GENERAL

California First National Bancorp, a California corporation, is a bank holding company headquartered in Orange County, California. 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 provides business loans to fund the purchase of assets leased by third parties, including the Leasing Companies. The Bank also provides commercial loans to businesses, including real estate based and unsecured revolving lines of credit, and purchases commercial loan participations. CalFirst Bank gathers deposits from a centralized location primarily through posting rates on the Internet.

The Company's direct finance, loan and interest income includes interest income earned on the Company's investment in lease receivables, residuals and commercial loans. 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 lease property ("lease extensions") while income from operating leases generally involves lease extensions that are accounted for as an operating lease rather than as a sales-type lease.

The Company's operating results are subject to quarterly fluctuations resulting from a variety of factors, including the volume and profitability of leased property being re-marketed through re-lease or sale, the size and credit quality of the lease and loan portfolio, the interest rate environment, the volume of new lease or loan originations, including variations in the mix and funding of such originations, and economic conditions in general. The Company's principal market risk exposure 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 historically has been short-term in nature, with a greater portion of assets that reprice or mature within one year. With the increased investment in commercial loans and investment securities with longer maturities, this maturity gap has diminished. The Company's interest margin also is susceptible to timing lags related to varying movements in market interest rates. Many of Company's leases, loans and liquid investments are tied to U.S. treasury rates and the fed funds rate that have decreased to a greater degree than bank deposit rates due to competitive market factors. As a result, this can result in a greater decline in net interest income than indicated by the repricing asset and liability comparison.

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

Critical Accounting Policies and Estimates

The preparation of the Company's financial statements requires management to make certain critical accounting estimates that impact the stated amount of assets and liabilities at a financial statement date and the reported amount of income and expenses during a reporting period. These accounting estimates are based on management's judgment and are considered to be critical because of their significance to the financial statements and the possibility that future events may differ from current judgments, or that the use of different assumptions could result in materially different estimates. The critical accounting policies and estimates have not changed from and should be read in conjunction with the Company's Annual Report filed on Form 10-K for the year ended June 30, 2008.

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

Overview of Results and Trends

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

Net earnings for the first quarter ended September 30, 2008 of $1.8 million were down 11% from $2.0 million earned for the same period of the prior year. A slight increase in direct finance, loan and interest income and lower selling, general and administrative expenses were offset by higher interest expense, decrease in other income and a higher provision for credit losses. The net investment in leases and loans of $259.6 million at September 30, 2008 decreased slightly from the balance at June 30, 2008, but was up $23.5 million, or 10%, from the balance at September 30, 2007.

New lease bookings during the first three months of fiscal 2009 of $41.4 million were 17% above the $35.5 million booked in the prior year, and along with commercial loans boarded of $10.8 million contributed to a 27% increase in loan and lease assets booked in the quarter to $52.2 million. For the first quarter of fiscal 2009, lease originations were about the same as during the first quarter of fiscal 2008, but with new loan commitments, total originations were up 60%. At September 30, 2008, property acquired for transactions in process of $32.9 million was up 13% from the level at June 30, 2008 but 20% lower than a year ago. The backlog of approved lease and loan commitments stood at $95.3 million at September 30, 2008.

The Bank's investment in leases and loans of $169.9 million at September 30, 2008 represented 65% of the Company's consolidated investment. In addition, the Bank increased its investment securities portfolio to $28.8 million at September 30, 2008 from $2.6 million at June 30, 2008. The new investments include certain U. S. agency issued securities and investment grade bank issued trust preferred securities that offer a better yield than federal funds sold and other short term investments. To fund this portfolio, demand, money market and time deposits increased by 5% to $163.9 million from $156.2 million at June 30, 2008 and federal funds sold and securities purchased under agreements to resell decreased to $8.8 million at September 30, 2008 from $24.7 million at June 30, 2008.

Consolidated Statement of Earnings Analysis

Summary -- For the first quarter ended September 30, 2008, net earnings of $1.8 million decreased 11% compared to the first quarter ended September 30, 2007. Diluted earnings per share were $.16 for the first quarter of fiscal 2009 compared to $.18 for the first quarter of fiscal 2008. In August 2008, the Company purchased 1.3 million shares of common stock pursuant to a modified Dutch auction tender offer, reducing the fully diluted average shares outstanding in the quarter by 4% to 10.9 million.

