for-sale		36,138			45,522
Receivables		3,920			1,395
Property acquired for transactions in process		28,514			11,927
Leases and loans:
Net investment in leases		328,266			345,753
Commercial loans		96,373			75,952
Allowance for credit losses		(5,142	)		(5,136	)
Net investment in leases and loans		419,497			416,569

Net property on operating leases		484			455
Income taxes receivable		324			3,301
Other assets		722			857
Discounted lease rentals assigned to lenders		10,404			768
	$	552,729		$	558,903

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Accounts payable	$	2,543		$	8,849
Accrued liabilities		2,544			2,156
Demand and savings deposits		71,251			71,946
Time certificates of deposit		266,978			274,082
Lease deposits		2,126			1,648
Non-recourse debt		10,404			768
Deferred income taxes, net		16,268			18,575
		372,114			378,024

Commitments and contingencies

Stockholders' equity:
Preferred stock; 2,500,000 shares authorized; none issued		-			-
Common stock; $.01 par value; 20,000,000 shares authorized; 10,448,381 (December 2013) and 10,447,227 (June 2013) issued and outstanding		104			104
Additional paid in capital		3,226			3,213
Retained earnings		176,809			176,972
Accumulated other comprehensive income, net of tax		476			590
		180,615			180,879
	$	552,729		$	558,903

The accompanying notes are an integral part of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

(thousands, except for per share amounts)

	Three months ended December 31,				Six months ended December 31,
	2013		2012		2013		2012

Direct finance and loan income	$	4,489	$	4,583	$	9,075	$	9,288
Investment interest income		388		667		814		1,355
Total direct finance, loan and interest income		4,877		5,250		9,889		10,643

Interest expense
Deposits		764		603		1,556		1,173
Borrowings		-		-		-		-
Net direct finance, loan and interest income		4,113		4,647		8,333		9,470
Provision for credit losses		-		-		-		275

Net direct finance, loan and interest income after provision for credit losses		4,113		4,647		8,333		9,195

Non-interest income
Operating and sales-type lease income		386		450		885		993
Gain on sale of leases and leased property		1,678		662		2,460		976
Realized gain on securities available-for-sale		-		14		-		14
Other fee income		126		122		257		243
Total non-interest income		2,190		1,248		3,602		2,226

Non-interest expenses
Compensation and employee benefits		1,954		2,090		3,701		4,330
Occupancy		161		237		366		471
Professional services		145		165		301		320
Other		498		398		1,049		785
Total non-interest expenses		2,758		2,890		5,417		5,906

Earnings before income taxes		3,545		3,005		6,518		5,515

Income taxes		1,361		1,195		2,503		2,168

Net earnings	$	2,184	$	1,810	$	4,015	$	3,347

Basic earnings per common share	$	0.21	$	0.17	$	0.38	$	0.32

Diluted earnings per common share	$	0.21	$	0.17	$	0.38	$	0.32

Weighted average common shares outstanding		10,448		10,447		10,448		10,445

Diluted common shares outstanding		10,451		10,455		10,451		10,453

The accompanying notes are an integral part of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

	Three months ended December 31,						Six months ended December 31,
	2013			2012			2013			2012

Net earnings	$	2,184		$	1,810		$	4,015		$	3,347

Other comprehensive income (loss) :

Unrealized (losses)/gains on securities available-for-sale		(102	)		(319	)		(186	)		702

Reclassification adjustment of realized gain included in net income on securities available-for-safe		-			(14	)		-			(14	)
		(102	)		(333	)		(186	)		688

Tax effect		39			129			72			(267	)

Total other comprehensive (loss)/income		(63	)		(204	)		(114	)		421

Total comprehensive income	$	2,121		$	1,606		$	3,901		$	3,768

The accompanying notes are an integral part of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Six Months Ended December 31,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings	$	4,015		$	3,347
Adjustments to reconcile net earnings to cash flows provided by (used for) operating activities:
Provision for credit losses		-			275
Depreciation and net amortization (accretion)		(94	)		(328	)
Stock-based compensation expense		2			2
Gain on sale of leased property and sales-type lease income		(387	)		(139	)
Net gain recognized on investment securities		-			(14	)
Deferred income taxes, including income taxes payable		(2,233	)		(5,803	)
Decrease in income taxes receivable		2,977			732
Net decrease in accounts payable and accrued liabilities		388			(345	)
Other, net		(2,084	)		252
Net cash used for operating activities		2,584			(2,021	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in leases, loans and transactions in process		(157,467	)		(140,009	)
Payments received on lease receivables and loans		129,301			98,694
Proceeds from sales of leased property and sales-type leases		3,272			4,040
Purchase of investment securities		(300	)		-
Pay down on investment securities		9,112			2,317
Proceeds from sale of investment securities		-			4,983
Net decrease in other assets		93			61
Net cash used for investing activities		(15,989	)		(29,914	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in time certificates of deposit		(7,104	)		40,148
Net (decrease) increase in demand and savings deposits		(695	)		11,709
Dividends to stockholders		(4,178	)		(22,983	)
Proceeds from exercise of stock options		11			164
Net cash (used for) provided by financing activities		(11,966	)		29,038

NET CHANGE IN CASH AND CASH EQUIVALENTS		(25,371	)		(2,897	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		75,469			56,921
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	50,098		$	54,024

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Increase (decrease) in lease rentals assigned to lenders and related non-recourse debt	$	9,636		$	(1,943	)
Estimated residual values recorded on leases	$	(2,481	)	$	(1,391	)

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net cash paid during the six month period for:
Interest	$	1,564		$	1,164
Income Taxes	$	1,759		$	7,238

The accompanying notes are an integral part of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

(in thousands, except for share amounts)

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

Six months ended December 31, 2012

Balance, June 30, 2012		10,433,684	$	104	$	3,044	$	192,603		$	688	$	196,439

Net earnings		-		-		-		3,347			-		3,347
Other comprehensive income (loss)		-		-		-		-			421		421

Shares issued - Stock options exercised		13,543		-		164		-			-		164

Stock based compensation expense		-		-		2		-			-		2

Dividends declared		-		-		-		(22,983	)		-		(22,983	)

Balance, December 31, 2012		10,447,227	$	104	$	3,210	$	172,967		$	1,109	$	177,390

