California First told to slash its portfolio of leveraged loans

California First National Bancorp in Irvine is looking to shrink its leveraged loan portfolio drastically after receiving a new directive from the Office of the Comptroller of the Currency.

The $880 million-asset company disclosed in a regulatory filing Monday that the OCC advised its bank in a March 21 letter to “substantially reduce” its concentration of leveraged loans. The letter followed an interim examination.

The OCC had already instructed California First in February to stop originating leveraged or nonleveraged syndicated commercial loans until the agency had validated that an acceptable risk management framework was in place.

California First said in Monday’s filing that the size of its syndicated loan portfolio declined by 10% between Jan. 1 and March 31 as a result of its following the OCC’s directive, as well as loan payoffs and sales.

The company said it expects the portfolio to shrink by another 6% after the completion of another sale or payoff.

California First said it is conducting a strategic review of its options, and that it will likely reduce the size of its leveraged loan portfolio by more than 50% over the next year.

“While the bank has the latitude to coordinate any reduction in the loan portfolio with reductions in deposits and other funding liabilities … this process could have a material adverse effect on net interest income,” the filing said.

The company said in February that about 70% of its syndicated loan book at Dec. 31 could be characterized as leveraged loans under the guidance of federal regulators.

California Federal plans to release its quarterly results around April 28.