ITEM 1. BUSINESS
California First National Bancorp, a California corporation (the "Company"), is a bank holding company headquartered in Orange County, California with leasing and bank subsidiaries. The Company has two leasing subsidiaries, California First Leasing Corporation ("CalFirst Leasing") and Amplicon, Inc. ("Amplicon"), collectively the "Leasing Companies". The Company has a bank subsidiary, California First National Bank ("CalFirst Bank" or the "Bank"), which is an FDIC-insured national bank.
	 The Leasing Companies and CalFirst Bank focus on leasing and financing capital assets, primarily computers, computer networks and other high technology assets, through centralized marketing programs designed to offer cost-effective leasing alternatives. Leased assets are re-marketed at lease expiration. CalFirst Bank also provides business loans to fund the purchase of assets leased by third parties, including the Leasing Companies. CalFirst Bank gathers deposits from a centralized location primarily through posting rates on the Internet.
Forward-Looking Statements
This Form 10-K contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and certain factors could cause actual results to differ materially from those anticipated. Factors that might affect forward-looking statements include, among other things:
General economic or industry conditions could be less favorable than expected, resulting in a reduced demand for capital assets, deterioration in credit quality, deterioration in the recoverability of our investment in leased property and lease residual values, and a change in the allowance for lease losses;
Changes in the domestic interest rate environment could reduce net interest income and negatively affect certain lessees, which could increase lease losses;
As CalFirst Bank grows and represents a greater portion of the Company’s assets, the Company’s sensitivity to changes in interest rates will increase;
The Company's subsidiaries have retained an increasing number of lease transactions in their own portfolios which has increased the Company's exposure to credit risk;
CalFirst Bank may not attract or retain sufficient deposits at attractive interest rates to fund its lease portfolio, and therefore could require additional investment by the Company and produce lower lease growth;
Security breaches, systems failures, computer viruses or other similar events could damage CalFirst Bank's reputation, or Internet banks in general, and inhibit the ability to raise deposits;
The conditions of the securities markets could change, adversely affecting certain lessees and the value or credit quality of the Company's assets, or the availability and terms of non-recourse financing obtained to complete certain lease transactions;
The Company's Common Stock trades on the NASDAQ National Market System, but the volume of trading has been limited and the low volume of trading limits the liquidity of the Common Stock;
Changes in the extensive laws, regulations and policies governing financial services companies could alter the Company's business environment or affect operations;
Catastrophic events could impair the Company's business operations or systems, or that of its lessees, resulting in losses;
All the above factors could impact the Company's ability to remain in compliance with commitments made to federal bank regulators in connection with the formation of CalFirst Bank.
The result of these and other factors could cause a difference from expectations of the risk characteristics of the lease portfolio, the level of defaults and a change in the provision for lease losses. Forward-looking statements speak only as of the date made. The Company undertakes no obligations to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.
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Leasing Activities
The Company leases most capital assets used by businesses and organizations, with a focus on high technology equipment and software systems. The leases are structured individually and can provide end-of-term options to accommodate a variety of our customers' objectives. Approximately 45% and 56% of the leases booked in fiscal 2005 and 2004, respectively, involved computer workstations and networks, mid-range computers, computer automated design systems and computer software. Other major property groups during fiscal 2005 included furniture and fixtures (11%), manufacturing equipment (9%), medical equipment (9%) and telecommunications systems (7%).
Computer Systems.
Advances in technology, including the rapidly expanding capabilities of personal computer systems and the Internet, have led to continued demand for more powerful computer servers and communications networks. Computer networks typically consist of a central server, which may be a mid-range computer or high-end microcomputer, multiple personal computers and workstations, network communications hardware and software, printers and associated products. Computer networks generally range in cost from $100,000 to $3,000,000. The leased property is used primarily by middle-market companies for centralized data processing, by subsidiaries and divisions of large companies to supplement mainframe computer systems, and by non-profit associations and institutions.
The computer systems and network products leased are manufactured by Apple Computers, Inc. ("Apple"), Cisco Systems, Inc. ("Cisco"), Dell Inc. ("Dell"), Gateway, Inc. ("Gateway"), Hewlett-Packard Company ("HP"), International Business Machines Corporation ("IBM"), and Sun Microsystems, Inc. ("Sun"), among many others.
	 Software. Specialized application software packages and operating system software products represent an increasing portion of property leased. These application software packages typically range in cost from $50,000 to $1,000,000. In addition to leasing stand-alone software packages, an increasing percentage of the cost of computer systems and networks consists of operating and application software. The software leased is acquired from vendors such as Microsoft Corporation, Oracle Corporation, J.D. Edwards & Company, Jenzabar, Inc., Parametric Technology Corporation, PeopleSoft, Inc., Geac Computer Corporation Limited, MSC.Software Corporation, and SAP AG, among many others.
	 Other Electronic Equipment. Advances in microcomputer technology have also expanded the scope of other electronic equipment utilized by the targeted customer base. Retail point-of-sale systems include those produced by IBM, Knogo Corporation, NCR Corporation ("NCR"), and Fujitsu Limited, while bank automated teller machines also have been procured from NCR. Telecommunications property leased includes digital private branch equipment, switching equipment and voice mail systems manufactured by Lucent Technologies Inc., NEC Corporation, Nortel Networks Limited, and Siemens Information and Communications Networks, Inc., as well as satellite tracking systems manufactured by QUALCOMM Incorporated. Other electronic equipment leased includes imaging systems, testing equipment, and copying equipment.
	 Production Equipment and Other Personal Property.
Leased property also includes technology-related manufacturing and distribution management systems that include complex computer controlled manufacturing and production systems, printing presses and warehouse distribution systems. In addition, a wide variety of personal property in the “non-high technology” area, including machine tools, trucks and office furniture are also leased.
	 Marketing Strategy
	 The Company's subsidiaries market through centralized marketing programs and direct delivery channels, including the telephone, the Internet, facsimile and express mail. The marketing programs include a confidential database of current and potential users of business property, a training program to introduce new marketing employees to leasing, and an in-house computer and telecommunications system. The marketing programs have been augmented through the development of interactive web sites that enable prospective customers to review a lease agreement, calculate lease payments and submit a credit application on-line.
	 The Company believes that a centralized marketing program is more cost effective than field sales representatives. Marketing through the telephone or the Internet, rather than through field sales representatives, has enabled us to limit selling, general and administrative expenses and allows the Company to offer more competitive lease rates to customers.
	 Potential customers are identified through a variety of methods. Lists of target market participants and computer users are purchased from private sources, direct mail and telephone campaigns are conducted to generate sales leads, and proprietary records of contacts made with potential customers are maintained by sales professionals. Prospect management software is utilized to enhance the productivity of the sales force. Specific information about potential customers is entered into a confidential database accessible to sales professionals and their
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managers. As potential customers are contacted, the database is updated and supplemented with information about what computer and other property they are using, related lease expiration dates and any future system needs or replacement plans. The database allows sales professionals to efficiently identify the most likely purchaser or lessee of capital assets and to concentrate efforts on these prospective customers.
	 The databases, combined with the respective prospect management software and an integrated in-house telecommunications system, permit sales management to monitor account executive activity, daily prospect status and pricing information. The ability to monitor account activity and offer immediate assistance in negotiating or pricing a transaction makes it possible to be responsive to customers and prospects.
	 Capital Leases
	 Leases are generally for initial terms ranging from two to five years. Substantially all leases are non-cancelable "net" leases which contain "hell-or-high-water" provisions under which the lessee must make all lease payments regardless of any defects in the property, and which require the lessee to maintain and service the property, insure the property against casualty loss and pay all property, sales and other taxes. The Leasing Companies or the Bank retain ownership of the property they lease, and in the event of default by the lessee, they, or the lender to whom the lease may have been assigned, may declare the lessee in default, accelerate all lease payments due under the lease and pursue other available remedies, including repossession of the property. Upon the expiration of the leases, the lessee typically has an option, which is dependent upon each lease's defined end of term options, to either purchase the property at a negotiated price, or in the case of a "conditional sales contract," at a predetermined minimum price, or to renew the lease. If the original lessee does not exercise the purchase option, once the leased property is returned, the Leasing Companies or CalFirst Bank will seek to sell the leased property. The terms of the software leases are substantially similar to equipment leases.
	 The Leasing Companies and CalFirst Bank conduct their leasing business in a manner designed to minimize risk, however, they are subject to risks through their investment in lease receivables held in their own portfolio, lease transactions in process, and residual investments. The Leasing Companies and CalFirst Bank do not purchase leased property until they have received a binding non-cancelable lease from the customer. A portion of the Leasing Companies' lease originations are discounted to banks or finance companies, including CalFirst Bank, on a non-recourse basis at fixed interest rates that reflect the customers' financial condition. The lender to which a lease has been assigned has no recourse against the Leasing Companies, unless the Leasing Companies are in default under the terms of the agreement by which the lease was assigned. The institution to which a lease has been assigned may take title to the leased property, but only in the event the lessee fails to make lease payments or otherwise defaults under the terms of the lease. If this occurs, the Leasing Companies may not realize their residual investment in the leased property.