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

Net direct finance, loan and interest income was $5.1 million for the quarter ended September 30, 2008, compared to $5.2 million for the quarter ended September 30, 2007, a decrease of $160,000, or 3%. Direct finance and loan income of $6.1 million remained flat as an 11% increase in the average investment in leases and loans held in the Company's own portfolio was offset by a 96 basis point decrease in the average yield earned. Investment income increased slightly to $548,000 due to a 65% increase in average investment balances offset by a 142 basis point decrease in the average yield. The decrease in the yield on investments was largely due to a 260 basis point decrease in the rates earned on federal funds sold as the result of actions by the Federal Reserve over the past year. Interest expense on deposits was $1.6 million for the first quarter of fiscal 2009 compared to $1.3 million for the same quarter of the prior year, reflecting a 53% increase in the average balances of interest bearing deposits offset by a 115 basis point decrease in the average interest rates paid.

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

                                                  Quarter ended
                                            September 30, 2008 vs 2007
                                        Volume           Rate        Total
                                                  (in thousands)
Interest income
Net investment in leases               $    (407 )     $    (193 )   $ (600 )
Commercial loans                             933            (291 )      642
Discounted lease rentals                      68             (23 )       45
Federal funds sold                           (17 )           (11 )      (28 )
Federal funds sold                            41            (181 )     (140 )
Investment securities                        174             (15 )      159
Interest-bearing deposits with banks         123             (90 )       33
                                             932            (793 )      139

Interest expense
Non-recourse debt                             68             (23 )       45
Demand and savings deposits                  440            (169 )      271
Time deposits                                235            (252 )      (17 )
                                             743            (444 )      299
                                       $     189       $    (349 )   $ (160 )

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

                                    Quarter ended                              Quarter ended
                                  September 30, 2008                         September 30, 2007
(dollars in
thousands)               Average                      Yield/        Average                      Yield/
                         Balance       Interest        Rate         Balance       Interest        Rate
Assets
Interest-earning
assets
  Interest-earning
deposits with banks     $  33,838     $      199           2.4 %   $  19,479     $      166           3.4 %
  Federal funds sold       27,848            158           2.3 %      24,510            298           4.9 %
  Investment
securities                 14,734            191           5.2 %       2,277             32           5.6 %
  Commercial loans         44,768            728           6.5 %       3,780             86           9.1 %
  Net investment in
leases, including
   discounted lease
rentals (1,2)             224,271          5,545           9.9 %     235,523          6,100          10.4 %
Total
interest-earning
assets                    345,459          6,821           7.9 %     285,569          6,682           9.3 %
Other assets               39,743                                     46,862
                        $ 385,202                                  $ 332,431

Liabilities and
Stockholders' Equity
Interest-bearing
liabilities
  Demand and savings
deposits                $  44,389            349           3.1 %   $   6,677             78           4.6 %
  Time deposits           116,141          1,252           4.3 %      97,967          1,269           5.1 %
  Non-recourse debt
(1)                        10,116            137           5.4 %       5,797             92           6.3 %
Total
interest-bearing
liabilities               170,646          1,738           4.1 %     110,441          1,439           5.2 %
Other liabilities          20,111                                     23,607
Stockholders' equity      194,445                                    198,383
                        $ 385,202                                  $ 332,431
Net direct finance,
loan and interest
income                                $    5,083                                 $    5,243
Net direct finance,
loan and interest
income to
  average
interest-earning
assets                                                     5.9 %                                      7.3 %
Average
interest-earning
assets over
  average
interest-bearing
liabilities                                              202.4 %                                    258.6 %

(1) Direct finance income and interest expense on average discounted lease rentals and non-recourse debt of $10.1 million and $5.8 million for the quarters ended September 30, 2008 and 2007, respectively, offset each other and do not contribute to the Company's net direct finance and interest income.

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

Provision for Credit Losses -- The Company made a provision for credit losses in the first quarter of fiscal 2009 of $225,000, compared to a $40,000 provision for the same period in the prior year. The increase in the provision related primarily to the deterioration of certain leases during the quarter as well as heightened credit risk within the commercial loan portfolio.

Other Income -- Total other income for the quarter ended September 30, 2008 decreased by $341,000, or 17.9%, to $1.6 million, compared to $1.9 million for the same quarter of the prior fiscal year. The decline was due to a $316,000 decrease in gain on sales of leased property and $224,000 decrease in income from lease extensions, offset somewhat by a $224,000 increase in income from the sale of leases. Other fee income declined $25,000 between periods.

Selling, General and Administrative Expenses -- The Company's selling, general and administrative expenses ("SG&A") reported during the first quarter of fiscal 2009 decreased $331,000, or 8.5%, to $3.6 million compared to $3.9 million for the first quarter of fiscal 2008. The decrease in SG&A expenses is primarily due to lower fixed and variable office costs as well as a slight reduction in sales and administrative personnel costs.

