CALIFORNIA FIRST LEASING CORP - Quarter Report: 2015 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 Commission File No.: 0-15641

California First National Bancorp

(Exact name of registrant as specified in charter)

Registrant's telephone number, including area code:       (949) 255-0500

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ☐   No ☒

The number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of October 25, 2015 was 10,459,924.

California First National Bancorp

INDEX

Forward-Looking Statements

This Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, the information concerning our possible future consolidated results of operations, business and growth strategies, financing plans, our competitive position and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “plan”, “may”, “should”, “will”, “would”, “project” and similar expressions. These forward-looking statements are based on information currently available to us and are subject to inherent risks and uncertainties, and certain factors could cause actual results to differ materially from those anticipated. Particular uncertainties arise from the behavior of financial markets, including fluctuations in interest rates and securities prices, from unanticipated changes in the risk characteristics of the lease and loan portfolio, the level of defaults and a change in the provision for credit losses, and from numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive or regulatory nature. Forward-looking statements speak only as of the date made. The Company undertakes no obligations to update any forward-looking statements. Management does not undertake to update our forward-looking statements to reflect events or circumstances arising after the date on which they are made.

California First National Bancorp

CONSOLIDATED BALANCE SHEETS

(in thousands, except for share amounts)

The accompanying notes are an integral part

of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

(in thousands, except share and per share amounts)

The accompanying notes are an integral part

of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

The accompanying notes are an integral part

of these consolidated financial statements.

California First National Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

The accompanying notes are an integral part

of these consolidated financial statements.

California First National Bancorp

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

(in thousands, except for share amounts)

The accompanying notes are an integral part

of these consolidated financial statements.

CALIFORNIA FIRST NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1- BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of California First National Bancorp (the “Company”) and its subsidiaries California First National Bank (“CalFirst Bank” or the “Bank”) and California First Leasing Corporation (“CalFirst Leasing”) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended June 30, 2015. The material under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is written with the presumption that the readers have read or have access to the 2015 Annual Report on Form 10-K, which contains Management’s Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2015 and for the year then ended.

In the opinion of management, the unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the consolidated balance sheet as of September 30, 2015 and the statements of earnings, comprehensive income, cash flows and stockholders’ equity for the three-month periods ended September 30, 2015 and 2014. The results of operations for the three-month period ended September 30, 2015 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending June 30, 2016.

Certain reclassifications have been made to the fiscal 2015 financial statements to conform to the presentation of the fiscal 2016 financial statements.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The ASU is a converged standard between the FASB and the International Accounting Standards Board that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The new accounting guidance clarifies the principles for recognizing revenue from contracts with customers. The FASB deferred this guidance, which does not apply to financial instruments, to be effective for interim and annual reporting periods beginning after December 15, 2017. The Company does not expect the new guidance to have a material impact on its consolidated financial position or results of operations.

NOTE 3 – STOCK-BASED COMPENSATION

At September 30, 2015, the Company has one stock option plan, which is more fully described in Note 14 in the Company’s 2015 Annual Report on Form 10-K. Pursuant to ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”), compensation expense is recognized over the requisite service period using the fair-value based method for all new awards calculated at the grant date.

During the quarters ended September 30, 2015 and 2014, the Company recognized pre-tax stock-based compensation expense of $1,100 in each respective quarter. Such expense related to options granted during fiscal 2013. The Company has not awarded any new grants in fiscal 2016 and has calculated the stock-based compensation expense based upon the original grant date fair value as allowed under ASC 718. The valuation variables utilized at the grant dates are discussed in the Company’s 2015 Annual Report on Form 10-K. As of September 30, 2015, approximately $8,000 of total unrecognized compensation expense related to unvested shares is expected to be recognized over the next 22 months.

Stock option activity for the periods indicated is summarized in the following table:

Stock options outstanding and exercisable are summarized below:

NOTE 4 – FAIR VALUE MEASUREMENT:

ASC Topic 820: “Fair Value Measurements and Disclosures” defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. ASC Topic 820 establishes a three-tiered value hierarchy that prioritizes inputs based on the extent to which inputs used are observable in the market and requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs.  If a value is based on inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. 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 Company’s financial assets measured at fair value on a recurring basis include primarily securities available-for-sale and at September 30, 2015, there were no liabilities subject to ASC 820. 