	 Lease Portfolio
	 The Company has pursued a strategy of retaining lease transactions in its own portfolios. During the fiscal years ended June 30, 2005, 2004 and 2003, 93%, 88% and 91%, respectively, of the total dollar amount of new leases completed by the Company's subsidiaries were retained in the Company's portfolios, with 7%, 12% and 9% for fiscal years 2005, 2004 and 2003, respectively, of such leases discounted to unaffiliated financial institutions. Approximately 18% and 8% of the new leases booked by the Leasing Companies were assigned to CalFirst Bank during fiscal 2005 and 2004, respectively.
	 The Leasing Companies apply a portfolio management system intended to develop portfolios with different risk/reward profiles. Each lease transaction held by the Leasing Companies must meet or exceed certain credit or profitability requirements established, on a case-by-case basis, by the credit committee for the portfolio. Through the use of non-recourse financing, the Leasing Companies avoid risks that do not meet their risk/reward requirements. Certain portfolios hold leases where the credit profile of the lessee or the value of the underlying leased property is not acceptable to other financial institutions. At June 30, 2005, 2004, and 2003, the discounted minimum lease payments receivable related to leases retained in the Leasing Companies' portfolio amounted to $108.3 million, $99.9 million and $100.3 million, respectively. Such amounts represented 61%, 71% and 76% of the Company's total investment in discounted lease payments receivable at June 30, 2005, 2004 and 2003, respectively.
The Bank's strategy is to develop a conservative, diversified portfolio of leases with high credit quality lessees. The Bank's loan committee has established underwriting standards and criteria for the lease portfolio and monitors the portfolio on an ongoing basis. The Bank performs an independent credit analysis and due diligence on each lease transaction originated or purchased. The committee applies the same underwriting standards to all leases, regardless of how they are sourced. At June 30, 2005, 2004 and 2003, the Bank's investment in discounted lease payments receivable amounted to $68.0 million, $41.7 million and $32.3 million or 39%, 29% and 34%, respectively, of the Company's total portfolio. Of such amounts, approximately 74%, 71% and 63%, respectively, represented leases originated directly by the Bank.
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Through its lease purchase operations, the Bank purchases lease receivables on a non-recourse basis at fixed interest rates that reflect the proposed lessee's financial condition and current market conditions. The Bank does not assume any obligations as lessor for these transactions, and the original lessor retains ownership of any underlying asset, with the Bank taking a priority first lien position. The Bank verifies the completeness of all lease documentation prior to purchase, to confirm that all documentation is correct and held, that liens have been perfected, and legal documentation has been filed as appropriate. Pursuant to the Bank's operating plan approved by regulators, no more than 50% of its lease portfolio will represent purchases of lease receivables from the Leasing Companies.
The Leasing Companies and the Bank often make payments to purchase leased property prior to the commencement of the lease. The disbursements for such lease transactions in process are generally made to facilitate the property implementation schedule of the lessees. The lessee is contractually obligated to make rental payments during the period that the transaction is in process, and generally is obligated to reimburse the Leasing Companies or the Bank for all disbursements under certain circumstances. At June 30, 2005, 2004, and 2003, the Company's total investment in property acquired for transactions in process amounted to $34.1 million, $30.5 million and $20.3 million, respectively. Of such amounts, approximately 76%, 76% and 93% related to the Leasing Companies, with the balance held by CalFirst Bank.
	 Credit Risk Management
	 The Company's strategy for credit risk management includes stringent credit authority centered at the most senior levels of management. The strategy also emphasizes diversification on both a geographic and customer level, and spreading risk across a breadth of leases while minimizing the risk to any one area. The credit process includes a policy of classifying all leases in accordance with a risk rating classification system, monitoring changes in the risk ratings of lessees, identification of problem leases and special procedures for the collection of problem leases. The lease classification system is consistent with regulatory models under which leases may be rated as "pass", "special mention", "substandard", "doubtful" or "loss".
	 The day-to-day management and oversight of the Leasing Companies' portfolios is conducted by an Asset Management ("AM") group that reports directly to the Chief Financial Officer. The AM group monitors the performance of all leases held in the Leasing Companies' portfolio, transactions in process as well as lease transactions assigned to lenders, if the Leasing Companies retain a residual investment in the leased property subject to the lease. The AM group conducts an ongoing review of all leases 10 or more days delinquent. The AM group contacts the lessee directly and generally sends the lessee a notice of non-payment within 15 days after the due date. In the event that payment is not then received, senior management is involved. Delinquent leases are coded in the AM tracking system in order to provide management visibility, periodic reporting, and appropriate reserves. Legal recourse is considered and promptly undertaken if alternative resolutions are not obtained. At 90 days past due, leases will be placed on non-accrual status such that interest income related to the lease no longer accretes into income.
The Bank internally funds all Bank originations and lease purchases, and consequently, the Bank retains the credit risk on such leases. The AM group at the Leasing Companies provides servicing to the Bank and, as servicer, maintains a delinquency reporting and monitoring system to identify potential problems in the Bank's portfolio early, and provide Bank management with information in a timely manner. Strategies similar to those used on the Leasing Companies' portfolio are utilized by the Bank.
The Bank has developed policies and procedures for identifying and qualifying third-party lessors. In sourcing third-party lease originations, the Bank will target those seasoned leasing companies whose principals are determined to be reputable, ethical and experienced with positive leasing operations histories. The Bank's due diligence, including background checks, qualifications verification and credit evaluation of the lessor firm and its principals, is considered to be as important as that conducted for each lessee.
	 Allowance for Lease Losses
	 The allowance for lease losses is an estimate of probable and assessable losses in the Company's lease portfolios applying the principles of SFAS 5, "Accounting for Contingencies," SFAS 114, "Accounting by Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." The allowance recorded is based on a quarterly review of all leases outstanding and transactions in process. 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 lease portfolio. The primary responsibility for setting reserves resides with the Chief Financial Officer, who reports quarterly to the Company's Audit Committee and Board of Directors regarding overall asset quality, problem leases and the adequacy of valuation allowances.
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	 The Company individually analyzes the net book value of each non-performing or problem lease to determine whether the carrying value is less than or equal to the expected recovery anticipated to be derived from lease payments, additional collateral or residual realization. The amount estimated as unrecoverable is recognized as a reserve specifically identified for the lease. An analysis of the remaining portfolio is conducted, taking into account recent loss experience, known and inherent risks in the portfolio, levels of delinquencies, adverse situations that may affect lessees' ability to repay, trends in volume and current and anticipated economic conditions in the market. This portfolio analysis includes a stratification of the lease portfolio by risk classification and estimation of potential losses based on risk classification. The composition of the portfolio based on risk ratings is monitored, and changes in the overall risk profile of the portfolio is factored into the evaluation of inherent risks in the portfolio. Regardless of the extent of the Company's analysis of customer performance or portfolio evaluation, certain inherent but undetected losses are probable within the lease portfolio. This is due to several factors including inherent delays in obtaining information regarding a lessee's financial condition or change in business conditions; the judgmental nature of individual lease evaluations and classification, and the interpretation of economic trends; volatility of economic or customer-specific conditions affecting the identification and estimation of losses and the sensitivity of assumptions utilized to establish allowances for leases, among other factors. Therefore, an estimated inherent loss not based directly on the specific problem assets is recorded as an unallocated allowance. The level of such unallocated reserve is determined based on a review of prior years' loss experience, and may vary depending on general market conditions. The aggregate allowance in any one period is apportioned between allowance for doubtful accounts and allowance for valuation of residual value.
Bank management reports monthly to the Bank's Board of Directors regarding overall asset quality, the adequacy of valuation allowances and adherence to policies and procedures regarding asset classification and valuation. A key component to the evaluation is the internal lease classification process. The Bank's classification of its assets and the amount of its valuation allowances are subject to review by regulators who can order the establishment of additional loss allowances.
Banking Operations
	 The Bank is focused on gathering deposits from depositors nationwide for the primary purpose of funding its investment in capital leases. The Bank's strategy is to be a low cost producer through marketing its products and services directly to end-users. The Bank believes that its operating costs generally will be lower than those of traditional "bricks and mortar" banks because it does not have the expense of a traditional branch network to generate deposits and conduct operations.
	 Deposit Products
	 The Bank's deposits have been gathered primarily through the Internet and print advertisements in its local market. Other strategies to identify depositors are through direct mail, telephone campaigns, purchase of leads from private sources and more extensive print advertisements. The Bank offers two types of interest-bearing checking accounts, savings accounts and three (3) month to three (3) year certificates of deposit ("CDs") to taxable and IRA depositors. CDs are offered with varying maturities in order to achieve a fair approximation or match of the average life of the Bank's lease portfolio. With leases generally providing for fixed rental rates, a matching fixed rate CD book is intended to allow the Bank to minimize interest rate fluctuation risk. The Bank generally offers interest rates on deposit accounts that are higher than the national average.
	 To open a new account, a customer can complete an on-line enrollment form on the Bank's Web site, or can call the Bank's toll-free customer service number and open an account telephonically. Signature cards and deposits are then mailed to the Bank. Customers can make deposits by wire transfer, via direct deposit programs, or by mail. No teller line is maintained. The Bank's customers have 24-hour access to account information. Customers can view their banking records and current balances, and transfer funds between accounts through the use of personal computers. They can also pay bills on-line. Each customer automatically receives a free ATM card upon opening an account. In order to obtain cash, the Bank's customers use other banks' automated teller machines that are affiliated with the Plus™ system. The Bank generally will reimburse customers for some portion of any ATM fees charged by other financial institutions. The Bank believes that any inconvenience resulting from the Bank not maintaining automated teller machines or a local branch office will be offset by the Bank's higher investment yields and lower banking fees.
