A. Credit Quality of Financing Receivables and Allowance for Credit Losses

We apply a systematic methodology to determine the Allowance for credit losses for finance receivables. Based upon our analysis of credit losses and risk factors, our portfolio segments are as follows:


•	Customer - Finance receivables with retail customers.


•	Dealer - Finance receivables with Caterpillar dealers.


•	Caterpillar Purchased Receivables - Trade receivables purchased from Caterpillar entities.

We further evaluate our 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, our finance receivables within a geographic area have similar credit risk profiles and methods for assessing and monitoring credit risk. Our 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 we 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 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, we 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 for the three months ended March 31, 2013 have been revised.

There were no impaired loans or finance leases as of March 31, 2014 and December 31, 2013, for the Dealer and Caterpillar Purchased Receivables portfolio segments. The average recorded investment for impaired loans and finance leases for the Dealer and Caterpillar Purchased Receivables portfolio segments 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:



(Millions of dollars)
	As of March 31, 2014						As of December 31, 2013
Impaired Loans and Finance Leases With No Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
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	13		13		3		17		17		2
Mining	32		32		12		—		—		—
Latin America	28		28		8		23		23		6
Caterpillar Power Finance	55		54		18		110		106		51
Total	$	153	$	151	$	50	$	183	$	178	$	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	18		18		3		24		24		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	$	555	$	552	$	50	$	629	$	621	$	70



(Millions of dollars)
	Three Months Ended March 31, 2014				Three Months Ended March 31, 2013
Impaired Loans and Finance Leases With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
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	16		—		26		1
Mining	24		—		19		—
Latin America	24		—		52		1
Caterpillar Power Finance	82		1		128		—
Total	$	175	$	1	$	283	$	2

Total Impaired Loans and Finance Leases
Customer
North America	$	35	$	1	$	52	$	1
Europe	67		—		79		—
Asia/Pacific	22		—		30		1
Mining	158		2		19		—
Latin America	41		—		61		1
Caterpillar Power Finance	287		3		413		—
Total	$	610	$	6	$	654	$	3

Non-accrual and past due loans and finance leases

For all classes, we consider 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 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 or Caterpillar Purchased Receivables portfolio segments.

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	$	6,632	$	6,714	$	1
Europe	31		19		35		85		2,786		2,871		6
Asia/Pacific	55		28		91		174		3,139		3,313		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	—		—		—		—		3,057		3,057		—
Europe	—		—		—		—		533		533		—
Asia/Pacific	—		—		—		—		687		687		—
Mining	—		—		—		—		4		4		—
Latin America	—		—		—		—		931		931		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Caterpillar Purchased Receivables
North America	7		4		2		13		1,731		1,744		1
Europe	2		—		—		2		537		539		—
Asia/Pacific	—		—		—		—		684		684		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		535		535		—
Caterpillar Power Finance	—		—		—		—		11		11		—
Total	$	245	$	123	$	414	$	782	$	29,018	$	29,800	$	71



(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	$	6,522	$	6,595	$	—
Europe	26		15		29		70		2,805		2,875		6
Asia/Pacific	55		46		59		160		3,174		3,334		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	—		—		—		—		3,034		3,034		—
Europe	—		—		—		—		569		569		—
Asia/Pacific	—		—		—		—		706		706		—
Mining	—		—		—		—		5		5		—
Latin America	—		—		—		—		940		940		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Caterpillar Purchased Receivables
North America	26		5		2		33		1,539		1,572		2
Europe	2		1		1		4		423		427		—
Asia/Pacific	—		—		—		—		468		468		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		616		616		—
Caterpillar Power Finance	—		—		1		1		8		9		1
Total	$	258	$	134	$	353	$	745	$	28,357	$	29,102	$	25

Allowance for credit losses

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



(Millions of dollars)
	March 31, 2014
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	365		$	10	$	3	$	378
Receivables written off	(52		)	—		—		(52		)
Recoveries on receivables previously written off	14			—		—		14
Provision for credit losses	32			—		1		33
Balance at end of period	$	359		$	10	$	4	$	373