Six months ended December 31, 2013

Balance, June 30, 2013	10,447,227	$	104	$	3,213	$	176,972		$	590		$	180,879

Net earnings	-		-		-		4,015			-			4,015
Other comprehensive income (loss)	-		-		-		-			(114	)		(114	)

Shares issued - Stock options exercised	1,154		-		11		-			-			11

Stock based compensation expense	-		-		2		-			-			2

Dividends declared	-		-		-		(4,178	)		-			(4,178	)

Balance, December 31, 2013	10,448,381	$	104	$	3,226	$	176,809		$	476		$	180,615

The accompanying notes are an integral part of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1- BASIS OF PRESENTATION

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

In the opinion of management, the unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the balance sheet as of December 31, 2013 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, 2013 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending June 30, 2014.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

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

NOTE 3 – STOCK-BASED COMPENSATION

During the quarter and six months ended December 31, 2013, the Company recognized pre-tax stock-based compensation expense of $1,000 and $2,000, respectively. Such expense related to options granted during fiscal 2013. The Company has not awarded any new grants in fiscal 2014 and has calculated the stock-based compensation expense based upon the original grant date fair value as allowed under ASC 718. The valuation variables utilized at the grant dates are discussed in the Company’s 2013 Annual Report on Form 10-K, the year of the original grant. As of December 31, 2013, approximately $16,000 of total unrecognized compensation expense related to unvested shares is expected to be recognized over the next 43 months.

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

	For the six months ended
	December 31, 2013					December 31, 2012
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Options outstanding at beginning of period		22,697		$	13.91		26,240		$	12.19
Exercised		(1,154	)		9.96		(13,543	)		12.13
Granted		-			-		10,000			16.00
Options outstanding at end of period		21,543		$	14.12		22,697		$	13.91
Options exercisable at end of period		13,543					12,697

As of December 31, 2013
Options Outstanding									Options Exercisable
Range of Exercise prices			Number Outstanding		Weighted Average Remaining Contractual Life (in years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$12.49	-	12.49		11,543		0.05	$	12.49		11,543	$	12.49
16.00	-	16.00		10,000		8.58		16.00		2,000		16.00
$12.49	-	16.00		21,543		4.01	$	14.12		13,543	$	13.01

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, 2013, there were no liabilities subject to ASC 820.

Securities available-for-sale include corporate bonds, municipal bonds, mutual fund and equity investments and generally are reported at fair value utilizing Level 1 and Level 2 inputs. The fair value of corporate and municipal bonds are obtained from independent quotation bureaus that use computerized valuation formulas to calculate current values based on observable transactions, but not a quoted bid, or are valued using prices obtained from the custodian, who uses third party data service providers (Level 2 input). Mutual funds and equity investments are valued by reference to the market closing or last trade price (Level 1 inputs). In the unlikely event that no trade occurred on the applicable date, an indicative bid or the last trade most proximate to the applicable date would be used (Level 2 input).

The following table summarizes the Company’s assets, which are measured at fair value on a recurring basis as of December 31, 2013 and June 30, 2013:

(in thousands) Description of Assets / Liabilities	Total Fair Value		Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

As of December 31, 2013
Corporate debt securities	$	33,761	$	-	$	33,761	$	-
Securities of state and political subdivisions		433		-		433		-
Mutual fund investments		1,136		1,136		-		-
Equity investment		808		808		-		-
	$	36,138	$	1,944	$	34,194	$	-

As of June 30, 2013
Corporate bonds	$	43,147	$	-	$	43,147	$	-
Securities of state and political subdivisions		436		-		436		-
Mutual fund investment		1,250		1,250		-		-
Equity investment		689		689		-		-
	$	45,522	$	1,939	$	43,583	$	-

Certain financial instruments, such as impaired loans and unfunded loan commitments, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances, usually if there was evidence of impairment. The Company had no such assets or liabilities at December 31, 2013 and June 30, 2013.

NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with ASC 825-50, the following table summarizes the estimated fair value of financial instruments as of December 31, 2013, and June 30, 2013, and includes financial instruments that are not accounted for or carried at fair value. In accordance with disclosure guidance, certain financial instruments, including all lease related assets and liabilities and all non-financial instruments are excluded from fair value of financial instrument disclosure requirements. Accordingly, the aggregate of the fair values presented does not represent the total underlying value of the Company. These fair value estimates are based on relevant market information and data, however, given there is no active market or observable market transactions for certain financial instruments, the Company has made estimates of fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values.

For cash and cash equivalents and demand deposits, because of their short-term nature, the carrying amounts approximate the fair value and are classified as Level 1 in the fair value hierarchy. Values for investments and available-for-sale securities are determined as set forth in Notes 4 and 7. The fair value of loan participations that trade regularly in the secondary market is based upon current bid prices in such market at the measurement date and are classified as Level 2 in the fair value hierarchy. For other loans, the estimated fair value is calculated based on discounted 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 are estimated based on discounted cash flows using current offered market rates or interest rates for borrowings of similar maturity and are classified as Level III in the fair value hierarchy.

The estimated fair values of financial instruments were as follows:

	December 31, 2013				June 30, 2013
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in thousands)
Financial Assets:
Cash and cash equivalents	$	50,098	$	50,098	$	75,469	$	75,469
Investments		2,628		2,641		2,640		2,659
Securities available-for-sale		36,138		36,138		45,522		45,522
Commercial loan participations		85,587		85,842		64,987		65,226
Other commercial loans		8,814		8,955		8,993		8,935
Financial Liabilities:
Demand and savings deposits		71,251		71,251		71,946		71,946
Time certificate of deposits	$	266,978	$	267,056	$	274,082	$	274,449

NOTE 6 – INVESTMENTS:

Investments are carried at cost and consist of the following:

	December 31, 2013				June 30, 2013
	Carrying Cost		Fair Value		Carrying Cost		Fair Value
	(in thousands)
Federal Reserve Bank Stock	$	1,955	$	1,955	$	1,655	$	1,655
Federal Home Loan Bank Stock		550		550		771		771
Mortgage-backed investments		123		135		214		233
	$	2,628	$	2,640	$	2,640	$	2,659

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

The mortgage-backed 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 at December 31, 2013 were as follows:

(in thousands)	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Corporate debt securities	$	33,241	$	520	$	-		$	33,761
Securities of state and political subdivisions		411		22		-			433
Mutual fund investments		1,306		-		(170	)		1,136
Equity investments		422		386		-			808
Total securities available-for-sale	$	35,380	$	928	$	(170	)	$	36,138

The amortized cost and fair value of securities at June 30, 2013 were as follows:

(in thousands)	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Corporate debt securities	$	42,435	$	712	$	-		$	43,147
Securities of state and political subdivisions		412		24		-			436
Mutual fund investments		1,306		-		(56	)		1,250
Equity investments		422		267		-			689
Total securities available-for-sale	$	44,575	$	1,003	$	(56	)	$	45,522

The amortized cost and estimated fair value of available-for-sale securities at December 31, 2013, 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.

