XNAS:CFNB California First National Bancorp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 2012
 
[  ]
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.)
   
18201 Von Karman, Suite 800  
Irvine, California 92612
(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 [x]     No [  ]

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 [  ]     Accelerated filer [  ]     Non-accelerated filer [  ]     Smaller Reporting Company [x]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
 Yes [  ]     No [x]

The number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of April 30, 2012 was 10,420,483.
 
 

 
CALIFORNIA FIRST NATIONAL BANCORP

INDEX

 
 
    PAGE
PART I. FINANCIAL INFORMATION
   NUMBER
   
 
   
 
 
 
 
 
 
   
 
 
   
PART II. OTHER INFORMATION
 
   
25
25
26

 
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,
2012
   
June 30,
2011
 
   
(Unaudited)
       
ASSETS
           
             
Cash and due from banks
  $ 45,963     $ 97,302  
Securities available-for-sale
    59,464       62,704  
Investment securities
    3,213       3,617  
Net receivables
    1,851       2,198  
Property acquired for transactions in process
    23,453       29,199  
Leases and loans:
               
Leases
    251,302       226,426  
Commercial loans
    87,045       95,797  
Allowance for credit losses
    (5,117 )     (5,049 )
Net investment in leases and loans
    333,230       317,174  
                 
Net property on operating leases
    834       1,191  
Income taxes receivable
    927       1,378  
Other assets
    900       1,204  
Discounted lease rentals assigned to lenders
    4,527       8,448  
    $ 474,362     $ 524,415  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Liabilities:
               
Accounts payable
  $ 3,433     $ 1,338  
Accrued liabilities
    3,102       3,042  
Demand and money market deposits
    79,382       88,633  
Time certificates of deposit
    162,712       186,142  
Short-term borrowings
    -       10,000  
Lease deposits
    1,962       2,749  
Non-recourse debt
    4,527       8,448  
Deferred income taxes – including income taxes payable, net
    24,805       24,441  
      279,923       324,793  
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
Preferred stock; 2,500,000 shares authorized; none issued
    -       -  
Common stock; $.01 par value; 20,000,000 shares authorized; 10,420,483 (March 2012) and 10,417,597 (June 2011) issued and outstanding
     104        104  
Additional paid in capital
    2,884       2,849  
Retained earnings
    190,367       195,162  
Accumulated other comprehensive income, net of tax
    1,084       1,507  
      194,439       199,622  
    $ 474,362     $ 524,415  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
3

 
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,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Direct finance and loan income
  $ 5,011     $ 5,992     $ 15,415     $ 16,844  
Investment interest income
    750       914       2,394       2,509  
Total direct finance, loan and interest income
    5,761       6,906       17,809       19,353  
                                 
Interest expense
                               
Deposits
    636       829       2,215       2,510  
Borrowings
    -       52       111       158  
Net direct finance, loan and interest income
    5,125       6,025       15,483       16,685  
Provision for credit losses
    -       250       -       1,025  
                                 
Net direct finance, loan and interest income after provision for credit losses
    5,125       5,775       15,483       15,660  
                                 
Non-interest income
                               
Operating and sales-type lease income
    602       333       2,378       1,578  
Gain on sale of leases and leased property
    545       1,780       1,660       2,527  
Realized gain on securities available-for-sale
    -       940       56       2,342  
Other fee income
    252       190       470       590  
Total non-interest income
    1,399       3,243       4,564       7,037  
                                 
Gross profit
    6,524       9,018       20,047       22,697  
                                 
Non-interest expenses
                               
Compensation and employee benefits
    2,236       2,261       6,736       6,464  
Occupancy
    224       238       702       712  
Professional services
    148       136       420       377  
Other
    499       460       1,435       1,503  
Total non-interest expenses
    3,107       3,095       9,293       9,056  
                                 
Earnings before income taxes
    3,417       5,923       10,754       13,641  
                                 
Income taxes
    1,299       2,266       4,087       5,218  
                                 
Net earnings
  $ 2,118     $ 3,657     $ 6,667     $ 8,423  
                                 
Basic earnings per common share
  $ 0.20     $ 0.36     $ 0.64     $ 0.82  
                                 
Diluted earnings per common share
  $ 0.20     $ 0.35     $ 0.64     $ 0.81  
                                 
Weighted average common shares outstanding
    10,420       10,301       10,420       10,276  
                                 