Securities available-for-sale include U.S. Treasury Notes, corporate bonds, municipal bonds, U.S. government agency (“Agency”) mortgaged-backed securities (“MBS”), and mutual fund investments and generally are reported at fair value utilizing Level 1 and Level 2 inputs. The fair value of corporate and municipal bonds and the Agency MBS are obtained from independent quotation bureaus that use computerized valuation formulas to calculate current values based on observable transactions, but not a quoted bid, or are valued using prices obtained from the custodian, who uses third party data service providers (Level 2 input). U.S. Treasury Notes and mutual funds are valued by reference to the market closing or last trade price (Level 1 inputs). 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).

The following table summarizes the Company’s assets, which are measured at fair value on a recurring basis as of September 30, 2015 and June 30, 2015:

Certain financial instruments, such as collateral dependent impaired loans, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances, usually if there is evidence of impairment. The Company had no such assets or liabilities at September 30, 2015 and June 30, 2015.

NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS:

In accordance with ASC 825-50, the following table summarizes the estimated fair value of financial instruments as of September 30, 2015, and June 30, 2015, and includes financial instruments that are not accounted for or carried at fair value. In accordance with disclosure guidance, certain financial instruments, including all lease related assets and liabilities and all non-financial instruments are excluded from fair value of financial instrument disclosure requirements. Accordingly, the aggregate of the fair values presented does not represent the total underlying value of the Company. These fair value estimates are based on relevant market information and data, however, given there is no active market or observable market transactions for certain financial instruments, the Company has made estimates of fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimated values.

For cash and cash equivalents and demand and savings deposits, because of their short-term nature, the carrying amounts approximate the fair value and are classified as Level 1 in the fair value hierarchy. Values for investments and available-for-sale securities are determined as set forth in Note 4, 6 and 7. The fair values of loan participations that trade regularly in the secondary market are based upon current bid prices in such market at the measurement date and are classified as Level 2 in the fair value hierarchy. For other loans, the estimated fair value 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. These calculations have been adjusted for credit risk based on the Company’s historical credit loss experience. The fair value of certificates of deposit and short-term borrowings are estimated based on discounted cash flows using current offered market rates or interest rates for borrowings of similar maturity and are classified as Level 3 in the fair value hierarchy.

The estimated fair values of financial instruments were as follows:

NOTE 6 – INVESTMENTS:

Investments are carried at cost and consist of the following:

The investment in Federal Home Loan Bank of San Francisco (“FHLB”) stock is a required investment related to CalFirst Bank’s borrowing relationship with the FHLB. The FHLB obtains its funding primarily through issuance of consolidated obligations of the Federal Home Loan Bank system. The U.S. Government does not guarantee these obligations, and each of the twelve FHLB’s are generally jointly and severally liable for repayment of each other’s debt. Therefore, the Company’s investment could be adversely impacted by the financial operations of the FHLB and actions by the Federal Housing Finance Agency. These investments have no stated maturity.

CalFirst Bank is required to hold Federal Reserve Bank stock equal to 6% of its capital surplus, which is defined as additional paid-in capital stock, less any gains (losses) on available for sale securities as of the current period end.

The mortgage-backed investment consists of one U.S. agency issued security. The Company has determined that it has the ability to hold this investment until maturity and, given the Company’s intent to do so, anticipates that it will realize the full carrying value of its investment and carries the security at amortized cost.

NOTE 7 – SECURITIES AVAILABLE-FOR-SALE:

The amortized cost, fair value, and carrying value of securities were as follows:

The amortized cost and estimated fair value of available-for-sale securities at September 30, 2015, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

For the quarter ended September 30, 2015, the Company realized a gain of $23,000 from an early call provision of a corporate debt security for proceeds of $4.8 million. For the three months ended September 30, 2014, the Company had no realized gains or losses from the sale of available-for-sale securities. The following table presents the fair value and associated gross unrealized loss on available-for-sale securities at September 30, 2015 and June 30, 2015.