Individually evaluated for impairment	$	50		$	—	$	—	$	50
Collectively evaluated for impairment	309			10		4		323
Ending Balance	$	359		$	10	$	4	$	373

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	555		$	—	$	—	$	555
Collectively evaluated for impairment	20,520			5,212		3,513		29,245
Ending Balance	$	21,075		$	5,212	$	3,513	$	29,800



(Millions of dollars)
	December 31, 2013
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	414		$	9	$	3	$	426
Receivables written off	(179		)	—		—		(179		)
Recoveries on receivables previously written off	56			—		—		56
Provision for credit losses	83			1		—		84
Adjustment due to sale of receivables	(3		)	—		—		(3		)
Foreign currency translation adjustment	(6		)	—		—		(6		)
Balance at end of year	$	365		$	10	$	3	$	378

Individually evaluated for impairment	$	70		$	—	$	—	$	70
Collectively evaluated for impairment	295			10		3		308
Ending Balance	$	365		$	10	$	3	$	378

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	629		$	—	$	—	$	629
Collectively evaluated for impairment	20,127			5,254		3,092		28,473
Ending Balance	$	20,756		$	5,254	$	3,092	$	29,102

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, we estimate the current fair market value of the collateral less selling costs. In addition, consideration is given to 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
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	6,685	$	3,057	$	1,744	$	11,486
Europe	2,840		533		539		3,912
Asia/Pacific	3,256		687		684		4,627
Mining	2,183		4		—		2,187
Latin America	2,700		931		535		4,166
Caterpillar Power Finance	3,026		—		11		3,037
Total Performing	$	20,690	$	5,212	$	3,513	$	29,415
Non-Performing
North America	$	29	$	—	$	—	$	29
Europe	31		—		—		31
Asia/Pacific	57		—		—		57
Mining	21		—		—		21
Latin America	165		—		—		165
Caterpillar Power Finance	82		—		—		82
Total Non-Performing	$	385	$	—	$	—	$	385
Total Performing and Non-Performing
North America	$	6,714	$	3,057	$	1,744	$	11,515
Europe	2,871		533		539		3,943
Asia/Pacific	3,313		687		684		4,684
Mining	2,204		4		—		2,208
Latin America	2,865		931		535		4,331
Caterpillar Power Finance	3,108		—		11		3,119
Total	$	21,075	$	5,212	$	3,513	$	29,800



(Millions of dollars)
	December 31, 2013
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	6,569	$	3,034	$	1,572	$	11,175
Europe	2,847		569		427		3,843
Asia/Pacific	3,284		706		468		4,458
Mining	2,120		5		—		2,125
Latin America	2,539		940		616		4,095
Caterpillar Power Finance	2,972		—		9		2,981
Total Performing	$	20,331	$	5,254	$	3,092	$	28,677
Non-Performing
North America	$	26	$	—	$	—	$	26
Europe	28		—		—		28
Asia/Pacific	50		—		—		50
Mining	23		—		—		23
Latin America	179		—		—		179
Caterpillar Power Finance	119		—		—		119
Total Non-Performing	$	425	$	—	$	—	$	425
Total Performing and Non-Performing
North America	$	6,595	$	3,034	$	1,572	$	11,201
Europe	2,875		569		427		3,871
Asia/Pacific	3,334		706		468		4,508
Mining	2,143		5		—		2,148
Latin America	2,718		940		616		4,274
Caterpillar Power Finance	3,091		—		9		3,100
Total	$	20,756	$	5,254	$	3,092	$	29,102

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, we estimate the current fair market value of the collateral less selling costs. In addition, consideration is given to 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 and 2013 for the Dealer or Caterpillar Purchased Receivables portfolio segments.

Loans and finance lease receivables in the Customer portfolio segment modified as TDRs 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

⁽¹⁾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 periods 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