Financing Receivables

3 Months Ended

Mar. 31, 2016

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)	2016		2015
Current:
Net investment in sales-type and direct financing leases	$	3,145	$	3,057
Commercial financing receivables		6,906		8,948
Client loan and installment payment receivables (loans)		6,596		7,015
Total	$	16,646	$	19,020
Noncurrent:
Net investment in sales-type and direct financing leases	$	4,350	$	4,501
Client loan and installment payment receivables (loans)		4,915		5,512
Total	$	9,266	$	10,013

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 $627 million and $645 million at March 31, 2016 and December 31, 2015, respectively, and is reflected net of unearned income of $588 million and $536 million, and net of allowance for credit losses of $246 million and $213 million at those dates, respectively.

Commercial financing receivables, net of allowance for credit losses of $14 million and $19 million at March 31, 2016 and December 31, 2015, 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 allowance for credit losses of $420 million and $377 million at March 31, 2016 and December 31, 2015, 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 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 $600 million and $545 million at March 31, 2016 and December 31, 2015, respectively.

The company did not have any financing receivables held for sale as of March 31, 2016 and December 31, 2015.

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 commercial financing receivables and other miscellaneous financing receivables at March 31, 2016 and December 31, 2015. 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, 2016		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	5,461	$	1,566	$	7,027
	Loan receivables		9,034		2,897		11,931
Ending balance		$	14,495	$	4,463	$	18,959
Collectively evaluated for impairment		$	14,404	$	4,005	$	18,409
Individually evaluated for impairment		$	92	$	458	$	550
Allowance for credit losses:
Beginning balance at January 1, 2016
	Lease receivables	$	25	$	188	$	213
	Loan receivables		83		293		377
Total		$	109	$	481	$	590
	Write-offs		(1)		(17)		(19)
	Provision		6		74		80
	Other		4		10		14
Ending balance at March 31, 2016		$	118	$	548	$	666
	Lease receivables	$	32	$	214	$	246
	Loan receivables	$	86	$	334	$	420

Collectively evaluated for impairment		$	39	$	105	$	144
Individually evaluated for impairment		$	79	$	443	$	522


(Dollars in millions)		Major		Growth
At December 31, 2015		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	5,517	$	1,524	$	7,041
	Loan receivables		9,739		3,165		12,904
Ending balance		$	15,256	$	4,689	$	19,945
Collectively evaluated for impairment		$	15,180	$	4,227	$	19,406
Individually evaluated for impairment		$	76	$	462	$	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		(14)		(48)		(62)
	Provision		20		122		141
	Other		(8)		(43)		(51)
Ending balance at December 31, 2015		$	109	$	481	$	590
	Lease receivables	$	25	$	188	$	213
	Loan receivables	$	83	$	293	$	377

Collectively evaluated for impairment		$	43	$	36	$	79
Individually evaluated for impairment		$	65	$	445	$	511

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, 2016 and December 31, 2015.


	At March 31,		At December 31,
(Dollars in millions)	2016		2015
Major markets	$	2	$	2
Growth markets		49		63
Total lease receivables	$	52	$	65

Major markets	$	15	$	13
Growth markets		107		91
Total loan receivables	$	123	$	104

Total receivables	$	174	$	168

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, 2016				At December 31, 2015
	Recorded		Related		Recorded		Related
(Dollars in millions)	Investment		Allowance		Investment		Allowance
Major markets	$	66	$	63	$	50	$	47
Growth markets		296		281		297		284
Total	$	362	$	343	$	347	$	331


					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended March 31, 2016:	Investment		Recognized		Cash Basis
Major markets	$	58	$	0	$	—
Growth markets		296		0		—
Total	$	354	$	0	$	—

					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	$	—

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, 2016 and December 31, 2015. 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 takes to transfer credit risk to third parties.

		Lease Receivables				Loan Receivables
(Dollars in millions)		Major		Growth		Major		Growth
At March 31, 2016:		Markets		Markets		Markets		Markets
Credit Rating:
	Aaa – Aa3	$	514	$	40	$	850	$	73
	A1 – A3		1,230		138		2,035		254
	Baa1 – Baa3		1,506		246		2,491		455
	Ba1 – Ba2		1,240		385		2,051		712
	Ba3 – B1		543		414		899		765
	B2 – B3		391		245		648		454
	Caa – D		37		99		61		183
Total		$	5,461	$	1,566	$	9,034	$	2,897

At March 31, 2016, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (35 percent), Government (14 percent), Manufacturing (14 percent), Services (10 percent), Retail (8 percent), Communications (7 percent), Healthcare (7 percent) and Other (6 percent).

		Lease Receivables				Loan Receivables
(Dollars in millions)		Major		Growth		Major		Growth
At December 31, 2015:		Markets		Markets		Markets		Markets
Credit Rating:
	Aaa – Aa3	$	538	$	39	$	949	$	80
	A1 – A3		1,324		162		2,338		336
	Baa1 – Baa3		1,493		392		2,635		813
	Ba1 – Ba2		1,214		352		2,143		732
	Ba3 – B1		513		277		905		576
	B2 – B3		403		215		711		447
	Caa – D		33		87		59		181
Total		$	5,517	$	1,524	$	9,739	$	3,165

At December 31, 2015, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (36 percent), Manufacturing (14 percent), Government (11 percent), Services (11 percent), Retail (9 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent).

Past Due Financing Receivables


			Fully		<90 Days				Recorded
	Total		Reserved		or Unbilled		Total		Investment
(Dollars in millions)	Past Due		Financing		Financing		Financing		> 90 Days and
At March 31, 2016:	> 90 days (1)		Receivables		Receivables		Receivables		Accruing (2)
Major markets	$	7	$	33	$	5,420	$	5,461	$	128
Growth markets		26		182		1,358		1,566		64
Total lease receivables	$	33	$	215	$	6,779	$	7,027	$	192

Major markets	$	10	$	36	$	8,989	$	9,034	$	150
Growth markets		33		279		2,585		2,897		74
Total loan receivables	$	42	$	315	$	11,574	$	11,931	$	224

Total	$	76	$	530	$	18,353	$	18,959	$	416

(1) Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved.
(2) At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days.


			Fully		<90 Days				Recorded
	Total		Reserved		or Unbilled		Total		Investment
(Dollars in millions)	Past Due		Financing		Financing		Financing		> 90 Days and
At December 31, 2015*:	> 90 days (1)		Receivables		Receivables		Receivables		Accruing (2)
Major markets	$	5	$	33	$	5,479	$	5,517	$	108
Growth markets		30		140		1,355		1,524		60
Total lease receivables	$	35	$	173	$	6,834	$	7,041	$	168

Major markets	$	7	$	35	$	9,696	$	9,739	$	134
Growth markets		31		309		2,825		3,165		86
Total loan receivables	$	38	$	344	$	12,521	$	12,904	$	220

Total	$	73	$	517	$	19,355	$	19,945	$	388

(1) Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved.
(2) At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days.
* Reclassified to conform with 2016 presentation.

Troubled Debt Restructurings

The company did not have any troubled debt restructurings during the three months ended March 31, 2016 and for the year ended December 31, 2015.