Diluted common shares outstanding
    10,430       10,394       10,429       10,368  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
4

 
CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

   
Nine months ended
March 31,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net Earnings
  $ 6,667     $ 8,423  
Adjustments to reconcile net earnings to cash flows provided by (used for) operating activities:
               
Provision for credit losses
    -       1,025  
Depreciation and net amortization (accretion)
    (724 )     (2,050 )
Gain on sale of leased property and sales-type lease income
    (722 )     (1,264 )
Net gain recognized on investment securities
    (56 )     (2,342 )
Deferred income taxes, including income taxes payable
    599       7,458  
Decrease in income taxes receivable
    451       762  
Net increase in accounts payable and accrued liabilities
    2,155       2,063  
Other, net
    (370 )     (3,424 )
Net cash provided by operating activities
    8,000       10,651  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Investment in leases, loans and transactions in process
    (135,178 )     (213,380 )
Payments received on lease receivables and loans
    123,025       158,799  
Proceeds from sales of leased property and sales-type leases
    4,165       4,336  
Purchase of investment securities
    (11,249 )     (24,346 )
Pay down on investment securities
    10,677       2,841  
Proceeds from sale of investment securities
    3,067       25,950  
Net decrease in other assets
    262       113  
Net cash used for investing activities
    (5,231 )     (45,687 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net (decrease) increase in time certificates of deposit
    (23,430 )     44,903  
Net (decrease) increase in demand and money market deposits
    (9,251 )     11,265  
Net decrease in short-term borrowings
    (10,000 )     -  
Dividends to stockholders
    (11,462 )     (10,289 )
Proceeds from exercise of stock options
    35       620  
Net cash (used for) provided by financing activities
    (54,108 )     46,499  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (51,339 )     11,463  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    97,302       73,988  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 45,963     $ 85,451  
                 
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
               
Decrease in lease rentals assigned to lenders and related non-recourse debt
  $ (3,921 )   $ (4,365 )
Estimated residual values recorded on leases
  $ (2,453 )   $ (2,832 )
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Net cash paid during the nine month period for:
               
Interest
  $ 2,475     $ 2,712  
Income Taxes
  $ 3,087     $ 869  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
5

 
CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands, except for share amounts)

   
Shares
   
Amount
   
Additional
Paid in
Capital
   
Retained
Earnings
   
Other
Comprehensive
Income
   
Total
 
                                     
Nine months ended March 31, 2011
                                   
                                     
Balance, June 30, 2010
    10,240,202     $ 102     $ 1,224     $ 194,543     $ 2,679     $ 198,548  
                                                 
Comprehensive income
                                               
Net earnings
    -       -       -       8,423       -       8,423  
Unrealized gain on investment securities, net of tax
    -       -       -       -       211       211  
Reclassification adjustment – realized gains on investment securities included in net income, net of tax
    -       -       -       -       (1,446 )     (1,446 )
Total comprehensive income
                                            7,188  
                                                 
Shares issued - Stock options exercised
    61,963       1       619       -       -       620  
                                                 
Dividends declared
    -       -       -       (10,289 )     -       (10,289 )
                                                 
Balance, March 31, 2011
    10,302,165     $ 103     $ 1,843     $ 192,677     $ 1,444     $ 196,067  
 
 
Nine months ended March 31, 2012
                                   
                                     
Balance, June 30, 2011
    10,417,597     $ 104     $ 2,849     $ 195,162     $ 1,507     $ 199,622  
                                                 
Comprehensive income
                                               
Net earnings
    -       -       -       6,667       -       6,667  
Unrealized gain on investment securities, net of tax
    -       -       -       -       (388 )     (388 )
Reclassification adjustment – realized gains on investment securities included in net income, net of tax
    -       -       -       -       (35 )     (35 )
Total comprehensive income
                                            6,244  
                                                 
Shares issued - Stock options exercised
    2,886       -       35       -       -       35  
                                                 
Dividends declared
    -       -       -       (11,462 )     -       (11,462 )
                                                 
Balance, March 31, 2012
    10,420,483     $ 104     $ 2,884     $ 190,367     $ 1,084     $ 194,439  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
6

 
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, 2011. 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 2011 Annual Report on Form 10-K, which contains Management’s Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2011 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, 2012 and the statements of earnings, cash flows and stockholders’ equity for the three and nine-month periods ended March 31, 2012 and 2011. The results of operations for the three and nine month periods ended March 31, 2012 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending June 30, 2012

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted. This guidance is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. Adoption of this guidance did not have a material impact on the consolidated financial statements.
 
