Financing Receivables:

9 Months Ended

Sep. 30, 2014

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

	At September 30,		At December 31,
(Dollars in millions)	2014		2013
Current:
Net investment in sales-type and direct financing leases	$	3,963	$	4,004
Commercial financing receivables		6,437		8,541
Client loan and installment payment receivables (loans)		7,011		7,243
Total	$	17,411	$	19,787
Noncurrent:
Net investment in sales-type and direct financing leases	$	4,641	$	5,700
Client loan and installment payment receivables (loans)		6,352		7,055
Total	$	10,993	$	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 $689 million and $737 million at September 30, 2014 and December 31, 2013, respectively, and is reflected net of unearned income of $560 million and $672 million, and net of the allowance for credit losses of $161 million and $123 million at those dates, respectively.

Commercial financing receivables, net of the allowance for credit losses of $16 million and $23 million at September 30, 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 and installment payment receivables (loans), net of the allowance for credit losses of $343 million and $242 million at September 30, 2014 and December 31, 2013, respectively, are loans that are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years.

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

The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $685 million and $769 million at September 30, 2014 and December 31, 2013, respectively.

The company did not have any financing receivables held for sale as of September 30, 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 September 30, 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, refer to the company’s 2013 Annual Report on pages 92 and 93.


(Dollars in millions)		Major		Growth
At September 30, 2014		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	5,926	$	2,069	$	7,995
	Loan receivables		9,250		4,456		13,706
Ending balance		$	15,176	$	6,525	$	21,701
Collectively evaluated for impairment		$	15,081	$	6,128	$	21,209
Individually evaluated for impairment		$	95	$	397	$	492
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		(14)		(5)		(19)
	Provision		1		169		170
	Other		(8)		(4)		(12)
Ending balance at September 30, 2014		$	116	$	388	$	504
	Lease receivables	$	34	$	127	$	161
	Loan receivables	$	82	$	261	$	343

Collectively evaluated for impairment		$	40	$	35	$	75
Individually evaluated for impairment		$	76	$	352	$	428


(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 September 30, 2014 and December 31, 2013.


	At September 30,		At December 31,
(Dollars in millions)	2014		2013
Major markets	$	16	$	25
Growth markets		57		34
Total lease receivables	$	73	$	59

Major markets	$	32	$	40
Growth markets		181		92
Total loan receivables	$	213	$	132

Total receivables	$	285	$	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 September 30, 2014				At December 31, 2013
	Recorded		Related		Recorded		Related
(Dollars in millions)	Investment		Allowance		Investment		Allowance
Major markets	$	65	$	55	$	79	$	67
Growth markets		280		237		122		116
Total	$	345	$	292	$	201	$	183


					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended September 30, 2014:	Investment		Recognized		Cash Basis
Major markets	$	67	$	0	$	0
Growth markets		235		0		0
Total	$	302	$	0	$	0

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended September 30, 2013:	Investment		Recognized		Cash Basis
Major markets	$	73	$	0	$	0
Growth markets		102		0		0
Total	$	174	$	0	$	0

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the nine months ended September 30, 2014:	Investment		Recognized		Cash Basis
Major markets	$	72	$	0	$	0
Growth markets		185		0		0
Total	$	256	$	0	$	0

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the nine months ended September 30, 2013:	Investment		Recognized		Cash Basis
Major markets	$	76	$	0	$	0
Growth markets		90		0		0
Total	$	166	$	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. The company uses information provided by Standard & Poor’s, where available, as one of many inputs in its determination of customer credit ratings.

The following tables present the gross recorded investment for each class of receivables, by credit quality indicator, at September 30, 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 September 30, 2014:		Markets		Markets		Markets		Markets
Credit Rating:
	AAA – AA-	$	501	$	50	$	782	$	107
	A+ – A-		1,460		140		2,279		302
	BBB+ – BBB-		1,732		1,048		2,703		2,256
	BB+ – BB		1,253		347		1,957		747
	BB- – B+		547		247		854		532
	B – B-		380		148		593		318
	CCC+ – D		53		90		83		194
Total		$	5,926	$	2,069	$	9,250	$	4,456

At September 30, 2014, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (40 percent), Government (16 percent), Manufacturing (14 percent), Retail (8 percent), Services (7 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 financing 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 September 30, 2014:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	8	$	5,918	$	5,926	$	8
Growth markets		25		2,044		2,069		12
Total lease receivables	$	33	$	7,962	$	7,995	$	20

Major markets	$	12	$	9,238	$	9,250	$	12
Growth markets		44		4,412		4,456		19
Total loan receivables	$	57	$	13,649	$	13,706	$	31

Total	$	90	$	21,611	$	21,701	$	51

* 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 nine months ended September 30, 2014 and for the year ended December 31, 2013.