GENERAL

California First National Bancorp, a California corporation, is a bank holding company headquartered in Orange County, California. CalFirst Bank focuses on leasing and financing capital assets that it funds directly or through CalFirst Leasing. 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 CalFirst Leasing, purchases participations in commercial loan syndications and provides commercial loans to businesses, including real estate based and revolving lines of credit. 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, commercial loans and investment securities. Non-interest income primarily includes gains realized on the sale of leased property and leases, income from sales-type and operating leases, gains and losses realized on investments, and other income. Income from sales-type leases relates to the re-lease of lease property ("lease extensions") while income from operating leases generally involves lease extensions that are accounted for as an operating lease rather than as a sales-type lease.

The Company's operating results are subject to quarterly fluctuations resulting from a variety of factors, including the size and credit quality of the lease and loan portfolios, the volume and profitability of leased property being re-marketed through re-lease or sale, the interest rate environment, the market for investment securities, the volume of new lease or loan originations, including variations in the mix and funding of such originations, and economic conditions in general. The Company's principal market risk exposure currently is related to interest rates and the differences in the repricing characteristics of interest-earning assets and interest-bearing liabilities. The Company's current balance sheet structure is short-term in nature, with over 60% of assets and 80% of liabilities repricing within one year. The Company's interest margin also is susceptible to timing lags related to varying movements in market interest rates. Many of the Company's leases, loans and liquid investments are tied to U.S. treasury rates and Libor that often do not move in step with bank deposit rates. As a result, this can cause a greater change in net interest income than indicated by the repricing asset and liability comparison.

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

Critical Accounting Policies and Estimates

The preparation of the Company's financial statements requires management to make certain critical accounting estimates that impact the stated amount of assets and liabilities at a financial statement date and the reported amount of income and expenses during a reporting period. These accounting estimates are based on management's judgment and are considered to be critical because of their significance to the financial statements and the possibility that future events may differ from current judgments, or that the use of different assumptions could result in materially different estimates. The critical accounting policies and estimates have not changed from and should be read in conjunction with the Company's Annual Report filed on Form 10-K for the year ended June 30, 2011.

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

Overview of Results and Trends

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

Net earnings of $2.1 million for the second quarter ended December 31, 2011 were down 33.6% from the second quarter of the prior year, while net earnings for the first six months of fiscal 2012 of $4.5 million were down $217,000, or 4.6% from the same period of the prior year. The decline in net earnings from the second quarter and first six months of fiscal 2011 is largely due to large gains realized on the sale of investment securities during the prior year periods. Excluding investment gains from both periods, gross profit during second quarter declined by 6%, while gross profit for the first six months of fiscal 2012 is up 10% from the prior year.

New lease bookings during the second quarter of fiscal 2012 of $51.2 million were 26% below the volume booked in the second quarter of the prior year. There were no new commercial loans added during the second quarter of fiscal 2012 compared to $30.7 million booked in the second quarter of the prior fiscal year due to continued restrictions on CalFirst Bank's commercial loan activities. As a result, the net investment in leases and loans of $326.8 million at December 31, 2011 was down 2% from the balance at December 31, 2010, however, up 3.1% from the balance at June 30, 2011. New direct lease originations during the second quarter of fiscal 2012 were down 11% from the second quarter of the prior year but combined with new loan and lease purchase commitments, total originations were down 29%. For the six months ended December 31, 2011, total originations were 34% below the same period of the prior year. The estimated backlog of approved lease commitments of $71.2 million is 6% less than a year ago. In addition, there were loan commitments of $20.0 million at December 31, 2011 related to unfunded commitments on revolving lines of credit.

Consolidated Statement of Earnings Analysis

Summary - For the second quarter ended December 31, 2011, net earnings of $2.1 million declined $1.0 million compared to the second quarter ended December 31, 2010. For the first six months of fiscal 2012, net earnings of $4.5 million decreased $217,000, or 4.5%, compared to the first six months of fiscal 2011. Diluted earnings per share of $0.20 per share for the second quarter of fiscal 2012 was down 34.0% from the $0.30 per share for the second quarter of fiscal 2011. For the six months ended December 31, 2011, diluted earnings per share of $0.44 decreased 5.2%, compared to $0.46 per share for the same prior year period.

