CALIFORNIA FIRST LEASING CORP - Quarter Report: 2014 March (Form 10-Q)

f10q_051314.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended		March 31, 2014


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

For the transition period from

	Commission File No.: 0-15641

	California First National Bancorp
	(Exact name of registrant as specified in charter)

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

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

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

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

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

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

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

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

Yes o No þ

The number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of May 6, 2014 was 10,459,924.

CALIFORNIA FIRST NATIONAL BANCORP

INDEX

		PAGE
PART 1. FINANCIAL INFORMATION		NUMBER

Item 1.	Financial Statements

	Consolidated Balance Sheets -
	March 31, 2014 and June 30, 2013	3

	Consolidated Statements of Earnings -
	Three and nine months ended March 31, 2014 and 2013	4

	Consolidated Statements of Comprehensive Income -
	Three and nine months ended March 31, 2014 and 2013	5

	Consolidated Statements of Cash Flows -
	Nine months ended March 31, 2014 and 2013	6

	Consolidated Statement of Stockholders’ Equity -
	Nine months ended March 31, 2014 and 2013	7

	Notes to Consolidated Financial Statements	8-16

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

	March 31, 2014			June 30, 2013
	(Unaudited)
ASSETS

Cash and due from banks	$	38,029		$	75,469
Investments		2,608			2,640
Securities available-for-sale		23,957			45,522
Receivables		980			1,395
Property acquired for transactions in process		31,338			11,927
Leases and loans:
Net investment in leases		340,158			345,753
Commercial loans		103,543			75,952
Allowance for credit losses		(5,142	)		(5,136	)
Net investment in leases and loans		438,559			416,569

Net property on operating leases		439			455
Income taxes receivable		622			3,301
Other assets		787			857
Discounted lease rentals assigned to lenders		9,522			768
	$	546,841		$	558,903

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Accounts payable	$	2,230		$	8,849
Accrued liabilities		2,289			2,156
Demand and savings deposits		68,058			71,946
Time certificates of deposit		266,028			274,082
Lease deposits		1,807			1,648
Non-recourse debt		9,522			768
Deferred income taxes, net		14,982			18,575
		364,916			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; 10,459,924 (March 2014) and 10,447,227 (June 2013) issued and outstanding		105			104
Additional paid in capital		3,371			3,213
Retained earnings		177,998			176,972
Accumulated other comprehensive income, net of tax		451			590
		181,925			180,879
	$	546,841		$	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 March 31,				Nine months ended March 31,
	2014		2013		2014		2013

Direct finance and loan income	$	4,546	$	4,872	$	13,622	$	14,160
Investment interest income		303		570		1,117		1,926
Total direct finance, loan and interest income		4,849		5,442		14,739		16,086

Interest expense
Deposits		728		707		2,284		1,881
Net direct finance, loan and interest income		4,121		4,735		12,455		14,205
Provision for credit losses		-		-		-		275


Net direct finance, loan and interest income after provision for credit losses		4,121		4,735		12,455		13,930

Non-interest income
Operating and sales-type lease income		383		357		1,268		1,351
Gain on sale of leases and leased property		129		999		2,589		1,974
Realized gain on securities available-for-sale		-		302		-		316
Other fee income		114		96		371		339
Total non-interest income		626		1,754		4,228		3,980

Non-interest expenses
Compensation and employee benefits		2,190		2,259		5,892		6,590
Occupancy		157		224		523		695
Professional services		146		163		446		484
Other		477		449		1,527		1,233
Total non-interest expenses		2,970		3,095		8,388		9,002

Earnings before income taxes		1,777		3,394		8,295		8,908

Income taxes		587		1,293		3,090		3,460

Net earnings	$	1,190	$	2,101	$	5,205	$	5,448

Basic earnings per common share	$	0.11	$	0.20	$	0.50	$	0.52

Diluted earnings per common share	$	0.11	$	0.20	$	0.50	$	0.52

Weighted average common shares outstanding		10,458		10,447		10,451		10,446

Diluted common shares outstanding		10,461		10,454		10,454		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 March 31,						Nine months ended March 31,
	2014			2013			2014			2013

Net earnings	$	1,190		$	2,101		$	5,205		$	5,448

Other comprehensive income (loss):

Unrealized (losses)/gains on securities available-for-sale		(39	)		(141	)		(222	)		558

Reclassification adjustment of realized gain included in net income on securities available for-sale		-			(302	)		-			(316	)
		(39	)		(443	)		(222	)		242

Tax effect		14			170			83			(93	)