Income Taxes -- Income taxes were accrued at a tax rate of 37.5% for the first quarter ended September 30, 2008 and September 30, 2007 representing the estimated annual tax rate for the fiscal years ending June 30, 2009 and 2008, respectively.

Financial Condition Analysis

As of September 30, 2008, consolidated total assets were $379.8 million, compared to $386.6 million at June 30, 2008. The $6.8 million decrease in total assets includes an $8.1 million decrease of the investment in leases to $212.1 million, a $5.3 million or 12.5% increase in commercial loans to $47.6 million, a $25.6 million increase in investment securities to $31.9 million and a $34.5 million decrease in cash and equivalents, including federal funds sold.

Lease and Loan Portfolio Analysis

All leases are secured by the underlying property being leased. The Company's strategy is to develop lease portfolios with risk/reward profiles that meet its objectives. The Company currently funds most new lease transactions internally, with a portion of lease receivables assigned to other financial institutions. During the first quarter ended September 30, 2008, approximately 84% of the total dollar amount of new leases booked by the Company were held in its own portfolios, compared to 98% during the first quarter of fiscal 2008. During the quarter ended September 30, 2008, the Company's net investment in leases and loans decreased by $2.8 million from June 30, 2008. This decrease includes a $6.9 million decrease in the investment in lease receivables and a $1.1 million decrease in the investment in estimated residual values, offset by the $5.3 million increase in commercial loan balances at the Bank. The decrease in the investment in lease receivables is primarily due to the increase in new lease receivables being assigned to unaffiliated financial institutions and the decrease in investment in residual values is due to a lower volume of leases being booked on which the Company records a residual value. The increase in loans held at the Bank primarily related to additional purchases of participations in syndicated transactions originated by other financial institutions.

The Company often makes payments to purchase leased property prior to the commencement of the lease. The disbursements for these lease transactions in process are generally made to facilitate the lessees' property implementation schedule. The lessee is contractually obligated by the lease to make rental payments directly to the Company during the period that the transaction is in process, and the lessee generally is obligated to reimburse the Company for all disbursements under certain circumstances. Income is not recognized while a transaction is in process and prior to the commencement of the lease. At September 30, 2008, the Company's investment in property acquired for transactions in process of $32.9 million related to approximately $80.8 million of approved lease commitments. This investment in transactions in process was up from $29.0 million at June 30, 2008, which related to approved lease commitments of $100.2 million, but down from $41.2 million at September 30, 2007, which related to approved lease commitments of $106.0 million. In addition to the approved lease commitments, CalFirst Bank had unfunded loan commitments at September 30, 2008 of $14.6 million.

The Company monitors the performance of all leases and loans held in its own portfolio, transactions in process, as well as lease transactions assigned to lenders, if the Company retains a residual investment in the leased property subject to those leases. An ongoing review of all leases and loans ten or more days delinquent is conducted. Customers 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 and loans generally will be discontinued when the customer becomes ninety days or more past due on its payments to the Company, unless the Company believes the investment is otherwise recoverable. Leases and loans may be placed on non-accrual earlier if the Company has significant doubt about the ability of the customer to meet its obligations, as evidenced by consistent delinquency, deterioration in the customer's financial condition or other relevant factors.

The following table summarizes the Company's non-performing leases. There were no non-performing loans during the periods summarized below:

                                                September 30, 2008         June 30, 2008
Non-performing Leases                                     (dollars in thousands)
Non-accrual leases                             $              2,281     $              2,132
Restructured leases                                             348                      398
Leases past due 90 days (other than above)                      164                       39
  Total non-performing capital leases          $              2,793     $              2,569
Non-performing assets as % of net investment
  in leases and loans before allowances                         1.1 %                    1.0 %

The increase in non-performing leases at September 30, 2008 compared to June 30, 2008 is primarily due to one relationship placed on non-accrual offset by other reductions during the quarter. In addition to the non-performing capital leases identified above, there was $1.4 million of investment in capital leases at September 30, 2008 for which management has concerns regarding the ability of the lessees to continue to meet existing lease obligations, compared with $1.1 million at June 30, 2008. 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. Although these leases have been identified as potential problem leases, they may never become non-performing. These potential problem leases are considered in the determination of the allowance for credit losses.