The Company conducts a regular assessment of its investment portfolios to determine whether any securities are other-than-temporarily impaired. In estimating other-than-temporary impairment losses, management considers, among other factors, length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery. The $60,000 unrealized losses at September 30, 2015 are related to fluctuations in interest rates during the period, and not credit quality. The Company has the intent to hold these securities and more likely than not, will not need to sell them, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2015.

In September 2014, the Company recorded a pre-tax impairment charge of $91,000 related to the mutual fund investment. While the Company had the ability and intent to retain this investment, given that the fund lowered its dividend by 11% in May 2014 and had traded below its recorded cost for over twelve months, the Company determined that an other than temporary impairment had occurred.

At September 30, 2015 and at June 30, 2015, U.S. Treasury notes and Agency MBS with an amortized cost of $65.4 million and $66.1 million, respectively, were pledged to secure borrowings from the FHLB (see Note 11).

NOTE 8 – NET INVESTMENT IN 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 capital lease. Unearned income includes the offset of initial direct costs of $2.5 million at September 30, 2015 and $2.4 million at June 30, 2015.

NOTE 9 – COMMERCIAL LOANS

The Company’s investment in commercial loans consists of the following:

Commercial loans are reported at their outstanding unpaid principal balances reduced by the allowance for loan losses and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related commercial loan.

In addition to the amount outstanding on revolving lines of credit set forth above, the Company had additional unused commitments on revolving lines of credit in the amount of $3.1 million at September 30, 2015 and $7.4 million at June 30, 2015. The Company has a recorded liability for unfunded loan commitments of $50,000 at September 30, 2015 and at June 30, 2015 related to such commitments.

NOTE 10 – CREDIT QUALITY OF FINANCING RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

The following tables provide information on the credit profile of the components of the portfolio and allowance for credit losses related to “financing receivables” as defined under ASC Topic 310, Receivables.  This disclosure on “financing receivables” covers the Company’s 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 segments and classifications appropriate for assessing and monitoring the portfolios’ risk and performance. This disclosure does not encompass all risk assets or the entire allowance for credit losses.

Portfolio segments identified by the Company include leases and loans. These segments have been disaggregated into four classes: 1) commercial leases, 2) education, government and non-profit leases, 3) commercial and industrial loans and 4) commercial real estate loans. Relevant risk characteristics for establishing these portfolio classes generally include the nature of the borrower, structure of the transaction and collateral type. The Company’s credit process includes a policy of classifying all leases and loans in accordance with a risk rating classification system consistent with regulatory models under which leases and loans may be rated as “pass”, “special mention”, “substandard”, or “doubtful”. These risk categories reflect an assessment of the ability of the borrowers to service their obligation based on current financial position, historical payment experience, and collateral adequacy, among other factors. The Company uses the following definitions for risk ratings:

Pass – Includes credits of the highest quality as well as credits with positive primary repayment source but one or more characteristics that are of higher than average risk.

Special Mention – Have a potential weakness that if left uncorrected may result in deterioration of the repayment prospects for the lease or loan or of the Company’s credit position at some future date.

Substandard – Are inadequately protected by the paying capacity of the obligor or of the collateral, if any. Substandard credits have a well-defined weakness that jeopardize the liquidation of the debt or indicate the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Based on current information and events, collection of all amounts due according to the contractual terms of the lease or loan agreement is considered highly questionable and improbable.

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 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 doubt about the ability of the customer to meet its lease or loan obligations, as evidenced by consistent delinquency, deterioration in the customer’s financial condition or other relevant factors. Payments received while on non-accrual are applied to reduce the Company’s recorded value.

The following table presents the aging of the financing receivables by portfolio class:

The allowance balances and activity in the allowance related to financing receivables, by portfolio segment for the three months ended September 30, 2015 and September 30, 2014 are presented in the following table:

The following table presents the recorded investment in loans and leases and the related allowance based on impairment method as of September 30, 2015 and June 30, 2015 by portfolio segment.