Total other comprehensive (loss)/income		(25	)		(273	)		(139	)		149

Total comprehensive income	$	1,165		$	1,828		$	5,066		$	5,597

The accompanying notes are an integral part

of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Nine Months Ended March 31,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings	$	5,205		$	5,448
Adjustments to reconcile net earnings to cash flows provided by (used for) operating activities:
Provision for credit losses		-			275
Depreciation and net amortization (accretion)		63			(413	)
Stock-based compensation expense		3			4
Gain on sale of leased property and sales-type lease income		(407	)		(744	)
Net gain recognized on investment securities		-			(316	)
Deferred income taxes, including income taxes payable		(3,493	)		(5,960	)
Decrease in income taxes receivable		2,679			195
Net increase (decrease) in accounts payable and accrued liabilities		133			(108	)
Other, net		580			(171	)
Net cash provided by (used for) operating activities		4,763			(1,790	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in leases, loans and transactions in process		(230,064	)		(230,026	)
Payments received on lease receivables and loans		179,217			147,562
Proceeds from sales of leased property and sales-type leases		3,771			5,699
Purchase of investment securities		(300	)		-
Pay down on investment securities		21,132			2,415
Proceeds from sale of investment securities		-			10,425
Net decrease in other assets		6			56
Net cash used for investing activities		(26,238	)		(63,869	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in time certificates of deposit		(8,054	)		78,518
Net (decrease) increase in demand and savings deposits		(3,888	)		11,512
Dividends to stockholders		(4,179	)		(22,985	)
Proceeds from exercise of stock options		156			164
Net cash (used for) provided by financing activities		(15,965	)		67,209

NET CHANGE IN CASH AND CASH EQUIVALENTS		(37,440	)		1,550
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		75,469			56,921
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	38,029		$	58,471

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Increase (decrease) in lease rentals assigned to lenders and related non-recourse debt	$	8,754		$	(2,233	)
Estimated residual values recorded on leases	$	(3,255	)	$	(1,801	)

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net cash paid during the nine month period for:
Interest	$	2,296		$	1,853
Income Taxes	$	3,904		$	9,224

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

Nine months ended March 31, 2013

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

Net earnings		-		-		-		5,448			-			5,448
Other comprehensive income		-		-		-		-			149			149

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

Stock based compensation expense		-		-		4		-			-			4

Dividends declared		-		-		-		(22,985	)		-			(22,985	)

Balance, March 31, 2013		10,447,227	$	104	$	3,212	$	175,066		$	837		$	179,219


Nine months ended March 31, 2014

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

Net earnings		-		-		-		5,205			-			5,205
Other comprehensive income		-		-		-		-			(139	)		(139	)

Shares issued - Stock options exercised		12,697		1		155		-			-			156

Stock based compensation expense		-		-		3		-			-			3

Dividends declared		-		-		-		(4,179	)		-			(4,179	)

Balance, March 31, 2014		10,459,924	$	105	$	3,371	$	177,998		$	451		$	181,925

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 March 31, 2014 and the statements of earnings, comprehensive income, cash flows and stockholders’ equity for the periods presented. The results of operations for the three and nine month periods ended March 31, 2014 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 nine months ended March 31, 2014, the Company recognized pre-tax stock-based compensation expense of $1,000 and $3,000, 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 March 31, 2014, approximately $15,000 of total unrecognized compensation expense related to unvested shares is expected to be recognized over the next 40 months.

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

	For the nine months ended
	March 31, 2014					March 31, 2013
	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		(12,697	)		12.26		(13,543	)		12.13
Granted		-			-		10,000			16.00
Options outstanding at end of period		10,000		$	16.00		22,697		$	13.91
Options exercisable at end of period		2,000					12,697

Stock options outstanding and exercisable are summarized below:

As of March 31, 2014

Options Outstanding

Options Exercisable

Weighted Average

Range of

Number

Remaining Contractual

Weighted Average

Number

Weighted Average

Exercise prices

Outstanding

Life (in years)

Exercise Price

Exercisable

Exercise Price

$16.00

10,000

8.33

16.00

2,000

16.00

NOTE 4 – FAIR VALUE MEASUREMENT

ASC Topic 820: “Fair Value Measurements and Disclosures” defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. ASC Topic 820 establishes a three-tiered value hierarchy that prioritizes inputs based on the extent to which inputs used are observable in the market and requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. If a value is based on inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. The three levels of inputs are defined as follows:

Level 1 - Valuation is based upon unadjusted quoted prices for identical instruments traded in active markets;

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market;

Level 3 - Valuation is generated from model-based techniques that use inputs not observable in the market and based on the entity’s own judgment. Level 3 valuation techniques could include the use of option pricing models, discounted cash flow models and similar techniques, and rely on assumptions that market participants would use in pricing the asset or liability.

ASC 820 applies whenever other accounting pronouncements require presentation of fair value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value. As such, ASC 820 does not apply to the Company’s investment in leases. The Company’s financial assets measured at fair value on a recurring basis include primarily securities available-for-sale and at March 31, 2014, 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 Company’s assets, which are measured at fair value on a recurring basis as of March 31, 2014 and June 30, 2013 are summarized as follows:

(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 March 31, 2014
Corporate debt securities	$	21,497	$	-	$	21,497	$	-
Securities of state and political subdivisions		430		-		430		-
Mutual fund investments		1,257		1,257		-		-
Equity investment		773		773		-		-
	$	23,957	$	2,030	$	21,927	$	-

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 March 31, 2014 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 March 31, 2014, 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 3 in the fair value hierarchy.

