Semi-Annual Report by Investment Company - Form N-CSRS

Item 1(a). Reports to Stockholders

Semi-Annual Financial Report

December 31, 2022

California First Leasing Corporation, (OTCQX: CFNB, "CalFirstLease" or the "Company"), headquartered in Newport Beach, California, registered as an internally managed non-diversified closed-end investment company under the Investment Company Act of 1940, as amended (the "1940 Act") in February 2022. The Company continues its lease business while using equity and other investments to maximize current income and generate capital appreciation.

An investment in the Company's common stock involves certain risks, including the risk of loss. The shares of common stock are not deposits or obligations of, or guaranteed by any federal or other government agency. A registration statement dated July 20, 2022 (the "Registration Statement") containing additional information about the Company has been filed with the Securities and Exchange Commission (the "SEC"). Investors should carefully consider the Company's objectives and risks detailed in the Registration Statement that may adversely affect the Company's shareholders' equity and stock price and may make an investment in the Company not appropriate for all investors.

Statements made in this report that are not strictly historical in nature constitute "forward-looking statements." Forward-looking statements involve management judgment and assumptions, risks and uncertainties and include, but are not limited to, beliefs regarding investments in equity securities, swings in stock prices and the potential for significant volatility in reported net earnings, changes in the lease portfolio, the impact of external events on business activities, estimates of expected tax rates applicable to future periods, impact of changes in interest rates and equity and fixed income markets. Such forward-looking statements involve known and unknown risks and uncertainties and factors that could cause actual results to differ materially include political, economic, competitive, market, regulatory and other risks. Consequently, if 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 information to reflect events or circumstances arising after the date hereof (January 30, 2023).

CONTENTS

Overview

For the six months ended December 31, 2022, net earnings decreased 68% to $3.4 million. This included a gain on equity securities of $12.8 million, a return of 10.0% for the three months ended December 31, 2022 that offset a loss on equity securities of $12.0 million reported for the first three months of fiscal 2023. The return on the equity portfolio for the six-month period of 1.9% compared to the return on the S&P 500^®TR Index of 2.4% for the same period. The Company's overall return based on the change in net asset value of 3.0% for the first half of fiscal 2023 benefitted from increased interest income related to higher interest rates and higher short-term investment balances, an 18% increase in lease income and 12% decline in operating expenses.

During the first six months of fiscal 2023, the Company did not declare or pay any dividends as in years past, but it did successfully complete a tender offer to repurchase 580,683 shares, or 5.6% of CalFirstLease's common stock outstanding. The repurchase of shares below book value contributed to a 1.5% increase to net book value per share at December 31, 2022.

Discussion of Performance and Results of Operations

The Company's operating results are comprised of two primary components:

·Investment income includes current income from dividends on equity securities, realized and unrealized gains or losses in the value of the securities, and interest earned on short-term treasury securities and money market balances.

·Lease income includes direct finance and interest income earned from leases and loans, as well as other income from sales of leased property, sales of leases and operating lease income.

The results discussed below represents past performance. Past performance is no guarantee of future results, and current or future performance may be lower or higher than the data included here. The Company's periodic earnings canfluctuate widely due to including gains and losses on equity securities, including unrealized amounts, that are determined based on stock prices on the last day of a fiscal period.

Investment Operations

The Company focuses on investing in fair or under-valued public companies that we expect to generate excess cash flow that can be reinvested into the business at attractive rates of return to continue substantial growth or be returned to shareholders via share repurchases or dividends. A high percentage of the equity portfolio generally is invested in U.S. large capitalization equities. From time to time, the Company may retain a significant amount of funds in short-term liquid investments in order to take advantage of investment or lease opportunities as they arise. The Company does not specialize in any specific industry, but may hold large positions in certain sectors that it believes offer the opportunity for long-term returns but may underperform in certain market environments.

U.S. equities made robust gains during the three months ended December 31, 2022, with the S&P 500 up 7.6% following the 4.9% decline during the September quarter, although technology and small-cap dominated NASDAQ was down slightly. While inflationary pressures persist,the latest consumer price index (CPI) data shows that inflation has slowed, GDP is stronger than earlier estimates and unemployment remains low. The Fed's last rate hike of 50 basis points in December signaled support for improving conditions.

