Note 8 – Credit Quality of Financing Receivables

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 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:

			Education
			Government		Commercial		Commercial		Total
(in thousands)	Commercial		Non-profit		& Industrial		Real Estate		Financing
	Leases		Leases		Loans		Loans		Receivable
As of June 30, 2016:
Pass	$	174,679	$	58,344	$	397,910	$	6,679	$	637,612
Special Mention		6,308		380		3,719		-		10,407
Substandard		241		-		-		-		241
Doubtful		10		2		-		-		12
	$	181,238	$	58,726	$	401,629	$	6,679	$	648,272
Non-accrual	$	10	$	2	$	-	$	-	$	12

As of June 30, 2015:
Pass	$	219,791	$	69,865	$	234,076	$	7,523	$	531,255
Special Mention		6,080		304		4,910		-		11,294
Substandard		5,435		217		-		-		5,652
Doubtful		37		4		-		-		41
	$	231,343	$	70,390	$	238,986	$	7,523	$	548,242
Non-accrual	$	37	$	4	$	-	$	-	$	41

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:

			Greater						Total		Over 90
	31-89		Than		Total				Financing		Days &
(in thousands)	Days		90 Days		Past Due		Current		Receivable		Accruing

As of June 30, 2016:
Commercial Leases	$	-	$	10	$	10	$	181,228	$	181,238	$	-
Education, Government, Non-profit Leases		-		2		2		58,724		58,726		-
Commercial and Industrial Loans		-		-		-		401,629		401,629		-
Commercial Real Estate Loans		-		-		-		6,679		6,679		-
	$	-	$	12	$	12	$	648,260	$	648,272	$	-

As of June 30, 2015:
Commercial Leases	$	2,733	$	37	$	2,770	$	228,573	$	231,343	$	-
Education, Government, Non-profit Leases		8		4		12		70,378		70,390		-
Commercial and Industrial Loans		-		-		-		238,986		238,986		-
Commercial Real Estate Loans		-		-		-		7,523		7,523		-
	$	2,741	$	41	$	2,782	$	545,460	$	548,242	$	-

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 June 30, 2016 and 2015:

				Education
				Government			Commercial		Commercial			Total
	Commercial			Non-profit			& Industrial		Real Estate			Financing
(in thousands)	Leases			Leases			Loans		Loans			Receivable
As of June 30, 2016:
Allowance for lease and loan losses
Balance beginning of period	$	2,592		$	817		$	2,936	$	111		$	6,456
Charge-offs		(1,118	)		(2	)		-		-			(1,120	)
Recoveries		1			50			-		-			51
Provision		350			(400	)		1,575		(50	)		1,475
Balance end of period	$	1,825		$	465		$	4,511	$	61		$	6,862

Individually evaluated for impairment	$	37		$	2		$	-	$	-		$	39
Collectively evaluated for impairment		1,788			463			4,511		61			6,823
Total ending allowance balance	$	1,825		$	465		$	4,511	$	61		$	6,862
Finance receivables
Individually evaluated for impairment	$	242		$	2		$	-	$	-		$	244
Collectively evaluated for impairment		180,996			58,724			401,629		6,679			648,028
Total ending finance receivable balance	$	181,238		$	58,726		$	401,629	$	6,679		$	648,272

As of June 30, 2015:
Allowance for lease and loan losses
Balance beginning of period	$	2,510		$	817		$	1,761	$	211		$	5,299
Charge-offs		(19	)		-			-		-			(19	)
Recoveries		1			-			-		-			1
Provision		100			-			1,175		(100	)		1,175
Balance end of period	$	2,592		$	817		$	2,936	$	111		$	6,456

Individually evaluated for impairment	$	563		$	58		$		$			$	621
Collectively evaluated for impairment		2,029			759			2,936		111			5,835
Total ending allowance balance	$	2,592		$	817		$	2,936	$	111		$	6,456
Finance receivables
Individually evaluated for impairment	$	5,449		$	221		$	-	$	-		$	5,670
Collectively evaluated for impairment		225,894			70,169			238,986		7,523			542,572
Total ending finance receivable balance	$	231,343		$	70,390		$	238,986	$	7,523		$	548,242