	 Operations
	 The Bank's operations have been developed by outsourcing certain principal operational functions to leading bank industry service providers and by sharing established systems utilized by the Leasing Companies or the Company. Outsourced systems include the Bank's core processing and electronic banking system, electronic bill payment systems and depositary services, including item processing. The Bank believes it benefits from the service provider's expertise and investments in developing technology. A critical element to the Bank's
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success is the ability to provide secure transmission of confidential information over the Internet. The Bank's service providers utilize sophisticated technology to provide maximum security. All banking transactions are encrypted and all transactions are routed from the Internet server through a "firewall" that limits access to the Bank's and service provider's systems. Systems are in place to detect attempts by third parties to access other users' accounts and feature a high degree of physical security, secure modem access, service continuity and transaction monitoring.
	 The Leasing Companies provide certain services to the Bank pursuant to formal agreements, including servicing the Bank's lease portfolio on the Bank's behalf.
Investments
	 In addition to leases, the Company had total investments of $44.8 million at June 30, 2005, which includes interest-bearing deposits with banks, money market securities, federal funds sold, Federal Reserve Bank stock and other investments, compared to $68.8 million at June 30, 2004. The Company is also authorized to invest in high-quality United States agency obligations, mortgage pool securities, and investment grade corporate bonds.
Customers
	 Leasing customers are primarily middle-market companies, subsidiaries and divisions of Fortune 1000 companies and organizations and institutions located throughout the United States with credit ratings acceptable to the Leasing Companies, CalFirst Bank or unaffiliated lenders providing non-recourse loans. The Company does not believe that the loss of any one customer would have a material adverse effect on all of its operations taken as a whole.
	 The Bank's deposit customers are individuals from across the nation who place a substantial portion of their savings in safe, government-insured investments and businesses that spread their liquid investments among a breadth of banks in order to ensure that they are government insured. Such depositors are seeking to maximize their interest income and, therefore, are more inclined to move their investments to a bank that offers the highest yield regardless of the geographic location of the depository.
Competition
	 The Company competes for the lease financing of capital assets with other independent leasing companies, commercial finance companies, banks and other financial institutions, credit companies affiliated with equipment manufacturers, such as IBM, Dell, and HP, and equipment brokers and dealers. Many of the Company's competitors have substantially greater resources, capital, and more extensive and diversified operations than the Company. The Company believes that the principal competitive factors are rate, responsiveness to customer needs, flexibility in structuring lease financing arrangements, financial technical proficiency and the offering of a broad range of lease financing options. The level of competition varies depending upon market and economic conditions, the interest rate environment, and availability of capital. Competition has increased in recent years as developments in the capital markets, and particularly the expansion of the securitization market, has increased access to capital to certain lenders that offer aggressive lease rates. Competition has also been heightened as credit companies affiliated with manufacturers have become more aggressive with respect to the financing terms offered.
	 The Bank competes with other banks and financial institutions to attract deposits. As a new entity, the Bank faces competition from established local and regional banks and savings and loan institutions. Many of them have larger customer bases, greater name recognition and brand awareness, greater financial and other resources and longer operating histories. Additionally, new competitors and competitive factors are likely to emerge, particularly in view of the continued development of Internet banking.
Supervision and Regulation
	 The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered with, regulated and examined by the Board of Governors of the Federal Reserve System (the "FRB"). In addition to the regulation of the Company, the Bank is subject to extensive regulation and periodic examination, principally by the Office of the Comptroller of the Currency ("OCC"). The Bank's deposits are insured up to $100,000 by the Federal Deposit Insurance Corporation ("FDIC") and the Bank is a member bank within the San Francisco Federal Reserve district.
	 The Bank Holding Company Act, the Federal Reserve Act, and the Federal Deposit Insurance Act subject the Company and the Bank to a number of laws and regulations. The primary concern of banking regulation is "Safety and Soundness" with an emphasis on asset quality and capital adequacy. These laws and regulations also encompasses a broad range of other regulatory concerns including insider
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transactions, the adequacy of the allowance for lease losses, inter-company transactions, regulatory reporting, adequacy of systems of internal controls and limitations on permissible activities. The federal banking agencies possess broad powers to take corrective action as deemed appropriate for an insured depository institution and its holding company. The FRB routinely examines the Company, which exam includes the Leasing Companies. The OCC, which has primary supervisory authority over the Bank, regularly examines banks in such areas as reserves, loans, investments, management practices, and other aspects of operations. These examinations are designed for the protection of the Bank's depositors rather than the Company's shareholders. The Bank must furnish annual and quarterly reports to the OCC, which has the authority under the Financial Institutions Supervisory Act to prevent a national bank from engaging in an unsafe or unsound practice in conducting its business. Many of these laws and regulations have undergone significant change in recent years. Future changes to these laws and regulations, and other new financial services laws and regulations are likely, and cannot be predicted with certainty.
	 Under FRB policy, the Company is expected to serve as a source of financial and managerial strength to the Bank and, under appropriate circumstances, to commit resources to support the Bank. Certain loans by the Company to the Bank would be subordinate in right of payment to deposits in, and certain other indebtedness of, the Bank.
	 Among the regulations that affect the Company and the Bank are provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of loans or extensions of credit the Bank may make to affiliates and the amount of assets purchased from affiliates, except for transactions exempted by the FRB. The aggregate of all of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank's capital and surplus and, as to all affiliates combined, to 20% of a bank's capital and surplus. The Bank and the Company must also comply with certain provisions designed to avoid the Bank buying low-quality assets. The Company and the Bank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution from engaging in transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. All services provided by the Company or its subsidiaries to the Bank are in accordance with this provision.
	 In December 2002, the FRB approved Regulation W ("Reg. W"), which implements, interprets and applies statutory provision in sections 23A and 23B, and became effective April 1, 2003. Under Reg. W, a bank does not have to comply with the quantitative limits of Section 23A when making a loan or extension of credit to an affiliate if 1) the extension of credit was originated by the affiliate; 2) the bank makes an independent evaluation of the creditworthiness of the borrower and commits to purchase the extension of credit before the affiliate makes or commits to make the extension of credit; 3) the bank does not make a blanket advance commitment to purchase loans from the affiliate and 4) the dollar amount of all purchases over any 12 month period by the bank from an affiliate does not represent more than 50% of that affiliate's credit extensions during such period. The Company believes the Bank's purchase of lease receivables from the Leasing Companies conform to the requirements of Reg. W. In addition, the Company has agreed with the FRB that the Bank's purchase of leases from the Leasing Companies will not exceed 50% of the Bank's lease portfolio.
At the time that Reg. W was published in December 2002, the FRB proposed for public comment an amendment to Reg. W that would limit the amount of extensions of credit that a bank could purchase from an affiliate to 100% of the bank's capital and surplus. If Reg. W is amended in accordance with this proposal, the ability of the Bank to purchase lease receivables from the Leasing Companies would be impacted. The final structure of Reg. W cannot be determined at this time, and there are no assurances that future regulations or interpretations from the FRB will not limit further or prohibit the Bank's purchases of leases from the Leasing Companies.
	 In connection with its approval of the Company's purchase of the stock of the Bank, the FRB and the OCC required the Company and the Bank to make certain commitments with respect to the operation of the Bank. These commitments included: (i) the Bank and the Company entering into a binding written agreement setting forth the Company's obligations to provide capital maintenance and liquidity support to the Bank, if and when necessary; (ii) the Bank's Board of Directors executing a binding written agreement with the OCC setting forth certain actions that the Bank would take if the Bank did not achieve certain operating results; (iii) during the first three years of operation, or until the Bank has reported four consecutive quarters of minimum acceptable profitability, the Bank must obtain prior approval from the OCC before implementing any significant deviation or change from its original operating plan; (iv) the Company must comply with Reg. W; and (v) the Bank's purchases of leases from affiliates will represent no more than 50% of the Bank's lease portfolio. During fiscal 2005, the Bank achieved four consecutive quarters of profitability, and the Company believes the OCC will shortly remove the restrictions (ii) and (iii) set forth above.
	 Bank holding companies are subject to risk-based capital guidelines adopted by the FRB. The Company currently is required to maintain (i) Tier 1 capital equal to at least six percent of its risk-weighted assets and (ii) total capital (the sum of Tier 1 and Tier 2 capital) equal to ten percent of risk-weighted assets. The FRB also requires the Company to maintain a minimum Tier 1 "leverage ratio" (measuring Tier 1 capital
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as a percentage of adjusted total assets) of at least five percent. At June 30, 2005 and 2004, the Company exceeded all these requirements.
	 The Bank is also subject to risk-based and leverage capital requirements mandated by the OCC. In general, banks are required to maintain a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines, banks are generally required to maintain a minimum ratio of Tier 1 capital to adjusted total assets, referred to as the leverage ratio, of 4%. As a condition of the approval to commence banking operations, for the first three years of the Bank's existence, the Bank is required to maintain a Tier 1 capital to adjusted total assets ratio, or leverage ratio, of not less than 8%. At June 30, 2005 and 2004, the Bank had capital in excess of all minimum risk-based and leverage capital requirements.
