Financing Receivables

9 Months Ended

Sep. 30, 2011

Financing Receivables

Financing Receivables

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

(Dollars in millions)	At September 30, 2011		At December 31, 2010
Current:
Net investment in sales-type and direct financing leases	$	3,834	$	3,945
Commercial financing receivables	5,027		6,777
Client loan receivables	4,531		4,718
Installment payment receivables	754		816
Total	$	14,145	$	16,257
Noncurrent:
Net investment in sales-type and direct financing leases	$	5,117	$	5,384
Commercial financing receivables	37		43
Client loan receivables	4,303		4,734
Installment payment receivables	372		388
Total	$	9,830	$	10,548

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 $738 million and $871 million at September 30, 2011 and December 31, 2010, respectively, and is reflected net of unearned income of $746 million and $816 million and net of the allowance for credit losses of $109 million and $126 million at those dates, respectively.

Commercial financing receivables, net of allowance for credit losses of $45 million and $58 million at September 30, 2011 and December 31, 2010, respectively, relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM 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 $99 million and $160 million at September 30, 2011 and December 31, 2010, respectively, are loans that are provided by Global Financing primarily to clients to finance the purchase of software and services. Separate contractual relationships on these financing arrangements are for terms ranging generally from two to seven years.

Installment payment receivables, net of allowance for credit losses of $49 million and $56 million at September 30, 2011 and December 31, 2010, respectively, are secured loans that are provided primarily to clients to finance hardware and software ranging generally from two to three years.

Both 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 non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $307 million and $302 million at September 30, 2011 and December 31, 2010, respectively.

The company did not have any financing receivables held for sale as of September 30, 2011 and December 31, 2010.

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, 2011 and December 31, 2010. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio via 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 2010 Annual Report beginning on page 77.

(Dollars in millions) At September 30, 2011	Major Markets			Growth Markets			Total
Financing receivables:
Lease receivables	$	6,290		$	1,935		$	8,225
Loan receivables	8,105			2,079			10,184
Ending balance	$	14,395		$	4,014		$	18,409
Collectively evaluated for impairment	$	14,111		$	3,905		$	18,016
Individually evaluated for impairment	$	284		$	109		$	393
Allowance for credit losses:
Lease receivables	$	84		$	42		$	126
Loan receivables	150			76			226
Beginning balance at January 1, 2011	$	234		$	119		$	353
Charge-offs	(56		)	(13		)	(69		)
Provision	(15		)	1			(14		)
Other	2			(4		)	(2		)
Lease receivables	68			41			109
Loan receivables	96			62			158
Ending balance at September 30, 2011	$	165		$	102		$	267
Collectively evaluated for impairment	$	43		$	13		$	56
Individually evaluated for impairment	$	122		$	89		$	211

(Dollars in millions) At December 31, 2010	Major Markets		Growth Markets		Total
Financing receivables:
Lease receivables	$	6,562	$	1,983	$	8,545
Loan receivables	9,087		1,993		11,080
Ending balance	$	15,650	$	3,975	$	19,625
Collectively evaluated for impairment	$	15,199	$	3,794	$	18,993
Individually evaluated for impairment	$	451	$	181	$	632
Allowance for credit losses:
Lease receivables*	$	84	$	42	$	126
Loan receivables*	150		76		226
Ending balance at December 31, 2010	$	234	$	119	$	353
Collectively evaluated for impairment	$	60	$	11	$	71
Individually evaluated for impairment	$	174	$	108	$	282

* Reclassified to conform with 2011 presentation.

When calculating 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 calculated 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 or other receivables 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, 2011 and December 31, 2010.

(Dollars in millions)	At September 30,2011		At December 31, 2010
Major markets	$	46	$	69
Growth markets	20		33
Total lease receivables	$	66	$	101
Major markets	$	77	$	141
Growth markets	18		123
Total loan receivables	$	95	$	264
Total receivables	$	161	$	366

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 (see section “Financing Receivables on Non-Accrual Status”).

The following tables present impaired client loan receivables at September 30, 2011 and December 31, 2010.