In June 2011, FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” This ASU requires an entity that reports items of other comprehensive income to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-12.  ASU 2011-12 defers the provisions of ASU 2011-05 that require the presentation of reclassification adjustments on the face of both the statement of income and statement of other comprehensive income.  Amendments under ASU 2011-05 that were not deferred under ASU 2011-12 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Adoption of these updates will not have a material impact on the consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The amendments in ASU 2011-11 require the disclosure of information on offsetting and related arrangements for financial instruments to enable users of its financial statements to understand the effect of those arrangements on its financial position.  Amendments under ASU 2011-11 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after January 1, 2013. Adoption of this update will not have a material impact on the consolidated financial statements.

NOTE 3 – STOCK-BASED COMPENSATION

At March 31, 2012, the Company has one stock option plan, which is more fully described in Note 14 in the Company’s 2011 Annual Report on Form 10-K.  The Company has not awarded any new grants since fiscal 2004 and has not recognized compensation expense related to unvested shares since September 2008.
 
7

 
The following table summarizes the stock option activity for the periods indicated:
 
   
Nine months ended
 
   
March 31, 2012
   
March 31, 2011
 
   
 
Shares
   
Weighted
Average
 Exercise Price
   
 
Shares
   
Weighted
Average
 Exercise Price
 
Options outstanding & exercisable at beginning of period
    42,327       $    12.17       219,722       $    7.90  
Exercised
    ( 2,886 )     12.13       ( 61,963 )     10.01  
Canceled/expired
    -       -       -       -  
Options outstanding & exercisable at end of period
    39,441       $    12.17       157,759       $    7.08  

As of March 31, 2012
Options exercisable and outstanding
Range of
Exercise prices
 
Number
 
Weighted Average
Remaining Contractual
Life (in years)
Weighted Average
Exercise Price
$  9.96   - $ 12.49
 
39,441
 
0.08
$  12.17

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, 2012, there were no liabilities subject to ASC 820. 
 
Securities available-for-sale include corporate bonds, municipal bonds, and 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 March 31, 2012 and June 30, 2011:
 
8

 
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, 2012
                       
Corporate debt securities
  $ 56,692     $ -     $ 56,692     $ -  
Securities of state and political subdivisions
    880       -       880       -  
Mutual fund investments
    1,340       1,340       -       -  
Equity investment
    552       552       -       -  
    $ 59,464     $ 1,892     $ 57,572     $ -  
                                 
As of June 30, 2011
                               
Corporate debt securities
  $ 60,082     $ -     $ 60,082     $ -  
Securities of state and political subdivisions
    887       -       887       -  
Mutual fund investments
    1,208       1,208       -       -  
Equity investment
    527       527       -       -  
    $ 62,704     $ 1,735     $ 60,969     $ -  

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, 2012 and June 30, 2011.
 
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, 2012, and June 30, 2011, 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 that 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, demand deposits, short-term borrowings, and certain commercial loans that re-price frequently, the fair value is estimated to equal the carrying cost.  Values for investments and available-for-sale securities are determined as set forth in Note 4 and 7.  The fair value of loan participations that trade in the secondary market is based upon current bid prices in such market at the measurement date.  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.  These calculations have been adjusted for credit risk based on the Company’s historical credit loss experience.  The fair value of certificates of deposit and long-term borrowings is estimated based on discounted cash flows using current offered market rates or interest rates for borrowings of similar maturity.