	 Under the Community Reinvestment Act ("CRA"), the Bank has a continuing and affirmative obligation, consistent with safe and sound operation, to help meet the credit needs of their entire communities, including low- and moderate-income neighborhoods. CalFirst Bank is designated as a wholesale institution for CRA purposes. To evaluate the CRA performance of banks with this designation, regulatory agencies use the community development test. This includes an assessment of the level and nature of the Bank's community development lending, investments and services. The CRA requires the OCC, in connection with its examination of the Bank, to assess and assign one of four ratings to the Bank's record of meeting the credit needs of its community. The CRA also requires that the Bank publicly disclose their CRA ratings. During fiscal 2005, CalFirst Bank was subjected to its first CRA examination and received a "satisfactory" rating on the CRA performance evaluation.
The principal source of cash flow to the Company, including cash flow to pay dividends on its common shares, is dividends from its subsidiaries and fees for services rendered to its subsidiaries. Various statutory and regulatory provisions limit the amount of dividends or fees that may be paid to the Company by the Bank. The Company does not depend on the Bank for such amounts, and believes the Leasing Companies have sufficient cash flow and assets to meet the Company's requirements.
	 On November 12, 1999, the Gramm-Leach-Bliley Act ("Gramm-Leach") became law. Gramm-Leach significantly changed the regulatory structure and oversight of the financial services industry. Most importantly for the Company and the Bank, Gramm-Leach established new requirements for financial institutions to provide new privacy protections to consumers. In June of 2000, the Federal banking agencies jointly adopted a final regulation providing for the implementation of these protections. It requires a financial institution to provide notice to customers about its privacy policies and practices, describes under what conditions a financial institution may disclose nonpublic personal information about consumers to non-affiliated third parties, and provides an "opt-out" method for consumers to prevent the financial institution from disclosing that information to non-affiliated third parties. Financial institutions were required to be in compliance with the final regulation by July 1, 2001, and the Bank and the Company believe that they were in compliance at such date, and continue to be in compliance.
	 On October 26, 2001, the USA Patriot Act became law. The United States Treasury Department has issued a number of implementing regulations which apply various requirements of the USA Patriot Act to financial institutions such as CalFirst Bank. These regulations impose obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences. With its existing systems and controls required as an Internet bank, the Bank believes it complies with the USA Patriot Act.
The commercial banking business is also influenced by the monetary and fiscal policies of the federal government and the policies of the FRB. The FRB implements national monetary policies through its management of the discount rate, the money supply, and reserve requirements on bank deposits. Indirectly, such policies and actions may impact the ability of non-bank financial institutions to compete with the Bank. Monetary policies of the FRB have had, and will continue to have, a significant effect on the operating results of financial institutions. The nature and impact of any future changes in monetary or other policies of the FRB cannot be predicted.
	 The laws, regulations and policies affecting financial services businesses are continually under review by Congress and state legislatures and federal and state regulatory agencies. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the California legislature and before various bank regulatory agencies and other professional agencies. Changes in the laws, regulations or policies that impact the Company cannot necessarily be predicted, and they may have a material effect on the business and earnings of the Company.
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Employees
	 The Company and its subsidiaries had 206 employees as of June 30, 2005, including 129 sales managers and account executives and 28 professionals engaged in finance and credit. None of the Company's employees are represented by a labor union. The Company believes that its relations with its employees are satisfactory.
Available Information
Our Internet address is www.calfirstbancorp.com. There we make available by link to the SEC our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC. Our SEC reports can be accessed through the Investor Information section of our Web site. Our Corporate Governance Guidelines and our Code of Ethics for Senior Financial Management are available for viewing and printing under the Corporate Governance section of our Internet site. The information found on our Web site is not part of this or any other report we file with or furnish to the SEC and is not incorporated by reference herein.
ITEM 2.
ITEM 2. PROPERTIES
	 At June 30, 2005, the Company and its subsidiaries occupied approximately 49,000 square feet of office space in Irvine, California leased from an unaffiliated party. The lease provides for monthly rental payments that average $87,919 from July 2005 through August 2008.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
	 The Company is sometimes named as a defendant in litigation relating to its business operations. Management does not expect the outcome of any existing suit to have a material adverse effect on the Company's financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	 None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of California First National Bancorp trades on the NASDAQ National Market System under the symbol CFNB. The following high and low closing sale prices for the periods shown reflect inter-dealer prices without retail markup, markdown or commissions and may not necessarily reflect actual transactions.
	 The Company had approximately 55 stockholders of record and in excess of 400 beneficial owners as of September 9, 2005.
	 The Board of Directors of the Company has adopted a policy of paying regular quarterly cash dividends, subject to an ongoing review of the Company's profitability, liquidity and future operating cash requirements. In August 2003, following changes in tax laws and based on the strength on the Company's financial position, the Board of Directors approved an increase in the quarterly dividend on the Company's common stock to $.10 a share from $.04 a share. On December 15, 2004, the Company paid a special dividend of $2.00 per outstanding common share, which totaled $22.2 million, to stockholders of record on December 1, 2004. In connection with the special dividend distribution, stock options under the Company's two stock option plans held by employees and directors of the Company that were not
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exercised prior to the distribution date were re-priced to preserve the economic benefit of the stock options at such time. The re-pricing was implemented in accordance with the provisions for an equity restructuring under FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation -- an Interpretation of APB Opinion No. 25." Accordingly, no compensation expense resulted from the re-pricing of the options. However, because FIN 44 limited the re-pricing adjustments, an additional 136,618 options were granted in order to preserve the economic benefit of the stock options. The exercise price of the re-priced options range from $5.20 to $15.27. For the fiscal year ended June 30, 2005, the Company declared cash dividends totaling $2.30 per common share. For the fiscal year ended June 30, 2004, the Company declared cash dividends totaling $.40 per common share and for fiscal year ended 2003, the Company declared cash dividends totaling $.16 per common share.
In April 2001, the Board of Directors authorized management, at its discretion, to repurchase up to 1,000,000 shares of common stock. Since this authorization has no termination date, the Board of Directors reviews the authorization to repurchase common stock from time to time. During the years ended June 30, 2005 and 2004, the Company did not repurchase any common stock. During the year ended June 30, 2003, the Company repurchased 268,900 shares at an aggregate cost of $3.3 million. As of September 9, 2005, 612,956 shares remain available under this authorization. The following table summarizes share repurchase activity for the quarter ended June 30, 2005:
Equity Compensation Plan Information
The following table provides information about shares of the Company's Common Stock that may be issued upon the exercise of options under all of our existing equity compensation plans as of June 30, 2005.
(1) The Company paid a special dividend in December 2004 where stock options which were not exercised as of the record date were re-priced in accordance with FIN 44 resulting in an additional 136,618 options granted and the exercise price of the re-priced options ranging from $5.20 to $15.27.
(2) The maximum number of shares that may be issued under the equity compensation plan increases each year by an amount equal to 1% of the total number of issued and outstanding shares of Common Stock as of June 30 of the fiscal year immediately preceding such fiscal year.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
	 The following table sets forth selected financial data and operating information of the Company and its subsidiaries. Certain reclassifications have been made to the fiscal years prior to 2005 to conform with this year's financial statement presentation. The selected financial data should be read in conjunction with the Financial Statements and notes thereto and Management's Discussion and Analysis of Results of Operations and Financial Condition contained herein.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
	 The Company's results include the operations of Amplicon, CalFirst Leasing, and CalFirst Bank. The Company's direct finance income includes interest income earned on the Company's investment in lease receivables and residuals. Other income primarily includes gains realized on the sale of leased property, income from sales-type and operating leases and gains realized on the sale of leases, and other fee income. Income from sales-type leases relates to the re-lease of off-lease property ("lease extensions") and new lease transactions that qualify as sales-type leases, generally where the fair value of the property subject to the lease differs from the Company's carrying cost. Income from operating leases generally involves the re-lease of off-lease property that is booked as an operating lease rather than as a sales-type lease.
	 The Company's operating results are subject to quarterly and annual fluctuations resulting from a variety of factors, including the size of the Company's lease portfolio, the volume and profitability of leased property being re-marketed through re-lease or sale, interest rates, the credit quality of the lease portfolio, variations in the mix of lease originations and economic conditions in general. The Company interest bearing liabilities represent less than 20% of total assets, and therefore, changes in interest rates in general have a greater impact on the yield earned on the investment in lease receivables, securities and other interest earning assets, with less impact from higher or lower interest expense.
	 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 in lease receivables 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 following is a description of the most critical accounting policies management applies, all of which require the use of accounting estimates and management's judgment, based on the relevant information available at the end of each period.
	 Residual Values -- For capital leases that qualify as direct financing leases, the aggregate lease payments receivable and estimated residual value, if any, are recorded on the balance sheet, net of unearned income and allowances, as net investment in capital leases. Of the volume of capital leases booked during the fiscal years ended June 30, 2005, 2004 and 2003, approximately 30%, 47% and 47%, respectively, were structured such that the Company owns the leased asset at the end of the term and therefore, the Company recorded a residual value. The residual value is an estimate for accounting purposes of the fair value of the leased property at lease termination and is determined at the inception of the lease based on the property leased and the terms and conditions of the underlying lease contract. The realizability of any estimated residual value depends on future collateral values, contractual options available to the lessee, the credit of the lessee, market conditions and other subjective and qualitative factors. The estimated residual values established at lease inception are periodically reviewed to determine if values are realizable and any identified losses are recognized at such time.
