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.

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

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



(Millions of dollars)
	As of September 30, 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	$	15	$	15	$	—	$	23	$	22	$	—
Europe	46		46		—		48		47		—
Asia/Pacific	1		1		—		7		7		—
Mining	10		10		—		134		134		—
Latin America	37		37		—		11		11		—
Caterpillar Power Finance	121		120		—		223		222		—
Total	$	230	$	229	$	—	$	446	$	443	$	—
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	7	$	7	$	2	$	13	$	13	$	4
Europe	33		32		9		20		19		7
Asia/Pacific	22		22		7		17		17		2
Mining	144		142		14		—		—		—
Latin America	43		43		14		33		33		9
Caterpillar Power Finance	137		137		41		110		106		51
Total	$	386	$	383	$	87	$	193	$	188	$	73
Total Impaired Loans and Finance Leases
Customer
North America	$	22	$	22	$	2	$	36	$	35	$	4
Europe	79		78		9		68		66		7
Asia/Pacific	23		23		7		24		24		2
Mining	154		152		14		134		134		—
Latin America	80		80		14		44		44		9
Caterpillar Power Finance	258		257		41		333		328		51
Total	$	616	$	612	$	87	$	639	$	631	$	73



(Millions of dollars)
	Three Months Ended September 30, 2014				Three Months Ended September 30, 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	$	19	$	—	$	23	$	—
Europe	47		1		52		—
Asia/Pacific	1		—		3		—
Mining	29		—		96		2
Latin America	37		—		14		—
Caterpillar Power Finance	143		1		280		1
Total	$	276	$	2	$	468	$	3
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	10	$	—	$	14	$	—
Europe	24		1		21		—
Asia/Pacific	26		—		18		—
Mining	127		2		—		—
Latin America	34		1		61		1
Caterpillar Power Finance	100		1		156		1
Total	$	321	$	5	$	270	$	2
Total Impaired Loans and Finance Leases
Customer
North America	$	29	$	—	$	37	$	—
Europe	71		2		73		—
Asia/Pacific	27		—		21		—
Mining	156		2		96		2
Latin America	71		1		75		1
Caterpillar Power Finance	243		2		436		2
Total	$	597	$	7	$	738	$	5



(Millions of dollars)
	Nine Months Ended September 30, 2014				Nine Months Ended September 30, 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	$	22	$	1	$	26	$	3
Europe	47		1		48		—
Asia/Pacific	4		—		4		—
Mining	82		3		40		2
Latin America	29		—		11		—
Caterpillar Power Finance	174		4		285		2
Total	$	358	$	9	$	414	$	7
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	10	$	—	$	18	$	—
Europe	21		1		23		1
Asia/Pacific	19		1		18		1
Mining	75		4		1		—
Latin America	33		1		52		2
Caterpillar Power Finance	84		2		143		1
Total	$	242	$	9	$	255	$	5
Total Impaired Loans and Finance Leases
Customer
North America	$	32	$	1	$	44	$	3
Europe	68		2		71		1
Asia/Pacific	23		1		22		1
Mining	157		7		41		2
Latin America	62		1		63		2
Caterpillar Power Finance	258		6		428		3
Total	$	600	$	18	$	669	$	12

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 September 30, 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)
	September 30, 2014		December 31, 2013
Customer
North America	$	23	$	26
Europe	38		28
Asia/Pacific	91		50
Mining	40		23
Latin America	241		210
Caterpillar Power Finance	130		119
Total	$	563	$	456

Aging related to loans and finance leases was as follows:



(Millions of dollars)
	September 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	$	47	$	8	$	24	$	79	$	7,078	$	7,157	$	4
Europe	19		20		36		75		2,722		2,797		8
Asia/Pacific	67		50		107		224		2,924		3,148		18
Mining	4		4		11		19		2,065		2,084		—
Latin America	70		30		239		339		2,551		2,890		16
Caterpillar Power Finance	24		28		95		147		2,947		3,094		—
Dealer
North America	—		—		—		—		3,390		3,390		—
Europe	—		—		—		—		503		503		—
Asia/Pacific	—		—		—		—		654		654		—
Mining	—		—		—		—		7		7		—
Latin America	—		—		—		—		864		864		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Caterpillar Purchased Receivables
North America	15		3		1		19		1,676		1,695		1
Europe	4		5		1		10		439		449		1
Asia/Pacific	—		—		—		—		377		377		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		461		461		—
Caterpillar Power Finance	—		—		1		1		13		14		1
Total	$	250	$	148	$	515	$	913	$	28,671	$	29,584	$	49



(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	$	6,507	$	6,580	$	6
Europe	26		15		29		70		2,805		2,875		8
Asia/Pacific	55		46		59		160		3,158		3,318		11
Mining	3		—		12		15		2,128		2,143		—
Latin America	54		25		196		275		2,438		2,713		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	$	384	$	776	$	28,290	$	29,066	$	33

Allowance for credit losses

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



(Millions of dollars)
	September 30, 2014
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	374		$	10	$	3	$	387
Receivables written off	(110		)	—		—		(110		)
Recoveries on receivables previously written off	36			—		—		36
Provision for credit losses	105			—		—		105
Adjustment due to sale of receivables	(2		)	—		—		(2		)
Foreign currency translation adjustment	(11		)	—		—		(11		)
Balance at end of period	$	392		$	10	$	3	$	405

