United Parcel Service, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

FINANCE RECEIVABLES

FINANCE RECEIVABLES

12 Months Ended

Dec. 31, 2011

NOTE 3. FINANCE RECEIVABLES

The following is a summary of finance receivables at December 31, 2011 and 2010 (in millions):


	2011			2010
Commercial term loans	$	197		$	266
Other financing receivables		154			245

Gross finance receivables		351			511
Less: Allowance for credit losses		(16	)		(20	)

Balance at December 31	$	335		$	491

Our finance receivables portfolio consists of two product groups: commercial term loans and other financing receivables. Other financing receivables consist of investments in finance leases, asset-based lending, cargo finance and receivable factoring. The current portion of finance receivables is included in “Other current assets” and the non-current portion of finance receivables is included in “Other non-current assets” on our consolidated balance sheets. Outstanding receivable balances at December 31, 2011 and 2010 are net of unearned income of $12 and $15 million, respectively.

When we “factor” (i.e., purchase) a customer invoice from a client, we record the customer receivable as an asset and also establish a liability for the funds due to the client, which is recorded in accounts payable on the consolidated balance sheets. As of December 31, 2011 and 2010, the amounts due to clients under our factoring programs were $79 and $71 million, respectively.

The following is a rollforward of the allowance for credit losses on finance receivables (in millions):


	2011			2010
Balance at January 1	$	20		$	31
Provisions charged to operations		4			10
Charge-offs, net of recoveries		(8	)		(21	)

Balance at December 31	$	16		$	20

We use a multiple tier risk assessment matrix to grade and monitor asset quality. The primary assessments are made to determine the degree of risk that an obligor may default in principal or interest payments and the potential range of loss in the event of default. The risk assessment categories are:

•

U.S. Government Guaranteed—Payments are guaranteed by the Small Business Administration or U.S. Department of Agriculture, and no loss is likely.

•

Acceptable Risk—Payments are current, and no loss is likely.

•

Sub-Standard Risk—In default or high probability of default, but loss is unlikely.

•

Classified—In default, loss is probable, specific allowance for loss is assigned.

The following is an allocation of the finance receivables portfolio by risk rating category as of December 31, 2011 (in millions):


	Commercial Lending		Other Financing Receivables		Total
U.S. Government guaranteed	$	62	$	—	$	62
Acceptable risk		119		151		270
Sub-standard risk		7		3		10
Classified		9		—		9

	$	197	$	154	$	351

The following is an aging analysis of our finance receivables as of December 31, 2011 (in millions):


	30-59 Days Past Due		60-90 Days Past Due		Greater than 90 Days Past Due		Current		Total Finance Receivables
Commercial term loans:
U.S. Government guaranteed	$	1	$	—	$	30	$	31	$	62
Other unguaranteed		—		5		15		115		135
Other financing receivables		—		—		1		153		154

Total finance receivables	$	1	$	5	$	46	$	299	$	351

The following is an analysis of impaired finance receivables as of December 31, 2011 (in millions):


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans with related allowance	$	9	$	36	$	7	$	14	$	—
Impaired loans with no related allowance		7		80		—		12		—
Impaired loans with U.S. government guarantee		35		35		—		51		—

Total impaired loans	$	51	$	151	$	7	$	77	$	—

The carrying value of finance receivables at December 31, 2011, by contractual maturity, is shown below (in millions). Actual maturities may differ from contractual maturities because some borrowers have the right to prepay these receivables without prepayment penalties.


	Carrying Value
Due in one year or less	$	130
Due after one year through three years		33
Due after three years through five years		28
Due after five years		160

	$	351

Based on interest rates for financial instruments with similar terms and maturities, the estimated fair value of finance receivables is approximately $335 and $491 million as of December 31, 2011 and 2010, respectively. At December 31, 2011, we had unfunded loan commitments totaling $248 million, consisting of standby letters of credit of $29 million and other unfunded lending commitments of $219 million.

During 2009, impaired finance receivables with a carrying amount of $13 million were written down to a net fair value of $8 million, based on the fair value for the related collateral which was determined using unobservable inputs (Level 3).