Financing Receivables:

6 Months Ended

Jun. 30, 2012

Financing Receivables:

Financing Receivables:

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)	2012		2011
Current:
Net investment in sales-type and direct financing leases	$	3,762	$	3,765
Commercial financing receivables	5,441		7,095
Client loan receivables	4,784		5,195
Installment payment receivables	995		846
Total	$	14,982	$	16,901
Noncurrent:
Net investment in sales-type and direct financing leases	$	5,195	$	5,406
Commercial financing receivables	7		34
Client loan receivables	5,139		4,925
Installment payment receivables	454		410
Total	$	10,795	$	10,776

Net investment in sales-type and direct financing leases relate 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 $713 million and $745 million at June 30, 2012 and December 31, 2011, respectively, and is reflected net of unearned income of $682 million and $733 million, and net of the allowance for credit losses of $116 million and $118 million at those dates, respectively.

Commercial financing receivables, net of allowance for credit losses of $39 million and $53 million at June 30, 2012 and December 31, 2011, 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 $140 million and $126 million at June 30, 2012 and December 31, 2011, 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 one to seven years.

Installment payment receivables, net of allowance for credit losses of $31 million and $51 million at June 30, 2012 and December 31, 2011, respectively, are loans that are provided primarily to clients to finance hardware, software and services ranging generally from one to three years.

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 $368 million and $324 million at June 30, 2012 and December 31, 2011, respectively.

The company did not have any financing receivables held for sale as of June 30, 2012 and December 31, 2011.

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 June 30, 2012 and December 31, 2011. 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 2011 Annual Report beginning on page 85.

(Dollars in millions)	Major			Growth
At June 30, 2012	Markets			Markets			Total
Financing receivables:
Lease Receivables	$	6,423		$	1,836		$	8,259
Loan Receivables	8,682			2,879			11,561
Ending balance	$	15,105		$	4,715		$	19,820
Collectively evaluated for impairment	$	14,971		$	4,610		$	19,581
Individually evaluated for impairment	$	134		$	105		$	239
Allowance for credit losses:
Beginning balance at January 1, 2012
Lease Receivables	$	79		$	40		$	118
Loan Receivables	125			64			189
Total	$	203		$	104		$	307
Write-offs	(4		)	(1		)	(5		)
Provision	(9		)	8			(1		)
Other	(2		)	(1		)	(3		)
Ending balance at June 30, 2012	$	188		$	110		$	298
Lease Receivables	$	71		$	45		$	116
Loan Receivables	$	117		$	65		$	182
Collectively evaluated for impairment	$	85		$	19		$	104
Individually evaluated for impairment	$	103		$	91		$	194

(Dollars in millions)	Major			Growth
At December 31, 2011	Markets			Markets			Total
Financing receivables:
Lease receivables	$	6,510		$	1,921		$	8,430
Loan receivables	9,077			2,552			11,629
Ending balance	$	15,587		$	4,472		$	20,060
Collectively evaluated for impairment	$	15,321		$	4,370		$	19,692
Individually evaluated for impairment	$	266		$	102		$	368
Allowance for credit losses:
Beginning balance at January 1, 2011
Lease receivables	$	84		$	42		$	126
Loan receivables	150			76			226
Total	$	234		$	119		$	353
Write-offs	(68		)	(16		)	(84		)
Provision	39			5			44
Other	(1		)	(4		)	(5		)
Ending balance at December 31, 2011	$	203		$	104		$	307
Lease receivables	$	79		$	40		$	118
Loan receivables	$	125		$	64		$	189
Collectively evaluated for impairment	$	82		$	15		$	96
Individually evaluated for impairment	$	122		$	89		$	211

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 creditrating, 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 are on non-accrual status at June 30, 2012 and December 31, 2011.

	At June 30,		At December 31,
(Dollars in millions)	2012		2011
Major markets	$	27	$	46
Growth markets	22		20
Total lease receivables	$	50	$	66
Major markets	$	52	$	75
Growth markets	28		24
Total loan receivables	$	80	$	99
Total receivables	$	130	$	165

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 June 30, 2012				At December 31, 2011
	Recorded		Related		Recorded		Related
(Dollars in millions)	Investment		Allowance		Investment		Allowance
Major markets	$	76	$	65	$	110	$	70
Growth markets	62		53		62		53
Total	$	139	$	118	$	172	$	123

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended June 30, 2012:	Investment		Recognized*		Cash Basis
Major markets	$	81	$	0	$	0
Growth markets	64		0		0
Total	$	145	$	0	$	0

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

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended June 30, 2011:	Investment		Recognized*		Cash Basis
Major markets	$	147	$	1	$	0
Growth markets	99		0		0
Total	$	246	$	1	$	0

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

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the six months ended June 30 2012:	Investment		Recognized*		Cash Basis
Major markets	$	91	$	0	$	0
Growth markets	63		0		0
Total	$	154	$	0	$	0

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

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the six months ended June 30 2011:	Investment		Recognized*		Cash Basis
Major markets	$	163	$	1	$	0
Growth markets	110		0		0
Total	$	273	$	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, 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. Moody’s does not provide credit ratings to the company on its customers.

The tables below present the gross recorded investment for each class of receivables, by credit quality indicator, at June 30, 2012 and December 31, 2011. 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)	Major		Growth		Major		Growth
At June 30, 2012:	Markets		Markets		Markets		Markets
Credit Rating:
Aaa – Aa3	$	552	$	95	$	746	$	149
A1 – A3	1,522		231		2,057		362
Baal – Baa3	2,244		644		3,033		1,011
Bal – Ba2	1,218		422		1,647		662
Ba3 – B1	542		315		733		495
B2 – B3	270		107		366		168
Caa – D	75		20		101		32
Total	$	6,423	$	1,836	$	8,682	$	2,879

At June 30, 2012, the industries which made up Global Financing’s receivables portfolio consist of: Financial (39 percent), Government (15 percent), Manufacturing (14 percent), Retail (9 percent), Services (8 percent), Communications (6 percent) and Other (9 percent).

	Lease Receivables				Loan Receivables
(Dollars in millions)	Major		Growth		Major		Growth
At December 31, 2011:	Markets		Markets		Markets		Markets
Credit Rating:
Aaa – Aa3	$	697	$	139	$	971	$	185
A1 – A3	1,459		306		2,034		407
Baal – Baa3	2,334		654		3,255		869
Bal – Ba2	1,118		457		1,559		607
Ba3 – B1	534		252		744		335
B2 – B3	260		97		362		129
Caa – D	108		15		151		20
Total	$	6,510	$	1,921	$	9,077	$	2,552

At December 31, 2011, the industries which make up Global Financing’s receivables portfolio consist of:  Financial (39 percent), Government (15 percent), Manufacturing (13 percent), Retail (9 percent), Services (7 percent), Communications (6 percent) and Other (11 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.

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At June 30, 2012:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	9	$	6,414	$	6,423	$	5
Growth markets	13		1,823		1,836		10
Total lease receivables	$	22	$	8,237	$	8,259	$	16
Major markets	$	26	$	8,656	$	8,682	$	7
Growth markets	30		2,849		2,879		25
Total loan receivables	$	56	$	11,505	$	11,561	$	32
Total	$	78	$	19,742	$	19,820	$	48

* Does not include accounts that are fully reserved.

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At December 31, 2011:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	6	$	6,504	$	6,510	$	6
Growth markets	9		1,911		1,921		6
Total lease receivables	$	16	$	8,415	$	8,430	$	12
Major markets	$	23	$	9,054	$	9,077	$	7
Growth markets	22		2,530		2,552		19
Total loan receivables	$	46	$	11,584	$	11,629	$	26
Total	$	62	$	19,998	$	20,060	$	38

* Does not include accounts that are fully reserved.

Troubled Debt Restructurings

The company assessed all restructurings that occurred on or after January 1, 2011 and determined that there were no troubled debt restructurings for the year ended December 31, 2011 and the six months ended June 30, 2012.