The estimated fair values of financial instruments were as follows:

   
March 31, 2012
   
June 30, 2011
 
   
Carrying
Amount
   
Estimated
Fair Value
   
Carrying
Amount
   
Estimated
Fair Value
 
   
(in thousands)
 
Financial Assets:
                       
Cash and cash equivalents
  $ 45,963     $ 45,963     $ 97,302     $ 97,302  
Investments
    3,213       3,249       3,617       3,672  
Securities available-for-sale
    59,464       59,464       62,704       62,704  
Commercial loans
    84,973       85,096       93,725       93,856  
Financial Liabilities:
                               
Demand and savings deposits
    79,382       79,382       88,633       88,633  
Time certificate of deposits
    162,712       162,930       186,142       186,467  
Short-term borrowings
  $ -     $ -     $ 10,000     $ 10,096  

 
9

 
NOTE 6 – INVESTMENTS:

Investments are carried at cost and consist of the following:

   
March 31, 2012
   
June 30, 2011
 
   
Carrying Cost
   
Fair Value
   
Carrying Cost
   
Fair Value
 
   
(dollars in thousands)
 
Federal Reserve Bank Stock
  $ 1,655     $ 1,655     $ 1,655     $ 1,655  
Federal Home Loan Bank Stock
    1,181       1,181       1,361       1,361  
Mortgage-backed investments
    377       413       601       656  
    $ 3,213     $ 3,249     $ 3,617     $ 3,672  

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 investments consist of two U.S. agency issued securities.  The Company has determined that it has the ability to hold these investments 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 securities at amortized cost.

NOTE 7 – SECURITIES AVAILABLE-FOR-SALE:

The amortized cost and fair value of securities at March 31, 2012 were as follows:

(in thousands)
 
Amortized
   
Gross Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Corporate debt securities
  $ 55,226     $ 1,491     $ (25 )   $ 56,692  
Securities of state and political subdivisions
    851       29       -       880  
Mutual fund investments
    1,306       34       -       1,340  
Equity investments
    422       130       -       552  
Total securities available-for-sale
  $ 57,805     $ 1,684     $ (25 )   $ 59,464  

The amortized cost and fair value of securities at June 30, 2011 were as follows:

(in thousands)
 
Amortized
   
Gross Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Corporate debt securities
  $ 57,791     $ 2,291     $ -     $ 60,082  
Securities of state and political subdivisions
    867       20       -       887  
Mutual fund investments
    1,306       -       (98 )     1,208  
Equity investments
    422       105       -       527  
Total securities available-for-sale
  $ 60,386     $ 2,416     $ (98 )   $ 62,704  

The amortized cost and estimated fair value of available-for-sale securities at March 31, 2012, 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
  $ 7,314     $ 7,365  
Due after one year but less than 5 years
    48,763       50,207  
Due after five years
    -       -  
No stated maturity
    1,728       1,892  
Total securities available-for-sale
  $ 57,805     $ 59,464  
 
10

 
Gross realized gains and gross realized losses on securities available-for-sale are summarized below. During the nine months ended March 31, 2012, the Company realized a gain of $56,000 from the early call of a corporate bond for proceeds of $3.1 million.  During the nine months ended March 31, 2011, the Company realized gains of $2.3 million on the sale of U.S. Treasury securities, mutual fund investments and the exercise of a call provision on a corporate bond. Proceeds from the sales and call were $25.9 million. These net gains are recognized using the specific identification method and are included in non-interest income.

   
Nine months ended
March 31,
 
   
2012
   
2011
 
   
(in thousands)
 
Gross realized gains
  $ 56     $ 2,342  
Gross realized losses
    -       -  
Total
  $ 56     $ 2,342  

The following table presents the fair value and associated gross unrealized losses on securities with unrealized losses, aggregated by investment category and length of time the individual securities have been in continuous unrealized loss positions, at March 31, 2012 and June 30, 2011.

   
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, 2012
                                   
Corporate debt security
  $ (25 )   $ 6,202     $ -     $ -     $ (25 )   $ 6,202  
Total
  $ (25 )   $ 6,202     $ -     $ -     $ (25 )   $ 6,202  
                                                 
At June 30, 2011
                                               
Mutual fund investment
  $ (98 )   $ 1,208     $ -     $ -     $ (98 )   $ 1,208  
Total
  $ (98 )   $ 1,208     $ -     $ -     $ (98 )   $ 1,208  

The decline in value of the corporate debt security primarily relates to changes in market spread for securities acquired of a foreign issuer. We evaluated the financial performance of the issuer to determine that the issuer can make all contractual principal and interest payments, and based upon this assessment, we expect to recover the entire amortized cost basis of this security. The Company has the ability and intent to retain all the investment for a sufficient time to recover its investment.

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. As of March 31, 2012, no securities were other-than-temporarily impaired.

NOTE 8 – NET INVESTMENT IN LEASES

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

   
March 31, 2012
   
June 30, 2011
 
   
(in thousands)
 
Minimum lease payments receivable
  $ 253,403     $ 229,677  
Estimated residual value
    18,450       18,585  
Less unearned income
    (20,551 )     (21,836 )
Net investment in leases before allowances
    251,302       226,426  
Less allowance for lease losses
    (2,964 )     (2,896 )
Less valuation allowance for estimated residual value
    (81 )     (81 )
Net investment in leases
  $ 248,257     $ 223,449  

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 $3.7 million and $4.1 million at March 31, 2012 and June 30, 2011, respectively.
 
11

 
NOTE 9 – COMMERCIAL LOANS

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

   
March 31, 2012
   
June 30, 2011
 
   
(in thousands)
 
Commercial term loans
  $ 70,739     $ 78,353  
Commercial real estate loans
    13,864       16,425  
Revolving lines of credit
    3,242       2,148  
Total commercial loans
    87,845       96,926  
Less unearned income and discounts
    (800 )     (1,129 )
Less allowance for loan losses
    (2,072 )     (2,072 )
Net commercial loans
  $ 84,973     $ 93,725  

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.

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.  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, transactions in process or residual values.   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.

 
12

 
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, 2012:
                             
Pass
  $ 143,333     $ 81,375     $ 65,810     $ -     $ 290,518  
Special Mention
    6,247       2,100       7,403       5,741       21,491  
Substandard
    2,109       375       -       8,091       10,575  
Doubtful
    154       2       -       -       156  
    $ 151,843     $ 83,852     $ 73,213     $ 13,832     $ 322,740  
Non-accrual
  $ 138     $ 77     $ -     $ -     $ 215  
                                         
As of June 30, 2011:
                                       
Pass
  $ 112,588     $ 79,994     $ 79,417     $ -     $ 271,999  
Special Mention
    10,928       3,101       -       4,934       18,963  
Substandard
    3,094       1,073       -       11,446       15,613  
Doubtful
    181       2       -       -       183  
    $ 126,791     $ 84,170     $ 79,417     $ 16,380     $ 306,758  
Non-accrual
  $ 550     $ 491     $ -     $ -     $ 1,041  

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)
 
30-89
Days
   
Greater
Than
90 Days
   
Total
Past Due
   
Current
   
Total
Financing
Receivable
   
Over 90
Days &
Accruing
 
                                       
As of March 31, 2012:
                                     
Commercial Leases
  $ 225     $ -     $ 225     $ 151,618     $ 151,843     $ -  
Education, Government, Non-profit Leases
    1,411       -       1,411       82,441       83,852       -  
Commercial and Industrial Loans
    -       -       -       73,213       73,213       -  
Commercial Real Estate Loans
    -       -       -       13,832       13,832       -  
    $ 1,636     $ -     $ 1,636     $ 321,104     $ 322,740     $ -  
                                                 
As of June 30, 2011:
                                               
Commercial Leases
  $ -     $ 20     $ 20     $ 126,771     $ 126,791     $ 20  
Education, Government, Non-profit Leases
    -       -       -       84,170       84,170       -  
Commercial and Industrial Loans
    -       -       -       79,417       79,417       -  
Commercial Real Estate Loans
    -       -       -       16,380       16,380       -  
    $ -     $ 20     $ 20     $ 306,738     $ 306,758     $ 20  
 
13

 

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 and for the nine months ended March 31, 2012 and as of and for the year ended June 30, 2011:

(in thousands)
 
Commercial
Leases
   
Education
Government
& Non-profit
Leases
   
Commercial
& Industrial
Loans
   
Commercial
Real Estate
Loans
   
Total
Financing
Receivable
 
As of March 31, 2012:
                             
Allowance for lease and loan losses
                             
Balance beginning of period
  $ 2,019     $ 877     $ 1,561     $ 511     $ 4,968  
Charge-offs
    (24 )     -       -       -       (24 )
Recoveries
    92       -       -       -       92  
Provision
    -       -       -       -       -  
Balance end of period
  $ 2,087     $ 877     $ 1,561     $ 511     $ 5,036  
                                         