NOTE 11 – BORROWINGS

CalFirst Bank is a member of the Federal Home Loan Bank of San Francisco and can take advantage of FHLB programs for overnight and term advances at published daily rates. Under terms of a blanket collateral agreement, advances from the FHLB are collateralized by qualifying real estate loans and investment securities. The Bank also has authority to borrow from the Federal Reserve Bank (“FRB”) discount window amounts secured by certain lease receivables. Borrowing capacity from the FHLB or FRB may fluctuate based upon the acceptability and risk rating of securities, loan and lease collateral and both the FRB and FHLB could adjust advance rates applied to such collateral at their discretion. 

The borrowings from the FHLB and weighted average interest rates at September 30, 2015 and June 30, 2015 were as follows:

At September 30, 2015, there was available borrowing capacity from the FHLB of $21.9 million related to qualifying real estate loans of $6.7 million and securities pledged with an amortized cost of $65.4 million. There were no borrowings from the FRB, leaving availability of approximately $101.8 million secured by $132.3 million of lease receivables.

NOTE 12 – SEGMENT REPORTING

The Company’s two subsidiaries, CalFirst Bank, an FDIC-insured national bank, and CalFirst Leasing are considered to be two different business segments. Below is a summary of each segment’s financial results for the quarters ended September 30, 2015 and 2014:

NOTE 13 – SUBSEQUENT EVENT

On October 29, 2015, the Company’s Board of Directors declared an annual dividend in the amount of forty-four cents ($0.44) per share. The dividend will be payable on December 15, 2015 to all stockholders of record at the close of business on December 1, 2015.

cALIFORNIA FIRST NATIONAL BANCORP

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

California First National Bancorp, a California corporation (the “Company”), is a bank holding company headquartered in Orange County, California with a bank subsidiary, California First National Bank (“CalFirst Bank” or the “Bank”) and leasing subsidiary, California First Leasing Corp (“CalFirst Leasing”). The primary business of the Company is secured financing provided through leasing and financing capital assets, commercial loans acquired through participation in the syndicated commercial loan market, by providing non-recourse loans to third parties secured by leases and equipment, and direct commercial loans. CalFirst Bank, now responsible for substantially all lease and loan origination and purchases, gathers deposits through posting rates on the Internet and conducts all banking and other operations from one central location.

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 impact the interest rate environment has on its net interest margin. The Company’s current balance sheet structure is short-term in nature, with over 64% of interest-earning assets and 85% of interest bearing liabilities repricing within one year. The Company’s interest margin is susceptible to the disparate impact of varying movements in market interest rates as 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 leases and loans held in its own portfolio, investment securities, 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, 2015.

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, 2015 of $1.7 million were down $735,000, or 29.9% largely due to a $1.65 million decrease in non-interest income that was offset some by a $333,000 or 8.1% increase in net interest income after provision for losses. The decline in non-interest income during the first quarter of fiscal 2016 compares to a large gain on sale of leased property during the comparable quarter of the prior year. Notably, total interest income for the 2016 quarter increased by almost $1 million or 18.9% while net interest income increased by $558,000 or 12.7%, reflecting the growth in loan activities.

New loan bookings of $66.0 million for the first quarter of fiscal 2016 were up 160% from $25.4 million during the first quarter of fiscal 2015, while new lease bookings of $25.6 million were down 60.8% from $65.4 million booked in the comparable quarter. Combined, total lease and loan bookings of $91.7 million were slightly above $90.8 million booked the prior year. The net investment in leases and loans of $552.1 million at September 30, 2015 was up 1.9% from June 30, 2015, and 13.8% from $485.4 million at September 30, 2014. New lease and loan originations during the first quarter of fiscal 2016 were up 41.1% from the first quarter of fiscal 2015, dominated by a doubling in loan commitments. Transactions in process were up 30.2% to $40.8 million, although the backlog of approved lease and loan commitments of $126.4 million is down 10.2% from the level of a year ago but up from June 30, 2015.

The Company’s portfolio of investment securities decreased 5.9% to $79.6 million at September 30, 2015 from $84.5 million at June 30, 2015 related to the early call of a corporate bond. Total assets increased 3.9% to $760 million, with net worth at $190.3 million and a common equity tier 1 capital of 28.0%.

Consolidated Statement of Earnings Analysis

Summary -- For the first quarter ended September 30, 2015, net earnings of $1.7 million decreased 29.9% from $2.5 million earned during the first quarter ended September 30, 2014. Diluted earnings per share of $0.16 for the first quarter of fiscal 2016 decreased 29.9% from $0.24 for the first quarter of fiscal 2015.