The equity securities portfolio at December 31, 2022 consisted of common stock holdings in 30 public companies, all with readily available stock prices, compared to 34 public companies at June 30, 2022. Although the Company owns shares in 30 businesses, about 38% of the equity portfolio is invested in our top 5 holdings that amount to 27% of net assets. That is due to in most part to the strong performance of those investments since we purchased shares. The distribution of the Company's equity securities across four segments at December 31, 2022 and the comparative gains or losses by group is summarized below:

After declining into a net loss position during the September 2022 quarter, by the end of December 2022 the Company's equity securities had swung back into positive territory and produced a 1.9% return for the first six months of fiscal 2023, compared to a 2.4% all-in return on the benchmark S&P 500^®TR Index for the comparable period. CFNB's six-month results include a 10.0% return on the equity portfolio for the 3 months ended December 31, 2022 compared to a 7.6% return on the S&P 500^®TR Index.

The equity portfolio's recent performance relative to the broader market reflects better performance by energy, large-cap and value stocks, while growth and technology stocks continued to lag. Energy remains the Company's largest sector and this overweight, dominated by Exxon Mobil at 23% of the equity portfolio at December 31, made the group the top contributor to the Company's results for the second quarter and six months of fiscal 2023. The runner up contribution came from the health plan sector comprised of Cigna and United Health, followed by financial services led by Goldman Sachs. The greatest detractors to performance were telecom companies Verizon and AT&T, internet platforms Alphabet and Meta, as well as semiconductor companies, though the latter group did recover somewhat during the December quarter.

During the first six months of fiscal 2023, the Company invested $20.8 million in 7 existing holdings and 6 new positions. It also sold 10 positions for $9.3 million, realizing a net loss of $2.0 million. Following the sale of 9 positions during the first quarter, including AT&T, the Company did not make any sizable shifts to the equity portfolio during the second quarter other than to sell Warner Bros Discovery.

Interest and Dividend Income

A key component of the Company's strategy is to generate current income through dividends in addition to the opportunity to realize investment returns from appreciation in stock values. Of the 30 stock positions held at December 31, 2022, 21 pay a dividend and account for 85% of the fair value of equity securities at December 31, 2022. In addition, following aggressive Federal Reserve actions to raise interest rates since March 2022, income from money market balances are a more meaningful contributor to income. The following table presents the Company's average balances and yields earned on investments for the periods shown:

Total dividend and interest income for the six months ending December 31, 2022 increased 22% to $2.48 million as interest income jumped significantly on an 88% increase in average interest-earning balances and 282 basis point increase in average yield earned to 2.89%. This offset a 12% decline in dividend income related to an 22% decline in average equity balances to $144 million, notwithstanding a 17-basis point increase in average dividend yield to 2.47%.

Lease Operations

Lease bookings of $6.9 million for the first six months of fiscal 2023 were up from $5.2 million for the first six months of fiscal 2022. Lease originations in fiscal 2023 have been minimal, leaving the backlog of approved lease commitments of $5.9 million at December 31, 2022, down from $8.0 million at June 30, 2022. Transactions in process of $250,000 at December 31, 2022 are down from $2.7 million at June 30, 2022.

Finance and loan income of $730,000 for the first six months of fiscal 2023 was down 42% due to a 39.3% decrease in average balances to $20.8 million and a 35-basis point decrease in the average yield to 7.02%. The following table presents the Company's average lease and loan balances, income and related yields earned on an annualized basis.

Other Lease Income - In December 2022, the Company recovered $906,200 on a lease-related claim filed in 2015 and recognized the recovery as part of other lease income in the period. An increase in operating lease income also contributed to a 130% increase in other lease income during the first six months of fiscal 2023.

Operating Expenses

The Company's operating expenses for the six months ended December 31, 2022 decreased by 12.1% to $1.4 million compared to $1.5 million the year before. The decrease in fiscal 2023 included the continued release of reserves for credit losses along with a 16.2% decline in compensation and benefit costs despite absorbing the requirements related to registering with the SEC as an investment company.

Income Taxes

The Company's effective income tax rate varies between periods due to changes in the mix of pre-tax earnings, the magnitude of gains or losses from equity securities included in earnings, and underlying income tax rates applicable in various taxing jurisdictions. For the first six months ending December 31, 2022, the tax provision of $842,000 included a provision accrued at an effective tax rate of 18.2% on pretax earnings of $3.40 million excluding the equity securities gain, and a provision accrued at 27.0% on the net equity security gain of $830,876. The effective tax rate reflects the benefit the Company receives from the dividends received exclusion. The equity gain for the first six months of fiscal 2023 included net realized taxable losses of $2.0 million on the sale of equity securities in the period, and unrealized gains of $2.83 million.