The estimated fair values of financial instruments were as follows:

	March 31, 2014				June 30, 2013
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in thousands)
Financial Assets:
Cash and cash equivalents	$	38,029	$	38,029	$	75,469	$	75,469
Investments		2,608		2,621		2,640		2,659
Securities available-for-sale		23,957		23,957		45,522		45,522
Commercial loan participations		92,865		93,102		64,987		65,226
Other commercial loans		8,706		8,851		8,993		8,935
Financial Liabilities:
Demand and savings deposits		68,058		68,058		71,946		71,946
Time certificate of deposits	$	266,028	$	265,934	$	274,082	$	274,449

NOTE 6 – INVESTMENTS:

Investments are carried at cost and consist of the following:

	March 31, 2014				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		531		531		771		771
Mortgage-backed investments		122		135		214		233
	$	2,608	$	2,621	$	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:

Securities available for sale amortized cost and fair value at March 31, 2014 were as follows:

(in thousands)	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Corporate debt securities	$	21,111	$	386	$	-		$	21,497
Securities of state and political subdivisions		410		20		-			430
Mutual fund investments		1,306		-		(49	)		1,257
Equity investments		422		351		-			773
Total securities available-for-sale	$	23,249	$	757	$	(49	)	$	23,957

Securities available for sale amortized cost and fair value 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 available-for-sale securities amortized cost and estimated fair value at March 31, 2014, 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	$	15,115	$	15,337
Due after one year but less than 5 years		6,406		6,590
Due after five years		-		-
No stated maturity		1,728		2,030
Total securities available-for-sale	$	23,249	$	23,957

For the nine months ended March 31, 2014, the Company had no gross realized gains, losses or other than temporary impairments of available-for-sale securities. During the nine months ended March 31, 2013, the Company realized a gain of $316,000 from the sale and tender of corporate bonds for proceeds of $12.8 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 available for sale securities at fair value with an associated gross unrealized loss at March 31, 2014 and June 30, 2013 are as follows:

	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 March 31, 2014
Mutual fund investment	$	(49	)	$	1,136	$	-	$	-	$	(49	)	$	1,136
Total	$	(49	)	$	1,136	$	-	$	-	$	(49	)	$	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 March 31, 2014, no securities were other than temporarily impaired.

NOTE 8 – NET INVESTMENT IN LEASES

Net investment in leases consists of the following:

	March 31, 2014			June 30, 2013
	(in thousands)
Minimum lease payments receivable	$	349,612		$	357,942
Estimated residual value		14,751			14,087
Less unearned income		(24,205	)		(26,276	)
Net investment in leases before allowances		340,158			345,753
Less allowance for lease losses		(3,069	)		(2,916	)
Less valuation allowance for estimated residual value		(101	)		(248	)
Net investment in leases	$	336,988		$	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 $2.3 million and $2.6 million at March 31, 2014 and June 30, 2013, respectively.

NOTE 9 – COMMERCIAL LOANS

Commercial loans consist of the following:

	March 31, 2014			June 30, 2013
	(in thousands)
Commercial term loans	$	93,161		$	65,094
Commercial real estate loans		9,122			9,411
Revolving lines of credit		1,685			1,841
Total commercial loans		103,968			76,346
Less unearned income and discounts		(425	)		(394	)
Less allowance for loan losses		(1,972	)		(1,972	)
Net commercial loans	$	101,571		$	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 to 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 $14.1 million at March 31, 2014 and $12.0 million at June 30, 2013. The Company has recorded a liability for unfunded loan commitments of $25,000 at March 31, 2014 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 March 31, 2014:
Pass	$	257,772	$	76,112	$	94,426	$	3,498	$	431,808
Special Mention		5,212		571		-		-		5,783
Substandard		4		410		-		5,619		6,033
Doubtful		73		4		-		-		77
	$	263,061	$	77,097	$	94,426	$	9,117	$	443,701
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 aging of financing receivables by portfolio class is as follows:

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

As of March 31, 2014:
Commercial Leases	$	-	$	-	$	-	$	263,061	$	263,061	$	-
Education, Government, Non-profit Leases		-		-		-		77,097		77,097		-
Commercial and Industrial Loans		-		-		-		94,426		94,426		-
Commercial Real Estate Loans		-		-		-		9,117		9,117		-
	$	-	$	-	$	-	$	443,701	$	443,701	$	-

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 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 March 31, 2014 and June 30, 2013 are presented in the following table:

(in thousands)	Commercial Leases			Education Government Non-profit Leases			Commercial & Industrial Loans		Commercial Real Estate Loans			Total Financing Receivable
As of March 31, 2014:
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	$	151		$	107		$	-	$	-		$	258
Collectively evaluated for impairment		2,401			511			1,561		411			4,884
Total ending allowance balance	$	2,552		$	618		$	1,561	$	411		$	5,142

Finance receivables
Individually evaluated for impairment	$	1,616		$	414		$	-	$	-		$	2,030
Collectively evaluated for impairment		261,445			76,683			94,426		9,117			441,671
Total ending finance receivable balance	$	263,061		$	77,097		$	94,426	$	9,117		$	443,701

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

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 March 31, 2014, there were no borrowings from the FHLB with available borrowing capacity of $2.2 million related to qualifying real estate loans of $3.5 million, and no borrowings from the FRB with borrowing availability of approximately $97.9 million secured by $126.6 million of lease receivables.

