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.

There were no impaired loans or finance leases as of June 30, 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 and six months ended June 30, 2014 and 2013.

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



	June 30, 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	$	20	$	20	$	—	$	23	$	22	$	—
Europe	46		46		—		48		47		—
Asia Pacific	—		—		—		7		7		—
Mining	42		42		—		134		134		—
Latin America	38		38		—		11		11		—
Caterpillar Power Finance	150		149		—		223		222		—
Total	$	296	$	295	$	—	$	446	$	443	$	—

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	15	$	15	$	7	$	13	$	13	$	4
Europe	14		14		5		20		19		7
Asia Pacific	17		17		4		16		16		2
Mining	114		114		11		—		—		—
Latin America	10		10		3		23		23		6
Caterpillar Power Finance	89		88		24		110		106		51
Total	$	259	$	258	$	54	$	182	$	177	$	70

Total Impaired Loans and Finance Leases
Customer
North America	$	35	$	35	$	7	$	36	$	35	$	4
Europe	60		60		5		68		66		7
Asia Pacific	17		17		4		23		23		2
Mining	156		156		11		134		134		—
Latin America	48		48		3		34		34		6
Caterpillar Power Finance	239		237		24		333		328		51
Total	$	555	$	553	$	54	$	628	$	620	$	70



	Three Months Ended June 30, 2014				Three Months Ended June 30, 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	$	22	$	—	$	28	$	2
Europe	47		—		45		—
Asia Pacific	4		—		5		—
Mining	87		1		4		—
Latin America	37		—		9		—
Caterpillar Power Finance	162		1		287		1
Total	$	359	$	2	$	378	$	3

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	13	$	—	$	17	$	—
Europe	16		—		21		—
Asia Pacific	13		1		16		—
Mining	73		2		2		—
Latin America	17		—		41		—
Caterpillar Power Finance	63		—		151		—
Total	$	195	$	3	$	248	$	—

Total Impaired Loans and Finance Leases
Customer
North America	$	35	$	—	$	45	$	2
Europe	63		—		66		—
Asia Pacific	17		1		21		—
Mining	160		3		6		—
Latin America	54		—		50		—
Caterpillar Power Finance	225		1		438		1
Total	$	554	$	5	$	626	$	3



	Six Months Ended June 30, 2014				Six Months Ended June 30, 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	$	23	$	1	$	28	$	3
Europe	47		—		45		—
Asia Pacific	5		—		5		—
Mining	107		3		3		—
Latin America	26		—		9		—
Caterpillar Power Finance	188		3		286		1
Total	$	396	$	7	$	376	$	4

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	11	$	—	$	20	$	—
Europe	18		—		24		1
Asia Pacific	14		1		17		1
Mining	51		2		1		—
Latin America	20		—		38		1
Caterpillar Power Finance	75		1		139		—
Total	$	189	$	4	$	239	$	3

Total Impaired Loans and Finance Leases
Customer
North America	$	34	$	1	$	48	$	3
Europe	65		—		69		1
Asia Pacific	19		1		22		1
Mining	158		5		4		—
Latin America	46		—		47		1
Caterpillar Power Finance	263		4		425		1
Total	$	585	$	11	$	615	$	7

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 June 30, 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)
	June 30, 2014		December 31, 2013
Customer
North America	$	27	$	26
Europe	30		28
Asia Pacific	80		50
Mining	26		23
Latin America	192		179
Caterpillar Power Finance	118		119
Total	$	473	$	425

Aging related to loans and finance leases was as follows:



(Millions of dollars)
	June 30, 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	$	34	$	9	$	31	$	74	$	6,865	$	6,939	$	5
Europe	45		25		35		105		2,860		2,965		10
Asia Pacific	67		33		94		194		2,699		2,893		16
Mining	4		—		12		16		2,119		2,135		—
Latin America	68		46		164		278		2,692		2,970		2
Caterpillar Power Finance	13		—		130		143		3,045		3,188		17
Dealer
North America	—		—		—		—		2,411		2,411		—
Europe	—		—		—		—		150		150		—
Asia Pacific	—		—		—		—		626		626		—
Latin America	—		—		—		—		689		689		—
Total	$	231	$	113	$	466	$	810	$	24,156	$	24,966	$	50



