Financing Receivables:

3 Months Ended

Mar. 31, 2014

4. Financing Receivables: The following table presents financing receivables, net of allowances for credit losses, including residual values.

	At March 31,		At December 31,
(Dollars in millions)	2014		2013
Current:
Net investment in sales-type and direct financing leases	$	4,096	$	4,004
Commercial financing receivables		7,024		8,541
Client loan receivables		5,797		5,854
Installment payment receivables		1,412		1,389
Total	$	18,329	$	19,787
Noncurrent:
Net investment in sales-type and direct financing leases	$	5,152	$	5,700
Commercial financing receivables		—		—
Client loan receivables		6,147		6,360
Installment payment receivables		619		695
Total	$	11,918	$	12,755

Net investment in sales-type and direct financing leases relates principally to the company’s systems products and are for terms ranging generally from two to six years. Net investment in sales-type and direct financing leases includes unguaranteed residual values of $698 million and $737 million at March 31, 2014 and December 31, 2013, respectively, and is reflected net of unearned income of $634 million and $672 million, and net of the allowance for credit losses of $131 million and $123 million at those dates, respectively.

Commercial financing receivables, net of allowance for credit losses of $16 million and $23 million at March 31, 2014 and December 31, 2013, respectively, relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days.

Client loan receivables, net of allowance for credit losses of $222 million and $201 million at March 31, 2014 and December 31, 2013, respectively, are loans that are provided primarily to clients to finance the purchase of software and services. Separate contractual relationships on these financing arrangements are for terms ranging generally from one to seven years.

Installment payment receivables, net of allowance for credit losses of $41 million and $41 million at March 31, 2014 and December 31, 2013, respectively, are loans that are provided primarily to clients to finance hardware, software and services ranging generally from one to three years.

Client loan receivables and installment payment receivables financing contracts are priced independently at competitive market rates. The company has a history of enforcing the terms of these separate financing agreements.

The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $756 million and $769 million at March 31, 2014 and December 31, 2013, respectively.

The company did not have any financing receivables held for sale as of March 31, 2014 and December 31, 2013.

Financing Receivables by Portfolio Segment

The following tables present financing receivables on a gross basis, excluding the allowance for credit losses and residual value, by portfolio segment and by class, excluding current commercial financing receivables and other miscellaneous current financing receivables at March 31, 2014 and December 31, 2013. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into two classes: major markets and growth markets. For additional information on the company’s accounting policies for the allowance for credit losses, see the company’s 2013 Annual Report on pages 92 and 93.


(Dollars in millions)		Major		Growth
At March 31, 2014		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	6,356	$	2,235	$	8,591
	Loan receivables		9,980		4,259		14,239
Ending balance		$	16,336	$	6,494	$	22,831
Collectively evaluated for impairment		$	16,223	$	6,270	$	22,494
Individually evaluated for impairment		$	113	$	224	$	337
Allowance for credit losses:
Beginning balance at January 1, 2014
	Lease receivables	$	42	$	80	$	123
	Loan receivables		95		147		242
Total		$	137	$	228	$	365
	Write-offs		(5)		(3)		(8)
	Provision		3		36		39
	Other		(0)		(1)		(1)
Ending balance at March 31, 2014		$	134	$	260	$	394
	Lease receivables	$	41	$	90	$	131
	Loan receivables	$	93	$	171	$	263

Collectively evaluated for impairment		$	41	$	47	$	89
Individually evaluated for impairment		$	93	$	213	$	306


(Dollars in millions)		Major		Growth
At December 31, 2013		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	6,796	$	2,200	$	8,996
	Loan receivables		10,529		4,012		14,542
Ending balance		$	17,325	$	6,212	$	23,537
Collectively evaluated for impairment		$	17,206	$	6,013	$	23,219
Individually evaluated for impairment		$	119	$	199	$	318
Allowance for credit losses:
Beginning balance at January 1, 2013
	Lease receivables	$	59	$	55	$	114
	Loan receivables		121		84		204
Total		$	180	$	138	$	318
	Write-offs		(23)		(10)		(33)
	Provision		(21)		105		84
	Other		1		(6)		(5)
Ending balance at December 31, 2013		$	137	$	228	$	365
	Lease receivables	$	42	$	80	$	123
	Loan receivables	$	95	$	147	$	242

Collectively evaluated for impairment		$	45	$	48	$	93
Individually evaluated for impairment		$	93	$	179	$	272

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.

Financing Receivables on Non-Accrual Status

Certain receivables for which the company has recorded a specific reserve may also be placed on non-accrual status. Non-accrual assets are those receivables with specific reserves and other accounts for which it is likely that the company will be unable to collect all amounts due according to original terms of the lease or loan agreement. Income recognition is discontinued on these receivables.