CalFirst Leasing had a $10 million line of credit with a bank that expired and was not renewed at March 31, 2014. The purpose of the line was to provide resources as needed for investment in transactions-in-process and leases, but CalFirst Leasing had not taken any borrowings down under this line of credit for over ten years.

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 nine months ended March 31, 2014 and 2013:

	CalFirst Bank		CalFirst Leasing		Bancorp and Eliminating Entries			Consolidated
	(in thousands)
Quarter ended March 31, 2014
Total direct finance and interest income	$	4,236	$	613	$	-		$	4,849
Net direct, loan and interest income after provision for credit losses		3,494		627		-			4,121
Other income		275		351		-			626
Net income	$	929	$	416	$	(155	)	$	1,190

Quarter ended March 31, 2013
Total direct finance and interest income	$	4,383	$	1,058	$	1		$	5,442
Net direct, loan and interest income after provision for credit losses		3,460		1,274		1			4,735
Other income		700		1,054		-			1,754
Net income	$	1,342	$	980	$	(221	)	$	2,101

Nine months ended March 31, 2014
Total direct finance and interest income	$	12,632	$	2,106	$	1		$	14,739
Net direct, loan and interest income after provision for credit losses		10,333		2,121		1			12,455
Other income		1,871		2,357		-			4,228
Net income	$	3,826	$	2,166	$	(787	)	$	5,205

Nine months ended March 31, 2013
Total direct finance and interest income	$	12,600	$	3,481	$	5		$	16,086
Net direct, loan and interest income after provision for credit losses		10,077		3,848		5			13,930
Other income		1,551		2,429		-			3,980
Net income	$	3,580	$	2,396	$	(528	)	$	5,448

Total assets at March 31, 2014	$	482,048	$	92,459	$	(27,666	)	$	546,841
Total assets at March 31, 2013	$	471,943	$	90,012	$	(6,357	)	$	555,598

CALIFORNIA FIRST NATIONAL BANCORP

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

GENERAL

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

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

The Company's operating results are subject to quarterly fluctuations resulting from a variety of factors, including the size and credit quality of the lease and loan portfolios, the volume and profitability of leased property being re-marketed through re-lease or sale, the interest rate environment, the market for investment securities, the volume of new lease or loan originations, including variations in the mix and funding of such originations, and economic conditions in general. The Company’s principal market risk exposure currently is related to interest rates and the impact the interest rate environment has on its net interest margin. The Company’s current balance sheet structure is short-term in nature, with over 55% of interest-earning assets and 83% of interest bearing liabilities repricing within one year. The Company’s interest margin is susceptible to the disparate impact of varying movements in market interest rates as many of the Company’s leases, loans and liquid investments are tied to U.S. Treasury rates and Libor that often do not move in step with bank deposit rates. As a result, this can cause a greater change in net interest income than indicated by the repricing asset and liability comparison.

The Company conducts its business in a manner designed to mitigate risks. However, the assumption of risk is a key source of earnings in the leasing and banking industries and the Company is subject to risks through its 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 $1.2 million for the third quarter ended March 31, 2014 were 43.4% below the third quarter of fiscal 2013 primarily due to a $1.1 million decline in non-interest income related to lower gains recognized on the sale of leased property and investment securities. The comparison to strong gains realized during the third quarter of the prior year illustrates the quarterly variability that can occur due to the timing of leases maturing during the year. In addition, net interest income in the third quarter of fiscal 2014 declined by $613,400, or 13.0%, reflecting the continued impact that low interest rates and competitive pricing have had on interest earning assets and net interest margins, despite growth in assets. The FRB began lowering interest rates in 2007 and has maintained historically low interest rates since 2009. As a result, the Company’s average yield on interest earning assets has declined by over 370 basis points since the fiscal year end June 30, 2009, while its net interest margin has declined by over 250 basis points over the same period.

For the third quarter of fiscal 2014, new lease and loan bookings of $61.0 million were down 40.4% from the third quarter of the prior year. Bookings included $48.2 million of direct leases, down from $72.9 million during the third quarter of fiscal 2013, lease purchases of $1.9 million compared to $9.4 million of lease purchases during the third quarter of fiscal 2013, and loan bookings of $10.9 million, down from $20.0 million during the third quarter of fiscal 2013. For the nine months ended March 31, 2014, total bookings of $190.5 million were down 18.0% from $232.4 million the prior year, and included lease bookings of $153.2 million, consisting of direct leases of $136.5 million and $16.6 million of lease purchases, and the addition of $37.4 million in commercial loans. As a result, the net investment in leases and loans of $438.6 million at March 31, 2014 is up 5% from June 30, 2013 and December 31, 2013.

Not included above is property acquired for lease transactions in process that has more than doubled since June 30, 2013 to $31.3 million. This is part of the estimated backlog of approved lease and loan commitments of $123 million at March 31, 2014, 24% greater than at March 31, 2013, including a 56% increase year over year of loan commitments to $34.1 million. While third quarter lease and loan originations were 19% below the third quarter of fiscal 2013, for the first nine months of fiscal 2014 they were 3% ahead of the prior year. Direct lease originations year to date are up 29% from the prior year while loan originations increased by 12%. The sustained originations combined with lower booking during the first nine months have contributed to growth in the Company’s lease backlog.

