Note 3 – Portfolio Quality

Allowance for Losses on Receivables

The following table reconciles the activity in the allowance for losses on receivables for the nine months ended September 30:


	2012			2011
Allowance for losses on receivables at beginning of period	$	53		$	87
Recovery of losses		(5	)		(20	)
Write-offs		–			(11	)
Allowance for losses on receivables at end of period	$	48		$	56

Allowance as a percentage of total receivables		2.2	%		2.4	%
Allowance for losses on receivables collectively evaluated for impairment	$	48		$	56

Of the $278 of financing receivables individually evaluated for impairment at September 30, 2012, $176 was classified as impaired. We recorded no allowance for losses on these impaired receivables.

Credit Quality

We assign internal credit ratings for all customers and determine the creditworthiness of each customer based upon publicly available information and information obtained directly from our customers. We utilize these credit ratings as one of the factors in assessing the adequacy of our allowance for losses on receivables. Our rating categories are comparable to those used by the major credit rating agencies.

The following table details our receivable balances by the internal rating category which was used as a factor in determining our allowance for losses on receivables:


	September 30, 2012						December 31, 2011
Rating categories	Out-of- Production Aircraft		In- Production Aircraft/Other		Total		Out-of- Production Aircraft		In- Production Aircraft/Other		Total
A	$	–	$	34	$	34	$	–	$	–	$	–
BBB		1,221		–		1,221		1,316		–		1,316
BB		–		62		62		–		67		67
B		54		–		54		103		–		103
CCC		298		239		537		194		318		512
D		205		73		278		171		179		350
Total carrying value	$	1,778	$	408	$	2,186	$	1,784	$	564	$	2,348

At September 30, 2012, our recorded allowance primarily related to receivables with rating of CCC in the preceding table, and we applied default rates that averaged 47.3% to exposure associated with those receivables.

At September 30, 2012 and December 31, 2011, receivables of $931 and $1,032 were related to customers we believe have less than investment-grade credit.

Impaired Receivables

At September 30, 2012 and December 31, 2011, we had impaired receivables with a carrying value and unpaid principal balance of $176 and $182, all of which related to out-of-production aircraft on lease to American Airlines. We recorded no allowance for losses on these impaired receivables.

In the fourth quarter of 2011, American Airlines filed for Chapter 11 bankruptcy protection. We believe that our receivables from American Airlines of $278 and $350 are sufficiently collateralized such that we have not recorded an allowance for losses as of September 30, 2012 and December 31, 2011 as a result of the bankruptcy. Our receivables from American Airlines include leveraged leases with a carrying value of $127 net of $241 non-recourse debt at September 30, 2012.

The following table details our average recorded investment and the related income recognized in the period of impairment on the impaired receivables for the nine months ended September 30:


2012	Average Carrying Value		Income Recognized
Out-of-production aircraft	$	181	$	5	⁽¹⁾

⁽¹⁾

For the nine months ended September 30, 2012, of the income recognized we received in cash $5.

For the nine months ended September 30, 2011, we had no impaired receivables.

Past Due Receivables

At September 30, 2012, we had no receivables greater than 30 days past due. At December 31, 2011, amounts which were 31 to 60 days past due totaled $1 associated with receivables with a principal balance of $46 and related to in-production/other aircraft, and there were no receivables greater than 60 days past due.

Non-Performing Assets

Non-performing assets (assets not earning income on an accrual basis) consisted of the following:


	September 30, 2012			December 31, 2011
Assets placed on non-accrual status:
Receivables:
Out-of-production aircraft	$	165		$	171
Equipment under operating leases, net⁽¹⁾		21			14
Assets held for sale or re-lease, net⁽¹⁾		134	⁽²⁾		50
	$	320		$	235

Percent of total non-performing assets to total portfolio		7.9	%		5.4	%

⁽¹⁾

At September 30, 2012 and December 31, 2011, equipment under operating leases of $167 and $23 are not included in non-performing assets due to intercompany guarantees provided by Boeing. At September 30, 2012 and December 31, 2011, assets held for sale or re-lease of $237 and $471 are not included in non-performing assets due to intercompany guarantees provided by Boeing.

⁽²⁾

At September 30, 2012, non-performing assets held for sale or re-lease of $21 had either a purchase or lease commitment.