Individually evaluated for impairment	$	87		$	—	$	—	$	87
Collectively evaluated for impairment	305			10		3		318
Ending Balance	$	392		$	10	$	3	$	405

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	616		$	—	$	—	$	616
Collectively evaluated for impairment	20,554			5,418		2,996		28,968
Ending Balance	$	21,170		$	5,418	$	2,996	$	29,584



(Millions of dollars)
	December 31, 2013
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	417		$	9	$	3	$	429
Receivables written off	(180		)	—		—		(180		)
Recoveries on receivables previously written off	56			—		—		56
Provision for credit losses	90			1		—		91
Adjustment due to sale of receivables	(3		)	—		—		(3		)
Foreign currency translation adjustment	(6		)	—		—		(6		)
Balance at end of year	$	374		$	10	$	3	$	387

Individually evaluated for impairment	$	73		$	—	$	—	$	73
Collectively evaluated for impairment	301			10		3		314
Ending Balance	$	374		$	10	$	3	$	387

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	639		$	—	$	—	$	639
Collectively evaluated for impairment	20,081			5,254		3,092		28,427
Ending Balance	$	20,720		$	5,254	$	3,092	$	29,066

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 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)
	September 30, 2014
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	7,134	$	3,390	$	1,695	$	12,219
Europe	2,759		503		449		3,711
Asia/Pacific	3,057		654		377		4,088
Mining	2,044		7		—		2,051
Latin America	2,649		864		461		3,974
Caterpillar Power Finance	2,964		—		14		2,978
Total Performing	$	20,607	$	5,418	$	2,996	$	29,021
Non-Performing
North America	$	23	$	—	$	—	$	23
Europe	38		—		—		38
Asia/Pacific	91		—		—		91
Mining	40		—		—		40
Latin America	241		—		—		241
Caterpillar Power Finance	130		—		—		130
Total Non-Performing	$	563	$	—	$	—	$	563
Total Performing and Non-Performing
North America	$	7,157	$	3,390	$	1,695	$	12,242
Europe	2,797		503		449		3,749
Asia/Pacific	3,148		654		377		4,179
Mining	2,084		7		—		2,091
Latin America	2,890		864		461		4,215
Caterpillar Power Finance	3,094		—		14		3,108
Total	$	21,170	$	5,418	$	2,996	$	29,584



(Millions of dollars)
	December 31, 2013
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	6,554	$	3,034	$	1,572	$	11,160
Europe	2,847		569		427		3,843
Asia/Pacific	3,268		706		468		4,442
Mining	2,120		5		—		2,125
Latin America	2,503		940		616		4,059
Caterpillar Power Finance	2,972		—		9		2,981
Total Performing	$	20,264	$	5,254	$	3,092	$	28,610
Non-Performing
North America	$	26	$	—	$	—	$	26
Europe	28		—		—		28
Asia/Pacific	50		—		—		50
Mining	23		—		—		23
Latin America	210		—		—		210
Caterpillar Power Finance	119		—		—		119
Total Non-Performing	$	456	$	—	$	—	$	456
Total Performing and Non-Performing
North America	$	6,580	$	3,034	$	1,572	$	11,186
Europe	2,875		569		427		3,871
Asia/Pacific	3,318		706		468		4,492
Mining	2,143		5		—		2,148
Latin America	2,713		940		616		4,269
Caterpillar Power Finance	3,091		—		9		3,100
Total	$	20,720	$	5,254	$	3,092	$	29,066

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, 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 and nine months ended September 30, 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 September 30, 2014					Three Months Ended September 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	20	$	9	$	3	14	$	1	$	—
Europe	—	—		—		7	5		5
Mining	45	122		124		45	123		123
Latin America	3	—		—		10	1		1
Caterpillar Power Finance⁽¹⁾	7	44		46		6	65		67
Total⁽²⁾	75	$	175	$	173	82	$	195	$	196

	Nine Months Ended September 30, 2014					Nine Months Ended September 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	24	$	11	$	5	46	$	5	$	5
Europe	8	7		7		15	6		6
Mining	47	165		157		45	123		123
Latin America	31	31		30		20	2		2
Caterpillar Power Finance⁽¹⁾	13	80		81		10	101		104
Total⁽²⁾	123	$	294	$	280	136	$	237	$	240

⁽¹⁾During the three and nine months ended September 30, 2014, there were no additional funds subsequently loaned to a borrower whose terms had been modified in a TDR. During the three and nine months ended September 30, 2013, $13 million and $25 million, respectively, of additional funds were subsequently loaned to a borrower whose terms had been modified in a TDR. The $13 million and $25 million of additional funds are not reflected in the table above as no incremental modifications have been made with the borrower during the periods presented. At September 30, 2014, there were no remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR.

⁽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 nine months ended September 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 September 30, 2014			Three Months Ended September 30, 2013
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	3	$	—	5	$	1
Europe	5	1		5	—
Latin America	7	—		—	—
Total	15	$	1	10	$	1

	Nine Months Ended September 30, 2014			Nine Months Ended September 30, 2013
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	10	$	1	18	$	4
Europe	12	2		5	—
Latin America	7	—		—	—
Caterpillar Power Finance	—	—		2	3
Total	29	$	3	25	$	7