	 Allowance for Lease Losses -- The allowance for lease losses provides coverage for probable and estimatable losses in the Company's lease portfolios. The allowance recorded is based on a quarterly review of all leases outstanding and transactions in process. 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 lease portfolio, including levels of non-performing leases, lessees' financial condition, leased property values as well as general economic conditions and credit quality indicators. The Company's allowance includes an estimate of reserves needed to cover specifically identified lease losses and certain unidentified but inherent risks in the portfolio.
Income Taxes -- Deferred tax assets and liabilities result from temporary differences between the time income or expense items are recognized for financial statement purposes and for tax reporting. Such amounts are calculated using the enacted tax rates and laws that are
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expected to be in effect when the differences are expected to reverse. The determination of current and deferred income taxes is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the difference between tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts due or owed such as the timing of reversals of temporary differences and current financial accounting standards. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities.
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 results for fiscal 2005 continued to reflect the impact of a smaller portfolio of assets reaching the end of term, which contributed to a 15% decline in other income compared to fiscal 2004. New lease bookings during fiscal 2005 of $161 million were up 28% from $126 million booked during the prior fiscal year and contributed to a 22% increase in the net investment in capital leases to $187.8 million at June 30, 2005. The increased investment in capital leases contributed to growth in direct finance income during the latter part of the year, which should continue into fiscal 2006. During fiscal 2005, the Company benefited from a rising interest rate environment, which was primarily reflected in improved yields on cash and other interest earning investments. The average yield on new leases booked during fiscal 2005 was lower than on new leases booked in fiscal 2004 and on maturing leases, due in part to market conditions and as a result of a higher percentage of tax-exempt leases booked.
During fiscal 2005, new lease transactions approved, "lease originations," of approximately $176 million were comparable to the level of originations in fiscal 2004. As a result, despite the increase in lease bookings during the year, the backlog of approved transactions at June 30, 2005 is only about 3% below the level at June 30, 2004. Property acquired for transactions in process of $34 million was up 12% from to the level at June 30, 2004.
During fiscal 2005, the Bank began to represent a growing portion of the Company's consolidated results, with the Bank's investment in capital leases of $70.5 million representing 38% of the consolidated investment. To fund this expansion, the Bank's demand, savings and time deposits more than doubled to $54.1 million, and now represent 19% of the Company's total assets, compared to 9% at June 30, 2004.
Consolidated Statement of Earnings Analysis
		Summary -- For fiscal year ended June 30, 2005, net earnings decreased 17% to $8.2 million, compared to $9.8 million for fiscal 2004. Diluted earnings per share decreased 18% to $0.72 for fiscal year ended June 30, 2005, compared to $0.88 per share for fiscal 2004. Of the new leases booked during fiscal 2005, approximately 93% were retained in the Company's own portfolios, compared to 88% in the prior year. Net earnings reflect an increase in direct finance income, which was offset by higher interest expense on deposits, an increase in the provision for lease losses, lower profits from end of term transactions and higher SG&A expense levels.
	Net Direct Finance and Interest Income -- Net direct finance and interest income is the difference between interest earned on the investment in capital leases, securities and other interest earning investments and interest paid on deposits or other borrowings. Net direct finance and interest income is affected by changes in the volume and mix of interest earning assets and liabilities, the movement of interest rates, and funding and pricing strategies.
	Net direct finance and interest income was $19.5 million for the fiscal year ended June 30, 2005 compared to $18.8 million for fiscal 2004 and $20.5 million in fiscal 2003. The increase in fiscal 2005 from fiscal 2004 was due to an increase of $819,000 in direct finance income and $431,000 in interest income on cash and investments, offset by a $624,000 increase in interest expense on deposits. The increase in direct finance income reflects an increase in the average investment in capital leases directly held by the Company, offset by a decrease in yields on such investment. The increase in interest income on cash and investments resulted from the increases in interest rates earned offset by a decrease in the average balances.
	The decrease in fiscal 2004 was due to a decrease of $956,000 in direct finance income, a decline of $490,000 in interest income on cash and investments and a $193,000 increase in interest expense on deposits. The decrease in direct finance income reflected an increase in the average investment in capital leases directly held by the Company, offset by a decrease in yields on such investment. The decrease in interest income on cash and investments resulted from the decline in interest rates earned, as the level of average balances increased slightly.
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The following table presents the components of the increases (decreases) in net direct finance and interest income by volume and rate:
The following table presents the Company's average balance sheets, direct finance 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.
Direct finance income and interest expense on average discounted lease rentals and non-recourse debt of $11.7 million and $26.2 million at June 30, 2005 and 2004, respectively, offset each other and do not contribute to the Company's net interest and finance income.
Average balance is based on month-end balances, includes non-accrual leases, and is presented net of unearned income.
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	Provision for Lease Losses -- The Company's provision for lease losses in fiscal 2005 was $359,000, compared to $164,000 in fiscal 2004 and $554,000 in 2003. The increase in the provision in fiscal 2005 from fiscal 2004 primarily relates to the 22% growth in the net investment in capital leases, including a higher percent of special mention leases, which offset the benefit from a decline in non-performing assets. The decline in the provision in 2004 from fiscal 2003 largely related to the fact that the overall level of reserves required against problem leases remained relatively unchanged during 2004, benefiting from the continued pay down on problem leases along with no significant new problem leases being identified.
	 Other Income -- Other income is a significant source of income for the Company, accounting for 42% of the Company's gross profit during the year ended June 30, 2005, 47% during fiscal 2004 and 43% during 2003. Total other income for the year ended June 30, 2005 decreased $2.5 million, or 15%, to $14.0 million, compared to $16.5 million in 2004 and $15.2 million in 2003. Fiscal 2005 included the recognition of a $1.3 million gain on sale of leased property related to a lease in bankruptcy. While the sale proceeds were received during fiscal 2004, the recognition of the gain was deferred until certain bankruptcy issues were resolved. The decrease in other income during fiscal 2005 from fiscal 2004 includes a decline in operating and sales-type income of $2.0 million, or 34%, as the volume of leases renewed during the year was down. The gain on sale of leases and leased property decreased by $664,000, or 7%, as the volume of lease property sold on leases coming to end of term decreased during the period, and would have decreased by $2 million without the gain noted above.
	 Total other income for the year ended June 30, 2004 increased by $1.4 million, or 9%, to $16.5 million, compared to $15.2 million in 2003. The increase in other income during fiscal 2004 was due to an increase of $1.7 million, or 21%, in gain on sale of leases and leased property, as the volume of lease property sold on leases coming to end of term increased during the period, which was offset in part by a $399,000 decrease in operating and sales-type lease income as the volume of leases renewed declined during the year.
	Selling, General, and Administrative Expenses -- The Company’s selling, general and administrative expenses (“SG&A”) increased $787,000, or 4%, to $20.0 million for the year ended June 30, 2005. This compared to SG&A expenses in fiscal 2004 of $19.3 million, which had increased by $1.6 million, or 9%, from $17.7 million in fiscal 2003. The increase in SG&A expenses during fiscal 2005 is primarily due to higher administrative costs required to manage the growth in the portfolio as well as the development of the organization. The increase in SG&A expenses during fiscal 2004 was primarily the result of the development of the organization and expanded marketing programs.
	Income Taxes -- Income taxes were accrued at a tax rate of 37.5% for the fiscal year ended June 30, 2005 compared to 38.5% for fiscal years ended June 30, 2004, and 2003 representing the Company's estimated annual tax rates for each respective year. The income tax rate declined in fiscal 2005 due to an increased volume of leases where interest earned is exempt from certain taxes. Tax-exempt leases represented approximately 13% of new lease bookings in fiscal 2005, compared to 6% during fiscal 2004.
Financial Condition Analysis
	 Lease Portfolio Analysis
The Company currently funds a significantly greater percentage of new lease transactions internally, while only a small portion of leases are assigned to financial institutions. During the fiscal year ended June 30, 2005, approximately 93% of the total dollar amount of new leases booked by the Company were held in its own portfolio, compared to 88% during fiscal 2004 and 91% during fiscal 2003. During the fiscal year ended June 30, 2005, the Company's net investment in capital leases increased by $33.9 million. This increase includes a $34.7 million increase in the Company's investment in lease receivables, and a $754,000 million reduction in the investment in estimated residual values. The increase in the investment in capital leases is primarily due to the higher volume of new lease transactions booked and retained by the Company.
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 is generally obligated to reimburse the Company for all disbursements under certain circumstances. At June 30, 2005, the Company's investment in property acquired for transactions in process was $34.1 million, up from $30.5 million at June 30, 2004, and $20.3 million at June 30, 2003.
