• Third quarter net interest income increased 2% on higher yields on leases and loans and a 4% increase in average interest earning assets offset a slight decline in the net interest margin.
• Non-interest expenses declined by 7% in the 2017 third quarter. 

• The growth in commercial loan income reflected a 22% increase in average loan balances to $424.9 million from $347.7 million for the same period of the prior year, while the average yield increased by 12 basis points to 3.82%.
• The decrease in finance income was due to a 29% decrease in average lease balances to $192.5 million offset by a 43 basis point increase in the average yield.
• Investment interest income increased 20% during the 2017 third quarter as average cash and investment balances increased 19.1% to $212.8 million but the average yield only increased by 2 basis points to 1.40% as a higher percent of investments were held in Fed Funds.
• During the third quarter of fiscal 2017, interest expense paid increased 14% to $1.8 million from $1.6 million, reflecting a 5% increase in the average balance of deposits and borrowings to $661.2 million and 9 basis point increase in average rate paid to 1.12%.
• The increased interest cost includes a 7 basis point increase in average cost of deposits to 1.15% on a $48 million increase in average deposits, with the total funding cost change tempered by a $17 million decrease in average borrowings at an average rate of that increased from 0.46% to .60%.
• The abrupt decline in commercial loan originations and accelerated loan payoffs during the third quarter, prior to realizing any benefit from reducing deposits and lower deposit rates, is believed to have negatively impacted net interest income during the third quarter.

Investment Securities

Investment securities of $98.7 million at March 31, 2017 are down 1% from $99.8 million at June 30, 2016.  The decrease includes pay downs of $4.8 million and a $2.2 million decline in the fair value of securities held for sale that offset the purchase of $6 million of equity securities.

Leases and Loans

Third quarter 2017 lease and loan bookings of $36.2 million declined 65% from $104.5 million booked the prior year. This included booking only $10.5 million of new loans in the quarter, while lease bookings of $25.6 million declined 39% from $42 million the year before.

Nine month 2017 lease and loan bookings of $203.4 million declined 31% from $296.2 million for the prior year period. Nine month loan bookings of $123.5 million were down 35% while lease bookings were down 24% to $79.9 million. Transactions in process declined 15% from June 30, 2016 to $26.3 million.

2017 third quarter lease and loan originations decreased 91% from the third quarter of fiscal 2016, while nine month originations were down 39%. As a result, the estimated backlog of approved lease and loan commitments of $70.0 million at March 31, 2017 is down 32% from $103.4 million at December 31, 2016, and 20% below $88.4 million at March 31, 2016.

Commercial Loan Portfolio and Regulatory Issues

At March 31, 2017, 97% of the commercial loan portfolio consists of participations in syndicated transactions, compared to 96% at June 30, 2016, with approximately 65% characterized as “leveraged loans” under guidance promulgated by federal bank regulators, down from 79% under such guidance at June 30, 2016. At March 31, 2017, approximately 17% of the syndicated loan portfolio is rated investment grade (Baa3 or higher) by Moody's Investors Service compared to 24% of the syndicated loan portfolio at June 30, 2016, while approximately 16% relates to companies that are rated lower than Ba, up from 12% at June 30, 2016. Only one loan is rated less than pass by the Company at March 31, 2017.  There were 72 different credits in the syndicated loan portfolio at March 31, 2017, 60 of which are publicly traded companies accounting for 87% of the syndicated loan portfolio, with an estimated average equity market capitalization of $7.0 billion.

In light of the decline in the loan portfolio, the Company took action in March 2017 to reduce deposits, particularly certificates of deposits (“CD”s), by drastically cutting rates offered on CDs. As a result, during the third quarter CDs declined by 9% and overall deposits declined by 8%. Nonetheless, the Company’s cash increased by over 20% to $111 million at March 31, 2017. Through this period of managing the decline in commercial loans and deposits, the Company expects to carry higher liquidity invested in lower yielding fed funds as the timing of deposit withdrawals and loan payoffs can be unpredictable.

CalFirst Bank is pursuing an appeal of the regulatory restrictions placed on its ability to originate loans, but cannot predict if it will be successful in its appeal, or what the conditions of any relief might be. At this time, the Bank expects no new syndicated loan originations during the fourth quarter of fiscal 2017 and that, in addition to the $29 million of loans held for sale at March 31, 2017, another 10% to 15% of the loan portfolio may also be sold or paid off during the fourth quarter ending June 30, 2017.  If regulatory restrictions on the Bank's ability to originate syndicated commercial loans are not lifted, it is expected that this will require more than a 50% reduction in the Bank's leverage loan portfolio over the next twelve months and this will have an adverse effect on the ability of the Company to grow its business and net interest income.  The Company cannot predict when or how this issue ultimately may be resolved, and is not able to estimate the impact on fourth quarter 2017 and beyond results with any accuracy. 

California First National Bancorp is a bank holding company with lending and bank operations based in Orange County, California. California First National Bank is an FDIC-insured national bank that gathers deposits using telephone, the Internet, and direct mail from a centralized location, and provides lease financing and commercial loans to businesses and organizations nationwide.

This release contains forward-looking statements which involve management assumptions, risks and uncertainties.  The statements in this document that are not strictly historical in nature constitute “forward-looking statements.”  Such statements include expectations regarding regulatory activities, backlog of lease and loan commitments and changes in interest income and lease and loan bookings.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause actual results to be different from the results expressed or implied by such forward-looking statements.  Consequently, if such management assumptions prove to be incorrect or such risks or uncertainties materialize, the Company’s actual results could differ materially from the results forecast in the forward-looking statements. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this release to reflect events or circumstances arising after the date hereof.  For further discussion regarding management assumptions, risks and uncertainties, readers should refer to the Company’s 2016 Annual Report on Form 10-K and the 2017 quarterly reports on Form 10-Q.

CONTACT:                                                                                                                                       

S. Leslie Jewett

ljewett@calfirstbancorp.com

949-255-0500

CALIFORNIA FIRST NATIONAL BANCORP

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CALIFORNIA FIRST NATIONAL BANCORP

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