Consolidated Statement of Earnings Analysis

Summary – For the third quarter ended March 31, 2014, net earnings of $1.2 million decreased $911,000 compared to the third quarter ended March 31, 2013. For the first nine months of fiscal 2014, net earnings of $5.2 million decreased $243,000, or 4.5%, compared to the first nine months of fiscal 2013. Diluted earnings per share of $0.11 per share for the third quarter of fiscal 2014 were down 43.4% from the $0.20 per share for the third quarter of fiscal 2013. For the nine months ended March 31, 2014, diluted earnings per share of $0.50 decreased 4.5%, compared to $0.52 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 March 31, 2014, a $614,000, or 13.0% decrease compared to the same quarter of the prior year. Total direct finance, loan and interest income for the third quarter of fiscal 2014 was down 10.9% to $4.8 million from $5.4 million during the third quarter of the prior year. The decrease was primarily due to a 47% decrease in investment income and 21% decline in commercial loan income. Commercial loan income was down by $236,600 as the average yield fell by 89 basis points to 3.67% with average balances 2% lower at $95.9 million. A decrease of $88,600 in direct finance income reflected an 8.6% increase in the average investment in leases to $328.0 million, offset by a 50 basis points drop in the average yield to 4.47%. Investment income declined by $267,800 as maturing securities brought average investment balances down 44% to $30.9 million and lowered the average yield by 26 basis points to 3.66%, contributing to a reduction in the overall yield on cash and investments by 69 basis points to 1.46% for the quarter ended March 31, 2014. During the third quarter of fiscal 2014, interest expense on deposits increased by $20,000, reflecting a 5.4% increase in average deposit balances to $335.4 million offset by a 2 basis point decrease in average interest rate paid to 0.87%.

For the nine months ended March 31, 2014, net direct finance, loan and interest income was $12.5 million, a $1.8 million or 12.3% decrease from $14.2 million earned during the same period of the prior year. Total direct finance, loan and interest income for the first nine months of fiscal 2014 decreased 8.4% to $14.7 million due to an $822,300 decrease in commercial loan income and $808,800 decrease in investment income, offset by a $284,000 increase in direct finance income. During the first nine months of fiscal 2014, the average investment in leases increased 19.7% to $331.6 million while the average yield earned decreased by 75 basis points to 4.49%. Average commercial loan balances of $82.8 million were down 9.7% while the average yield fell by 81 basis points to 3.95%. As a number of investments matured during the first nine months of fiscal 2014, average investment balances declined 37% to $38.7 million and brought average yields down by 46 basis points to 3.59%, contributing to a 26% increase in average cash balances and reduction in overall yields on cash and investments of 84 basis points to 1.42% for the nine months ended March 31, 2014. Interest expense paid for the nine months ended March 31, 2014 increased by $402,900, 21.4%, to $2.3 million due to a 22% increase in average deposit balances to $339.9 million while the average rate paid remained at 0.90%.

The average yield on all interest-earning assets during the third quarter of fiscal 2014 decreased by 50 basis points to 3.8% from 4.3% for the third quarter ended March 31, 2013, while the average rate paid on all interest-bearing liabilities declined by only 2 basis points to .87% from 0.90%. As a result, the net interest margin decreased to 3.3% for the third quarter of fiscal 2014 from 3.7% in fiscal 2013. For the first nine months of fiscal 2014, the net interest margin of 3.2% is down from 3.9% for the first nine 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 competitive pricing market, 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									Nine Months ended
	March 31, 2014 vs 2013									March 31, 2014 vs 2013
	Volume			Rate			Total			Volume			Rate			Total
	(in thousands)
Interest income
Net investment in leases	$	323		$	(412	)	$	(89	)	$	2,148		$	(1,864	)	$	284
Commercial loans		(24	)		(213	)		(237	)		(319	)		(503	)		(822	)
Investment securities		(241	)		(20	)		(261	)		(676	)		(134	)		(810	)
Interest-earning deposits with banks		1			(7	)		(6	)		20			(19	)		1
		59			(652	)		(593	)		1,173			(2,520	)		(1,347	)
Interest expense
Demand and savings deposits		(23	)		1			(22	)		(38	)		1			(37	)
Time deposits		94			(51	)		43			565			(125	)		440
		71			(50	)		21			527			(124	)		403
Net direct finance, loan and interest income	$	(12	)	$	(602	)	$	(614	)	$	646		$	(2,396	)	$	(1,750	)

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.