Net Interest Income -- Net 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 and borrowings. Net 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.

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

Net interest income was $5.0 million for the quarter ended September 30, 2015, a $558,000, or 12.7% increase compared to the same quarter of the prior year. Total interest income for the first quarter ending September 30, 2015 increased 18.9% to $6.3 million from $5.3 million for the first quarter of fiscal 2015. This increase includes a $1.1 million, or 86.5%, increase in commercial loan income and a $161,700, or 51.9% increase in investment income offset by a $243,800, or 6.6% decrease in finance income. The growth in commercial loan income reflected an 88.0% increase in average loan balances to $258.9 million from $137.7 million, which was offset only by a 3 basis point decline in average loan yield. The decrease in finance income was due to a 9.9% decrease in average lease balances to $285.3 million that offset a 17 basis point improvement in the average yield. The average yield on all leases and loans in the Company’s portfolio declined by 11 basis points during the first quarter of 2016 to 4.25% on an average portfolio that increased 19.8% to $544.2 million. For the first quarter of fiscal 2016, the average yield on cash and investments of 1.26% was down 11 basis points from the first quarter of fiscal 2015 as investments increased over 100% to $80.9 million, but at average yields that declined 65 basis points to 2.19%, while average cash balances increased by 36.8% to $69.8 million with an average yield down 2 basis points. Interest expense paid increased 50.7% to $1.3 million, reflecting a 39.1% increase in the average balance of deposits and borrowings to $523.9 million and an 8 basis point increase in average rate paid to 0.99%. The increased interest cost is largely due to a 12 basis points increase in average cost of deposit to 1.04% on a $112 million increase in average deposits, with the total funding cost increase tempered by a $35 million increase in average borrowings at an average rate of 0.35%.

The following table presents the Company’s average balances, 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.

The average yield on all interest-earning assets for the first quarter of fiscal 2016 decreased to 3.60% from 3.85% for the first quarter ended September 30, 2014, while the average rate paid on all interest-bearing liabilities increased by 8 basis points to 0.99%. As a result, the net interest margin decreased to 2.85% in the first quarter of fiscal 2016 from 3.22% in the first quarter of fiscal 2015. Fiscal 2015 first quarter yields benefited from accelerated finance income from early terminated leases that boosted yields. Excluding that amount, overall first quarter yields on interest earning assets for 2016 were in line with the prior year, but the net interest spread and margin would still be impacted by the cost of funds increasing faster than yields. The average yield on interest earnings assets can fluctuate from quarter to quarter due to transaction activity in both the lease and loan portfolio.

Provision for Credit Losses -- The Company recorded a $500,000 provision for credit losses during the first quarter of fiscal 2016, compared to a $275,000 provision made during the quarter ending September 30, 2014. The first quarter 2016 provision related to the growth in the loan portfolio since June 30, 2015 and the deterioration in the credit profile of one customer in the lease portfolio.

Non-interest Income -- Total non-interest income for the first quarter of fiscal 2016 decreased by 64.8% to $896,000 from $2.5 million in the first quarter of the prior year, primarily due to a $1.8 million decrease in income realized on the sale of leased property. The first quarter of 2015 included a gain of $2.1 million from the sale of property on one large transaction reaching the end of term during the quarter which accounted for 80.9% of non-interest income for the period.

Non-interest Expenses -- The Company’s non-interest expenses of $2.5 million reported for the quarter ended September 30, 2015 declined by $141,000 or 5% from $2.7 million in the first quarter of fiscal 2015. The decrease reflected higher deferred origination expenses in the period compared to the prior year.

Income Taxes -- Income taxes were accrued at a tax rate of 38.91% and 38.51% for the first quarter ended September 30, 2015 and 2014, respectively, representing the estimated annual tax rate at the end of each respective first quarter.

Financial Condition Analysis

Consolidated total assets at September 30, 2015 of $759.9 million increased 3.9% from $731.1 million at June 30, 2015 and 23% from September 30, 2014. The growth in total assets from June 30, 2015 is due to an increase of $37.2 million in the commercial loan portfolio, an $11.7 million increase in cash and due from banks, and a $9.5 million increase in property acquired for transactions in process, offset by a $26.9 million decrease in net investment in leases and a $5.0 million decrease in securities available-for-sale.

