Cat Financial Financing Activities

A. 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, 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 days past due). 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, 2012 or December 31, 2011, 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, 2012 and 2011.

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



	June 30, 2012						December 31, 2011
(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 Recorded¹
Customer
North America	$	46	$	44	$	—	$	83	$	80	$	—
Europe	45		44		—		47		46		—
Asia Pacific	3		3		—		4		4		—
Mining	8		8		—		8		8		—
Latin America	5		5		—		9		9		—
Caterpillar Power Finance	175		174		—		175		170		—
Total	$	282	$	278	$	—	$	326	$	317	$	—

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	58	$	53	$	12	$	69	$	64	$	15
Europe	38		38		11		36		33		12
Asia Pacific	28		28		4		13		13		3
Mining	69		68		7		13		13		4
Latin America	45		45		7		25		25		6
Caterpillar Power Finance	112		108		20		93		92		16
Total	$	350	$	340	$	61	$	249	$	240	$	56

Total Impaired Loans and Finance Leases
Customer
North America	$	104	$	97	$	12	$	152	$	144	$	15
Europe	83		82		11		83		79		12
Asia Pacific	31		31		4		17		17		3
Mining	77		76		7		21		21		4
Latin America	50		50		7		34		34		6
Caterpillar Power Finance	287		282		20		268		262		16
Total	$	632	$	618	$	61	$	575	$	557	$	56

¹ No related allowance for credit losses due to sufficient collateral value.



	Three Months Ended June 30, 2012				Three Months Ended June 30, 2011
(Millions of dollars)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Loans and Finance Leases With No Allowance Recorded¹
Customer
North America	$	57	$	—	$	104	$	1
Europe	45		—		8		—
Asia Pacific	3		—		6		—
Mining	8		—		8		—
Latin America	5		—		10		—
Caterpillar Power Finance	203		1		261		—
Total	$	321	$	1	$	397	$	1

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	66	$	1	$	161	$	2
Europe	40		—		53		—
Asia Pacific	24		—		17		1
Mining	41		1		—		—
Latin America	40		1		46		1
Caterpillar Power Finance	86		—		72		—
Total	$	297	$	3	$	349	$	4

Total Impaired Loans and Finance Leases
Customer
North America	$	123	$	1	$	265	$	3
Europe	85		—		61		—
Asia Pacific	27		—		23		1
Mining	49		1		8		—
Latin America	45		1		56		1
Caterpillar Power Finance	289		1		333		—
Total	$	618	$	4	$	746	$	5

¹ No related allowance for credit losses due to sufficient collateral value.



	Six Months Ended June 30, 2012				Six Months Ended June 30, 2011
(Millions of dollars)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Loans and Finance Leases With No Allowance Recorded¹
Customer
North America	$	63	$	1	$	97	$	2
Europe	45		—		7		—
Asia Pacific	3		—		5		—
Mining	8		—		8		—
Latin America	6		—		7		—
Caterpillar Power Finance	191		2		231		1
Total	$	316	$	3	$	355	$	3

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	69	$	1	$	175	$	4
Europe	40		—		58		1
Asia Pacific	22		1		21		1
Mining	29		1		—		—
Latin America	33		1		46		2
Caterpillar Power Finance	87		—		59		—
Total	$	280	$	4	$	359	$	8

Total Impaired Loans and Finance Leases
Customer
North America	$	132	$	2	$	272	$	6
Europe	85		—		65		1
Asia Pacific	25		1		26		1
Mining	37		1		8		—
Latin America	39		1		53		2
Caterpillar Power Finance	278		2		290		1
Total	$	596	$	7	$	714	$	11

¹ No related allowance for credit losses due to sufficient collateral value.

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). 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, 2012 and December 31, 2011, 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, 2012		December 31, 2011
Customer
North America	$	92	$	112
Europe	48		58
Asia Pacific	30		24
Mining	12		12
Latin America	169		108
Caterpillar Power Finance	297		158
Total	$	648	$	472

Aging related to loans and finance leases were as follows:



(Millions of dollars)
	June 30, 2012
	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	$	41	$	17	$	89	$	147	$	5,516	$	5,663	$	1
Europe	32		27		56		115		2,204		2,319		10
Asia Pacific	82		29		42		153		2,842		2,995		15
Mining	4		—		12		16		1,708		1,724		—
Latin America	45		23		157		225		2,354		2,579		—
Caterpillar Power Finance	83		32		177		292		2,876		3,168		14
Dealer
North America	—		—		—		—		1,907		1,907		—
Europe	—		—		—		—		69		69		—
Asia Pacific	—		—		—		—		620		620		—
Mining	—		—		—		—		1		1		—
Latin America	—		—		—		—		681		681		—
Total	$	287	$	128	$	533	$	948	$	20,778	$	21,726	$	40



(Millions of dollars)
	December 31, 2011
	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	$	74	$	39	$	111	$	224	$	5,378	$	5,602	$	9
Europe	27		11		57		95		2,129		2,224		10
Asia Pacific	47		23		38		108		2,769		2,877		14
Mining	—		—		12		12		1,473		1,485		—
Latin America	32		15		99		146		2,339		2,485		—
Caterpillar Power Finance	14		16		125		155		2,765		2,920		25
Dealer
North America	—		—		—		—		1,689		1,689		—
Europe	—		—		—		—		57		57		—
Asia Pacific	—		—		—		—		161		161		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		480		480		—
Total	$	194	$	104	$	442	$	740	$	19,240	$	19,980	$	58

Allowance for credit loss activity

In estimating the allowance for credit losses, Cat Financial reviews loans and finance leases that are past due, non-performing or in bankruptcy. The allowance for credit losses as of June 30, 2012 and December 31, 2011 was as follows:



(Millions of dollars)
	June 30, 2012
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	360		$	6	$	366
Receivables written off	(50		)	—		(50		)
Recoveries on receivables previously written off	23			—		23
Provision for credit losses	51			2		53
Other	(2		)	—		(2		)
Balance at end of period	$	382		$	8	$	390

Allowance for Credit Losses:
Individually evaluated for impairment	$	61		$	—	$	61
Collectively evaluated for impairment	321			8		329
Ending Balance	$	382		$	8	$	390

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	632		$	—	$	632
Collectively evaluated for impairment	17,816			3,278		21,094
Ending Balance	$	18,448		$	3,278	$	21,726



(Millions of dollars)
	December 31, 2011
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	357		$	5	$	362
Receivables written off	(210		)	—		(210		)
Recoveries on receivables previously written off	52			—		52
Provision for credit losses	167			1		168
Other	(6		)	—		(6		)
Balance at end of year	$	360		$	6	$	366

Allowance for Credit Losses:
Individually evaluated for impairment	$	56		$	—	$	56
Collectively evaluated for impairment	304			6		310
Ending Balance	$	360		$	6	$	366

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	575		$	—	$	575
Collectively evaluated for impairment	17,018			2,387		19,405
Ending Balance	$	17,593		$	2,387	$	19,980

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. 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, 2012						December 31, 2011
	Customer		Dealer		Total		Customer		Dealer		Total
Performing
North America	$	5,571	$	1,907	$	7,478	$	5,490	$	1,689	$	7,179
Europe	2,271		69		2,340		2,166		57		2,223
Asia Pacific	2,965		620		3,585		2,853		161		3,014
Mining	1,712		1		1,713		1,473		—		1,473
Latin America	2,410		681		3,091		2,377		480		2,857
Caterpillar Power Finance	2,871		—		2,871		2,762		—		2,762
Total Performing	$	17,800	$	3,278	$	21,078	$	17,121	$	2,387	$	19,508

Non-Performing
North America	$	92	$	—	$	92	$	112	$	—	$	112
Europe	48		—		48		58		—		58
Asia Pacific	30		—		30		24		—		24
Mining	12		—		12		12		—		12
Latin America	169		—		169		108		—		108
Caterpillar Power Finance	297		—		297		158		—		158
Total Non-Performing	$	648	$	—	$	648	$	472	$	—	$	472

Performing & Non-Performing
North America	$	5,663	$	1,907	$	7,570	$	5,602	$	1,689	$	7,291
Europe	2,319		69		2,388		2,224		57		2,281
Asia Pacific	2,995		620		3,615		2,877		161		3,038
Mining	1,724		1		1,725		1,485		—		1,485
Latin America	2,579		681		3,260		2,485		480		2,965
Caterpillar Power Finance	3,168		—		3,168		2,920		—		2,920
Total	$	18,448	$	3,278	$	21,726	$	17,593	$	2,387	$	19,980

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, Cat Financial estimates the current fair market value of the collateral. In addition, Cat Financial factors in 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, 2012 or 2011 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, 2012 and 2011, were as follows:



(Dollars in millions)
	Three Months Ended June 30, 2012					Three Months Ended June 30, 2011
	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	18	$	2	$	2	15	$	4	$	4
Europe	—	—		—		5	6		6
Latin America	—	—		—		4	5		5
Caterpillar Power Finance ^1,2	—	—		—		25	60		60
Total ⁴	18	$	2	$	2	49	$	75	$	75




	Six Months Ended June 30, 2012					Six Months Ended June 30, 2011
	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	41	$	4	$	4	39	$	9	$	9
Europe	7	7		7		6	7		7
Latin America	—	—		—		12	10		10
Caterpillar Power Finance ^1,3	5	32		32		31	113		113
Total ⁴	53	$	43	$	43	88	$	139	$	139

During the three and six months ended June 30, 2012, $6 million and $15 million, respectively, of additional funds were subsequently loaned to a borrower whose terms had been modified in a TDR. The additional funds loaned are not reflected in the table above as no incremental modifications have been made with the borrower during the periods presented. At June 30, 2012, remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR were $7 million.


²	Two customers comprise $55 million of the $60 million pre-TDR and post-TDR outstanding recorded investment for the three months ended June 30, 2011.


³	Three customers comprise $32 million of the pre-TDR and post-TDR outstanding recorded investment for the six months ended June 30, 2012. Four customers comprise $105 million of the $113 million pre-TDR and post-TDR outstanding recorded investment for the six months ended June 30, 2011.

⁴ 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 and six months ended June 30, 2012 and 2011, which had been modified within twelve months prior to the default date, were as follows:



(Dollars in millions)	Three Months Ended June 30, 2012			Three Months Ended June 30, 2011
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	14	$	1	7	$	3
Europe	—	—		1	1
Latin America	—	—		—	—
Caterpillar Power Finance	2	2		—	—
Total	16	$	3	8	$	4



(Dollars in millions)	Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	25	$	2	41	$	9
Europe	—	—		1	1
Latin America	—	—		—	—
Caterpillar Power Finance ¹	16	21		6	5
Total	41	$	23	48	$	15

¹Two customers comprise $19 million of the $21 million post-TDR recorded investment for the six months ended June 30, 2012.

B. Securitized Retail Installment Sale Contracts and Finance Leases

Cat Financial has periodically transferred certain finance receivables relating to retail installment sale contracts and finance leases to SPEs as part of their asset-backed securitization program.

On April 25, 2011, Cat Financial exercised a clean-up call on their only outstanding asset-backed securitization transaction. As a result, Cat Financial had no assets or liabilities related to their securitization program as of June 30, 2012 and December 31, 2011.