	Quarter ended							Quarter ended
(dollars in thousands)	March 31, 2014							March 31, 2013
	Average				Yield/			Average				Yield/
Assets	Balance		Interest		Rate			Balance		Interest		Rate
Interest-earning assets
Interest-earning deposits with banks	$	52,006	$	20		0.15	%	$	50,667	$	26		0.21	%
Investment securities		30,929		283		3.66	%		55,459		544		3.92	%
Commercial loans		95,905		881		3.67	%		98,032		1,118		4.56	%
Net investment in leases		327,990		3,665		4.47	%		302,022		3,754		4.97	%
Total interest-earning assets		506,830		4,849		3.83	%		506,180		5,442		4.30	%
Other assets		43,657							24,291
	$	550,487						$	530,471

Liabilities and Shareholders' Equity
Interest-bearing liabilities
Demand and savings deposits	$	67,106	$	82		0.49	%	$	85,869	$	104		0.48	%
Time deposits		268,285		646		0.96	%		232,304		603		1.04	%
Total interest-bearing liabilities		335,391		728		0.87	%		318,173		707		0.89	%
Non-interest bearing demand deposits		1,849							2,264
Other liabilities		31,795							31,814
Shareholders' equity		181,452							178,220
	$	550,487						$	530,471
Net interest income			$	4,121						$	4,735

Net interest spread (2)						2.96	%						3.41	%
Net interest margin (3)						3.25	%						3.74	%
Average interest earning assets over
average interest bearing liabilities						151.1	%						159.1	%

	Nine months ended							Nine months ended
	March 31, 2014							March 31, 2013
	Average				Yield/			Average				Yield/
Assets	Balance		Interest		Rate			Balance		Interest		Rate
Interest-earning assets
Interest-earning deposits with banks	$	66,485	$	77		0.15	%	$	52,661	$	76		0.19	%
Investment securities		38,661		1,040		3.59	%		60,920		1,850		4.05	%
Commercial loans		82,813		2,455		3.95	%		91,748		3,277		4.76	%
Net investment in leases		331,574		11,167		4.49	%		276,912		10,883		5.24	%
Total interest-earning assets		519,533		14,739		3.78	%		482,241		16,086		4.45	%
Other assets		34,541							25,541
	$	554,074						$	507,782

Liabilities and Shareholders' Equity
Interest-bearing liabilities
Demand and savings deposits	$	69,042	$	255		0.49	%	$	79,408	$	292		0.49	%
Time deposits		270,850		2,029		1.00	%		199,842		1,589		1.06	%
Total interest bearing liabilities		339,892		2,284		0.90	%		279,250		1,881		0.90	%
Non-interest bearing demand deposits		1,829							2,210
Other liabilities		30,838							38,377
Shareholders' equity		181,515							187,945
	$	554,074						$	507,782
Net interest income			$	12,455						$	14,205

Net interest spread (2)						2.79	%						3.55	%
Net interest margin (3)						3.20	%						3.93	%
Average interest earning assets over
average interest bearing liabilities						152.9	%						172.7	%

(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 third quarter of fiscal 2014 or 2013. For the first nine months of fiscal 2014, the Company also made no provision for credit losses compared to a provision of $275,000 recorded during the first nine months of fiscal 2013. A provision for credit losses has not been required in fiscal 2014 despite growth in the portfolio due to stable credit metrics and improved market conditions that indicate that existing reserves established in prior periods are adequate to support the risks in the portfolios.

Non-interest Income – Total non-interest income for the quarter ended March 31, 2014 decreased by $1.1 million or 64.3% to $626,000, compared to $1.8 million for the same quarter of the prior fiscal year. This decrease was principally due to a $747,000 decline in income from leases at the end of term during the period as the residual investment maturing in the quarter was less than half the amount realized during the third quarter of fiscal 2013. Also, the third quarter of fiscal 2013 included a gain realized on the sale of a security of $302,000. Total non-interest income of $4.2 million for the first nine months of fiscal 2014 was up $248,000 or 6.2% from $4.0 million during the comparable period of fiscal 2013. The increase included a $1.3 million gain realized on the sale of leases during the second quarter of fiscal 2014 that offset a 20% or $650,000 decline in income realized from leases at their end of term during the first nine months of fiscal 2014. The residual investment maturing during the first nine months of fiscal 2014 was 43% less than the amount realized during the first nine months of fiscal 2013.

Non-interest Expenses – During the third quarter of fiscal 2014, non-interest expenses of $3.0 million were 4.0% lower than the third quarter of fiscal 2013. The drop in expenses during the third quarter related to lower administrative compensation and occupancy expense, offset in part by higher compensation expense related to growth in the sales organization. For the first nine months of fiscal 2014 non-interest expenses of $8.4 million were down 6.8% from $9.0 million for the first nine months of fiscal 2013. The decrease in non-interest expenses for the nine months is primarily due to lower compensation expenses related to a smaller sales organization 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 33.0% for the third quarter of fiscal 2014 and 37.25% for the nine months ended March 31, 2014, compared to 38.1% for the third quarter of fiscal 2013 and 38.8% for the nine months ended March 31, 2013. The reduced tax accrual rate in the third quarter ended March 31, 2014 incorporates an estimated lower state tax rate for fiscal 2014 than previously projected. The rate of 37.25% for the nine months of fiscal 2014 compares to the rate of 37.1% accrued for the full fiscal year ended June 30, 2013.

Financial Condition Analysis

Consolidated total assets at March 31, 2014 of $546.8 million were down $12.1 million, or 2.2% from $558.9 million at June 30, 2013. The change in total assets includes a $19.4 million increase in property acquired for transactions in process and $27.6 million increase in commercial loans, offset by a $5.6 million decrease in net investment in leases, $21.6 million decrease in securities available-for-sale and $37.4 million drop in cash balances.

