Cat Financial Financing Activities

Credit quality of financing receivables and allowance for credit losses

Cat Financial applies a systematic methodology to determine the allowance for credit losses for finance receivables. Based upon Cat Financial’s analysis of credit losses and risk factors, portfolio segments are as follows:


•	Customer – Finance receivables with retail customers.


•	Dealer – Finance receivables with Caterpillar dealers.

Cat Financial further evaluates portfolio segments by the class of finance receivables, which is defined as a level of information (below a portfolio segment) in which the finance receivables have the same initial measurement attribute and a similar method for assessing and monitoring credit risk. Typically, Cat Financial’s finance receivables within a geographic area have similar credit risk profiles and methods for assessing and monitoring credit risk. Cat Financial’s classes, which align with management reporting for credit losses, are as follows:


•	North America – Finance receivables originated in the United States or Canada.


•	Europe – Finance receivables originated in Europe, Africa, Middle East and the Commonwealth of Independent States.


•	Asia Pacific – Finance receivables originated in Australia, New Zealand, China, Japan, South Korea and Southeast Asia.


•	Mining – Finance receivables related to large mining customers worldwide.


•	Latin America – Finance receivables originated in Central and South American countries and Mexico.


•	Caterpillar Power Finance – Finance receivables related to marine vessels with Caterpillar engines worldwide and Caterpillar electrical power generation, gas compression and co-generation systems and non-Caterpillar equipment that is powered by these systems worldwide.

Impaired loans and finance leases

For all classes, a loan or finance lease is considered impaired, based on current information and events, if it is probable that Cat Financial will be unable to collect all amounts due according to the contractual terms of the loan or finance lease. Loans and finance leases reviewed for impairment include loans and finance leases that are past due, non-performing or in bankruptcy. Recognition of income is suspended and the loan or finance lease is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due except in locations where local regulatory requirements dictate a different method, or in instances in which relevant information is known that warrants placing the loan or finance lease on non-accrual status). Accrual is resumed, and previously suspended income is recognized, when the loan or finance lease becomes contractually current and/or collection doubts are removed. Cash receipts on impaired loans or finance leases are recorded against the receivable and then to any unrecognized income.

During the second quarter of 2013, Cat Financial changed the classification of certain loans and finance leases previously reported as impaired. While these loans and finance leases had been incorrectly reported as impaired, the related allowance for these loans and finance leases was appropriately measured; therefore, this change had no impact on the allowance for credit losses. The impact of incorrectly reporting these loans and finance leases as impaired was not considered material to previously issued financial statements; however, prior period impaired loan and finance lease balances have been revised.

There were no impaired loans or finance leases as of March 31, 2014 or December 31, 2013, for the Dealer portfolio segment. The average recorded investment for impaired loans and finance leases for the Dealer portfolio segment was zero for the three months ended March 31, 2014 and 2013.

Individually impaired loans and finance leases for the Customer portfolio segment were as follows:



	March 31, 2014						December 31, 2013
(Millions of dollars)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired Loans and Finance Leases With No Allowance Recorded
Customer
North America	$	24	$	23	$	—	$	23	$	22	$	—
Europe	47		47		—		48		47		—
Asia Pacific	5		5		—		7		7		—
Mining	133		133		—		134		134		—
Latin America	37		37		—		11		11		—
Caterpillar Power Finance	156		156		—		223		222		—
Total	$	402	$	401	$	—	$	446	$	443	$	—

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	8	$	8	$	3	$	13	$	13	$	4
Europe	17		16		6		20		19		7
Asia Pacific	11		11		3		16		16		2
Mining	32		32		12		—		—		—
Latin America	28		28		8		23		23		6
Caterpillar Power Finance	55		54		18		110		106		51
Total	$	151	$	149	$	50	$	182	$	177	$	70

Total Impaired Loans and Finance Leases
Customer
North America	$	32	$	31	$	3	$	36	$	35	$	4
Europe	64		63		6		68		66		7
Asia Pacific	16		16		3		23		23		2
Mining	165		165		12		134		134		—
Latin America	65		65		8		34		34		6
Caterpillar Power Finance	211		210		18		333		328		51
Total	$	553	$	550	$	50	$	628	$	620	$	70



	Three Months Ended March 31, 2014				Three Months Ended March 31, 2013
(Millions of dollars)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Loans and Finance Leases With No Allowance Recorded
Customer
North America	$	25	$	1	$	28	$	1
Europe	48		—		45		—
Asia Pacific	6		—		4		—
Mining	134		2		—		—
Latin America	17		—		9		—
Caterpillar Power Finance	205		2		285		—
Total	$	435	$	5	$	371	$	1

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	10	$	—	$	24	$	—
Europe	19		—		34		—
Asia Pacific	14		—		26		1
Mining	24		—		19		—
Latin America	24		—		52		1
Caterpillar Power Finance	82		1		128		—
Total	$	173	$	1	$	283	$	2

Total Impaired Loans and Finance Leases
Customer
North America	$	35	$	1	$	52	$	1
Europe	67		—		79		—
Asia Pacific	20		—		30		1
Mining	158		2		19		—
Latin America	41		—		61		1
Caterpillar Power Finance	287		3		413		—
Total	$	608	$	6	$	654	$	3

Non-accrual and past due loans and finance leases

For all classes, Cat Financial considers a loan or finance lease past due if any portion of a contractual payment is due and unpaid for more than 30 days. Recognition of income is suspended and the loan or finance lease is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due except in locations where local regulatory requirements dictate a different method, or in instances in which relevant information is known that warrants placing the loan or finance lease on non-accrual status). Accrual is resumed, and previously suspended income is recognized, when the loan or finance lease becomes contractually current and/or collection doubts are removed.

As of March 31, 2014 and December 31, 2013, there were no loans or finance leases on non-accrual status for the Dealer portfolio segment.

The investment in customer loans and finance leases on non-accrual status was as follows:



(Millions of dollars)
	March 31, 2014		December 31, 2013
Customer
North America	$	29	$	26
Europe	31		28
Asia Pacific	57		50
Mining	21		23
Latin America	165		179
Caterpillar Power Finance	82		119
Total	$	385	$	425

Aging related to loans and finance leases was as follows:



(Millions of dollars)
	March 31, 2014
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables		91+ Still Accruing
Customer
North America	$	38	$	14	$	30	$	82	$	6,620	$	6,702	$	1
Europe	31		19		35		85		2,786		2,871		6
Asia Pacific	54		28		91		173		2,680		2,853		35
Mining	—		—		11		11		2,193		2,204		—
Latin America	85		39		143		267		2,598		2,865		4
Caterpillar Power Finance	27		19		102		148		2,960		3,108		24
Dealer
North America	—		—		—		—		2,312		2,312		—
Europe	—		—		—		—		157		157		—
Asia Pacific	—		—		—		—		600		600		—
Latin America	—		—		—		—		734		734		—
Total	$	235	$	119	$	412	$	766	$	23,640	$	24,406	$	70



(Millions of dollars)
	December 31, 2013
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables		91+ Still Accruing
Customer
North America	$	37	$	12	$	24	$	73	$	6,508	$	6,581	$	—
Europe	26		15		29		70		2,805		2,875		6
Asia Pacific	54		23		59		136		2,752		2,888		11
Mining	3		—		12		15		2,128		2,143		—
Latin America	54		25		165		244		2,474		2,718		5
Caterpillar Power Finance	55		30		60		145		2,946		3,091		—
Dealer
North America	—		—		—		—		2,283		2,283		—
Europe	—		—		—		—		150		150		—
Asia Pacific	—		—		—		—		583		583		—
Mining	—		—		—		—		1		1		—
Latin America	—		—		—		—		748		748		—
Total	$	229	$	105	$	349	$	683	$	23,378	$	24,061	$	22

Allowance for credit loss activity

An analysis of the allowance for credit losses was as follows:



(Millions of dollars)
	March 31, 2014
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	365		$	10	$	375
Receivables written off	(52		)	—		(52		)
Recoveries on receivables previously written off	14			—		14
Provision for credit losses	32			—		32
Balance at end of period	$	359		$	10	$	369

Individually evaluated for impairment	$	50		$	—	$	50
Collectively evaluated for impairment	309			10		319
Ending Balance	$	359		$	10	$	369

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	553		$	—	$	553
Collectively evaluated for impairment	20,050			3,803		23,853
Ending Balance	$	20,603		$	3,803	$	24,406



(Millions of dollars)
	December 31, 2013
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	414		$	9	$	423
Receivables written off	(179		)	—		(179		)
Recoveries on receivables previously written off	56			—		56
Provision for credit losses	83			1		84
Other	(9		)	—		(9		)
Balance at end of year	$	365		$	10	$	375

Individually evaluated for impairment	$	70		$	—	$	70
Collectively evaluated for impairment	295			10		305
Ending Balance	$	365		$	10	$	375

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	628		$	—	$	628
Collectively evaluated for impairment	19,668			3,765		23,433
Ending Balance	$	20,296		$	3,765	$	24,061

Credit quality of finance receivables

The credit quality of finance receivables is reviewed on a monthly basis. Credit quality indicators include performing and non-performing. Non-performing is defined as finance receivables currently over 120 days past due and/or on non-accrual status or in bankruptcy. Finance receivables not meeting the criteria listed above are considered performing. Non-performing receivables have the highest probability for credit loss. The allowance for credit losses attributable to non-performing receivables is based on the most probable source of repayment, which is normally the liquidation of collateral. In determining collateral value, Cat Financial estimates the current fair market value of the collateral less selling costs. In addition, Cat Financial considers credit enhancements such as additional collateral and contractual third-party guarantees in determining the allowance for credit losses attributable to non-performing receivables.

The recorded investment in performing and non-performing finance receivables was as follows:



(Millions of dollars)
	March 31, 2014						December 31, 2013
	Customer		Dealer		Total		Customer		Dealer		Total
Performing
North America	$	6,673	$	2,312	$	8,985	$	6,555	$	2,283	$	8,838
Europe	2,840		157		2,997		2,847		150		2,997
Asia Pacific	2,796		600		3,396		2,838		583		3,421
Mining	2,183		—		2,183		2,120		1		2,121
Latin America	2,700		734		3,434		2,539		748		3,287
Caterpillar Power Finance	3,026		—		3,026		2,972		—		2,972
Total Performing	$	20,218	$	3,803	$	24,021	$	19,871	$	3,765	$	23,636

Non-Performing
North America	$	29	$	—	$	29	$	26	$	—	$	26
Europe	31		—		31		28		—		28
Asia Pacific	57		—		57		50		—		50
Mining	21		—		21		23		—		23
Latin America	165		—		165		179		—		179
Caterpillar Power Finance	82		—		82		119		—		119
Total Non-Performing	$	385	$	—	$	385	$	425	$	—	$	425

Performing & Non-Performing
North America	$	6,702	$	2,312	$	9,014	$	6,581	$	2,283	$	8,864
Europe	2,871		157		3,028		2,875		150		3,025
Asia Pacific	2,853		600		3,453		2,888		583		3,471
Mining	2,204		—		2,204		2,143		1		2,144
Latin America	2,865		734		3,599		2,718		748		3,466
Caterpillar Power Finance	3,108		—		3,108		3,091		—		3,091
Total	$	20,603	$	3,803	$	24,406	$	20,296	$	3,765	$	24,061

Troubled Debt Restructurings

A restructuring of a loan or finance lease receivable constitutes a troubled debt restructuring (TDR) when the lender grants a concession it would not otherwise consider to a borrower experiencing financial difficulties. Concessions granted may include extended contract maturities, inclusion of interest only periods, below market interest rates, and extended skip payment periods.

TDRs are reviewed along with other receivables as part of management’s ongoing evaluation of the adequacy of the allowance for credit losses. The allowance for credit losses attributable to TDRs is based on the most probable source of repayment, which is normally the liquidation of collateral. In determining collateral value, Cat Financial estimates the current fair market value of the collateral less selling costs. In addition, Cat Financial considers credit enhancements such as additional collateral and contractual third-party guarantees in determining the allowance for credit losses attributable to TDRs.

There were no loans or finance lease receivables modified as TDRs during the three months ended March 31, 2014 or 2013 for the Dealer portfolio segment.

Loan and finance lease receivables in the Customer portfolio segment modified as TDRs during the three months ended March 31, 2014 and 2013, were as follows:



(Dollars in millions)
	Three Months Ended March 31, 2014					Three Months Ended March 31, 2013
	Number of Contracts	Pre-TDR Outstanding Recorded Investment		Post-TDR Outstanding Recorded Investment		Number of Contracts	Pre-TDR Outstanding Recorded Investment		Post-TDR Outstanding Recorded Investment
Customer
North America	3	$	2	$	2	10	$	2	$	2
Europe	3	5		5		—	—		—
Mining	1	11		10		—	—		—
Latin America	1	29		28		—	—		—
Caterpillar Power Finance ¹	1	1		1		4	36		37
Total ²	9	$	48	$	46	14	$	38	$	39

During the three months ended March 31, 2014, there were no additional funds subsequently loaned to a borrower whose terms had been modified in a TDR. During the three months ended March 31, 2013, $5 million of additional funds were subsequently loaned to a borrower whose terms had been modified in a TDR. The $5 million of additional funds is not reflected in the table above as no incremental modifications have been made with the borrower during the period presented. At March 31, 2014, remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR were $3 million.


²	Modifications include extended contract maturities, inclusion of interest only periods, below market interest rates, and extended skip payment periods.

TDRs in the Customer portfolio segment with a payment default during the three months ended March 31, 2014 and 2013, which had been modified within twelve months prior to the default date, were as follows:



(Dollars in millions)	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	7	$	1	8	$	2
Europe	7	1		—	—
Caterpillar Power Finance	—	—		2	3
Total	14	$	2	10	$	5