Allowance for Credit Losses

The allowance for credit losses provides coverage for probable and estimatable losses in the Company's lease and loan portfolios. The allowance recorded is based on a quarterly review of all leases and loans outstanding and transactions in process. Lease and loan receivables or residuals on leases 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 and loan portfolio.

                                                                Three months ended
                                                                   September 30,
                                                               2008             2007
                                                              (dollars in thousands)
Property acquired for transactions in process before
allowance                                                  $     32,954      $    41,299
Net investment in leases and loans before allowance             263,644          239,511
   Net investment in "risk assets"                         $    296,598      $   280,810

Allowance for credit losses at beginning of period         $      3,921      $     3,344
   Charge-off of lease receivables                                  (31 )              -
   Recovery of amounts previously written off                         -               68
   Provision for credit losses                                      225               40
Allowance for credit losses at end of period               $      4,115      $     3,452

Components of allowance for credit losses:
   Allowance for lease and loan losses                     $      4,052      $     3,384
   Liability for unfunded loan commitments                           20                -
   Allowance for transactions in process                             43               68
                                                           $      4,115      $     3,452
Allowance for credit losses as a percent of net
investment
 in leases and loans before allowances                              1.6 %            1.4 %
Allowance for credit losses as a percent of net
investment in "risk assets"                                         1.4 %            1.2 %

The allowance for credit losses increased $169,000 to $4.1 million (1.6% of net investment in leases and loans before allowances) at September 30, 2008 from $3.9 million (1.5% of net investment in leases and loans before allowances) at June 30, 2008. The allowance at September 30, 2008 consisted of $1.6 million allocated to specific accounts that were impaired and $2.44 million that was available to cover losses inherent in the portfolio. This compared to $1.5 million allocated to specific accounts at June 30, 2008 and $2.41 million available for losses inherent in the portfolio at that time. The increase in the specific allowance at September 30, 2008 primarily relates to the increase in specifically identified problems during the quarter. The Company considers the allowance for credit losses of $4.1 million at September 30, 2008 adequate to cover losses specifically identified as well as inherent in the lease and loan portfolios. However, no assurance can be given that the Company will not, in any particular period, sustain lease and loan losses that are sizeable in relation to the amount reserved, or that subsequent evaluations of the lease and loan portfolio, in light of factors then prevailing, including economic conditions and the on-going credit review process, will not require significant increases in the allowance for credit losses. Among other factors, economic and political events may have an adverse impact on the adequacy of the allowance for credit losses by increasing credit risk and the risk of potential loss even further.

Liquidity and Capital Resources

The Company funds its operating activities through internally generated funds, bank deposits and non-recourse debt. At September 30, 2008 and June 30, 2008, the Company's cash and cash equivalents were $37.3 million and $71.8 million, respectively. Stockholders' equity at September 30, 2008 was $185.7 million, or 49% of total assets, compared to $202.4 million, or 52% of total assets, at June 30, 2008. At September 30, 2008, the Company and the Bank exceed their regulatory capital requirements and are considered "well-capitalized" under guidelines established by the FRB and OCC.

On July 21, 2008, the Company commenced a modified "Dutch Auction" tender offer to purchase up to 1,300,000 shares of its common stock. CalFirst Bancorp shareholders were given the opportunity to tender part or all of their shares to the Company at a price not greater than $13.00 and not less than $12.00 per share. On August 25, 2008, the Company announced that it accepted for purchase 1,300,000 shares of its common stock, representing approximately 11.4% of its outstanding shares, at a purchase price of $13.00 per share for a total cost of $16.9 million, excluding fees and expenses relating to the offer. The tender offer was funded through cash on hand.

Deposits at CalFirst Bank totaled $163.9 million at September 30, 2008, compared to $112.3 million at September 30, 2007 and $156.2 million at June 30, 2008. The $51.6 million increase from September 30, 2007 was used to fund leases, loans and the Bank's growth in the investment portfolio, as well as maintain liquidity at the Bank. The following table presents average balances and average rates paid on deposits for the quarters ended September 30, 2008 and 2007:

                                                 Three months ended September 30,
                                                 2008                         2007
                                        Average        Average       Average       Average
                                        Balance       Rate Paid      Balance      Rate Paid
                                                      (dollars in thousands)
Non-interest bearing demand deposits   $    1,976            n/a     $  1,679            n/a
Interest-bearing demand deposits              377           0.50 %         62           0.44 %
Money market deposits                      44,012           3.14 %      6,615           4.67 %
Time deposits, less than $100,000          58,541           4.21 %     47,689           5.15 %
Time deposits, $100,000 or more        $   57,600           4.35 %   $ 50,278           5.13 %

. . .