(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)
	June 30, 2014
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	365		$	10	$	375
Receivables written off	(83		)	—		(83		)
Recoveries on receivables previously written off	26			—		26
Provision for credit losses	67			—		67
Other	(1		)	—		(1		)
Balance at end of period	$	374		$	10	$	384

Individually evaluated for impairment	$	54		$	—	$	54
Collectively evaluated for impairment	320			10		330
Ending Balance	$	374		$	10	$	384

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	555		$	—	$	555
Collectively evaluated for impairment	20,535			3,876		24,411
Ending Balance	$	21,090		$	3,876	$	24,966



(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)
	June 30, 2014						December 31, 2013
	Customer		Dealer		Total		Customer		Dealer		Total
Performing
North America	$	6,912	$	2,411	$	9,323	$	6,555	$	2,283	$	8,838
Europe	2,935		150		3,085		2,847		150		2,997
Asia Pacific	2,813		626		3,439		2,838		583		3,421
Mining	2,109		—		2,109		2,120		1		2,121
Latin America	2,778		689		3,467		2,539		748		3,287
Caterpillar Power Finance	3,070		—		3,070		2,972		—		2,972
Total Performing	$	20,617	$	3,876	$	24,493	$	19,871	$	3,765	$	23,636

Non-Performing
North America	$	27	$	—	$	27	$	26	$	—	$	26
Europe	30		—		30		28		—		28
Asia Pacific	80		—		80		50		—		50
Mining	26		—		26		23		—		23
Latin America	192		—		192		179		—		179
Caterpillar Power Finance	118		—		118		119		—		119
Total Non-Performing	$	473	$	—	$	473	$	425	$	—	$	425

Performing & Non-Performing
North America	$	6,939	$	2,411	$	9,350	$	6,581	$	2,283	$	8,864
Europe	2,965		150		3,115		2,875		150		3,025
Asia Pacific	2,893		626		3,519		2,888		583		3,471
Mining	2,135		—		2,135		2,143		1		2,144
Latin America	2,970		689		3,659		2,718		748		3,466
Caterpillar Power Finance	3,188		—		3,188		3,091		—		3,091
Total	$	21,090	$	3,876	$	24,966	$	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, extended skip payment periods and reduction of principal and/or accrued interest.

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 and six months ended June 30, 2014 or 2013 for the Dealer portfolio segment.

Loan and finance lease receivables in the Customer portfolio segment modified as TDRs during the three and six months ended June 30, 2014 and 2013, were as follows:



(Dollars in millions)
	Three Months Ended June 30, 2014					Three Months Ended June 30, 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	1	$	—	$	—	22	$	2	$	3
Europe	5	2		2		8	1		1
Mining	1	32		23		—	—		—
Latin America	1	—		—		6	1		1
Caterpillar Power Finance ¹	5	35		34		—	—		—
Total ²	13	$	69	$	59	36	$	4	$	5



	Six Months Ended June 30, 2014					Six Months Ended June 30, 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	4	$	2	$	2	32	$	4	$	5
Europe	8	7		7		8	1		1
Mining	2	43		33		—	—		—
Latin America	2	29		28		6	1		1
Caterpillar Power Finance ¹	6	36		35		4	36		37
Total ²	22	$	117	$	105	50	$	42	$	44

During the three and six months ended June 30, 2014, there were no additional funds subsequently loaned to a borrower whose terms had been modified in a TDR. During the three and six months ended June 30, 2013, $7 million and $12 million, respectively, of additional funds were subsequently loaned to a borrower whose terms had been modified in a TDR. The $7 million and $12 million of additional funds are not reflected in the table above as no incremental modifications have been made with the borrower during the period presented. At June 30, 2014, remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR were $2 million.


²	Modifications include extended contract maturities, inclusion of interest only periods, below market interest rates, extended skip payment periods and reduction of principal and/or accrued interest.

TDRs in the Customer portfolio segment with a payment default during the three and six months ended June 30, 2014 and 2013, which had been modified within twelve months prior to the default date, were as follows:



(Dollars in millions)	Three Months Ended June 30, 2014			Three Months Ended June 30, 2013
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	—	$	—	5	$	1
Total	—	$	—	5	$	1



	Six Months Ended June 30, 2014			Six Months Ended June 30, 2013
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	7	$	1	13	$	3
Europe	7	1		—	—
Caterpillar Power Finance	—	—		2	3
Total	14	$	2	15	$	6