Cat Financial financing activities

Credit quality of finance 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 finance receivables

For all classes, a finance receivable 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 finance receivable. Finance receivables reviewed for impairment include those that are past due, non-performing or in bankruptcy. Recognition of income is suspended and the finance receivable 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 finance receivable on non-accrual status). Accrual is resumed, and previously suspended income is recognized, when the finance receivable becomes contractually current and/or collection doubts are removed. Cash receipts on impaired finance receivables are recorded against the receivable and then to any unrecognized income.

There were no impaired finance receivables as of March 31, 2015 or December 31, 2014, for the Dealer portfolio segment. The average recorded investment for impaired finance receivables within the Dealer portfolio segment was zero for the three months ended March 31, 2015 and 2014.

Individually impaired finance receivables for the Customer portfolio segment were as follows:



	March 31, 2015						December 31, 2014
(Millions of dollars)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired Finance Receivables With No Allowance Recorded
Customer
North America	$	13	$	13	$	—	$	14	$	14	$	—
Europe	43		43		—		44		43		—
Asia Pacific	5		5		—		1		1		—
Mining	119		119		—		29		29		—
Latin America	32		32		—		34		34		—
Caterpillar Power Finance	189		188		—		129		128		—
Total	$	401	$	400	$	—	$	251	$	249	$	—

Impaired Finance Receivables With An Allowance Recorded
Customer
North America	$	6	$	6	$	2	$	6	$	6	$	1
Europe	17		17		4		12		12		4
Asia Pacific	25		24		8		29		29		8
Mining	43		43		6		138		137		9
Latin America	48		48		16		42		42		12
Caterpillar Power Finance	123		123		38		135		134		41
Total	$	262	$	261	$	74	$	362	$	360	$	75

Total Impaired Finance Receivables
Customer
North America	$	19	$	19	$	2	$	20	$	20	$	1
Europe	60		60		4		56		55		4
Asia Pacific	30		29		8		30		30		8
Mining	162		162		6		167		166		9
Latin America	80		80		16		76		76		12
Caterpillar Power Finance	312		311		38		264		262		41
Total	$	663	$	661	$	74	$	613	$	609	$	75



	Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
(Millions of dollars)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Finance Receivables With No Allowance Recorded
Customer
North America	$	14	$	—	$	25	$	1
Europe	44		—		48		—
Asia Pacific	3		—		6		—
Mining	102		2		134		2
Latin America	32		—		17		—
Caterpillar Power Finance	135		1		205		2
Total	$	330	$	3	$	435	$	5

Impaired Finance Receivables With An Allowance Recorded
Customer
North America	$	6	$	—	$	10	$	—
Europe	14		—		19		—
Asia Pacific	26		—		14		—
Mining	63		1		24		—
Latin America	46		1		24		—
Caterpillar Power Finance	128		—		82		1
Total	$	283	$	2	$	173	$	1

Total Impaired Finance Receivables
Customer
North America	$	20	$	—	$	35	$	1
Europe	58		—		67		—
Asia Pacific	29		—		20		—
Mining	165		3		158		2
Latin America	78		1		41		—
Caterpillar Power Finance	263		1		287		3
Total	$	613	$	5	$	608	$	6

Non-accrual and past due finance receivables

For all classes, Cat Financial considers a finance receivable 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 finance receivable 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 finance receivable on non-accrual status). Accrual is resumed, and previously suspended income is recognized, when the finance receivable becomes contractually current and/or collection doubts are removed.

As of March 31, 2015 and December 31, 2014, there were no finance receivables on non-accrual status for the Dealer portfolio segment.

The investment in customer finance receivables on non-accrual status was as follows:




(Millions of dollars)	March 31, 2015		December 31, 2014
Customer
North America	$	31	$	27
Europe	43		28
Asia Pacific	44		54
Mining	124		62
Latin America	213		201
Caterpillar Power Finance	143		96
Total	$	598	$	468

Aging related to finance receivables was as follows:




	March 31, 2015
(Millions of dollars)	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	$	14	$	35	$	86	$	7,170	$	7,256	$	9
Europe	26		15		43		84		2,335		2,419		6
Asia Pacific	73		32		64		169		2,073		2,242		24
Mining	20		10		76		106		1,883		1,989		50
Latin America	100		47		190		337		2,181		2,518		—
Caterpillar Power Finance	17		1		87		105		3,055		3,160		1
Dealer
North America	—		—		—		—		2,275		2,275		—
Europe	—		—		—		—		135		135		—
Asia Pacific	1		—		—		1		528		529		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		599		599		—
Total	$	274	$	119	$	495	$	888	$	22,234	$	23,122	$	90




	December 31, 2014
(Millions of dollars)	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	$	46	$	8	$	27	$	81	$	7,192	$	7,273	$	4
Europe	16		23		29		68		2,607		2,675		6
Asia Pacific	29		22		69		120		2,316		2,436		16
Mining	28		—		11		39		2,084		2,123		—
Latin America	55		23		196		274		2,583		2,857		8
Caterpillar Power Finance	1		4		64		69		3,079		3,148		1
Dealer
North America	—		—		—		—		2,189		2,189		—
Europe	—		—		—		—		153		153		—
Asia Pacific	—		—		—		—		566		566		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		646		646		—
Total	$	175	$	80	$	396	$	651	$	23,415	$	24,066	$	35

Allowance for credit loss activity

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




(Millions of dollars)	March 31, 2015
Allowance for Credit Losses:	Customer			Dealer			Total
Balance at beginning of year	$	388		$	10		$	398
Receivables written off	(23		)	—			(23		)
Recoveries on receivables previously written off	11			—			11
Provision for credit losses	18			(1		)	17
Other	(14		)	—			(14		)
Balance at end of period	$	380		$	9		$	389

Individually evaluated for impairment	$	74		$	—		$	74
Collectively evaluated for impairment	306			9			315
Ending Balance	$	380		$	9		$	389

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	663		$	—		$	663
Collectively evaluated for impairment	18,921			3,538			22,459
Ending Balance	$	19,584		$	3,538		$	23,122




(Millions of dollars)	December 31, 2014
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	365		$	10	$	375
Receivables written off	(151		)	—		(151		)
Recoveries on receivables previously written off	47			—		47
Provision for credit losses	150			—		150
Other	(23		)	—		(23		)
Balance at end of year	$	388		$	10	$	398

Individually evaluated for impairment	$	75		$	—	$	75
Collectively evaluated for impairment	313			10		323
Ending Balance	$	388		$	10	$	398

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	613		$	—	$	613
Collectively evaluated for impairment	19,899			3,554		23,453
Ending Balance	$	20,512		$	3,554	$	24,066

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 finance receivables have the highest probability for credit loss. The allowance for credit losses attributable to non-performing finance 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 finance receivables.

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




	March 31, 2015						December 31, 2014
(Millions of dollars)	Customer		Dealer		Total		Customer		Dealer		Total
Performing
North America	$	7,225	$	2,275	$	9,500	$	7,246	$	2,189	$	9,435
Europe	2,376		135		2,511		2,647		153		2,800
Asia Pacific	2,198		529		2,727		2,382		566		2,948
Mining	1,865		—		1,865		2,061		—		2,061
Latin America	2,305		599		2,904		2,656		646		3,302
Caterpillar Power Finance	3,017		—		3,017		3,052		—		3,052
Total Performing	$	18,986	$	3,538	$	22,524	$	20,044	$	3,554	$	23,598

Non-Performing
North America	$	31	$	—	$	31	$	27	$	—	$	27
Europe	43		—		43		28		—		28
Asia Pacific	44		—		44		54		—		54
Mining	124		—		124		62		—		62
Latin America	213		—		213		201		—		201
Caterpillar Power Finance	143		—		143		96		—		96
Total Non-Performing	$	598	$	—	$	598	$	468	$	—	$	468

Performing & Non-Performing
North America	$	7,256	$	2,275	$	9,531	$	7,273	$	2,189	$	9,462
Europe	2,419		135		2,554		2,675		153		2,828
Asia Pacific	2,242		529		2,771		2,436		566		3,002
Mining	1,989		—		1,989		2,123		—		2,123
Latin America	2,518		599		3,117		2,857		646		3,503
Caterpillar Power Finance	3,160		—		3,160		3,148		—		3,148
Total	$	19,584	$	3,538	$	23,122	$	20,512	$	3,554	$	24,066

Troubled Debt Restructurings

A restructuring of a finance 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 finance 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 remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR as of March 31, 2015 and December 31, 2014.

There were no finance receivables modified as TDRs during the three months ended March 31, 2015 or 2014 for the Dealer portfolio segment.

Finance receivables in the Customer portfolio segment modified as TDRs during the three months ended March 31, 2015 and 2014, were as follows:




	Three Months Ended March 31, 2015					Three Months Ended March 31, 2014
(Millions of dollars)	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
Customer
North America	3	$	1	$	1	3	$	2	$	2
Europe	—	—		—		3	5		5
Mining	—	—		—		1	11		10
Latin America	—	—		—		1	29		28
Caterpillar Power Finance	2	83		80		1	1		1
Total ¹	5	$	84	$	81	9	$	48	$	46


¹	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 months ended March 31, 2015 and 2014, which had been modified within twelve months prior to the default date, were as follows:




	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
(Millions of dollars)	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	4	$	1	7	$	1
Europe	—	—		7	1
Latin America	1	—		—	—
Total	5	$	1	14	$	2