	At September 30, 2011				At December 31, 2010
(Dollars in millions)	RecordedInvestment		RelatedAllowance		RecordedInvestment		Related Allowance
Major markets	$	111	$	75	$	196	$	119
Growth markets	59		52		132		68
Total	$	170	$	127	$	328	$	187

(Dollars in millions) For the three months ended September 30, 2011:	AverageRecordedInvestment		InterestIncomeRecognized*		InterestIncomeRecognized on Cash Basis
Major markets	$	125	$	1	$	0
Growth markets	60		0		0
Total	$	185	$	1	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

(Dollars in millions) For the nine months ended September 30, 2011:	AverageRecordedInvestment		InterestIncomeRecognized*		InterestIncomeRecognized on Cash Basis
Major markets	$	150	$	2	$	0
Growth markets	97		0		0
Total	$	248	$	2	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

Credit Quality Indicators

The company’s credit quality indicators are based on rating agency data, publicly available information and information provided by the companies, and 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. Moody’s has not provided to the company a credit rating on its clients.

The tables below present the gross recorded investment for each class of receivables, by credit quality indicator, at September 30, 2011 and December 31, 2010. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade.

	Lease Receivables				Loan Receivables
(Dollars in millions) At September 30, 2011:	MajorMarkets		GrowthMarkets		MajorMarkets		GrowthMarkets
Credit Rating:
Aaa — Aa3	$	810	$	151	$	1,043	$	162
A1 — A3	1,357		188		1,748		202
Baal — Baa3	2,296		738		2,958		793
Bal — Ba2	944		471		1,217		506
Ba3 — B1	548		259		706		278
B2 — B3	230		109		297		117
Caa — D	105		19		135		20
Total	$	6,290	$	1,935	$	8,105	$	2,079

At September 30, 2011, the industries which made up Global Financing’s receivables portfolio consist of: Financial (38 percent), Government (16 percent), Manufacturing (13 percent), Retail (9 percent), Services (8 percent), Communications (5 percent) and Other (11 percent).

	Lease Receivables*				Loan Receivables*
(Dollars in millions) At December 31, 2010:	MajorMarkets		GrowthMarkets		MajorMarkets		GrowthMarkets
Credit Rating:
Aaa — Aa3	$	794	$	173	$	1,100	$	173
A1 — A3	1,463		182		2,026		183
Baal — Baa3	2,494		837		3,453		841
Bal — Ba2	899		403		1,245		405
Ba3 — B1	518		242		718		243
B2 — B3	230		93		318		94
Caa — D	164		54		227		54
Total	$	6,562	$	1,983	$	9,087	$	1,993

* Reclassified to conform with 2011 presentation.

At December 31, 2010, the industries which make up Global Financing’s receivables portfolio consist of:  Financial (36 percent), Government (16 percent), Manufacturing (14 percent), Retail (9 percent), Services (8 percent), Communications (5 percent) and Other (12 percent).

Past Due Financing Receivables

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

(Dollars in millions) At September 30, 2011:	Total Past Due > 90 days*		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
Major markets	$	10	$	6,279	$	6,290	$	10
Growth markets	13		1,923		1,935		10
Total lease receivables	$	23	$	8,202	$	8,225	$	19
Major markets	$	28	$	8,077	$	8,105	$	11
Growth markets	20		2,059		2,079		18
Total loan receivables	$	48	$	10,136	$	10,184	$	30
Total	$	71	$	18,337	$	18,409	$	49

* Does not include accounts that are fully reserved.

(Dollars in millions) At December 31, 2010:	Total Past Due > 90 days*		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
Major markets	$	10	$	6,552	$	6,562	$	5
Growth markets	13		1,970		1,983		5
Total lease receivables	$	22	$	8,523	$	8,545	$	10
Major markets	$	11	$	9,076	$	9,087	$	4
Growth markets	32		1,961		1,993		17
Total loan receivables	$	43	$	11,037	$	11,080	$	21
Total	$	65	$	19,560	$	19,625	$	31

* Does not include accounts that are fully reserved.

Troubled Debt Restructurings

As noted in Note 2, “Accounting Changes,” the company adopted new FASB guidance to help creditors determine whether a restructuring constitutes a troubled debt restructuring. The company assessed all restructurings that occurred on or after January 1, 2011 and determined that there were no troubled debt restructurings for the nine months ended September 30, 2011.