Finance Assets

Finance Receivables

Finance receivables are comprised of sales-type lease receivables and unsecured revolving loan receivables. Sales-type leases are generally due in monthly, quarterly or semi-annual installments over periods ranging from three to five years. Loan receivables arise primarily from financing services offered to our customers for postage and related supplies. Loan receivables are generally due each month; however, customers may rollover outstanding balances.

Finance receivables at June 30, 2012 and December 31, 2011 consisted of the following:



	June 30, 2012
	North America			International			Total
Sales-type lease receivables
Gross finance receivables	$	1,638,414		$	447,317		$	2,085,731
Unguaranteed residual values	163,736			20,336			184,072
Unearned income	(325,882		)	(103,142		)	(429,024		)
Allowance for credit losses	(23,881		)	(9,041		)	(32,922		)
Net investment in sales-type lease receivables	1,452,387			355,470			1,807,857
Loan receivables
Loan receivables	407,327			45,621			452,948
Allowance for credit losses	(16,530		)	(2,289		)	(18,819		)
Net investment in loan receivables	390,797			43,332			434,129
Net investment in finance receivables	$	1,843,184		$	398,802		$	2,241,986

	December 31, 2011
	North America			International			Total
Sales-type lease receivables
Gross finance receivables	$	1,727,653		$	460,101		$	2,187,754
Unguaranteed residual values	185,450			20,443			205,893
Unearned income	(348,286		)	(102,618		)	(450,904		)
Allowance for credit losses	(28,661		)	(12,039		)	(40,700		)
Net investment in sales-type lease receivables	1,536,156			365,887			1,902,043
Loan receivables
Loan receivables	436,631			40,937			477,568
Allowance for credit losses	(20,272		)	(2,458		)	(22,730		)
Net investment in loan receivables	416,359			38,479			454,838
Net investment in finance receivables	$	1,952,515		$	404,366		$	2,356,881

Allowance for Credit Losses and Aging of Receivables

We estimate our finance receivable risks and provide allowances for credit losses accordingly. We establish credit approval limits based on the credit quality of the customer and the type of equipment financed. We believe that our concentration of credit risk is limited because of our large number of customers, small account balances for most of our customers, and customer geographic and industry diversification.

Our policy is to discontinue revenue recognition for lease receivables that are more than 120 days past due and for unsecured loan receivables that are more than 90 days past due. We resume revenue recognition when customer payments reduce the account balance aging to 60 days or less past due. We evaluate the adequacy of the allowance for credit losses based on historical loss experience, the nature and volume of our portfolios, adverse situations that may affect a customer's ability to pay and prevailing economic conditions, and make adjustments to the reserves as necessary. This evaluation is inherently subjective and actual results may differ significantly from estimated reserves.

We maintain a program for U.S. borrowers in our North America loan portfolio who are experiencing financial difficulties, but are able to make reduced payments over an extended period of time. Upon acceptance into the program, the borrower’s credit line is closed, interest accrual is suspended, the borrower’s minimum required payment is reduced and the account is re-aged and classified as current. There is generally no forgiveness of debt or reduction of balances owed. The loans in the program are considered to be troubled debt restructurings because of the concessions granted to the borrower. At June 30, 2012 and December 31, 2011, loans in this program had a balance of $5 million and $7 million, respectively.

The allowance for credit losses for these modified loans is determined by the difference between cash flows expected to be received from the borrower discounted at the original effective rate and the carrying value of the loan. The allowance for credit losses related to such loans was $1 million at June 30, 2012 and $2 million at December 31, 2011 and is included in the allowance for credit losses of North America loans in the table below. Management believes that the allowance for credit losses is adequate for these loans and all other loans in the portfolio. Write-offs of loans in the program for the past twelve months were less than $1 million.

Activity in the allowance for credit losses for finance receivables for the six months ended June 30, June 30, 2012 was as follows:



	Sales-type Lease Receivables						Loan Receivables
	North America			International			North America			International			Total
Balance at January 1, 2012	$	28,661		$	12,039		$	20,272		$	2,458		$	63,430
Amounts charged to expense	288			53			2,284			422			3,047
Accounts written off	(5,068		)	(3,051		)	(6,026		)	(591		)	(14,736		)
Balance at June 30, 2012	$	23,881		$	9,041		$	16,530		$	2,289		$	51,741

The aging of finance receivables at June 30, 2012 and December 31, 2011 was as follows:



	Sales-type Lease Receivables				Loan Receivables
	North America		International		North America		International		Total
June 30, 2012
< 31 days	$	1,556,971	$	419,905	$	387,285	$	43,646	$	2,407,807
> 30 days and < 61 days	32,991		11,043		11,372		1,291		56,697
> 60 days and < 91 days	22,348		4,893		3,660		327		31,228
> 90 days and < 121 days	8,044		3,809		2,404		147		14,404
> 120 days	18,060		7,667		2,606		210		28,543
Total	$	1,638,414	$	447,317	$	407,327	$	45,621	$	2,538,679
Past due amounts > 90 days
Still accruing interest	$	8,044	$	3,809	$	—	$	—	$	11,853
Not accruing interest	18,060		7,667		5,010		357		31,094
Total	$	26,104	$	11,476	$	5,010	$	357	$	42,947



	Sales-type Lease Receivables				Loan Receivables
	North America		International		North America		International		Total
December 31, 2011
< 31 days	$	1,641,706	$	434,811	$	414,434	$	38,841	$	2,529,792
> 30 days and < 61 days	41,018		10,152		12,399		1,066		64,635
> 60 days and < 91 days	24,309		5,666		4,362		425		34,762
> 90 days and < 121 days	4,912		3,207		2,328		186		10,633
> 120 days	15,708		6,265		3,108		419		25,500
Total	$	1,727,653	$	460,101	$	436,631	$	40,937	$	2,665,322
Past due amounts > 90 days
Still accruing interest	$	4,912	$	3,207	$	—	$	—	$	8,119
Not accruing interest	15,708		6,265		5,436		605		28,014
Total	$	20,620	$	9,472	$	5,436	$	605	$	36,133

Credit Quality

The extension of credit and management of credit lines to new and existing customers uses a combination of an automated credit score, where available, and a detailed manual review of the customer’s financial condition and, when applicable, the customer’s payment history. Once credit is granted, the payment performance of the customer is managed through automated collections processes and is supplemented with direct follow up should an account become delinquent. We have robust automated collections and extensive portfolio management processes. The portfolio management processes ensure that our global strategy is executed, collection resources are allocated appropriately and enhanced tools and processes are implemented as needed.

We use a third party to score the majority of the North American portfolio on a quarterly basis using a commercial credit score. We do not use a third party to score our International portfolios because the cost to do so is prohibitive, it is a localized process and there is no single credit score model that covers all countries.

The table below shows the North American portfolio at June 30, 2012 and December 31, 2011 by relative risk class (low, medium, high) based on the relative scores of the accounts within each class. The relative scores are determined based on a number of factors, including the company type, ownership structure, payment history and financial information. A fourth class is shown for accounts that are not scored. Absence of a score is not indicative of the credit quality of the account. The degree of risk, as defined by the third party, refers to the relative risk that an account in the next 12 month period may become delinquent.


•	Low risk accounts are companies with very good credit scores and are considered to approximate the top 30% of all commercial borrowers.


•	Medium risk accounts are companies with average to good credit scores and are considered to approximate the middle 40% of all commercial borrowers.


•	High risk accounts are companies with poor credit scores, are delinquent or are at risk of becoming delinquent and are considered to approximate the bottom 30% of all commercial borrowers.



	June 30, 2012		December 31, 2011
Sales-type lease receivables
Risk Level
Low	$	1,041,255	$	1,096,676
Medium	470,064		473,394
High	49,313		58,177
Not Scored	77,782		99,406
Total	$	1,638,414	$	1,727,653
Loan receivables
Risk Level
Low	$	243,419	$	269,547
Medium	145,053		115,490
High	13,720		21,081
Not Scored	5,135		30,513
Total	$	407,327	$	436,631

Although the relative score of accounts within each class is used as a factor in determining a customer credit limit, it is not indicative of our actual history of losses due to the business essential nature of our products and services. The aging schedule included above, showing approximately 1.7% of the portfolio as greater than 90 days past due, and the roll-forward schedule of the allowance for credit losses, showing the actual losses for the six months ended June 30, 2012 are more representative of the potential loss performance of our portfolio than relative risk based on scores, as defined by the third party.

Leveraged Leases

Our investment in leveraged lease assets consisted of the following:



	June 30, 2012			December 31, 2011
Rental receivables	$	88,942		$	810,306
Unguaranteed residual values	13,816			13,784
Principal and interest on non-recourse loans	(61,497		)	(606,708		)
Unearned income	(8,536		)	(79,111		)
Investment in leveraged leases	32,725			138,271
Less: deferred taxes related to leveraged leases	(20,117		)	(101,255		)
Net investment in leveraged leases	$	12,608		$	37,016

The following is a summary of the components of income from leveraged leases:



	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
Pre-tax leveraged lease income	$	432	$	1,558		$	1,225	$	3,094
Income tax effect	7		(81		)	26		(163		)
Income from leveraged leases	$	439	$	1,477		$	1,251	$	2,931

During 2012, we sold certain non-U.S. leveraged lease assets for cash. The investment in the leveraged lease assets at the date of sale was $109 million and an after-tax gain of $13 million was recognized. The effects of the sale are not included in the table above.