NOTE 5 - Allowance for Credit Losses

In accordance with the Contingencies Topic of the FASB ASC, we maintain an allowance for credit losses at an amount sufficient to absorb losses inherent in our existing lease and loan portfolios as of the reporting dates based on our estimate of probable net credit losses.

The table which follows provides activity in the allowance for credit losses and asset quality statistics for each of the years ended December 31, 2013, 2012 and 2011.

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⁽¹⁾ At December 31, 2013, 2012 and 2011, there was no allowance for credit losses allocated to loans.

⁽²⁾ Total finance receivables include net investment in direct financing leases and loans. For purposes of asset quality and allowance calculations, the effects of (i) the allowance for credit losses and (ii) initial direct costs and fees deferred are excluded.

⁽³⁾ Calculated as a percent of total minimum lease payments receivable for leases and as a percent of principal outstanding for loans.

Net investments in finance receivables are generally charged-off when they are contractually past due for 121 days. Income recognition is discontinued on leases or loans when a default on monthly payment exists for a period of 90 days or more. Income recognition resumes when a lease or loan becomes less than 90 days delinquent. At December 31, 2013 and 2012, there were no finance receivables past due 90 days or more and still accruing.

Net charge-offs for the year ended December 31, 2013 were $7.6 million, or 1.41% of average total finance receivables, compared to $4.8 million, or 1.11% of average total finance receivables, for the year ended December 31, 2012. The increase in net charge-offs during year ended December 31, 2013 compared to recent years is primarily due to the growth in average total finance receivables, the ongoing seasoning of the portfolio as reflected in the mix of origination vintages and the mix of credit profiles. Our key credit quality indicator is delinquency status..