Individually evaluated for impairment
  $ 426     $ 55     $ -     $ -     $ 481  
Collectively evaluated for impairment
    1,661       822       1,561       511       4,555  
Total ending allowance balance
  $ 2,087     $ 877     $ 1,561     $ 511     $ 5,036  
                                         
Finance receivables
                                       
Individually evaluated for impairment
  $ 2,814     $ 484     $ -     $ -     $ 3,298  
Collectively evaluated for impairment
    149,029       83,368       73,123       13,832       319,442  
    $ 151,843     $ 83,852     $ 73,123     $ 13,832     $ 322,740  
                                         
As of June 30, 2011:
                                       
Allowance for lease and loan losses
                                       
Balance beginning of period
  $ 1,772     $ 797     $ 1,321     $ 201     $ 4,091  
Charge-offs
    (192 )     (49 )     -       -       (241 )
Recoveries
    14       129       -       -       143  
Provision
    425       -       240       310       975  
Balance end of period
  $ 2,019     $ 877     $ 1,561     $ 511     $ 4,968  
                                         
Individually evaluated for impairment
  $ 591     $ 104     $ -     $ -     $ 695  
Collectively evaluated for impairment
    1,428       773       1,561       511       4,273  
Total ending allowance balance
  $ 2,019     $ 877     $ 1,561     $ 511     $ 4,968  
                                         
Finance receivables
                                       
Individually evaluated for impairment
  $ 4,004     $ 781     $ -     $ -     $ 4,785  
Collectively evaluated for impairment
    122,787       83,389       79,417       16,380       301,973  
Total ending finance receivable balance
  $ 126,791     $ 84,170     $ 79,417     $ 16,380     $ 306,758  

NOTE 11 – BORROWINGS

CalFirst Bank is a member of the Federal Home Loan Bank of San Francisco (“FHLB”) and, as such can take advantage of FHLB programs for overnight and term advances at published daily rates.  Under terms of a blanket collateral agreement, advances from the FHLB are collateralized by qualifying investment securities.  The Bank also has authority to borrow from the Federal Reserve Bank (“FRB”) discount window amounts secured by certain lease receivables.  Prior to December 31, 2011, the $10 million borrowed from the FHLB, classified as short-term at June 30, 2011, was paid off and the Bank has no current borrowings. CalFirst Bank has $2.4 million borrowing availability under the FHLB and unused borrowing availability of approximately $76.8 million from the FRB, secured by $102.0 million of lease receivables.
 
14

 
Borrowing capacity from the FHLB or FRB may fluctuate based upon the acceptability and risk rating of securities, loan and lease collateral and both the FRB and FHLB could adjust advance rates applied to such collateral at their discretion.
 
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 nine months ended March 31, 2012 and 2011:

   
CalFirst
Leasing
   
CalFirst
Bank
   
Bancorp and
Eliminating
Entries
   
Consolidated
 
   
(in thousands)
 
Quarter ended March 31, 2012
                       
Net direct, loan and interest income after provision for credit losses
  $ 2,168     $ 2,942     $ 15     $ 5,125  
Non-interest income
    1,251       148       -       1,399  
Gross profit
  $ 3,419     $ 3,090     $ 15     $ 6,524  
Net income
  $ 1,322     $ 858     $ (62 )   $ 2,118  
                                 
Quarter ended March 31, 2011
                               
Net direct finance, loan and interest income after provision for credit losses
  $ 2,372     $ 3,355     $ 48     $ 5,775  
Non-interest income
    2,953       290       -       3,243  
Gross profit
  $ 5,325     $ 3,645     $ 48     $ 9,018  
Net earnings
  $ 2,092     $ 1,694     $ (129 )   $ 3,657  
                                 
Nine months ended March 31, 2012
                               
Net direct, loan and interest income after provision for credit losses
  $ 6,093     $ 9,314     $ 76     $ 15,483  
Non-interest income
    4,250       314       -       4,564  
Gross profit
  $ 10,343     $ 9,628     $ 76     $ 20,047  
Net income
  $ 3,640     $ 3,394     $ (367 )   $ 6,667  
                                 
Nine months ended March 31, 2011