The components of earnings and taxes are summarized as follows:

STATEMENT OF INVESTMENTS - December 31, 2022

(Unaudited - showing percentage of net assets)

The accompanying notes are an integral part of these financial statements.

STATEMENTS OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

The accompanying notes are an integral part of these financial statements.

STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited, in thousands, except share amounts)

The accompanying notes are an integral part of these financial statements.

STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

The accompanying notes are an integral part of these financial statements.

Financial Highlights*

(Unaudited)

(1)Return on market price assumes a purchase on the first day and sale on the last day of each period reported. Dividends and distributions are assumed to be reinvested. Total return on book value uses the same methodology, using book value for the beginning and ending values, and dividend reinvestment at the closing price on the day of distribution. Returns for periods of less than one year are not annualized.

(2) Expense ratio is annualized.

The accompanying notes are an integral part of these financial statements.

NOTES TO FINANCIAL STATEMENTS

Note 1 - Basis of Presentation

The accompanying unaudited financial statements of California First Leasing Corporation, ("CFNB" or the "Company"), have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and do not include all of the information and footnotes required for complete financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual report on Form N-CSR for the year ended June 30, 2022.

In the opinion of management, the unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of investments as of December 31, 2022 and the related statements of operations, stockholders' equity and cash flows for the periods presented. The results of operations for the three and six-month periods ended December 31, 2022 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending June 30, 2023. Certain reclassifications have been made to the fiscal 2022 financial statements to conform to the presentation of the fiscal 2023 financial statements.

Note 2 -Fair Value Measurement:

ASC Topic 820: "Fair Value Measurements and Disclosures" defines fair value as the price that would be received in an orderly transaction between market participants in the principal or most advantageous market. ASC Topic 820 establishes a three-tiered value hierarchy that prioritizes inputs that are observable in the market and requires the maximum use of observable inputs and minimum use of unobservable inputs. The three levels of inputs are defined as follows:

ASC 820 applies whenever other accounting pronouncements require presentation of fair value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value. As such, ASC 820 does not apply to the Company's investment in leases.

The value of deposits with banks and short-term treasury securities, because of their short-term nature, approximate fair value and are classified as Level 1. Equity securities, money market funds and income fund are reported utilizing Level 1 inputs by reference to the market closing or last trade price. In the unlikely event that no trade occurred on the applicable date, an indicative bid or the last trade most proximate to the applicable date would be used (Level 2 input). Changes in markets, economic conditions or the Company valuation model may require the transfer of financial instruments from one level to another. Such transfer, if any, would be recorded at the fair value as of the beginning of the period in which the transfer occurred. The Company has had no transfers in fiscal 2022 and 2023.

The following table summarizes the Company's assets, which are measured at fair value on a recurring basis as of December 31, 2022 and June 30, 2022:

The Company's loans are not accounted for or carried at fair value, but in accordance with the fair value disclosure requirements of ASC 825-50, the estimated fair value of the loans as of December 31, 2022 and June 30, 2022 is calculated based on discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and are classified as Level 3 in the fair value hierarchy. Loan fair values are based on an exit value and have been adjusted for credit risk.

These fair value estimates are based on relevant market information and data however, given there are no active market or observable market transactions, the Company has made estimates of fair values which are subjective in nature, involve uncertainties and cannot be determined with precision. Changes in assumptions could significantly affect the estimated values.

Note 3 - Investment Transactions and Compensation:

For the six months ended December 31, 2022, purchases and sales of investments, excluding short-term investments, were $20,752,604 and $9,306,495, respectively.

The aggregate remuneration paid to all officers and directors during the six months ended December 31, 2022 was $687,010 and $72,000, respectively.

Note 4- Leases:

The Company's net investment in 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 lease.

Note 5 - Commercial Loans:

Commercial loans consists of the following:

Note 6 - Allowance for Credit Losses:

The allowance for credit losses includes amounts to cover losses related to the net investment in leases, commercial loans, and transactions-in-process. A summary of the allocation of the allowance for credit losses and selected statistics is as follows:

Note 7 - Credit Quality of Financing Receivables:

The following tables provide information related to "financing receivables" as defined under Topic 310, Receivables. "Financing receivables" include direct finance and sales-type leases and all commercial loans, but does not include operating leases and transactions in process. The portfolio is disaggregated into two segments of leases and loans and four classes: 1) commercial leases, 2) education, government and non-profit ("EGNP") leases, 3) commercial and industrial loans and 4) commercial real estate loans. Relevant risk characteristics generally include the nature of the borrower, structure of the transaction and collateral type. The Company classifies all credits under regulatory models that rate as "pass", "special mention", "substandard", or "doubtful" and reflect an assessment of the ability of the credit to service the obligation based on current financial position, historical payment experience, and collateral adequacy, among other factors. The Company uses the following definitions for risk ratings:

The risk classification of financing receivables by portfolio class is as follows:

The accrual of interest income on leases and loans will be discontinued when the customer becomes ninety days or more past due on its lease or loan payments, 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 lease or loan obligations, as evidenced by consistent delinquency, deterioration in financial condition or other relevant factors. Payments received while on non-accrual are applied to reduce the Company's recorded value.

There were no past due credits at December 31, 2022 or June 30, 2022, and no increase in non-performing assets during either period.

The following table presents the allowance balances and activity in the allowance related to financing receivables, along with the recorded investment and allowance determined based on impairment method as of December 31 and June 30, 2022:

Other Information

Privacy Policy

The Company has systems in place to safeguard shareholder privacy, with access to all information limited to a need to know basis. Through our transfer agent, Computershare Trust Company, the Company has access to nonpublic shareholder information such as name, address, tax identification number and the shares held that is used to send annual reports, proxy statements, tax statements or other information required by law. This information is not shared with any non-affiliated third party except pursuant to contracts to perform transaction processing, servicing or maintaining shareholder accounts. These companies are required to protect information and use it solely for the purpose for which they received it.

Proxy Voting Policies and Procedures

The policies and procedures to determine how to vote proxies relating to the securities portfolio is available without charge by contacting investor relations at California First Leasing Corporation, 5000 Birch Street, Suite 500, Newport Beach, CA 92660; by email at [email protected]; or on the Securities and Exchange Commission's website at www.sec.gov.The Company's initial report on its proxy voting record for the twelve-month period ended June 30, 2022 is available without charge by email request at [email protected] is available on the SEC's website at www.sec.gov.

Quarterly Portfolio Information

The Company files its complete schedule of investments with the SEC for the first and the third quarter of each fiscal year on Form N-PORT beginning in the third calendar quarter of 2022. The Company's Form N-PORT filing for September 30, 2022 is available on the SEC's website at www.sec.gov.

Annual Meeting of Shareholders

The annual meeting of shareholders of the Company was held on January 31, 2023. At the meeting, all of the directors of the Company were reelected by the following vote of the holders of Common Stock:

Transfer Agent

Computershare Inc. serves as transfer agent and registrar with respect to Shares of the Company.

Independent Auditors

Eide Bailly, LLP serves as the independent registered public accounting firm to the Company.

(b) Not applicable

Item 2.Code of Ethics The information required by this Item is only required in an annual report on this Form N-CSR.

Item 3.Audit Committee Financial Expert

The information required by this Item is only required in an annual report on this Form N-CSR.

Item 4. Principal Accountant fees and Services

The information required by this Item is only required in an annual report on this Form N-CSR.

Item 5. Audit Committee of Listed Registrants. Not applicable insofar as the Company is not a listed issuer under the Securities Exchange Act of 1934, as amended.

Item 6. Investments.

(a) Schedule is included as a part of the report to shareholders filed under Item 1 of this Form.

(b) Not applicable.

Item 7. Disclose Proxy Voting Policies and Procedures for Closed-End Management Companies.

The information required by this Item is only required in an annual report on this Form N-CSR.

Item 8. Portfolio Managers of Closed-End Management Investment Companies.

The information required by this Item is only required in an annual report on this Form N-CSR.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

Not applicable insofar as the Company's shares are not registered pursuant to Section 12 of the Exchange Act.

There have been no changes to the procedures by which shareholders may recommend nominees to the registrant's board of directors since such procedures were last described in the Company's proxy statement dated January 6, 2023.

Item 11. Controls and Procedures.

a)The Principal Executive Officer and Principal Financial Officer of the Company have concluded that the Company's Disclosure Controls and Procedures (as defined in Rule 30a-3(c) under the Act are effective as of a date within 90 days of the filing date of this report based on their evaluation of the Disclosure Controls and Procedures.

b)There have been no changes in the Company's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.

Not applicable.

Item 13. Exhibits.

(a) (1) The information required by this Item is only required in an annual report on this Form N-CSR.

(2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Act is attached hereto.

SIGNATURES

Pursuant to the requirements of the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.