Financing Receivables

3 Months Ended

Mar. 31, 2015

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)	2015		2014
Current:
Net investment in sales-type and direct financing leases	$	3,560	$	3,781
Commercial financing receivables		6,026		8,423
Client loan and installment payment receivables (loans)		6,717		7,631
Total	$	16,303	$	19,835
Noncurrent:
Net investment in sales-type and direct financing leases	$	4,081	$	4,449
Client loan and installment payment receivables (loans)		5,740		6,660
Total	$	9,820	$	11,109

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 $649 million and $671 million at March 31, 2015 and December 31, 2014, respectively, and is reflected net of unearned income of $491 million and $517 million, and net of the allowance for credit losses of $188 million and $165 million at those dates, respectively.

Commercial financing receivables, net of the allowance for credit losses of $13 million and $17 million at March 31, 2015 and December 31, 2014, 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 $408 million and $396 million at March 31, 2015 and December 31, 2014, 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 (loans) 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 $596 million and $642 million at March 31, 2015 and December 31, 2014, respectively.

The company did not have any financing receivables held for sale as of March 31, 2015 and December 31, 2014.

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, 2015 and December 31, 2014. 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.


(Dollars in millions)		Major		Growth
At March 31, 2015		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	5,265	$	1,840	$	7,105
	Loan receivables		8,911		3,953		12,864
Ending balance		$	14,176	$	5,793	$	19,970
Collectively evaluated for impairment		$	14,098	$	5,332	$	19,431
Individually evaluated for impairment		$	78	$	461	$	539
Allowance for credit losses:
Beginning balance at January 1, 2015
	Lease receivables	$	32	$	133	$	165
	Loan receivables		79		317		396
Total		$	111	$	450	$	561
	Write-offs		(1)		(1)		(1)
	Provision		5		49		54
	Other		(8)		(11)		(19)
Ending balance at March 31, 2015		$	107	$	488	$	595
	Lease receivables	$	32	$	156	$	188
	Loan receivables	$	75	$	332	$	408

Collectively evaluated for impairment		$	41	$	39	$	80
Individually evaluated for impairment		$	66	$	449	$	515


(Dollars in millions)		Major		Growth
At December 31, 2014		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	5,702	$	1,943	$	7,645
	Loan receivables		10,049		4,639		14,687
Ending balance		$	15,751	$	6,581	$	22,332
Collectively evaluated for impairment		$	15,665	$	6,156	$	21,821
Individually evaluated for impairment		$	86	$	425	$	511
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		(18)		(6)		(24)
	Provision		3		240		243
	Other		(12)		(11)		(23)
Ending balance at December 31, 2014		$	111	$	450	$	561
	Lease receivables	$	32	$	133	$	165
	Loan receivables	$	79	$	317	$	396

Collectively evaluated for impairment		$	42	$	39	$	81
Individually evaluated for impairment		$	69	$	411	$	480

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

The following table presents the recorded investment in financing receivables which were on non-accrual status at March 31, 2015 and December 31, 2014.


	At March 31,		At December 31,
(Dollars in millions)	2015		2014
Major markets	$	13	$	13
Growth markets		78		40
Total lease receivables	$	91	$	53

Major markets	$	24	$	27
Growth markets		137		151
Total loan receivables	$	160	$	178

Total receivables	$	251	$	231

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, 2015				At December 31, 2014
	Recorded		Related		Recorded		Related
(Dollars in millions)	Investment		Allowance		Investment		Allowance
Major markets	$	50	$	47	$	54	$	47
Growth markets		331		320		299		293
Total	$	381	$	366	$	353	$	340


					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended March 31, 2015:	Investment		Recognized		Cash Basis
Major markets	$	52	$	0	$	—
Growth markets		315		0		—
Total	$	367	$	0	$	—

					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	$	—
Growth markets		134		0		—
Total	$	211	$	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 Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’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 March 31, 2015 and December 31, 2014. Receivables with a credit quality indicator ranging from Aaa to Baa3 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, 2015:		Markets		Markets		Markets		Markets
Credit Rating:
	Aaa – Aa3	$	541	$	43	$	916	$	93
	A1 – A3		1,233		151		2,086		324
	Baa1 – Baa3		1,409		824		2,384		1,770
	Ba1 – Ba2		1,225		264		2,073		567
	Ba3 – B1		433		282		732		606
	B2 – B3		387		176		656		378
	Caa – D		38		100		64		215
Total		$	5,265	$	1,840	$	8,911	$	3,953

At March 31, 2015, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (38 percent), Government (15 percent), Manufacturing (13 percent), Services (9 percent), Retail (8 percent), Communications (7 percent), Healthcare (5 percent) and Other (5 percent)

		Lease Receivables				Loan Receivables
(Dollars in millions)		Major		Growth		Major		Growth
At December 31, 2014:		Markets		Markets		Markets		Markets
Credit Rating:
	Aaa – Aa3	$	563	$	46	$	993	$	110
	A1 – A3		1,384		178		2,438		425
	Baa1 – Baa3		1,704		900		3,003		2,148
	Ba1 – Ba2		1,154		272		2,034		649
	Ba3 – B1		470		286		827		683
	B2 – B3		372		176		655		420
	Caa – D		55		85		98		203
Total		$	5,702	$	1,943	$	10,049	$	4,639

At December 31, 2014, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (40 percent), Manufacturing (14 percent), Government (13 percent), Services (9 percent), Retail (8 percent), Communications (6 percent), Healthcare (5 percent), and Other (5 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 March 31, 2015:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	7	$	5,258	$	5,265	$	7
Growth markets		39		1,801		1,840		16
Total lease receivables	$	46	$	7,060	$	7,105	$	23

Major markets	$	11	$	8,901	$	8,911	$	10
Growth markets		30		3,923		3,953		13
Total loan receivables	$	41	$	12,824	$	12,864	$	23

Total	$	87	$	19,883	$	19,970	$	46

* Does not include accounts that are fully reserved.


							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At December 31, 2014:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	6	$	5,696	$	5,702	$	6
Growth markets		32		1,911		1,943		14
Total lease receivables	$	38	$	7,607	$	7,645	$	20

Major markets	$	9	$	10,040	$	10,049	$	9
Growth markets		35		4,603		4,639		18
Total loan receivables	$	44	$	14,643	$	14,687	$	27

Total	$	82	$	22,250	$	22,332	$	47

* 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, 2015 and for the year ended December 31, 2014.