Lease Portfolio

During the three months ended September 30, 2015 and 2014, 96.4% and 100%, respectively, of the new leases booked by the Company were held in its own portfolios. Of the new leases booked during the first quarter of fiscal 2016, 94% related to leases originated directly by Company compared to 96% during the prior year first quarter. The Company’s net investment in leases at September 30, 2015 of $271.4 million compared to $298.3 million at June 30, 2015. The $26.9 million decrease in the net investment in leases during the quarter is due to the lower volume of new leases being booked during the period that did not exceed payments received and leases terminating.

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 generally is obligated by the lease to make rental payments directly to the Company during the period that the transaction is in process, and contractually 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, 2015, the Company’s investment in property acquired for transactions in process of $40.8 million increased from $31.3 million at June 30, 2015, and was up from $25.4 million at September 30, 2014.

Commercial Loan Portfolio

The Company’s commercial loan portfolio increased $37.2 million during the first quarter of fiscal 2016 to $280.7 million compared to $243.5 million at June 30, 2015. The increase in the Company’s commercial loan portfolio reflected new commercial loans booked of $66.0 million offset by repayments aggregating to $28.8 million during the quarter. Additional loan commitments of $38.30 million were made during the quarter but not funded, and at September 30, 2015 unfunded commercial loan commitments of $46.1 million were up from $35.4 million at June 30, 2015.

Asset Quality

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.

The change in non-performing assets at September 30, 2015 as compared to June 30, 2015 reflects the addition of a $2.7 million lease with a customer in bankruptcy that was placed on non-accrual. In addition to the non-performing leases identified above, there was $271,000 of investment in leases at September 30, 2015 classified as substandard or with credits that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future. This amount compared to $5.6 million at June 30, 2015, of which $2.7 million was transferred to non-performing in July 2015, and $6.0 million at September 30, 2014. Although these credits have been identified as potential problems, 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 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.

The allowance for credit losses increased $499,000 to $6.96 million (1.24% of net investment in leases and loans before allowances) at September 30, 2015 from $6.46 million (1.18% of net investment in leases and loans before allowances) at June 30, 2015. The allowance at September 30, 2015 consisted of $988,300 allocated to specific accounts that were identified as problems and $5.97 million that was available to cover losses inherent in the portfolio. This compared to $645,000 allocated to specific accounts at June 30, 2015 and $5.8 million available for losses inherent in the portfolio at that time. The increase in the specific allowance at September 30, 2015 primarily relates to deterioration during the quarter of the credit of one large lease that was offset in part by the improvement of other problem leases. The Company considers the allowance for credit losses of $6.96 million at September 30, 2015 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.

Securities Available-for-sale

Total securities available-for-sale was $76.2 million as of September 30, 2015, compared with $81.2 million at June 30, 2015. The amortized cost and fair value of the Company’s securities portfolio available-for-sale at September 30, 2015 and June 30, 2015 are as follows:

During the first quarter of fiscal 2016, the Company’s portfolio of securities available-for-sale declined $5.0 million due to an early call of a corporate bond where the Company realized a gain of $23,000 and a maturing municipal bond. At September 30, 2015, the weighted average maturity of the portfolio is 6.0 years and the corresponding weighted average yield was 1.90%.

Liquidity and Capital Resources

The Company funds its operating activities through internally generated funds, bank deposits and borrowings, and non-recourse debt. At September 30, 2015 and June 30, 2015, the Company’s cash and cash equivalents were $71.9 million and $60.2 million, respectively.

Deposits at CalFirst Bank totaled $497.3 million at September 30, 2015 compared to $376.8 million at September 30, 2014 and $471.9 million at June 30, 2015. The $120.5 million increase from September 30, 2014 was used primarily to fund the growth in the Bank’s loan and securities portfolios and maintain liquidity. The following table presents the ending balances, average balances and average rates paid on deposits for the quarters ended September 30, 2015 and 2014:

The following table shows the maturities of certificates of deposits at September 30, 2015: