A. Credit Quality of Finance 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 finance receivables

For all classes, a finance receivable 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 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 instances in which relevant information is known that warrants placing the finance receivable on non-accrual status earlier). 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 June 30, 2015 and December 31, 2014, for the Dealer and Caterpillar Purchased Receivables portfolio segments. The average recorded investment for impaired finance receivables within the Dealer and Caterpillar Purchased Receivables portfolio segments was zero for the three and six months ended June 30, 2015 and 2014.

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



(Millions of dollars)
	As of June 30, 2015						As of December 31, 2014
Impaired Finance Receivables With No Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Customer
North America	$	11	$	11	$	—	$	14	$	14	$	—
Europe	43		42		—		44		43		—
Asia/Pacific	1		1		—		2		2		—
Mining	66		66		—		29		29		—
Latin America	32		32		—		34		34		—
Caterpillar Power Finance	149		149		—		129		128		—
Total	$	302	$	301	$	—	$	252	$	250	$	—
Impaired Finance Receivables With An Allowance Recorded
Customer
North America	$	6	$	6	$	2	$	6	$	6	$	1
Europe	15		13		5		12		12		4
Asia/Pacific	70		70		19		29		29		8
Mining	23		23		6		138		137		9
Latin America	54		54		20		42		42		12
Caterpillar Power Finance	138		137		46		135		134		41
Total	$	306	$	303	$	98	$	362	$	360	$	75
Total Impaired Finance Receivables
Customer
North America	$	17	$	17	$	2	$	20	$	20	$	1
Europe	58		55		5		56		55		4
Asia/Pacific	71		71		19		31		31		8
Mining	89		89		6		167		166		9
Latin America	86		86		20		76		76		12
Caterpillar Power Finance	287		286		46		264		262		41
Total	$	608	$	604	$	98	$	614	$	610	$	75



(Millions of dollars)
	Three Months Ended June 30, 2015				Three Months Ended June 30, 2014
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Customer
North America	$	12	$	—	$	22	$	—
Europe	42		—		47		—
Asia/Pacific	3		—		4		—
Mining	80		1		87		1
Latin America	32		—		37		—
Caterpillar Power Finance	176		1		162		1
Total	$	345	$	2	$	359	$	2
Impaired Finance Receivables With An Allowance Recorded
Customer
North America	$	6	$	—	$	13	$	—
Europe	15		1		16		—
Asia/Pacific	41		1		14		1
Mining	62		—		73		2
Latin America	51		—		27		—
Caterpillar Power Finance	132		1		63		—
Total	$	307	$	3	$	206	$	3
Total Impaired Finance Receivables
Customer
North America	$	18	$	—	$	35	$	—
Europe	57		1		63		—
Asia/Pacific	44		1		18		1
Mining	142		1		160		3
Latin America	83		—		64		—
Caterpillar Power Finance	308		2		225		1
Total	$	652	$	5	$	565	$	5



(Millions of dollars)
	Six Months Ended June 30, 2015				Six Months Ended June 30, 2014
Impaired Loans and Finance Leases With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Customer
North America	$	13	$	—	$	23	$	1
Europe	43		—		47		—
Asia/Pacific	3		—		5		—
Mining	87		3		107		3
Latin America	32		—		26		—
Caterpillar Power Finance	151		2		188		3
Total	$	329	$	5	$	396	$	7
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	6	$	—	$	11	$	—
Europe	14		1		18		—
Asia/Pacific	34		1		15		1
Mining	66		1		51		2
Latin America	49		1		30		—
Caterpillar Power Finance	131		1		75		1
Total	$	300	$	5	$	200	$	4
Total Impaired Loans and Finance Leases
Customer
North America	$	19	$	—	$	34	$	1
Europe	57		1		65		—
Asia/Pacific	37		1		20		1
Mining	153		4		158		5
Latin America	81		1		56		—
Caterpillar Power Finance	282		3		263		4
Total	$	629	$	10	$	596	$	11

Non-accrual and past due finance receivables

For all classes, we consider 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 instances in which relevant information is known that warrants placing the finance receivable on non-accrual status earlier). Accrual is resumed and previously suspended income is recognized when the finance receivable becomes contractually current and/or collection doubts are removed.

As of June 30, 2015 and December 31, 2014, there were no finance receivables on non-accrual status for the Dealer portfolio segment. As of June 30, 2015 and December 31, 2014, there was $5 million and $4 million, respectively, in finance receivables on non-accrual status for the Caterpillar Purchased Receivables portfolio segment, all of which was in the Europe finance receivable class.

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



(Millions of dollars)
	June 30, 2015		December 31, 2014
Customer
North America	$	28	$	27
Europe	40		28
Asia/Pacific	40		54
Mining	155		62
Latin America	236		201
Caterpillar Power Finance	119		96
Total	$	618	$	468

Aging related to finance receivables was as follows:



(Millions of dollars)
	June 30, 2015
	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	$	56	$	17	$	29	$	102	$	7,608	$	7,710	$	6
Europe	22		15		38		75		2,434		2,509		6
Asia/Pacific	58		25		50		133		2,380		2,513		14
Mining	2		—		72		74		1,878		1,952		10
Latin America	90		45		223		358		2,134		2,492		—
Caterpillar Power Finance	2		1		89		92		3,020		3,112		1
Dealer
North America	—		—		—		—		3,462		3,462		—
Europe	—		—		—		—		403		403		—
Asia/Pacific	—		—		—		—		627		627		—
Mining	—		—		—		—		3		3		—
Latin America	—		—		—		—		765		765		—
Caterpillar Power Finance	—		—		—		—		3		3		—
Caterpillar Purchased Receivables
North America	20		4		1		25		1,856		1,881		1
Europe	3		3		5		11		392		403		—
Asia/Pacific	—		—		—		—		361		361		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		345		345		—
Caterpillar Power Finance	2		—		—		2		10		12		—
Total	$	255	$	110	$	507	$	872	$	27,681	$	28,553	$	38



(Millions of dollars)
	December 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	$	46	$	8	$	27	$	81	$	7,291	$	7,372	$	4
Europe	16		23		29		68		2,607		2,675		6
Asia/Pacific	29		22		69		120		2,773		2,893		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	—		—		—		—		3,209		3,209		—
Europe	—		—		—		—		467		467		—
Asia/Pacific	—		—		—		—		637		637		—
Mining	—		—		—		—		3		3		—
Latin America	—		—		—		—		853		853		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Caterpillar Purchased Receivables
North America	23		5		1		29		1,916		1,945		1
Europe	4		1		5		10		429		439		1
Asia/Pacific	—		—		—		—		401		401		—
Mining	—		—		—		—		—		—		—
Latin America	6		5		—		11		420		431		—
Caterpillar Power Finance	—		—		1		1		21		22		1
Total	$	208	$	91	$	403	$	702	$	28,773	$	29,475	$	38

Allowance for credit losses

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



(Millions of dollars)
	June 30, 2015
Allowance for Credit Losses:	Customer			Dealer			Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	388		$	10		$	3	$	401
Receivables written off	(72		)	—			—		(72		)
Recoveries on receivables previously written off	22			—			—		22
Provision for credit losses	67			(1		)	—		66
Adjustment due to sale of receivables	(1		)	—			—		(1		)
Foreign currency translation adjustment	(11		)	—			—		(11		)
Balance at end of period	$	393		$	9		$	3	$	405

Individually evaluated for impairment	$	98		$	—		$	—	$	98
Collectively evaluated for impairment	295			9			3		307
Ending Balance	$	393		$	9		$	3	$	405

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	608		$	—		$	—	$	608
Collectively evaluated for impairment	19,680			5,263			3,002		27,945
Ending Balance	$	20,288		$	5,263		$	3,002	$	28,553



(Millions of dollars)
	December 31, 2014
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	374		$	10	$	3	$	387
Receivables written off	(146		)	—		—		(146		)
Recoveries on receivables previously written off	47			—		—		47
Provision for credit losses	136			—		—		136
Adjustment due to sale of receivables	(3		)	—		—		(3		)
Foreign currency translation adjustment	(20		)	—		—		(20		)
Balance at end of year	$	388		$	10	$	3	$	401

Individually evaluated for impairment	$	75		$	—	$	—	$	75
Collectively evaluated for impairment	313			10		3		326
Ending Balance	$	388		$	10	$	3	$	401

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	614		$	—	$	—	$	614
Collectively evaluated for impairment	20,454			5,169		3,238		28,861
Ending Balance	$	21,068		$	5,169	$	3,238	$	29,475

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, 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 finance receivables.

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



(Millions of dollars)
	June 30, 2015
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	7,682	$	3,462	$	1,881	$	13,025
Europe	2,469		403		398		3,270
Asia/Pacific	2,473		627		361		3,461
Mining	1,797		3		—		1,800
Latin America	2,256		765		345		3,366
Caterpillar Power Finance	2,993		3		12		3,008
Total Performing	$	19,670	$	5,263	$	2,997	$	27,930
Non-Performing
North America	$	28	$	—	$	—	$	28
Europe	40		—		5		45
Asia/Pacific	40		—		—		40
Mining	155		—		—		155
Latin America	236		—		—		236
Caterpillar Power Finance	119		—		—		119
Total Non-Performing	$	618	$	—	$	5	$	623
Total Performing and Non-Performing
North America	$	7,710	$	3,462	$	1,881	$	13,053
Europe	2,509		403		403		3,315
Asia/Pacific	2,513		627		361		3,501
Mining	1,952		3		—		1,955
Latin America	2,492		765		345		3,602
Caterpillar Power Finance	3,112		3		12		3,127
Total	$	20,288	$	5,263	$	3,002	$	28,553



(Millions of dollars)
	December 31, 2014
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	7,345	$	3,209	$	1,945	$	12,499
Europe	2,647		467		435		3,549
Asia/Pacific	2,839		637		401		3,877
Mining	2,061		3		—		2,064
Latin America	2,656		853		431		3,940
Caterpillar Power Finance	3,052		—		22		3,074
Total Performing	$	20,600	$	5,169	$	3,234	$	29,003
Non-Performing
North America	$	27	$	—	$	—	$	27
Europe	28		—		4		32
Asia/Pacific	54		—		—		54
Mining	62		—		—		62
Latin America	201		—		—		201
Caterpillar Power Finance	96		—		—		96
Total Non-Performing	$	468	$	—	$	4	$	472
Total Performing and Non-Performing
North America	$	7,372	$	3,209	$	1,945	$	12,526
Europe	2,675		467		439		3,581
Asia/Pacific	2,893		637		401		3,931
Mining	2,123		3		—		2,126
Latin America	2,857		853		431		4,141
Caterpillar Power Finance	3,148		—		22		3,170
Total	$	21,068	$	5,169	$	3,238	$	29,475

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, 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 remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR as of June 30, 2015 and December 31, 2014.

There were no finance receivables modified as TDRs during the three and six months ended June 30, 2015 and 2014 for the Dealer or Caterpillar Purchased Receivables portfolio segments.

Finance receivables in the Customer portfolio segment modified as TDRs were as follows:



(Dollars in millions)	Three Months Ended June 30, 2015					Three Months Ended June 30, 2014
	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	1	$	—	$	—	1	$	—	$	—
Europe	19	2		2		5	2		2
Asia/Pacific	20	25		25		—	—		—
Mining	—	—		—		1	32		23
Latin America	—	—		—		18	1		1
Caterpillar Power Finance	2	21		21		5	35		34
Total⁽¹⁾	42	$	48	$	48	30	$	70	$	60

	Six Months Ended June 30, 2015					Six Months Ended June 30, 2014
	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	4	$	1	$	1	4	$	2	$	2
Europe	19	2		2		8	7		7
Asia/Pacific	20	25		25		—	—		—
Mining	—	—		—		2	43		33
Latin America	—	—		—		28	31		30
Caterpillar Power Finance	4	104		101		6	36		35
Total⁽¹⁾	47	$	132	$	129	48	$	119	$	107

⁽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 and six months ended June 30, 2015 and 2014, which had been modified within twelve months prior to the default date, were as follows:



(Dollars in millions)	Three Months Ended June 30, 2015			Three Months Ended June 30, 2014
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	1	$	—	—	$	—
Total	1	$	—	—	$	—

	Six Months Ended June 30, 2015			Six Months Ended June 30, 2014
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	5	$	1	7	$	1
Europe	—	—		7	1
Latin America	1	—		—	—
Total	6	$	1	14	$	2