DIRECT FINANCING LEASE RECEIVABLES

We lease revenue earning equipment to customers for periods typically ranging from three to seven years for trucks and tractors and up to ten years for trailers. The majority of our leases are classified as operating leases. However, some of our revenue earning equipment leases are classified as direct financing leases and, to a lesser extent, sales-type leases. The net investment in direct financing and sales-type leases consisted of:



	September 30, 2012			December 31, 2011
	(In thousands)
Total minimum lease payments receivable	$	637,870		561,772
Less: Executory costs	(208,499		)	(181,820	)
Minimum lease payments receivable	429,371			379,952
Less: Allowance for uncollectibles	(651		)	(903	)
Net minimum lease payments receivable	428,720			379,049
Unguaranteed residuals	63,284			63,472
Less: Unearned income	(100,523		)	(92,637	)
Net investment in direct financing and sales-type leases	391,481			349,884
Current portion	(77,360		)	(68,896	)
Non-current portion	$	314,121		280,988

Our direct financing lease customers operate in a wide variety of industries, and we have no significant customer concentrations in any one industry. We assess credit risk for all of our customers including those who lease equipment under direct financing leases. Credit risk is assessed using an internally developed model which incorporates credit scores from third party providers and our own custom risk ratings and is updated on a monthly basis. The external credit scores are developed based on the customer’s historical payment patterns and an overall assessment of the likelihood of delinquent payments. Our internal ratings are weighted based on the industry in which the customer operates, company size, years in business, and other credit-related indicators (i.e. profitability, cash flow, liquidity, tangible net worth, etc.). Any one of the following factors may result in a customer being classified as high risk: i) the customer has a history of late payments; ii) the customer has open lawsuits, liens or judgments; iii) the customer has been in business less than 3 years; and iv) the customer operates in an industry with low barriers to entry. For those customers who are designated as high risk, we typically require deposits to be paid in advance in order to mitigate our credit risk. Additionally, our receivables are collateralized by the vehicle’s fair value, which further mitigates our credit risk.

The following table presents the credit risk profile by creditworthiness category of our direct financing lease receivables:



	September 30, 2012		December 31, 2011
	(In thousands)
Very low risk to low risk	$	184,214	121,836
Moderate risk	185,102		190,070
Moderately high risk to high risk	60,055		68,046
	$	429,371	379,952

The following table is a rollforward of the allowance for credit losses on direct financing lease receivables for the nine months ended September 30, 2012:




	(In thousands)
Balance at December 31, 2011	$	903
Charged to earnings	667
Deductions	(919		)
Balance at September 30, 2012	$	651

As of September 30, 2012, the amount of direct financing lease receivables which were past due was not significant, and there were no impaired receivables. Accordingly, we do not believe there is a material risk of default with respect to the direct financing lease receivables as of September 30, 2012.