The following table presents the recorded investment in financing receivables which were on non-accrual status at March 31, 2014 and December 31, 2013.


	At March 31,		At December 31,
(Dollars in millions)	2014		2013
Major markets	$	24	$	25
Growth markets		62		34
Total lease receivables	$	85	$	59

Major markets	$	41	$	40
Growth markets		116		92
Total loan receivables	$	157	$	132

Total receivables	$	242	$	191

Impaired Loans

The company considers any loan with an individually evaluated reserve as an impaired loan. Depending on the level of impairment, loans will also be placed on non-accrual status.

The following tables present impaired client loan receivables.

	At March 31, 2014				At December 31, 2013
	Recorded		Related		Recorded		Related
(Dollars in millions)	Investment		Allowance		Investment		Allowance
Major markets	$	75	$	63	$	79	$	67
Growth markets		147		136		122		116
Total	$	222	$	199	$	201	$	183


					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended March 31, 2014:	Investment		Recognized		Cash Basis
Major markets	$	77	$	0	$	0
Growth markets		134		0		0
Total	$	211	$	0	$	0

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended March 31, 2013:	Investment		Recognized		Cash Basis
Major markets	$	79	$	0	$	0
Growth markets		79		0		0
Total	$	158	$	0	$	0

Credit Quality Indicators

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Standard & Poor’s Ratings Services credit ratings as shown below. Standard & Poor’s does not provide credit ratings to the company on its customers.

The following tables present the gross recorded investment for each class of receivables, by credit quality indicator, at March 31, 2014 and December 31, 2013. Receivables with a credit quality indicator ranging from AAA to BBB- are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company may take to transfer credit risk to third parties.

		Lease Receivables				Loan Receivables
(Dollars in millions)		Major		Growth		Major		Growth
At March 31, 2014:		Markets		Markets		Markets		Markets
Credit Rating:
	AAA – AA-	$	648	$	63	$	1,017	$	119
	A+ – A-		1,243		168		1,952		320
	BBB+ – BBB-		2,172		1,025		3,411		1,953
	BB+ – BB		1,349		333		2,119		634
	BB- – B+		519		350		814		666
	B – B-		354		218		555		414
	CCC+ – D		71		80		111		152
Total		$	6,356	$	2,235	$	9,980	$	4,259

At March 31, 2014, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (39 percent), Government (15 percent), Manufacturing (13 percent), Retail (9 percent), Services (8 percent), Communications (6 percent), Healthcare (5 percent) and Other (4 percent).

		Lease Receivables				Loan Receivables
(Dollars in millions)		Major		Growth		Major		Growth
At December 31, 2013:		Markets		Markets		Markets		Markets
Credit Rating:
	AAA – AA-	$	743	$	68	$	1,151	$	125
	A+ – A-		1,513		168		2,344		307
	BBB+ – BBB-		2,111		957		3,271		1,745
	BB+ – BB		1,393		350		2,158		638
	BB- – B+		595		368		922		672
	B – B-		365		214		565		391
	CCC+ – D		76		74		118		134
Total		$	6,796	$	2,200	$	10,529	$	4,012

At December 31, 2013, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (39 percent), Government (14 percent), Manufacturing (14 percent), Retail (8 percent), Services (8 percent), Healthcare (6 percent), Communications (6 percent) and Other (4 percent).

Past Due Financing Receivables

The company views receivables as past due when payment has not been received after 90 days, measured from the billing date.


							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At March 31, 2014:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	8	$	6,348	$	6,356	$	8
Growth markets		17		2,218		2,235		10
Total lease receivables	$	25	$	8,566	$	8,591	$	18

Major markets	$	11	$	9,969	$	9,980	$	11
Growth markets		31		4,228		4,259		6
Total loan receivables	$	43	$	14,197	$	14,239	$	18

Total	$	68	$	22,763	$	22,831	$	35

* Does not include accounts that are fully reserved.


							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At December 31, 2013:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	6	$	6,789	$	6,796	$	5
Growth markets		19		2,181		2,200		11
Total lease receivables	$	25	$	8,970	$	8,996	$	16

Major markets	$	9	$	10,520	$	10,529	$	6
Growth markets		34		3,979		4,012		18
Total loan receivables	$	43	$	14,499	$	14,542	$	25

Total	$	68	$	23,469	$	23,537	$	41

* Does not include accounts that are fully reserved.

Troubled Debt Restructurings

The company did not have any troubled debt restructurings during the three months ended March 31, 2014 and for the year ended December 31, 2013.