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

Net direct finance, loan and interest income was $5.1 million for the quarter ended December 31, 2011, a $560,000, or 9.9%, decrease compared to the same quarter of the prior year. Total direct finance, loan and interest income for the second quarter ended December 31, 2011 decreased 9.4% to $5.9 million from $6.5 million earned during the second quarter of fiscal 2011. This decrease was primarily due to a $662,000 or 39% decrease in loan income due to lower yields together with a 14.1% decline in average loan balances. During the second quarter of fiscal 2012, interest expense paid on deposits and borrowings decreased by $58,000 or 6.7% reflecting a 34 basis point drop in average interest rates paid to 1.16% and a 21% increase in average balances to $279.6 million.

For the six months ended December 31, 2011, net direct finance, loan and interest income was $10.4 million, a $302,000 or 2.8% decrease from $10.7 million earned during the same period of the prior year. Total direct finance, loan and interest income for the first six months of fiscal 2012 decreased $400,000, or 3.2%, to $12.0 million. Commercial loan income declined $872,000 or 28.8%, which was offset by increases in direct finance income and investment income of $423,000 and $50,000, respectively. The decrease in commercial loan income for the first six months of fiscal 2012 was the result of a 3.2% decrease in average balances to $87.3 million and a 177 basis point decrease in the average yield to 4.9%. The 5.4% increase in direct finance income reflected a $29.8 million increase in average balances to $228.8 million and a 65 basis point drop in average rates to 7.2%. The 3.1% increase in investment income reflected a $31.9 million increase in the average investment in cash and investments to $161.1 million, and a 43 basis point drop in the average yields earned to 2.04%. For the six months ended December 31, 2011, interest expense on deposits and borrowings decreased by $97,000 or 5.5% to $1.7 million, reflecting a 36 basis point decrease in interest rates paid on average balances that increased by 22.9% from the prior year to $279.1 million.

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

                                               Quarter ended                       Six Months ended
                                        December 31, 2011 vs 2010               December 31, 2011 vs 2010
                                    Volume          Rate        Total       Volume          Rate        Total
                                                                 (in thousands)
Interest income
Net investment in leases           $    540       $   (546 )   $    (6 )   $    727       $   (304 )   $   423
Commercial loans                       (236 )         (425 )      (661 )        (97 )         (775 )      (872 )
Discounted lease rentals                (72 )            -         (72 )       (149 )            1        (148 )
Investment securities                   146           (107 )        39          167           (131 )        36
Interest-earning deposits with
banks                                    11              -          11           25            (11 )        14
                                        389         (1,078 )      (689 )        673         (1,220 )      (547 )
Interest expense
Non-recourse debt                       (72 )            -         (72 )       (149 )            1        (148 )
Demand and money market deposits         37            (64 )       (27 )         81           (117 )       (36 )
Time deposits                           136           (171 )       (35 )        319           (385 )       (66 )
Borrowings                               (1 )            6           5           (1 )            6           5
                                        100           (229 )      (129 )        250           (495 )      (245 )
Net direct finance, loan and
interest income                    $    289       $   (849 )   $  (560 )   $    423       $   (725 )   $  (302 )

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

                                                    Quarter ended                            Quarter ended
(dollars in thousands)                            December 31, 2011                        December 31, 2010
                                          Average                     Yield/       Average                     Yield/
Assets                                    Balance       Interest       Rate        Balance       Interest       Rate
Interest-earning assets
Interest-earning deposits with banks     $  88,705     $       39         0.2 %   $  63,134     $       28         0.2 %
Investment securities                       66,439            768         4.6 %      55,353            729         5.3 %
Commercial loans                            86,702          1,015         4.7 %     100,897          1,676         6.6 %
Net investment in leases, including
discounted lease rentals (1,2)             240,463          4,191         7.0 %     218,496          4,269         7.8 %
Total interest-earning assets              482,309          6,013         5.0 %     437,880          6,702         6.1 %
Other assets                                36,044                                   36,115
                                         $ 518,353                                $ 473,995

Liabilities and Shareholders' Equity
Interest-bearing liabilities
Demand and savings deposits              $  85,174            120         0.6 %   $  67,844            147         0.9 %
Time deposits                              184,595            630         1.4 %     153,354            665         1.7 %
FHLB & FRB borrowings                        9,873             58         2.3 %      10,000             53         2.1 %
Non-recourse debt                            6,409             88         5.5 %      11,669            160         5.5 %
Total interest-bearing liabilities         286,051            896         1.3 %     242,867          1,025         1.7 %
Other liabilities                           33,185                                   31,813
Shareholders' equity                       199,117                                  199,315
                                         $ 518,353                                $ 473,995

