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

	At June 30,		At December 31,
(Dollars in millions)	2016		2015
Current:
Net investment in sales-type and direct financing leases	$	3,089	$	3,057
Commercial financing receivables	7,146		8,948
Client loan and installment payment receivables (loans)	6,400		7,015

Total	$	16,635	$	19,020

Noncurrent:
Net investment in sales-type and direct financing leases	$	4,200	$	4,501
Client loan and installment payment receivables (loans)	5,067		5,512

Total	$	9,267	$	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 $595 million and $645 million at June 30, 2016 and December 31, 2015, respectively, and is reflected net of unearned income of $546 million and $536 million, and net of allowance for credit losses of $222 million and $213 million at those dates, respectively.

Commercial financing receivables, net of allowance for credit losses of $19 million both at June 30, 2016 and December 31, 2015, 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 $428 million and $377 million at June 30, 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 $563 million and $545 million at June 30, 2016 and December 31, 2015, respectively.

The company did not have any financing receivables held for sale as of June 30, 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 June 30, 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 June 30, 2016	Markets			Markets			Total
Financing receivables:
Lease receivables	$	5,355		$	1,478		$	6,833
Loan receivables	9,077			2,817			11,894

Ending balance	$	14,433		$	4,294		$	18,727

Collectively evaluated for impairment	$	14,334		$	3,829		$	18,163
Individually evaluated for impairment	$	99		$	465		$	564
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	(3		)	(25		)	(27		)
Provision	12			64			76
Other	3			8			11

Ending balance at June 30, 2016	$	121		$	528		$	649

Lease receivables	$	36		$	186		$	222
Loan receivables	$	85		$	343		$	428

Collectively evaluated for impairment	$	36		$	82		$	119
Individually evaluated for impairment	$	85		$	446		$	531

(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 June 30, 2016 and December 31, 2015.

	At June 30,		At December 31,
(Dollars in millions)	2016		2015
Major markets	$	1	$	2
Growth markets	44		63

Total lease receivables	$	45	$	65


Major markets	$	18	$	13
Growth markets	121		91

Total loan receivables	$	139	$	104


Total receivables	$	184	$	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 June 30, 2016				At December 31, 2015
	Recorded		Related		Recorded		Related
(Dollars in millions)	Investment		Allowance		Investment		Allowance
Major markets	$	74	$	70	$	50	$	47
Growth markets	319		302		297		284

Total	$	393	$	372	$	347	$	331

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended June 30, 2016:	Investment		Recognized		Cash Basis
Major markets	$	70	$	0	$	—
Growth markets	307		0		—

Total	$	377	$	0	$	—

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended June 30, 2015:	Investment		Recognized		Cash Basis
Major markets	$	51	$	—	$	—
Growth markets	341		0		—

Total	$	392	$	0	$	—

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the six months ended June 30, 2016:	Investment		Recognized		Cash Basis
Major markets	$	64	$	0	$	—
Growth markets	304		0		—

Total	$	367	$	0	$	—

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the six months ended June 30, 2015:	Investment		Recognized		Cash Basis
Major markets	$	52	$	—	$	—
Growth markets	327		0		—

Total	$	379	$	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 June 30, 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 June 30, 2016:	Markets		Markets		Markets		Markets
Credit Rating:
Aaa – Aa3	$	490	$	41	$	831	$	78
A1 – A3	1,235		136		2,093		260
Baa1 – Baa3	1,498		192		2,539		366
Ba1 – Ba2	1,213		359		2,055		684
Ba3 – B1	513		427		870		814
B2 – B3	372		213		631		407
Caa – D	35		109		59		209

Total	$	5,355	$	1,478	$	9,077	$	2,817

At June 30, 2016, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (36 percent), Government (14 percent), Manufacturing (14 percent), Services (10 percent), Retail (8 percent), Communications (7 percent), Healthcare (6 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 (11percent), 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 June 30, 2016:	> 90 days (1)		Receivables		Receivables		Receivables		Accruing (2)
Major markets	$	7	$	35	$	5,314	$	5,355	$	106
Growth markets	24		144		1,310		1,478		73

Total lease receivables	$	30	$	179	$	6,624	$	6,833	$	179


Major markets	$	9	$	39	$	9,030	$	9,077	$	130
Growth markets	15		296		2,506		2,817		55

Total loan receivables	$	24	$	335	$	11,536	$	11,894	$	185


Total	$	54	$	513	$	18,160	$	18,727	$	364

(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 six months ended June 30, 2016 and for the year ended December 31, 2015.