Lease Portfolio

During the first nine months of fiscal 2014, 94.4% of the direct leases booked by the Company were held in its own portfolios, with 5.6% 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 ended December 31, 2013. As a result, the Company’s net investment in leases at March 31, 2014 of $337.0 million was down 1.6% from $342.6 million at June 30, 2013, a reduction of $5.6 million, but increased 3.7% from $325.1 million at December 31, 2013.

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 March 31, 2014, the Company’s investment in property acquired for transactions in process of $31.3 million was up 163% from $11.9 million at June 30, 2013, and up 169% from $11.7 million at March 31, 2013.

Commercial Loan Portfolio

The Company’s commercial loan portfolio increased $27.6 million, or 37.3%, to $101.6 million at March 31, 2014 from $74.0 million at June 30, 2013. The increase in the Company’s commercial loan portfolio included the investment of $37.4 million in five new commercial loan participations offset by loan payoffs and repayments aggregating to $9.8 million. In addition, at March 31, 2014 the Company had unfunded commercial loan commitments of $34.1 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.

	March 31,			June 30,
	2014			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 March 31, 2014 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 $6.1 million of investment in leases and loans at March 31, 2014 classified as substandard or with credits that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future. This amount compared to $6.5 million at June 30, 2013 and $9.8 million at March 31, 2013. Although these credits have been identified as potential problems, they may never become non-performing. These potential problem leases and loans are considered in the determination of the allowance for credit losses.

Allowance for Credit Losses

The allowance for credit losses provides coverage for probable and 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.

	Nine months ended
	March 31,
	2014			2013
	(dollars in thousands)

Property acquired for transactions in process before allowance	$	31,349		$	11,672
Net investment in leases and loans before allowance		443,701			432,412
Net investment in “risk assets”	$	475,050		$	444,084

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	%		1.3	%
Allowance for credit losses as a percent of net investment in “risk assets”		1.1	%		1.2	%

The allowance for credit losses increased $6,000 to $5.2 million (1.2% of net investment in leases and loans before allowances) at March 31, 2014 from $5.1 million (1.2% of net investment in leases and loans before allowances) at June 30, 2013. This allowance consisted of $290,000 allocated to specific accounts that were identified as problems and $4.9 million that was available to cover losses inherent in the portfolio. This compared to $473,000 allocated to specific accounts at June 30, 2013 and $4.7 million available for losses inherent in the portfolio at that time. The decrease in the specific allowance at March 31, 2014 primarily relates to the reduced reserve on a specific account that emerged from bankruptcy as well to payments received. The Company considers the allowance for credit losses of $5.2 million at March 31, 2014 adequate to cover losses specifically identified as well as inherent in the lease and loan portfolios. However, no assurance can be given that the Company will not, in any particular period, sustain lease and loan losses that are sizeable in relation to the amount reserved, or that subsequent evaluations of the lease and loan portfolio, in light of factors then prevailing, including economic conditions and the on-going credit review process, will not require significant increases in the allowance for credit losses. Among other factors, economic and political events may have an adverse impact on the adequacy of the allowance for credit losses by increasing credit risk and the risk of potential loss even further.

Investment Securities Available-for-sale

Total available-for-sale investment securities were $24.0 million as of March 31, 2014, 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 March 31, 2014 and June 30, 2013 are as follows:

	As of March 31, 2014				As of June 30, 2013
(in thousands)	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Available-for-sale
Corporate debt securities	$	21,111	$	21,497	$	42,435	$	43,147
Securities of state and political subdivisions		410		430		412		436
Mutual fund investments		1,306		1,257		1,306		1,250
Equity investments		422		773		422		689
Total securities available-for-sale	$	23,249	$	23,957	$	44,575	$	45,522

The $21.6 million decline in the Company’s portfolio of securities available-for-sale during the first nine months of fiscal 2014 was primarily due to maturing bonds. The weighted average maturity at March 31, 2014 was 10 months and the corresponding weighted average yield was 3.5 percent at March 31, 2014.

Liquidity and Capital Resources

The Company funds its operating activities through internally generated funds, bank deposits, and non-recourse debt. At March 31, 2014 and June 30, 2013, the Company’s cash and due from banks were $38.0 million and $75.5 million, respectively. Stockholders’ equity at March 31, 2014 was $181.9 million, or 33.3% of total assets, compared to $180.9 million, or 32.4% of total assets, at June 30, 2013. At March 31, 2014, the Company and the Bank exceed their regulatory capital requirements and are considered “well-capitalized” under guidelines established by the FRB and OCC.