The Company's risk assets are comprised almost exclusively of leases for capital assets to businesses and other commercial or non-profit organizations. All leases are secured by the underlying property being leased. The Company's strategy is to develop lease portfolios with
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risk/reward profiles that meet its objectives. Through the use of non-recourse financing, the Company avoids risks that do not meet these requirements. The strategy also emphasizes diversification on both a geographic and customer level, and spreading the Company's risk across a breadth of leases while minimizing the risk to any one area. At June 30, 2005, no lessee accounted for more than 5% of the Company's net investment in capital leases, and two lessees combined represented approximately 7% of the Company's net investment in capital leases. The investment in capital leases is diversified by geographic regions, with the Company's portfolio spread across all fifty states. At June 30, 2005, California (15%) and New York (10%) were the only states that represented more than 10% of the Company's net investment in capital leases. The Company has no exposure to foreign lessees. The Company's leases are with lessees in a wide spectrum of industries; however, at June 30, 2005 approximately 46% of the Company's net investment in capital leases was with public and private colleges, universities, elementary and secondary schools located throughout the United States. The educational portfolio includes over 780 leases with over 380 different lessees, and only two of these leases are included among the Company's substandard leases. One university represented approximately 3% of the Company's net investment in capital leases. The Company believes the exposure to this sector is warranted based on the historically good credit profile of this group.
	 The Company monitors the performance of all leases 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 ten or more days delinquent is conducted. Lessees who 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 will be discontinued when the lessee becomes ninety days or more past due on its lease payments with the Company, unless the Company believes the investment is otherwise recoverable. Leases may be placed on non-accrual earlier if the Company has significant doubt about the ability of the lessee to meet its lease obligations, as evidenced by consistent delinquency, deterioration in the lessee's financial condition or other relevant factors.
	 The following table summarizes the Company's non-performing capital leases:
	 Non-performing assets decreased during fiscal 2005 due primarily to positive results from the workout of leases in bankruptcy and other non-performing assets. Direct finance income that would have been recorded had non-performing leases at each respective fiscal year end been current in accordance with their original terms would have been $96,429, $320,609 and $325,338 during fiscal 2005, 2004 and 2003, respectively. The amount of direct finance income actually recorded on non-performing capital leases was $71,297, $150,983 and $322,614 during fiscal 2005, 2004 and 2003, respectively.
	 In addition to the non-performing capital leases identified above, there were $2.0 million of investment in capital leases at June 30, 2005 for which management has concerns regarding the ability of the lessees to continue to meet existing lease obligations, compared with $1.5 million at June 30, 2004. This amount consists of leases classified as substandard or doubtful, or with lessees that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future. The increase reflects the deterioration in the credit of several special mention credits, which offset the benefit from the pay down on other substandard leases.
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Allowance for Lease Losses
	 The allowance for lease losses provides coverage for probable and estimatable losses in the Company's lease portfolios. The allowance recorded is based on a quarterly review of all leases outstanding and transactions in process. Lease receivables 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 lease portfolio.
	 The allowance for lease losses increased slightly to $3.50 million (1.8% of net investment in capital leases) at June 30, 2005 from $3.46 million (2.2% of net investment in capital leases) at June 30, 2004. The allowance at June 30, 2005 consisted of $1.26 million allocated to specific accounts that were impaired and $2.24 million that was available to cover losses inherent in the portfolio. This compared to $1.23 million allocated to specific impaired accounts at June 30, 2004 and $2.23 million that was available to cover losses inherent in the portfolio at such date. While non-performing leases decreased during fiscal 2005, the slight increase in the 2005 allowance relates to an increase in reserves allocated to substandard accounts that were considered partially impaired. The unallocated allowance remained relatively unchanged, as the increase in the net investment in capital leases generally occurred with higher rated lessees, after excluding the accounts noted above. While the volume of transactions in process at June 30, 2005 was up from the end of the prior year, the volume of unfunded lease commitments was down, as the backlog of total approved but unbooked leases was down slightly. The Company considers the allowance for doubtful accounts of $3.5 million at June 30, 2005 adequate to cover losses specifically identified as well as inherent in the lease portfolios. However, no assurance can be given that the Company will not, in any particular period, sustain lease losses that are sizeable in relation to the amount reserved, or that subsequent evaluations of the lease 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 lease losses. Among other factors, a continued economic slowdown may have an adverse impact on the adequacy of the allowance for lease losses by increasing credit risk and the risk of potential loss even further. As the Company has retained a significantly greater percentage of leases in its own portfolio, this creates increased exposure to delinquencies, repossessions, foreclosures and losses than the Company has historically experienced.
	 Liquidity and Capital Resources
	 The Company funds its operating activities through internally generated funds, bank deposits and non-recourse debt. At June 30, 2005 and 2004, the Company's cash and cash equivalents were $43.3 million and $64.9 million, respectively. Stockholders' equity at June 30, 2005 was $186.9 million, or 67% of total assets, compared to $203.8 million, or 74% of total assets, at June 30, 2004. The decline in stockholders' equity was due to the payment of a special dividend of $2.00 per outstanding common share, which totaled $22.2 million, paid on December 15 to stockholders of record on December 1, 2004. At June 30, 2005, the Company and the Bank exceed their regulatory capital requirements and are considered "well-capitalized" under guidelines established by the FRB and the OCC.
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	 Deposits at CalFirst Bank totaled $54.1 million at June 30, 2005, compared to $24.6 million at June 30, 2004. The $29.5 million increase was used to fund leases and maintain liquidity at the Bank. The following table presents average balances and average rates paid on deposits for years ended June 30, 2005 and 2004:
	 The Leasing Companies' capital expenditures for leased property purchases are sometimes financed by assigning certain base lease term payments to banks or other financial institutions, including CalFirst Bank. The assigned lease payments are discounted at fixed rates such that the lease payments are sufficient to fully amortize the aggregate outstanding debt. At June 30, 2005, the Company had outstanding non-recourse debt aggregating $8.4 million relating to property under capital leases. 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 to make and receive future payments at June 30, 2005. Commitments to purchase property for unfunded leases are binding and generally have fixed expiration dates or other termination clauses. Since the Company expects some of the commitments to expire without being funded, the total commitment amounts do not necessarily represent the Company's future liquidity requirements.
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 fiscal 2007.
Based upon contractual cash flows; amounts could differ due to prepayments, lease restructures, charge-offs and other factors.
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.
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Recent Accounting Pronouncements
In June 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), a replacement of APB Opinion No. 20, “Accounting Changes”, and Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 changes the requirements for the accounting for and the reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition by recording a cumulative effect adjustment within net income in the period of change. SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the specific period effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not believe SFAS No. 154 will have a material effect on its consolidated financial position, results of operations or cash flow.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from changes in market indices such as interest rates and equity 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. The Company's balance sheet structure is primarily short-term in nature, with a greater portion of assets that reprice or mature within one year. As a result, the Company's exposure to interest rate risk largely results from declines in interest rates and the impact on net direct finance and interest income.
At June 30, 2005, the Company had $43.3 million invested in securities of very short duration, including $12.6 million in federal funds sold and securities purchased under agreements to resell. The Company's gross investment in lease payments receivable of $199.9 million consists of leases with fixed rates, however, $103.3 million of such investment is due within one year of June 30, 2005. This compares to the Bank's interest bearing deposit liabilities of $54.1 million, 83% of which mature within one year. The Leasing Companies have 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. Based on the foregoing, at June 30, 2005, the Company had assets of $144.0 million subject to changes in interest rates over the next twelve months, compared to repricing liabilities of $43.7 million. Given the current structure of the consolidated balance sheet, as interest rates decrease, interest income on the Company's short-term investment position decreases, and future lease rates from direct financing leases, which often are based on United States Treasury rates, will tend to be lower. Conversely, as interest rates rise, the Company's earnings will benefit as yields on cash investments and lease investments improve, with less offsetting impact from rising interest expense.
As the banking operations of the Company grow and the Bank's deposits represent a greater portion of the Company's assets, the Company is subject to increased interest rate risk. The Bank has an Asset/Liability Management Committee and policies established to manage its interest rate risk. 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. The results of this analysis on the Bank currently are not material to the Company as a whole.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and supplementary financial information are included herein at the pages indicated below:
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of California First National Bancorp
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of California First National Bancorp and its subsidiaries at June 30, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the consolidated financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California		
September 12, 2005
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CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
The accompanying notes are an integral
part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share and per share amounts)
The accompanying notes are an integral
part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except for share amounts)
The accompanying notes are an integral
part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral
part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies:
Nature of Operations
California First National Bancorp, a California corporation (the "Company") and its subsidiaries have two principal lines of business, leasing and banking. The Company leases high-technology and other capital assets to customers located throughout the United States. The Company is also engaged in the re-marketing of leased assets at lease expiration. The Company's banking subsidiary, California First National Bank ("CalFirst Bank") is an FDIC-insured national bank that gathers deposits using the telephone, the Internet, and direct mail from a centralized location and leases capital assets to businesses and organizations and provides business loans to fund the purchase of assets leased by third parties.
Basis of Presentation
The consolidated financial statements include the accounts of California First National Bancorp and its wholly owned subsidiaries, Amplicon, Inc., California First Leasing Corporation (collectively, the "Leasing Companies"), and CalFirst Bank. All intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of these statements, cash and cash equivalents include cash in banks, cash in demand deposit accounts, money market accounts and federal funds sold, all of which have initial maturities of less than ninety days. Included in cash and cash equivalents at June 30, 2005 and 2004 was $12,610,000 and $3,575,000, respectively, that was held by the Bank and was only available to fund the Bank's operations.
Investment Securities
Investment securities that the Company has the intent and ability to hold until maturity are classified as 'held-to-maturity" and are stated at cost adjusted for amortization of premium or accretion of discount under criteria established with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Investment securities held with the intent to sell are classified as "available-for-sale" and are stated at fair value. Unrealized gains and losses on available-for-sale investment securities, net of taxes, are reported as a separate component of stockholders' equity until realized.
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Leases
	 Capital Leases
New lease transactions are generally structured as direct financing leases or sales-type leases. The re-lease of property that has come off lease may be accounted for as a sales-type lease or as an operating lease, depending on the terms of the re-lease. Leased property that comes off lease and is re-marketed through a sale to the lessee or a third party is accounted for as sale of leased property.
For capital leases that qualify as direct financing leases, the aggregate lease payments receivable and estimated residual value, if any, are recorded on the balance sheet net of unearned income as net investment in capital leases. The unearned income is recognized as direct finance income on an internal rate of return method calculated to achieve a level yield on the Company's investment over the lease term. There are no costs or expenses related to direct financing leases since lease income is recorded on a net basis.
For capital leases that qualify as sales-type leases, the Company recognizes profit or loss at lease inception to the extent the fair value of the property leased differs from the Company's carrying value. The difference between the discounted value of the aggregate lease payments receivable and the property cost, less the discounted value of the residual, if any, and any initial direct costs is recorded as sales-type lease income. For balance sheet purposes, the aggregate lease payments receivable, and estimated residual value, if any, are recorded on the balance sheet net of unearned income as net investment in capital leases. Unearned income is recognized as direct finance income over the lease term on an internal rate of return method.
The residual value is an estimate for accounting purposes of the fair value of the lease property at lease termination. The estimates are reviewed continuously to ensure reasonableness; however the amounts the Company may ultimately realize could differ from the estimated amounts.
The Company assigns, on a non-recourse basis, the minimum lease payments receivable related to certain leases to financial institutions at fixed interest rates. When leases are assigned to unaffiliated financial institutions without recourse, the discounted value of the minimum lease payments receivable is recategorized on the balance sheet as discounted lease rentals assigned to lenders. The related obligations resulting from the discounting of the leases are recorded as non-recourse debt. The unearned income related to the lease is reduced by the interest expense from the non-recourse debt. In the event of default by a lessee, the lender has a first lien against the underlying leased property with no further recourse against the Company. If this occurs, the Company may not realize its residual investment in the leased property.
A portion of the Company's selling, general and administrative costs directly related to originating direct financing lease transactions is deferred as an increase to direct finance income and amortized over the lease term as a reduction to direct finance income utilizing the effective interest method.
	 Operating Leases
Lease contracts, which do not meet the criteria of capital leases, are accounted for as operating leases. Property on operating leases is recorded at cost and depreciated on a straight-line basis over the lease term to the estimated residual value at the termination of the lease. Most operating leases involve the re-lease of off-lease property and the associated cost is the Company's previously booked residual. Rental income is recorded monthly or quarterly when due. Selling costs directly associated with operating leases are deferred and amortized over the lease term.
Allowance for Lease Losses
The allowance for lease losses and residual valuation allowance is periodically reviewed for adequacy considering levels of past due leases and non-performing assets, lessees' financial condition, leased property values as well as general economic conditions and credit quality indicators. The need for reserves is subject to future events, which by their nature are uncertain. Therefore, changes in economic conditions or other events affecting specific lessees or industries may necessitate additions or deductions to the allowance for lease losses or the residual valuation allowance.
Property Acquired for Transactions in Process
Property acquired for transactions in process represents partial deliveries of property of which the lessee has accepted on in-process lease transactions. Such amounts are stated at cost.
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Earnings Per Share
Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share includes the effect of the potential shares outstanding, including dilutive stock options, using the treasury stock method. The following table reconciles the components of the basic net income per share calculation to diluted net income per share.
The Company did not include the following number of antidilutive stock option shares in its calculation of diluted earnings per share.
Capital Structure
At June 30, 2005, the Company has 20,000,000 authorized shares of common stock and is authorized to issue 2,500,000 shares of preferred stock, from time to time, in one or more series and to fix the voting powers, designations, preferences and the relative participating, optional or other rights, if any, of any wholly unissued series of preferred stock.
In November 1995, the Company's stockholders approved the 1995 Equity Participation Plan (the "1995 Plan"), which replaced a previous plan. The Company accounts for options issued under APB Opinion No. 25, "Accounting for Stocks Issued to Employees," under which no compensation cost has been recognized. In accordance with Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation " Transition and Disclosure," (SFAS No. 148), the Company adopted the disclosure requirements of SFAS No. 148. The 1995 Plan provides for the granting of options, restricted stock and stock appreciation rights ("SARs") to key employees, directors and consultants of the Company. Under the 1995 Plan, the maximum number of shares of common stock that can be issued upon the exercise of options or SARs, or upon the vesting of restricted stock awards, was initially 1,000,000, but the maximum number of available shares of common stock could increase by an amount equal to 1% of the total number of issued and outstanding shares of common stock as of June 30 of the fiscal year immediately preceding such fiscal year. Each grant or issuance under the 1995 Plan is set forth in a separate agreement and indicates, as determined by the stock option committee, the type, terms, vesting period and conditions of the award.
On December 15, 2004, the Company paid a special dividend of $2.00 per outstanding common share, which totaled $22.2 million, to stockholders of record on December 1, 2004. In connection with the distribution, stock options under the Company's two stock option plans held by employees and directors of the Company that were not exercised prior to the distribution date were re-priced to preserve the economic benefit of the stock options at such time. The re-pricing was implemented in accordance with the provisions for an equity restructuring under FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation -- an Interpretation of APB Opinion No. 25." Accordingly, no compensation expense resulted from the re-pricing of the options. However, because FIN 44 limited the re-pricing adjustments, an additional 136,618 options were granted in order to preserve the economic benefit of the stock options. The exercise price of the re-priced options range from $5.20 to $15.27.
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The following table summarizes activity related to stock options for the periods indicated:
(1) All 2005 option grants were the result of the special dividend in December 2004, which resulted in all unexercised options as of the record date being re-priced under FIN 44 to preserve the economic benefit of the stock options at such time.
The Company accounts for these Plans under APB Opinion No. 25, "Accounting for Stocks Issued to Employees," under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation " Transition and Disclosure an Amendment to FASB No 123, Accounting for Stock-Based Compensation" ("SFAS No. 148"), the Company's net income and earnings per share would have been reduced to the following proforma amounts:
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Since the SFAS No. 123 method of accounting, as amended by SFAS No. 148, has not been applied to options granted prior to July 1, 1995, the resulting proforma compensation cost may not be indicative of that to be expected in future periods.
On December 16, 2004, the Financial Accounting Standards Board (“FASB”), issued FASB Statement No. 123R (revised 2004), “Share-based Payment” (“SFAS No. 123R”). This Statement requires entities to expense the estimated fair value of employee stock options and similar awards and provides certain changes to the method for valuing stock-based compensation, among other changes . SFAS No. 123R is effective for interim periods and fiscal years beginning after June 15, 2005. The Company will adopt SFAS No. 123R using a modified prospective application under which SFAS No. 123R will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service has not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS 123. At June 30, 2005, unamortized compensation expense determined in accordance with SFAS No. 123R that we expect to record during the first quarter of fiscal 2006 is approximately $47,000 before income taxes; however this amount may change due to pre-vesting forfeitures and subsequent grants.
The fair value of each grant is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2004 and 2003. There were no option grants in 2005.
Recent Accounting Pronouncements
In June 2005, the FASB issued Statement No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154"), a replacement of APB Opinion No. 20, "Accounting Changes", and Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS No. 154 changes the requirements for the accounting for and the reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition by recording a cumulative effect adjustment within net income in the period of change. SFAS No. 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the specific period effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not believe SFAS No. 154 will have a material effect on its consolidated financial position, results of operations or cash flow.
Reclassifications
Certain reclassifications have been made to the fiscal 2004 and 2003 financial statements to conform to the presentation of the fiscal 2005 financial statements.
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Note 2 - Investment Securities:
The amortized cost, fair value, and carrying value of investment securities held at June 30, 2005 were as follows:
The amortized cost, fair value, and carrying value of investment securities held at June 30, 2004 were as follows:
The amortized cost and estimated fair value of investment securities at June 30, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Note 3 - Receivables:
The Company's receivables consist of the following:
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Note 4 - Net Investment in Capital Leases:
The Company's net investment in capital leases consists of the following:
The minimum lease payments receivable and estimated residual value are discounted using the internal rate of return method related to each specific capital lease. Unearned income includes the offset of initial direct costs of $4,521,656 and $4,622,055 at June 30, 2005 and 2004, respectively.
At June 30, 2005, a summary of the installments due on minimum lease payments receivable and the expected maturity of the Company's estimated residual value are as follows:
Non-recourse debt, which relates to the discounting of capital lease receivables, bears interest at rates ranging from 4.20% to 9.65%. Maturities of such obligations at June 30, 2005 are as follows:
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Deferred interest expense of $694,000 at June 30, 2005 will be amortized against direct finance income related to the Company's discounted lease rentals assigned to lenders of $8,405,000 using the effective yield method over the applicable lease term.
Note 5 - Fair Value of Financial Instruments:
The Company has estimated the fair value of its financial instruments in compliance with Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No. 107"). For cash and cash equivalents and demand and savings deposits the estimated fair value is based on respective market prices, which was equal to book value for all periods presented. For investment securities, the fair values were based on quoted market prices when available. For securities, which had no quoted market prices, fair values were estimated by discounting cash flows using current rates on similar securities. The fair value of the Company's net investment in capital leases is not a required disclosure under SFAS No. 107.
The estimated fair value of financial instruments were as follows:
Note 6 - Income Taxes:
The Company accounts for its income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Among other provisions, this standard requires deferred tax balances to be determined using the enacted income tax rate for the years in which taxes will be paid or refunds received. From time to time, various governmental taxing authorities audit the Company. The Company believes that its accrual for income taxes is adequate for adjustments, if any, which may result from these examinations.
The provision for income taxes is summarized as follows:
Deferred taxes result principally from the method of recording lease income on capital leases and depreciation methods for tax reporting, which differ from financial statement reporting.
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Deferred income tax liabilities (assets) are comprised of the following:
The differences between the federal statutory income tax rate and the Company's effective tax rate are as follows:
Note 7 - Regulatory Capital Requirements:
The Company and CalFirst Bank are subject to regulatory capital adequacy guidelines administered by federal banking agencies. Failure to meet minimum capital requirements can result in the initiation of certain actions by the federal agencies that, if undertaken, could have a material effect on the Company's financial statements. The Company currently is required to maintain (i) Tier 1 risked-based capital equal to at least six percent (6%) of its risk-weighted assets; (ii) total risked-based capital (the sum of Tier 1 and Tier 2 capital) equal to ten percent (10%) of risk-weighted assets; and (iii) a minimum Tier 1 "leverage ratio" (measuring Tier 1 risked-based capital as a percentage of adjusted total assets) of at least five percent (5%). CalFirst Bank is subject to risk-based and leverage capital requirements mandated by the Office of Comptroller of the Currency. The Bank is required to maintain (i) a minimum ratio of Tier 1 risked-based capital to risk-adjusted assets of four percent (4%); (ii) a minimum ratio of qualifying total capital to risk-adjusted assets of eight percent (8%) and (iii) for the first three years of operations, a minimum ratio of Tier 1 risked-based capital to adjusted total assets, leverage ratio, of 5%.
The following table presents capital and capital ratio information for the Company and its banking subsidiary as of June 30, 2005 and 2004. At June 30, 2005, the Company and CalFirst Bank exceeded all capital requirements by a significant amount.
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Note 8 - Commitments and Contingencies:
Leases
The Company leases its corporate offices under an operating lease that expires in fiscal 2009. Rent expense was $979,637 (2005), $927,621, (2004) and $1,084,209 (2003).
Litigation
From time to time, the Company is party to various legal actions and administrative proceedings and subject to various claims arising out of the Company's normal business activities. Management does not expect the outcome of any of these matters, individually and in the aggregate, to have a material adverse effect on the financial condition and results of operations of the Company.
401(k) Plan
Employees of the Company may participate in a voluntary defined contribution plan (the "401K Plan") qualified under Section 401(k) of the Internal Revenue Code of 1986. Under the 401K Plan, employees who have met certain age and service requirements may contribute up to a certain percentage of their compensation. The Company has made contributions of $135,056 (2005), $145,002 (2004) and $143,789 (2003).
Note 9 - Segment Reporting:
The Company has two leasing subsidiaries, Amplicon and CalFirst Leasing ("Leasing Companies"), involved in leasing and financing capital assets, and re-marketing leased assets at lease expiration.
The Company's banking subsidiary, CalFirst Bank, is an FDIC-insured national bank that gathers deposits from a centralized location and is involved in leasing and remarketing capital assets in a manner similar to the Leasing Companies. CalFirst Bank also provides business loans to fund the purchase of assets leased by third parties.
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The accounting policies of each segment are the same as those described in "Summary of Significant Accounting Policies" (see Note 1). Below is a summary of each segment's financial results for 2005, 2004 and 2003:
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Note 10 - California First National Bancorp (Parent Only) Financial Information:
The condensed financial statements of California First National Bancorp as of June 30, 2005, and 2004 and for the years ended June 30, 2005 and 2004 are presented below:
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Note 11 - Selected Quarterly Financial Data (Unaudited):
Summarized quarterly financial data for the fiscal years ended June 30, 2005 and 2004 is as follows:
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Note 12 - Subsequent Event:
At June 30, 2005, the Company had a net investment in capital leases and transactions in process of $1.6 million related to leases with several organizations, mostly colleges, located in New Orleans. It appears that these customers were severely impacted by the flooding resulting from Hurricane Katrina, and the property subject to the leases may have been damaged. The Company cannot yet quantify the impact on its customers or its investment in these leases. While the lessees are required to carry insurance coverage for the property, confirmation of specific damage or coverage is not yet available. A provision for potential lease losses may be required for some portion of this investment during the first quarter of fiscal 2006 and actual losses may be recognized later.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 	 	 	 FINANCIAL DISCLOSURE
	None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it 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. As of the end of the period covered by this report, the Company's principal executive officer and its principal financial officer, based on their evaluation of the Company's disclosure controls and procedures have concluded that the Company's disclosure controls and procedures are adequate and effective for the purposes set forth in the definition in Exchange Act rules. There were no significant changes made during the most recent fiscal quarter to the Company's internal controls or other factors that could significantly affect the Company's internal control over financial reporting.
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PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 2005 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 2005 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 2005 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 2005 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 14.
ITEM 14. PRINCIPAL ACOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than October 28, 2005 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
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PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report
(1)
Financial Statements
All financial statements of the Registrant as set forth under Part II
Item 8 of this report on Form 10-K, see index to financial statements on page 21
(2) Financial Statement Schedules:
Schedule Number Description
Page Number
II.Valuation and Qualifying Accounts					
All other schedules are omitted because of the absence of conditions under which they are required or because all material information required to be reported is included in the financial statements and notes thereto.
	 (3) Exhibits:
See Index to Exhibits filed as part of this Form 10-K					
(b) Reports on Form 8-K
There was one report filed on Form 8-K filed during the fourth quarter of fiscal 2005. The report filed on April 22, 2005 was regarding the Company's press release on the financial results for the three and nine months ended March 31, 2005 and certain other information.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
By: S. Leslie Jewett/s/			
Date: September 13,
S. Leslie Jewett
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes each of Patrick E. Paddon, S. Leslie Jewett and Glen T. Tsuma as attorney-in-fact to sign on his behalf, individually in each capacity stated below, and to file all amendments and/or supplements to this Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature
Title
Date		
Patrick E. Paddon/s/
Patrick E. Paddon 		
President, Chief Executive
Officer and Director September 12, 2005
Glen T. Tsuma/s/
Glen T. Tsuma		
Vice President, Chief Operating
Officer and Director September 12, 2005
S. Leslie Jewett/s/
S. Leslie Jewett	 		
Chief Financial Officer	 September 12, 2005
Michael H. Lowry/s/
Michael H. Lowry 		
Director September 12, 2005
Harris Ravine/s/
Harris Ravine		
Director September 12, 2005
Danilo Cacciamatta/s/
Danilo Cacciamatta
Director September 12, 2005
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Note: The allowance for lease losses and valuation of residual value includes balances related to receivables, capital leases and operating leases described in Notes 1 and 4 of the Notes to Financial Statements.
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INDEX TO EXHIBITS
Exhibit No.			 Description of Exhibit						
Page No.
2.1
Agreement of Merger dated as of May 22, 2001 among
Amplicon, Inc., California First National Bancorp and
CFNB Merger Sub (incorporated by reference to Exhibit 2.1
			 to Registrant's Statement on Form 8-K dated May 25, 2001)	
3.1
Articles of Incorporation of California First National Bancorp
			 (incorporated by reference to Exhibit 3.1 to Registrant's
			 Statement on Form 8-K dated May 25, 2001)
3.2
Bylaws of California First National Bancorp (incorporated by reference
to Exhibit 3.2 to Registrant's Statement on Form 8-K
dated May 25, 2001)
10.1
1984 Stock Option Plan, as amended to date
(incorporated by reference to Exhibit 10.1 to
Registrant's Statement on Form S-8 File No. 33-27283)
10.2
1995 Equity Participation Plan, as amended to date
(incorporated by reference to Exhibit 10.1 to
Registrant's Statement on Form S-8 File No. 333-15683)
10.3
Capital Assurances and Liquidity Maintenance Agreement between
California First National Bancorp and California First National
Bank, effective as of May 23, 2001 (incorporated by reference to
Exhibit 10.1 to Registrant's Statement on Form 8-K dated May 25, 2001)
10.4
Agreement by and between California First National Bank and the
Office of the Comptroller of the Currency dated as of
May 23, 2001 (incorporated by reference to Exhibit 10.2
to Registrant's Statement on Form 8-K dated May 25, 2001)
10.5
Office Lease dated January 30, 2003, between California First National Bancorp
and World Trade Center Building, Inc. (incorporated by reference to Exhibit 10.8
to the Registrant's March 31, 2003 Form 10-Q)
31.1
Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
31.2
Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer
Section 1350 Certifications by Principal Executive Officer and Principal Financial Officer