Net direct finance, loan and interest
income                                                 $    5,117                               $    5,677
Net direct finance, loan and interest
income to average interest-earning
assets                                                                    4.2 %                                    5.2 %
Average interest-earning assets over
average interest-bearing liabilities                                    168.6 %                                  180.3 %

                                                  Six months ended                        Six months ended
                                                  December 31, 2011                       December 31, 2010
                                          Average                    Yield/       Average                    Yield/
Assets                                    Balance      Interest       Rate        Balance      Interest       Rate
Interest-earning assets
Interest-earning deposits with banks     $  94,053     $      83         0.2 %   $  68,751     $      69         0.2 %
Investment securities                       67,088         1,562         4.7 %      60,495         1,526         5.0 %
Commercial loans                            87,312         2,155         4.9 %      90,217         3,027         6.7 %
Net investment in leases, including
discounted lease rentals (1,2)             235,891         8,443         7.2 %     211,554         8,168         7.7 %
Total interest-earning assets              484,344        12,243         5.1 %     431,017        12,790         5.9 %
Other assets                                34,535                                  37,509
                                         $ 518,879                               $ 468,526

Liabilities and Shareholders' Equity
Interest-bearing liabilities
Demand and savings deposits              $  84,679           289         0.7 %   $  67,749           324         1.0 %
Time deposits                              184,514         1,290         1.4 %     149,389         1,357         1.8 %
FHLB & FRB borrowings                        9,891           111         2.2 %      10,000           106         2.1 %
Non-recourse debt                            7,078           195         5.5 %      12,504           343         5.5 %
Total interest-bearing liabilities         286,162         1,885         1.3 %     239,642         2,130         1.8 %
Other liabilities                           33,208                                  29,574
Shareholders' equity                       199,509                                 199,310
                                         $ 518,879                               $ 468,526

Net direct finance, loan and interest
income                                                 $  10,358                               $  10,660
Net direct finance, loan and interest
income to average interest-earning
assets                                                                   4.3 %                                   4.9 %
Average interest-earning assets over
average interest-bearing liabilities                                   169.3 %                                 179.9 %

(1) Direct finance income and interest expense on discounted lease rentals and non-recourse debt of $5.8 million and $10.9 million at December 31, 2011 and 2010, 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 did not record a provision for credit losses in the second quarter and first six months of fiscal 2012, compared to a provision of $500,000 in the second quarter of fiscal 2011 and a provision of $775,000 for the first six months of the prior year. No provision was recorded in the three and six months ended December 31, 2011 due to a 9% decline in the commercial loan portfolio to $85.0 million at December 31, 2011, along with some improvement in the credit metrics of the portfolios. The large provision during the first six months of fiscal 2011 was largely due to significant growth in the commercial loan portfolio to $108.3 million at December 31, 2010.

Non-interest Income - Total non-interest income for the quarter ended December 31, 2011 decreased by $1.5 million or 53.6% to $1.3 million, compared to $2.8 million for the same quarter of the prior fiscal year. The primary reason for the decline is due to a realized gain on the sale of securities available-for-sale of $1.2 million in the prior year compared to a gain realized in the current year quarter of $56,000. Excluding such investment gains, other non-interest income of $1.2 million declined from $1.6 million during the second quarter of the prior year primarily due to a $487,000 decrease in income realized from the re-lease of property on leases reaching the end of term, offset by an $184,000 increase in income from the sale of leased property.

For the six months ended December 31, 2011, total non-interest income of $3.2 million decreased 16.6% from $3.8 million for the six months ended December 31, 2010. The decrease included a $1.3 million decline in gains realized on the sale of investment securities to $56,000. Excluding investment gains, non-interest income for the first six months of fiscal 2012 increased 30% primarily due to an $888,000 increase in income realized on the sale or re-lease of property on leases reaching the end of term.

Non-interest Expense - During the second quarter of fiscal 2012, non-interest expense of $3.1 million was 4.4% higher than the second quarter of fiscal 2011. Non-interest expense of $6.2 million for the first six months of fiscal 2012 was up 3.8% from the $6.0 million for the first six months of fiscal 2011. The increase in non-interest expenses in both periods is primarily due to higher compensation expenses being recognized as a smaller percent of origination expenses related to the sales organization are being deferred.

Taxes - Income taxes were accrued at a tax rate of 38.00% for the second quarter ended and six months ended December 31, 2011 compared to 38.25% for the same comparable periods of the prior year, which represents the estimated annual tax rate for the fiscal years ending June 30, 2012 and 2011, respectively.

Financial Condition Analysis

Consolidated total assets at December 31, 2011 of $492.8 million were down $31.6 million, or 6.0% from $524.4 million at June 30, 2011. The change in total assets includes a $30.9 million decrease in cash and cash equivalents, $8.7 million decrease in the commercial loan portfolio, $3.6 million decrease in property acquired for transactions-in-process and $2.3 million decrease in securities available-for-sale, offset by an increase of $18.4 million in the net investment in leases.

Lease and Loan Portfolio Analysis

The Company's strategy is to develop lease and loan 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 six months ended December 31, 2011, 99.6% of the new leases booked by the Company were held in its own portfolios, compared to 98.4% during the first six months of fiscal 2011. The $18.4 million increase in the Company's net investment in leases during the six months ended December 31, 2011 includes an $18.7 million increase in lease receivables and a slight increase in estimated residual values. The increase in lease receivables is due to the volume of new leases being booked during the period being sufficient to offset payments received and leases terminating. The $8.7 million decline in the Company's commercial loan portfolio reflected loan payoffs and repayments aggregating to $14.0 million offset by the addition of $5.2 million new commercial loan participations or draw downs on lines of credit.

The Company often makes payments to purchase leased property prior to the commencement of the lease. The disbursements for these lease transactions in process are generally made to facilitate the lessees' property implementation schedule. The lessee is contractually obligated by the lease to make rental payments directly to the Company during the period that the transaction is in process, and the lessee generally is obligated to reimburse the Company for all disbursements under certain circumstances. Income is not recognized while a transaction is in process and prior to the commencement of the lease. At December 31, 2011, the Company's investment in property acquired for transactions in process of $25.6 million related to approximately $62.5 million of approved lease commitments. This investment in transactions in process decreased $3.4 million from $29.2 million at June 30, 2011, which related to direct lease commitments of $87.2 million, but was up from $14.7 million at December 31, 2010, which related to direct lease commitments of $69.7 million. In addition to the direct lease commitments, the Company had unfunded lease purchase commitments of $8.7 million and commitments related to unused lines of credit of $20.0 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 day's delinquent is conducted. Leases and loans that are delinquent with the Company or an assignee are coded in the Company's accounting and tracking systems in order to provide management visibility, periodic reporting, and appropriate reserves. The accrual of interest income on leases and loans generally will be discontinued when the lease or loan becomes ninety days or more past due on its payments with the Company, unless the Company believes the investment is otherwise recoverable. Leases and loans may be placed on non-accrual earlier if the Company has significant doubts about the ability of the customer to meet its obligations, as evidenced by consistent delinquency, deterioration in the customer's financial condition or other relevant factors.

The following table summarizes the Company's non-performing leases and loans.

                                                                    December 31, 2011       June 30, 2011
Non-performing Leases and Loans                                            (dollars in thousands)
Non-accrual leases (including residual)                            $               770     $         1,137
Restructured leases                                                              1,545               1,441
Leases past due 90 days (other than above, including residual)                       -                  45
Total non-performing capital leases and loans                      $             2,315     $         2,623
Non-performing assets as % of net investment in leases and loans
before allowances                                                                  0.7 %               0.9 %

The decrease in non-performing assets at December 31, 2011 was primarily due to the decline in non-accrual leases from June 30, 2011, as payments received lowered the balances due. The restructured lease balance includes two leases, both of which were current with their payments at December 31, 2011. In addition to the non-performing leases and loans identified above, there was $9.2 million of investment in leases and loans at December 31, 2011 classified as substandard or with credits that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future. Although these credits have been identified as potential problems, they may never become non-performing. These potential problem leases and loans are considered in the determination of the allowance for credit losses.

Allowance for Credit Losses

The allowance for credit losses provides coverage for probable and 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 receivables, loans or residuals are charged off when they are deemed completely uncollectible. The determination of the appropriate amount of any provision is based on management's judgment at that time and takes into consideration all known relevant internal and external factors that may affect the portfolios.

                                                                        Six months ended
                                                                          December 31,
                                                                       2011            2010
                                                                     (dollars in thousands)
Property acquired for transactions in process before allowance     $     25,627      $  18,094
Net investment in leases and loans before allowance                     331,964        338,384
Net investment in "risk assets"                                    $    357,591      $ 356,478

Allowance for credit losses at beginning of period                 $      5,080      $   4,467
Charge-off of lease receivables                                             (22 )           (3 )
Recovery of amounts previously written off                                   91             39
Provision for credit losses                                                   -            775
Allowance for credit losses at end of period                       $      5,149      $   5,278

Components of allowance for credit losses:
. . .