Deposits at CalFirst Bank totaled $334.1 million at March 31, 2014, down 3% from $343.3 million at March 31, 2013 and $346.0 million at June 30, 2013. The $9.2 million decrease from March 31, 2013 was the result of the Company’s effort to reduce excess liquidity and was supported by the sale or assignment of leases during the second quarter of fiscal 2014. The following table presents average balances and average rates paid on deposits for the nine months ended March 31, 2014 and 2013:

	Nine months ended March 31,
	2014					2013
	Ending		Average		Average	Ending		Average		Average
	Balance		Balance		Rate Paid	Balance		Balance		Rate Paid
	(in thousands)
Non-interest bearing demand deposits	$	2,174	$	1,829	n/a	$	1,488	$	2,210	n/a
Interest-bearing demand deposits		1,442		1,696	0.20%		2,412		2,430	0.20%
Money market deposits		64,442		67,346	0.50%		86,769		76,978	0.50%
Time deposits, less than $100,000		50,345		51,569	1.00%		51,341		47,057	1.09%
Time deposits, $100,000 or more	$	215,683	$	219,281	1.00%	$	201,317	$	152,785	1.05%

The following table shows the maturities of certificates of deposits at March 31, 2014:

	Less Than		$250,000
	$250,000		or Greater
	(in thousands)
Under 3 months	$	41,716	$	11,068
3 – 6 months		31,551		6,323
7 – 12 months		90,447		27,081
13 – 24 months		34,210		8,251
25 – 36 months		8,811		6,570
	$	206,735	$	59,293

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 March 31, 2014. 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 March 31, 2014. The Bank also has the authority to borrow from the Federal Reserve Bank (“FRB”) discount window amounts secured by certain lease receivables with unused borrowing availability of approximately $97.9 million.

An additional source of liquidity for financing and managing the lease portfolio comes from 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 March 31, 2014, the Company had outstanding non-recourse debt aggregating $9.5 million relating to discounted lease rentals assigned to unaffiliated lenders, up from $768,000 at June 30, 2013 and $1.0 million at March 31, 2013. In the past, the Company has been able to obtain adequate non-recourse funding commitments, and the Company believes it will be able to do so in the future.

Contractual Obligations and Commitments

The following table summarizes various contractual obligations as of March 31, 2014. Commitments to purchase property for leases are binding and generally have fixed expiration dates or other termination clauses. Commercial loan commitments are agreements to lend to a customer or purchase a participation provided there is no violation of any condition in the contract. These commitments generally have fixed expiration dates or other termination clauses. Since the Company expects some of the commitments to expire without being funded, the total amounts do not necessarily represent the Company’s future liquidity requirements.

		Due by Period
				Less Than				After
Contractual Obligations		Total		1 Year		1-5 Years		5 Years
	(in thousands)
Commercial loan and lease purchase commitments		$	39,539	$	39,539	$	-	$	-
Lease property purchases (1)			53,210		53,210		-		-
Operating lease rental payments			2,966		622		2,344		-
Total contractual commitments		$	95,715	$	93,371	$	2,344	$	-

______________________________________

(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 March 31, 2014, the Company had $45.1 million of cash or invested in securities of very short duration. The Company’s investment in gross lease payments receivable and commercial loans of $468.3 million consists of leases with fixed rates and loans with variable rates, however, $239.6 million of such investment matures or reprices within one year of March 31, 2014. Of the $26.6 million investment in securities, $17.4 million mature within twelve months. This compares to interest bearing deposit liabilities of $331.9 million, of which $274.1 million, or 83%, mature within one year. Based on the foregoing, at March 31, 2014 the Company had assets of $295.0 million subject to changes in interest rates over the next twelve months, compared to repricing liabilities of $274.1 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 March 31, 2014 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	$	38,029		$	-		$	-		$	-		$	-		$	38,029
Investment securities		7,070			10,297			6,590			2,608			-			26,565
Net investment in leases		34,426			110,290			207,612			12,035			(27,375	)		336,988
Commercial loans		94,846			-			9,122			-			(2,397	)		101,571
Non-interest earning assets		-			-			-			-			43,688			43,688
Totals		174,371			120,587			223,324			14,643		$	13,916		$	546,841
Cumulative total for RSA	$	174,371		$	294,958		$	518,282		$	532,925

Rate Sensitive Liabilities (RSL):
Demand and savings deposits	$	65,883		$	-		$	-		$	-		$	2,175			68,058
Time deposits		52,784			155,403			57,841			-			-			266,028
Non-interest bearing liabilities		-			-			-			-			30,830			30,830
Stockholders' equity		-			-			-			-			181,925			181,925
Totals		118,667			155,403			57,841			-		$	214,930		$	546,841
Cumulative total for RSL	$	118,667		$	274,070		$	331,911		$	331,911

Interest rate sensitivity gap	$	55,704		$	(34,816	)	$	165,483		$	14,643
Cumulative GAP	$	55,704		$	20,888		$	186,371		$	201,014

RSA divided by RSL (cumulative)		146.94	%		107.62	%		156.15	%		160.56	%
Cumulative GAP / total assets		10.19	%		3.82	%		34.08	%		36.76	%

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 March 31, 2014 to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes made during the most recent fiscal quarter to the Company's internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS

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

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

The following table summarizes share repurchase activity for the quarter ended March 31, 2014:

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


January 1, 2014 - January 31, 2014		-	$	-		368,354
February 1, 2014 - February 28, 2014		-	$	-		368,354
March 1, 2014 - March 31, 2014		-	$	-		368,354
		-	$	-

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

ITEM 6. EXHIBITS

(a) Exhibits		Page
31.1	Rule 13a-14(a)/15d-14(a) Certifications of 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: May 6, 2014	BY:	/s/ S. Leslie Jewett
		S. Leslie Jewett
		Executive Vice President
		(Principal Financial and Accounting Officer)