Note 4 – Portfolio Quality

Allowance for Losses on Receivables

The following table reconciles the activity in the allowance for losses on receivables at December 31:


	2012			2011			2010
Allowance for losses on receivables at beginning of year	$	53		$	87		$	71
Provision for (recovery of) losses		(7	)		(23	)		16
Write-offs		–			(11	)		(1	)
Recovery of write-offs		–			–			1
Allowance for losses on receivables at end of year	$	46		$	53		$	87

Allowance as a percentage of total receivables		2.0	%		2.3	%		3.8	%

Allowance for losses on receivables collectively evaluated for impairment	$	46		$	53		$	87

Of the $253 of financing receivables individually evaluated for impairment at December 31, 2012, $174 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 balance by the internal rating category which was used as a factor in determining our allowance for losses on receivables at December 31:


	2012						2011
Rating categories	Out-of- Production Aircraft		In-Production Aircraft/ Other		Total		Out-of- Production Aircraft		In-Production Aircraft/ Other		Total
BBB	$	1,201	$	–	$	1,201	$	1,316	$	–	$	1,316
BB		–		63		63		–		67		67
B		51		–		51		103		–		103
CCC		174		604		778		194		318		512
D		163		90		253		171		179		350
Total carrying value	$	1,589	$	757	$	2,346	$	1,784	$	564	$	2,348

At December 31, 2012, our recorded allowance primarily related to receivables with rating of CCC in the preceding table, and we applied default rates that averaged 46.1% to exposure associated with those receivables. As of December 31, 2012, we have not recorded an allowance on our receivables with a rating of D in the preceding table because we believe they are sufficiently collateralized.

At December 31, 2012 and 2011, receivables of $1,145 and $1,032 were related to customers we believe have less than investment-grade credit.

Impaired Receivables

At December 31, 2012 and 2011, we had impaired receivables with a carrying value and unpaid principal balance of $174 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 $253 and $350 are sufficiently collateralized such that we have not recorded an allowance for losses as of December 31, 2012 and 2011 as a result of the bankruptcy. Our receivables from American Airlines include leveraged leases with a carrying value of $127 net of $231 non-recourse debt at December 31, 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 years ended December 31:


2012	Average Carrying Value		Income Recognized
Out-of-production aircraft	$	180	$	6	⁽¹⁾

2011
Out-of-production aircraft	$	198	$	–

2010
Out-of-production aircraft	$	88	$	9	⁽¹⁾

⁽¹⁾

For the year ended December 31, 2012 and 2010, of the income recognized we received in cash $6 and $9.

Past Due Receivables

At December 31, 2012, we had no receivables greater than 30 days past due. As of 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 at December 31:


	2012			2011
Assets placed on non-accrual status:
Receivables:
In-production aircraft	$	265		$	–
Out-of-production aircraft		163			171
Equipment under operating leases, net ⁽¹⁾		21			14
Assets held for sale or re-lease, net ⁽¹⁾		119	⁽²⁾		50
	$	568		$	235

Percent of total non-performing assets to total portfolio		14.0	%		5.4	%

⁽¹⁾

At December 31, 2012 and 2011, equipment under operating leases of $166 and $23 are not included in non-performing assets due to intercompany guarantees provided by Boeing. At December 31, 2012 and 2011, assets held for sale or re-lease of $235 and $471 are not included in non-performing assets due to intercompany guarantees provided by Boeing.

⁽²⁾

At December 31, 2012, non-performing assets held for sale or re-lease of $31 had either a purchase or lease commitment.