	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	22,109	$	22,263
Due after one year but less than 5 years		11,543		11,931
Due after five years		-		-
No stated maturity		1,728		1,944
Total securities available-for-sale	$	35,380	$	36,138

For the six months ended December 31, 2013, the Company had no gross realized gains, losses or other than temporary impairments of available-for-sale securities. For the six months ended December 31, 2012, the Company realized a gain of $14,000 from the sale of a corporate bond for proceeds of $5.0 million and had no losses or other than temporary impairments. These net gains are recognized using the specific identification method and are included in non-interest income.

The following table presents the fair value and associated gross unrealized loss on an available-for-sale security with a gross unrealized loss at December 31, 2013 and June 30, 2013.

	Less than 12 Months					12 Months or More				Total
	Unrealized Loss			Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss			Estimated Fair Value
	(in thousands)
At December 31, 2013
Mutual fund investment	$	(170	)	$	1,136	$	-	$	-	$	(170	)	$	1,136
Total	$	(170	)	$	1,136	$	-	$	-	$	(170	)	$	1,136

At June 30, 2013
Mutual fund investment	$	(56	)	$	1,250	$	-	$	-	$	(56	)	$	1,250
Total	$	(56	)	$	1,250	$	-	$	-	$	(56	)	$	1,250

The Company conducts a regular assessment of its investment portfolios to determine whether any securities are other-than-temporarily impaired. In estimating other-than-temporary impairment losses, management considers, among other factors, length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery. At December 31, 2013, no securities were other than temporarily impaired.

NOTE 8 – NET INVESTMENT IN LEASES

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

	December 31, 2013			June 30, 2013
	(in thousands)
Minimum lease payments receivable	$	337,652		$	357,942
Estimated residual value		14,105			14,087
Less unearned income		(23,491	)		(26,276	)
Net investment in leases before allowances		328,266			345,753
Less allowance for lease losses		(2,919	)		(2,916	)
Less valuation allowance for estimated residual value		(251	)		(248	)
Net investment in leases	$	325,096		$	342,589

The minimum lease payments receivable and estimated residual value are discounted using the internal rate of return method related to each specific capital lease. Unearned income includes the offset of initial direct costs of $2.4 million and $2.6 million at December 31, 2013 and June 30, 2013, respectively.

NOTE 9 – COMMERCIAL LOANS

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

	December 31, 2013			June 30, 2013
	(in thousands)
Commercial term loans	$	84,544		$	65,094
Commercial real estate loans		9,232			9,411
Revolving lines of credit		3,000			1,841
Total commercial loans		96,776			76,346
Less unearned income and discounts		(403	)		(394	)
Less allowance for loan losses		(1,972	)		(1,972	)
Net commercial loans	$	94,401		$	73,980

Commercial loans are reported at their outstanding unpaid principal balances reduced by the allowance for loan losses and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related commercial loan.

In addition to the amount outstanding on revolving lines of credit set forth above, the Company had additional unused commitments on revolving lines of credit in the amount of $9.9 million at December 31, 2013 and $12.0 million at June 30, 2013. The Company has recorded a liability for unfunded loan commitments of $25,000 at December 31, 2013 and June 30, 2013 related to such commitments.

NOTE 10 – CREDIT QUALITY OF FINANCING RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

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

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

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

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

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

Doubtful – Based on current information and events, collection of all amounts due according to the contractual terms of the lease or loan agreement is considered highly questionable and improbable.

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

(dollars in thousands)	Commercial Leases		Education Government Non-profit Leases		Commercial & Industrial Loans		Commercial Real Estate Loans		Total Financing Receivable
As of December 31, 2013:
Pass	$	246,704	$	75,996	$	82,216	$	3,537	$	408,453
Special Mention		3,249		116		4,932		-		8,297
Substandard		1,499		625		-		5,688		7,812
Doubtful		73		4		-		-		77
	$	251,525	$	76,741	$	87,148	$	9,225	$	424,639
Non-accrual	$	1,591	$	5	$	-	$	-	$	1,596

As of June 30, 2013:
Pass	$	256,360	$	81,730	$	64,366	$	3,616	$	406,072
Special Mention		5,264		200		2,182		-		7,646
Substandard		1,499		615		-		5,788		7,902
Doubtful		73		12		-		-		85
	$	263,196	$	82,557	$	66,548	$	9,404	$	421,705
Non-accrual	$	1,591	$	23	$	-	$	-	$	1,614

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

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

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

As of December 31, 2013:
Commercial Leases	$	-	$	-	$	-	$	251,525	$	251,525	$	-
Education, Government, Non-profit Leases		624		-		624		76,117		76,741		-
Commercial and Industrial Loans		-		-		-		87,148		87,148		-
Commercial Real Estate Loans		-		-		-		9,225		9,225		-
	$	624	$	-	$	624	$	424,015	$	424,639	$	-

As of June 30, 2013:
Commercial Leases	$	113	$	-	$	113	$	263,083	$	263,196	$	-
Education, Government, Non-profit Leases		-		-		-		82,557		82,557		-
Commercial and Industrial Loans		-		-		-		66,548		66,548		-
Commercial Real Estate Loans		-		-		-		9,404		9,404		-
	$	113	$	-	$	113	$	421,592	$	421,705	$	-

The following table presents the allowance balances and activity in the allowance related to financing receivables, along with the recorded investment and allowance determined based on impairment method as of December 31, 2013 and June 30, 2013:

(in thousands)	Commercial Leases			Education Government Non-profit Leases			Commercial & Industrial Loans		Commercial Real Estate Loans			Total Financing Receivable
As of December 31, 2013:
Allowance for lease and loan losses
Balance beginning of period	$	2,546		$	618		$	1,561	$	411		$	5,136
Charge-offs		(8	)		-			-		-			(8	)
Recoveries		14			-			-		-			14
Provision		-			-			-		-			-
Balance end of period	$	2,552		$	618		$	1,561	$	411		$	5,142

Individually evaluated for impairment	$	326		$	160		$	-	$	-		$	486
Collectively evaluated for impairment		2,226			458			1,561		411			4,656
Total ending allowance balance	$	2,552		$	618		$	1,561	$	411		$	5,142

Finance receivables
Individually evaluated for impairment	$	2,073		$	629		$	-	$	-		$	2,702
Collectively evaluated for impairment		249,452			76,112			87,148		9,225			421,937
Total ending finance receivable balance	$	251,525		$	76,741		$	87,148	$	9,225		$	424,639

As of June 30, 2013:
Allowance for lease and loan losses
Balance beginning of period	$	2,236		$	897		$	1,561	$	511		$	5,205
Charge-offs		(71	)		(279	)		-		-			(350	)
Recoveries		6			-			-		-			6
Provision		375			-			-		(100	)		275
Balance end of period	$	2,546		$	618		$	1,561	$	411		$	5,136

Individually evaluated for impairment	$	330		$	111		$	-	$	-		$	441
Collectively evaluated for impairment		2,216			507			1,561		411			4,695
Total ending allowance balance	$	2,546		$	618		$	1,561	$	411		$	5,136

Finance receivables
Individually evaluated for impairment	$	1,926		$	627		$	-	$	-		$	2,553
Collectively evaluated for impairment		261,270			81,930			66,548		9,404			419,152
Total ending finance receivable balance	$	263,196		$	82,557		$	66,548	$	9,404		$	421,705

NOTE 11 – BORROWINGS

At December 31, 2013, CalFirst Leasing had a $10 million line of credit with a bank. The purpose of the line is to provide resources as needed for investment in transactions-in-process and leases. The agreement provides for borrowings based on Libor, requires a commitment fee on the unused line balance and allows for advances through March 31, 2014. The line is unsecured, however, the Company guarantees CalFirst Leasing’s obligations. Under provisions of the agreement, CalFirst Leasing must maintain a minimum net worth and profitability. No borrowings have been made under this line of credit over the past five years.

CalFirst Bank is a member of the Federal Home Loan Bank of San Francisco (“FHLB”) and can take advantage of FHLB programs for overnight and term advances at published daily rates. Under terms of a blanket collateral agreement, advances from the FHLB are collateralized by qualifying real estate loans and investment securities. The Bank also has authority to borrow from the Federal Reserve Bank (“FRB”) discount window amounts secured by certain lease receivables. At December 31, 2013, there were no borrowings from the FHLB with available borrowing capacity of $2.2 million related to qualifying real estate loans of $3.6 million, and no borrowings from the FRB with borrowing availability of approximately $92.7 million secured by $120.8 million of lease receivables.

NOTE 12 – SEGMENT REPORTING

The Company’s two subsidiaries, CalFirst Leasing and CalFirst Bank, an FDIC-insured national bank, 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, 2013 and 2012:

	CalFirst Bank		CalFirst Leasing		Bancorp and Eliminating Entries			Consolidated
			(in thousands)
Quarter ended December 31, 2013
Total direct finance and interest income	$	4,137	$	740	$	-		$	4,877
Net direct, loan and interest income after provision for credit losses		3,373		740		-			4,113
Other income		1,220		970		-			2,190
Net income	$	1,566	$	997	$	(379	)	$	2,184

Quarter ended December 31, 2012
Total direct finance and interest income	$	4,103	$	1,145	$	2		$	5,250
Net direct, loan and interest income after provision for credit losses		3,370		1,275		2			4,647
Other income		540		708		-			1,248
Net income	$	1,265	$	723	$	(178	)	$	1,810

Six months ended December 31, 2013
Total direct finance and interest income	$	8,395	$	1,493	$	1		$	9,889
Net direct, loan and interest income after provision for credit losses		6,839		1,493		1			8,333
Other income		1,596		2,006		-			3,602
Net income	$	2,897	$	1,750	$	(632	)	$	4,015

Six months ended December 31, 2012
Total direct finance and interest income	$	8,217	$	2,422	$	4		$	10,643
Net direct, loan and interest income after provision for credit losses		6,618		2,573		4			9,195
Other income		851		1,375		-			2,226
Net income	$	2,239	$	1,417	$	(309	)	$	3,347

Total assets at December 31, 2013	$	468,676	$	94,551	$	(10,498	)	$	552,729
Total assets at December 31, 2012	$	429,669	$	100,225	$	(20,671	)	$	509,223

CALIFORNIA FIRST NATIONAL BANCORP

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

GENERAL

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

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

The Company's operating results are subject to quarterly fluctuations resulting from a variety of factors, including the size and credit quality of the lease and loan portfolios, the volume and profitability of leased property being re-marketed through re-lease or sale, the interest rate environment, the market for investment securities, the volume of new lease or loan originations, including variations in the mix and funding of such originations, and economic conditions in general. The Company’s principal market risk exposure currently is related to interest rates and the impact the interest rate environment has on its net interest margin. The FRB began lowering interest rates in 2007 and maintained historically low interest rates from 2009 through the middle of 2013. During this period, the Company’s average yield on interest earning assets declined by over 300 basis points, while its net interest margin declined by 200 basis points. The Company’s current balance sheet structure is short-term in nature, with over 56% of interest-earning assets and 79% of interest bearing liabilities repricing within one year. The Company’s interest margin is susceptible to timing lags related to varying movements in market interest rates as many of the Company’s leases, loans and liquid investments are tied to U.S. Treasury rates and Libor that often do not move in step with bank deposit rates. As a result, this can cause a greater change in net interest income than indicated by the repricing asset and liability comparison.

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

Critical Accounting Policies and Estimates

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

The Company's estimates are reviewed continuously to ensure reasonableness. However, the amounts the Company may ultimately realize could differ from such estimated amounts.

Overview of Results and Trends

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

Net earnings of $2.2 million for the second quarter ended December 31, 2013 were up 20.7% from the second quarter of the prior year, while net earnings for the first six months of fiscal 2014 of $4.0 million were 20.0% greater than the same period of the prior year. The increase in net earnings for the second quarter and first six months of fiscal 2014 is due to gains realized on the sale of leases during the second quarter of fiscal 2014. The sale of leases in the second quarter largely related to reducing exposure with certain customers in order to provide capacity to handle new commitments. These gains were offset in part by a 12% drop in net interest income due to continued compression in yields on earning assets while rates paid for deposits have remained relatively unchanged.

For the second quarter of fiscal 2014, new lease and loan bookings of $89.0 million were up 28.5% from the second quarter of the prior year. Bookings included a 71% increase in leases directly originated to $58.9 million, $3.6 million of lease purchases, and $26.5 million of new commercial loans. For the six months ended December 31, 2013, direct lease bookings were up 3%, but total bookings of $129.6 million were unchanged from the first six months of the prior year due to lower lease purchases. Of total new leases booked for the six months, 14.3% related to leases purchased from third parties, down from 17% during the first six months of fiscal 2013. Following the sale or assignment of $31.8 million of lease receivables during the second quarter, the net investment in leases and loans of $419.5 million at December 31, 2013 is up 13% from December 31, 2012, 4% from September 30, 2013 and 1% from June 30, 2013. With new lease and loan originations during the first six months of fiscal 2014 up 1% from the first six months of fiscal 2013, the backlog of approved lease and loan commitments of $120 million is 13% below the level of a year ago, but up 9% from June 30, 2013. Transactions in process of $28.5 million are up 139% from June 30, 2013 and 56% above the level at December 31, 2012.

Consolidated Statement of Earnings Analysis

Summary – For the second quarter ended December 31, 2013, net earnings of $2.2 million increased $374,000 compared to the second quarter ended December 31, 2012. For the first six months of fiscal 2014, net earnings of $4.0 million increased $668,000, or 20.0%, compared to the first six months of fiscal 2013. Diluted earnings per share of $0.21 per share for the second quarter of fiscal 2014 were up 20.7% from the $0.17 per share for the second quarter of fiscal 2013. For the six months ended December 31, 2013, diluted earnings per share of $0.38 increased 20.0%, compared to $0.32 per share for the same prior year period.

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

Net direct finance, loan and interest income was $4.1 million for the quarter ended December 31, 2013, a $534,000, or 11.5% decrease compared to the same quarter of the prior year. Total direct finance, loan and interest income for the second quarter of fiscal 2014 decreased 7.1% to $4.9 million from $5.3 million during the second quarter of the prior year. A $216,200, or 6%, increase in direct finance income was offset by a $310,000 decline in loan income and $279,100 decline in investment income. The increase in direct finance income reflected a 21% increase in the average investment in leases that offset a 60 basis point decline in average yield to 4.47%. The decline in commercial loan income reflected a 9% decline in average balances to $80.9 million and a 104 basis point decline in average yield. The average yield on all leases and loans held in the Company’s portfolio decreased 69 basis points to 4.37%. The average yield on cash and investments of 1.48% was down 85 basis points from the second quarter of fiscal 2013 as maturing investments brought average investment balances down 34% to $41.3 million and decreased average investment yields by 60 basis points to 3.52%, contributing to a 23% increase in average cash balances and reduction in overall yields on cash and investments. Interest expense paid on deposits during the second quarter of fiscal 2014 increased by $161,200, or 27%, reflecting a 26% increase in average balances to $339.8 million while the average rate paid increased from .89% to .90%.

For the six months ended December 31, 2013, net direct finance, loan and interest income was $8.3 million, a $1.1 million or 12.0% decrease from $9.5 million earned during the same period of the prior year. Total direct finance, loan and interest income for the first six months of fiscal 2014 decreased 7.1% to $9.9 million due to a $585,700 decrease in commercial loan income and $541,000 decrease in investment income, offset by a $372,600 increase in direct finance income. During the first six months of fiscal 2014, the average investment in leases increased 26.4% to $332.7 million while the average yield earned decreased by 91 basis points to 4.51%. Average commercial loan balances of $77.0 million declined 12.6%, while the average yield fell 81 basis points to 4.09%. For the first six months of fiscal 2014, the average yield on all leases and loans held in the Company’s portfolio decreased 86 basis points to 4.43% compared to 5.29% for the first six months of the prior year. Maturing investments brought average investment balances down 33% to $43.1 million and decreased average yields by 57 basis points to 3.51%, contributing to a 34% increase in average cash balances and reduction in overall yields on cash and investments by 89 basis points to 1.41% for the six months ended December 31, 2013. For the six months ended December 31, 2013, interest expense on deposits increased by $382,600 or 33% to $1.6 million, largely due to a 31% increase in average deposit balances to $342.1 million, while the average rate paid increased by 1 basis point to .91%.

The average yield on all interest-earning assets during the second quarter of fiscal 2014 decreased to 3.8% from 4.4% for the second quarter ended December 31, 2012, while the average rate paid on all interest-bearing liabilities increased to 0.90% from 0.89% in the same period of the prior fiscal year. As a result, the net interest margin decreased to 3.2% for the second quarter of fiscal 2014 from 3.9% in fiscal 2013. For the first six months of fiscal 2014, the net interest margin of 3.2% is down from 4.0% for the first six months of fiscal 2013.The prolonged period of low interest rates has allowed the continued run off of higher yielding leases and securities that have been replaced with leases and variable rate loans based on current historically low rates, and the Bank is limited in its ability to lower deposit rates in tandem.

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

	Quarter ended December 31, 2013 vs 2012									Six Months ended December 31, 2013 vs 2012
	Volume			Rate			Total			Volume			Rate			Total
	(in thousands)
Interest income
Net investment in leases	$	714		$	(498	)	$	216		$	1,185		$	(812	)	$	373
Commercial loans		(99	)		(211	)		(310	)		(273	)		(313	)		(586	)
Investment securities		(218	)		(62	)		(280	)		(424	)		(124	)		(548	)
Interest-earning deposits with banks		5			(4	)		1			17			(10	)		7
		402			(775	)		(373	)		505			(1,259	)		(754	)
Interest expense
Demand and savings deposits		(9	)		-			(9	)		(16	)		1			(15	)
Time deposits		203			(33	)		170			464			(66	)		398
		194			(33	)		161			448			(65	)		383
Net direct finance, loan and interest income	$	208		$	(742	)	$	(534	)	$	57		$	(1,194	)	$	(1,137	)

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

(dollars in thousands)	Quarter ended December 31, 2013							Quarter ended December 31, 2012
Assets	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
Interest-earning assets
Interest-earning deposits with banks	$	63,574	$	24		0.15	%	$	51,886	$	23		0.18	%
Investment securities		41,335		364		3.52	%		62,505		644		4.12	%
Commercial loans		80,860		801		3.96	%		88,809		1,111		5.00	%
Net investment in leases		330,285		3,688		4.47	%		273,943		3,472		5.07	%
Total interest-earning assets		516,054		4,877		3.78	%		477,143		5,250		4.40	%
Other assets		36,512							24,441
	$	552,566						$	501,584

Liabilities and Shareholders' Equity
Interest-bearing liabilities
Demand and savings deposits	$	69,683		86		0.49	%	$	76,946		95		0.49	%
Time deposits		270,135		678		1.00	%		193,009		508		1.04	%
Total interest-bearing liabilities		339,818		764		0.90	%		269,955		603		0.89	%
Non-interest bearing demand deposits		1,844							2,163
Other liabilities		29,261							41,447
Shareholders' equity		181,643							188,019
	$	552,566						$	501,584
Net interest income			$	4,113						$	4,647

Net interest spread (2)						2.88	%						3.51	%
Net interest margin (3)						3.19	%						3.90	%
Average interest earning assets over average interest bearing liabilities						151.9	%						176.7	%

	Six months ended December 31, 2013							Six months ended December 31, 2012
Assets	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
Interest-earning assets
Interest-earning deposits with banks	$	72,417	$	57		0.16	%	$	53,995	$	50		0.19	%
Investment securities		43,095		757		3.51	%		63,861		1,305		4.09	%
Commercial loans		76,987		1,573		4.09	%		88,126		2,159		4.90	%
Net investment in leases		332,696		7,502		4.51	%		263,168		7,129		5.42	%
Total interest-earning assets		525,195		9,889		3.77	%		469,150		10,643		4.54	%
Other assets		30,736							25,871
	$	555,931						$	495,021

Liabilities and Shareholders' Equity
Interest-bearing liabilities
Demand and savings deposits	$	69,989		173		0.49	%	$	76,469		188		0.47	%
Time deposits		272,106		1,383		1.01	%		185,118		985		1.05	%
Total interest bearing liabilities		342,095		1,556		0.90	%		261,587		1,173		0.90	%
Non-interest bearing demand deposits		1,819							2,239
Other liabilities		30,480							39,200
Shareholders' equity		181,537							191,995
	$	555,931						$	495,021
Net interest income			$	8,333						$	9,470

Net interest spread (2)						2.86	%						3.64	%
Net interest margin (3)						3.17	%						4.04	%
Average interest earning assets over average interest bearing liabilities						153.5	%						179.3	%

(1)	Average balance is based on month-end balances, includes non-accrual leases, and is presented net of unearned income.

(2)	Net interest spread is equal to the difference between the average yield on interest earning assets and the average rate paid on interest-bearing liabilities.

(3)	Net interest margin represents net direct finance and interest income as a percent of average interest earning assets.

Provision for Credit Losses – The Company did not record a provision for credit losses in the second quarter of fiscal 2014 or 2013. For the first six months of fiscal 2014, the Company also made no provision for credit losses compared to a provision of $275,000 recorded during the first six months of fiscal 2013. A provision for credit losses has not been required in fiscal 2014 despite growth in the portfolio due to reserves previously provided for in prior periods that are available to support the risks identified in the portfolio.

Non-interest Income – Total non-interest income for the quarter ended December 31, 2013 increased by $942,000 or 75.5% to $2.2 million, compared to $1.2 million for the same quarter of the prior fiscal year. The increase included a $1.3 million gain realized on the sale of leases, offset slightly by a decline in gains from the sale of leased property of $231,000 to $426,000. Total non-interest income of $3.6 million for the first six months of fiscal 2014 was up 61.8% from $2.2 million during the comparable period of fiscal 2013. Fiscal 2014 non-interest income included the contribution of $1.3 million of income realized from the sale of leases during the second quarter of fiscal 2014 and a $206,000 increase in gains from the sale of leased property.

Non-interest Expense – During the second quarter of fiscal 2014, non-interest expense of $2.8 million was 4.6% lower than the second quarter of fiscal 2013. Non-interest expense of $5.4 million for the first six months of fiscal 2014 was down 8.3% from $5.9 million for the first six months of fiscal 2013. The decrease in non-interest expenses in both periods is primarily due to lower compensation expenses related to a smaller sales force as well as lower occupancy expenses, offset in part by one-time expenses related to the Company’s move to a new office in August 2013.

Taxes – Income taxes were accrued at a tax rate of 38.4% for the second quarter and six months ended December 31, 2013, compared to 39.8% and 39.3% for the same periods of the prior year, respectively, which represents the estimated annual tax rate for the fiscal years ending June 30, 2014 and 2013, respectively.

Financial Condition Analysis

Consolidated total assets at December 31, 2013 of $552.7 million were down $6.2 million, or 1.1% from $558.9 million at June 30, 2013. The change in total assets includes a $16.6 million increase in property acquired for transactions in process and a $2.9 million increase in the net investment in leases and loans offset by lower cash balances and a $9.4 million decrease in the securities available-for-sale.

Lease Portfolio

During the first six months of fiscal 2014, 90.4% of the direct leases booked by the Company were held in its own portfolios, with 9.6% assigned to other financial institutions. In addition, the Company sold or assigned previously booked receivables of $23.9 million to other financial institutions during the second quarter of fiscal 2014. As a result, the Company’s net investment in leases at December 31, 2013 of $325.1 million was down 5% from $342.6 million at June 30, 2013, a reduction of $17.5 million.

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, 2013, the Company’s investment in property acquired for transactions in process of $28.5 million was up 139% from $11.9 million at June 30, 2013, and up 56.1% from $18.3 million at December 31, 2012.

Commercial Loan Portfolio

The Company’s commercial loan portfolio increased $20.4 million, or 27.6%, to $94.4 million at December 31, 2013 from $74.0 million at June 30, 2013. The increase in the Company’s commercial loan portfolio included the addition of $26.5 million of new commercial loan participations offset by loan payoffs and repayments aggregating to $6.1 million. In addition, at December 31, 2013 the Company had unfunded commercial loan commitments of $17.4 million compared to $12.4 million at June 30, 2013.

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, 2013			June 30, 2013
Non-performing Leases and Loans	(dollars in thousands)
Non-accrual leases and loans	$	1,595		$	1,614
Restructured leases		-			-
Leases past due 90 days (other than above)		-			-
Total non-performing leases and loans	$	1,595		$	1,614
Non-performing assets as % of net investment in leases and loans before allowances		0.4	%		0.4	%

The change in non-performing assets at December 31, 2013 as compared to June 30, 2013 reflects payments received on non-accrual leases with no new leases added. In addition to the non-performing leases and loans identified above, there was $6.3 million of investment in leases and loans at December 31, 2013 classified as substandard or with credits that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future. This amount compared to $6.5 million at June 30, 2013 and $11.0 million at December 31, 2012. Although these credits have been identified as potential problems, they may never become non-performing. These potential problem leases and loans are considered in the determination of the allowance for credit losses.

Allowance for Credit Losses

The allowance for credit losses provides coverage for probable and 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,
	2013			2012
	(dollars in thousands)
Property acquired for transactions in process before allowance	$	28,525		$	18,282
Net investment in leases and loans before allowance		424,639			378,151
Net investment in “risk assets”	$	453,164		$	396,433

Allowance for credit losses at beginning of period	$	5,147		$	5,216
Charge-off of lease receivables		(8	)		(14	)
Recovery of amounts previously written off		14			-
Provision for credit losses		-			275
Allowance for credit losses at end of period	$	5,153		$	5,477

Components of allowance for credit losses:
Allowance for lease and loan losses	$	5,142		$	5,466
Allowance for transactions in process		11			11
	$	5,153		$	5,477
Allowance for credit losses as a percent of net investment in leases and loans before allowances		1.2	%		1.4	%
Allowance for credit losses as a percent of net investment in “risk assets”		1.1	%		1.4	%

The allowance for credit losses increased $6,000 to $5.2 million (1.2% of net investment in leases and loans before allowances) at December 31, 2013 from $5.1 million (1.2% of net investment in leases and loans before allowances) at June 30, 2013. This allowance consisted of $518,000 allocated to specific accounts that were identified as problems and $4.6 million that was available to cover losses inherent in the portfolio. This compared to $473,000 allocated to specific accounts at June 30, 2013 and $4.7 million available for losses inherent in the portfolio at that time. The increase in the specific allowance at December 31, 2013 primarily relates to the increased reserve on a specific account offset by payments received. The Company considers the allowance for credit losses of $5.2 million at December 31, 2013 adequate to cover losses specifically identified as well as inherent in the lease and loan portfolios. However, no assurance can be given that the Company will not, in any particular period, sustain lease and loan losses that are sizeable in relation to the amount reserved, or that subsequent evaluations of the lease and loan portfolio, in light of factors then prevailing, including economic conditions and the on-going credit review process, will not require significant increases in the allowance for credit losses. Among other factors, economic and political events may have an adverse impact on the adequacy of the allowance for credit losses by increasing credit risk and the risk of potential loss even further.

Investment Securities Available-for-sale

Total available-for-sale investment securities were $36.1 million as of December 31, 2013, compared with $45.5 million at June 30, 2013. The amortized cost and fair value of the Company’s securities portfolio available-for-sale at December 31, 2013 and June 30, 2013 are as follows:

	As of December 31, 2013				As of June 30, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available-for-sale
Corporate debt securities	$	33,241	$	33,761	$	42,435	$	43,147
Securities of state and political subdivisions		411		433		412		436
Mutual fund investments		1,306		1,136		1,306		1,250
Equity investments		422		808		422		689
Total securities available-for-sale	$	35,380	$	36,138	$	44,575	$	45,522

During the first six months of fiscal 2014, the decline in the Company’s portfolio of securities available-for-sale of $9.4 million was primarily due to maturing bonds. The weighted average maturity at December 31, 2013 was 0.7 years and the corresponding weighted average yield was 3.3 percent at December 31, 2013.

Liquidity and Capital Resources

The Company funds its operating activities through internally generated funds, bank deposits, and non-recourse debt. At December 31, 2013 and June 30, 2013, the Company’s cash and due from banks were $50.1 million and $75.5 million, respectively. Stockholders’ equity at December 31, 2013 was $180.6 million, or 32.7% of total assets, compared to $180.9 million, or 32.4% of total assets, at June 30, 2013. At December 31, 2013, the Company and the Bank exceed their regulatory capital requirements and are considered “well-capitalized” under guidelines established by the FRB and OCC.

Deposits at CalFirst Bank totaled $338.2 million at December 31, 2013 compared to $305.2 million at December 31, 2012 and $346.0 million at June 30, 2013. The $33.1 million increase from December 31, 2012 was used to fund the growth in the Bank’s lease and loan portfolio and maintain liquidity. The following table presents average balances and average rates paid on deposits for the six months ended December 31, 2013 and 2012:

	Six months ended December 31,
	2013					2012
	Ending Balance		Average Balance		Average Rate Paid	Ending Balance		Average Balance		Average Rate Paid
	(in thousands)
Non-interest bearing demand deposits	$	1,014	$	1,819	n/a	$	8,566	$	2,239	n/a
Interest-bearing demand deposits		1,413		1,833	0.20%		2,301		2,436	0.20%
Money market deposits		68,824		68,156	0.50%		79,999		74,033	0.50%
Time deposits, less than $100,000		50,951		52,028	1.01%		49,580		45,679	1.09%
Time deposits, $100,000 or more	$	216,027	$	220,077	1.01%	$	164,708	$	139,439	1.04%

The following table shows the maturities of certificates of deposits at December 31, 2013:

	Less Than $250,000		Greater Than $250,000
	(in thousands)
Under 3 months	$	47,330	$	17,470
3 – 6 months		41,011		6,790
7 – 12 months		68,908		15,882
13 – 24 months		38,081		6,709
25 – 36 months		15,735		9,062
	$	211,065	$	55,913

The Bank has entered into a borrowing agreement with the Federal Home Loan Bank of San Francisco and as such, can take advantage of FHLB programs for overnight and term advances at published daily rates. The Bank had no outstanding balance at December 31, 2013. Under terms of the blanket collateral agreement, advances from the FHLB are collateralized by qualifying securities and real estate loans, with $2.2 million available under the agreement as of December 31, 2013. The Bank also has the authority to borrow from the Federal Reserve Bank (“FRB”) discount window amounts secured by certain lease receivables with unused borrowing availability of approximately $92.7 million.

Capital expenditures for leased property purchases are sometimes financed by assigning certain lease term payments to banks or other financial institutions. The assigned lease payments are discounted at fixed rates such that the lease payments are sufficient to fully amortize the aggregate outstanding debt. At December 31, 2013, the Company had outstanding non-recourse debt aggregating $10.4 million relating to discounted lease rentals assigned to unaffiliated lenders, up from $768,000 at June 30, 2013 and $1.3 million at December 31, 2012. In the past, the Company has been able to obtain adequate non-recourse funding commitments, and the Company believes it will be able to do so in the future.

At December 31, 2013, CalFirst Leasing has a $10 million line of credit with a bank. The purpose of the line is to provide resources as needed for investment in transactions-in-process and leases. The agreement provides for borrowings based on Libor, requires a commitment fee on the unused line balance and allows for advances through March 31, 2014. The agreement is unsecured, however, the Company guarantees CalFirst Leasing’s obligations. No borrowings have been made under this line of credit over the past five years.

Contractual Obligations and Commitments

The following table summarizes various contractual obligations as of December 31, 2013. Commitments to purchase property for leases are binding and generally have fixed expiration dates or other termination clauses. Commercial loan commitments are agreements to lend to a customer or purchase participation provided there is no violation of any condition in the contract. These commitments generally have fixed expiration dates or other termination clauses. Since the Company expects some of the commitments to expire without being funded, the total amounts do not necessarily represent the Company’s future liquidity requirements.

	Due by Period
Contractual Obligations	Total		Less Than 1 Year		1-5 Years		After 5 Years
	(in thousands)
Commercial loan and lease purchase commitments	$	19,910	$	19,910	$	-	$	-
Lease property purchases (1)		70,459		70,459		-		-
Operating lease rental payments		3,117		614		2,503		-
Total contractual commitments	$	93,486	$	90,983	$	2,503	$	-

___________________________

(1)	Disbursements to purchase property on approved leases are estimated to be completed within one year, but it is likely that some portion could be deferred to later periods.

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

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

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, 2013, the Company had $64.1 million of cash or invested in securities of very short duration. The Company’s investment in gross lease payments receivable and commercial loans of $448.5 million consists of leases with fixed rates and loans with variable rates, however, $224.2 million of such investment matures or reprices within one year of December 31, 2013. Of the $38.8 million investment in securities, $24.2 million mature within twelve months. This compares to interest bearing deposit liabilities of $337.2 million, of which $267.6 million, or 79%, mature within one year. Based on the foregoing, at December 31, 2013 the Company had assets of $298.5 million subject to changes in interest rates over the next twelve months, compared to repricing liabilities of $267.6 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 repricing 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. The gap analysis at December 31, 2013 presented below indicates that net interest income should increase during periods of rising interest rates and decrease during periods of falling interest rates. However, the static 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 changes in interest rates may adversely impact 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	$	50,098		$	-		$	-		$	-		$	-		$	50,098
Investment securities		13,982			10,224			11,931			2,629			-			38,766
Net investment in leases		30,665			106,035			200,554			14,503			(26,661	)		325,096
Commercial loans		87,544			-			9,232			-			(2,375	)		94,401
Non-interest earning assets		-			-			-			-			44,368			44,368
Totals		182,289			116,259			221,717			17,132			15,332		$	552,729
Cumulative total for RSA	$	182,289		$	298,548		$	520,265		$	537,397

Rate Sensitive Liabilities (RSL):
Demand and savings deposits	$	70,237		$	-		$	-		$	-		$	1,014		$	71,251
Time deposits		64,799			132,591			69,588			-			-			266,978
Borrowings		-			-			-			-			-			-
Non-interest bearing liabilities		-			-			-			-			33,885			33,885
Stockholders' equity		-			-			-			-			180,615			180,615
Totals	$	135,036		$	132,591		$	69,588		$	-		$	215,514		$	552,729
Cumulative total for RSL	$	135,036		$	267,627		$	337,215		$	337,215

Interest rate sensitivity gap	$	47,253		$	(16,332	)	$	152,129		$	17,132
Cumulative GAP	$	47,253		$	30,921		$	183,050		$	200,182

RSA divided by RSL (cumulative)		134.99	%		111.55	%		154.28	%		159.36	%
Cumulative GAP / total assets		8.55	%		5.59	%		33.12	%		36.22	%

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, 2013 to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes made during the most recent fiscal quarter to the Company's internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

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, 2013.

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

The following table summarizes share repurchase activity for the quarter ended December 31, 2013:

					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, 2013 - October 31, 2013		-	$	-		368,354
November 1, 2013 - November 30, 2013		-	$	-		368,354
December 1, 2013 - December 31, 2013		-	$	-		368,354
		-	$	-

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

ITEM 6. EXHIBITS

(a) Exhibits		Page
31.1	Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer	29
31.2	Rule 13a-14(a)/15d-14(a) Certifications of Principal Financial Officer	30
31.3	Section 1350 Certifications by Principal Executive Officer and Principal Financial Officer	31

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: February 11, 2014	BY:	/s/ S. Leslie Jewett
		S. Leslie Jewett
		Executive Vice President
		(Principal Financial and Accounting Officer)