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 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 September 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 nine months ended September 30, 2012 and 2011.

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



	September 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 Recorded
Customer
North America	$	42	$	41	$	—	$	83	$	80	$	—
Europe	44		44		—		47		46		—
Asia Pacific	4		4		—		4		4		—
Mining	9		9		—		8		8		—
Latin America	7		7		—		9		9		—
Caterpillar Power Finance	269		268		—		175		170		—
Total	$	375	$	373	$	—	$	326	$	317	$	—

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	38	$	34	$	9	$	69	$	64	$	15
Europe	50		48		17		36		33		12
Asia Pacific	34		34		7		13		13		3
Mining	68		67		7		13		13		4
Latin America	53		53		17		25		25		6
Caterpillar Power Finance	112		110		18		93		92		16
Total	$	355	$	346	$	75	$	249	$	240	$	56

Total Impaired Loans and Finance Leases
Customer
North America	$	80	$	75	$	9	$	152	$	144	$	15
Europe	94		92		17		83		79		12
Asia Pacific	38		38		7		17		17		3
Mining	77		76		7		21		21		4
Latin America	60		60		17		34		34		6
Caterpillar Power Finance	381		378		18		268		262		16
Total	$	730	$	719	$	75	$	575	$	557	$	56



	Three Months Ended September 30, 2012				Three Months Ended September 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 Recorded
Customer
North America	$	42	$	1	$	91	$	1
Europe	45		—		10		—
Asia Pacific	3		—		5		1
Mining	9		—		8		—
Latin America	6		—		11		—
Caterpillar Power Finance	220		1		240		—
Total	$	325	$	2	$	365	$	2

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	51	$	—	$	126	$	—
Europe	44		1		44		1
Asia Pacific	29		—		9		—
Mining	68		1		10		—
Latin America	58		1		40		—
Caterpillar Power Finance	110		—		126		—
Total	$	360	$	3	$	355	$	1

Total Impaired Loans and Finance Leases
Customer
North America	$	93	$	1	$	217	$	1
Europe	89		1		54		1
Asia Pacific	32		—		14		1
Mining	77		1		18		—
Latin America	64		1		51		—
Caterpillar Power Finance	330		1		366		—
Total	$	685	$	5	$	720	$	3



	Nine Months Ended September 30, 2012				Nine Months Ended September 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 Recorded
Customer
North America	$	56	$	2	$	93	$	3
Europe	45		—		8		—
Asia Pacific	3		—		5		1
Mining	8		—		8		—
Latin America	6		—		8		—
Caterpillar Power Finance	204		3		234		1
Total	$	322	$	5	$	356	$	5

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	63	$	1	$	160	$	4
Europe	42		1		53		2
Asia Pacific	24		1		18		1
Mining	41		2		4		—
Latin America	42		2		44		2
Caterpillar Power Finance	94		—		79		—
Total	$	306	$	7	$	358	$	9

Total Impaired Loans and Finance Leases
Customer
North America	$	119	$	3	$	253	$	7
Europe	87		1		61		2
Asia Pacific	27		1		23		2
Mining	49		2		12		—
Latin America	48		2		52		2
Caterpillar Power Finance	298		3		313		1
Total	$	628	$	12	$	714	$	14

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 September 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)
	September 30, 2012		December 31, 2011
Customer
North America	$	77	$	112
Europe	44		58
Asia Pacific	40		24
Mining	12		12
Latin America	150		108
Caterpillar Power Finance	286		158
Total	$	609	$	472

Aging related to loans and finance leases was as follows:



(Millions of dollars)
	September 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	$	35	$	9	$	76	$	120	$	5,665	$	5,785	$	—
Europe	28		12		44		84		2,371		2,455		5
Asia Pacific	74		22		51		147		2,956		3,103		17
Mining	2		—		12		14		1,825		1,839		—
Latin America	57		25		136		218		2,478		2,696		—
Caterpillar Power Finance	17		47		154		218		2,945		3,163		12
Dealer
North America	—		—		—		—		1,970		1,970		—
Europe	—		—		—		—		78		78		—
Asia Pacific	—		—		—		—		642		642		—
Mining	—		—		—		—		1		1		—
Latin America	—		—		—		—		688		688		—
Total	$	213	$	115	$	473	$	801	$	21,619	$	22,420	$	34



(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		—
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 September 30, 2012 and December 31, 2011 was as follows:



(Millions of dollars)
	September 30, 2012
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	360		$	6	$	366
Receivables written off	(92		)	—		(92		)
Recoveries on receivables previously written off	36			—		36
Provision for credit losses	90			1		91
Balance at end of period	$	394		$	7	$	401

Allowance for Credit Losses:
Individually evaluated for impairment	$	75		$	—	$	75
Collectively evaluated for impairment	319			7		326
Ending Balance	$	394		$	7	$	401

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	730		$	—	$	730
Collectively evaluated for impairment	18,311			3,379		21,690
Ending Balance	$	19,041		$	3,379	$	22,420



(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)
	September 30, 2012						December 31, 2011
	Customer		Dealer		Total		Customer		Dealer		Total
Performing
North America	$	5,708	$	1,970	$	7,678	$	5,490	$	1,689	$	7,179
Europe	2,411		78		2,489		2,166		57		2,223
Asia Pacific	3,063		642		3,705		2,853		161		3,014
Mining	1,827		1		1,828		1,473		—		1,473
Latin America	2,546		688		3,234		2,377		480		2,857
Caterpillar Power Finance	2,877		—		2,877		2,762		—		2,762
Total Performing	$	18,432	$	3,379	$	21,811	$	17,121	$	2,387	$	19,508

Non-Performing
North America	$	77	$	—	$	77	$	112	$	—	$	112
Europe	44		—		44		58		—		58
Asia Pacific	40		—		40		24		—		24
Mining	12		—		12		12		—		12
Latin America	150		—		150		108		—		108
Caterpillar Power Finance	286		—		286		158		—		158
Total Non-Performing	$	609	$	—	$	609	$	472	$	—	$	472

Performing & Non-Performing
North America	$	5,785	$	1,970	$	7,755	$	5,602	$	1,689	$	7,291
Europe	2,455		78		2,533		2,224		57		2,281
Asia Pacific	3,103		642		3,745		2,877		161		3,038
Mining	1,839		1		1,840		1,485		—		1,485
Latin America	2,696		688		3,384		2,485		480		2,965
Caterpillar Power Finance	3,163		—		3,163		2,920		—		2,920
Total	$	19,041	$	3,379	$	22,420	$	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 nine months ended September 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 nine months ended September 30, 2012 and 2011, were as follows:



(Dollars in millions)
	Three Months Ended September 30, 2012					Three Months Ended September 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	17	$	4	$	4	14	$	2	$	2
Europe	14	1		1		—	—		—
Asia Pacific	12	3		3		—	—		—
Caterpillar Power Finance ^1,2	15	151		151		—	—		—
Total ⁴	58	$	159	$	159	14	$	2	$	2



	Nine Months Ended September 30, 2012					Nine Months Ended September 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	58	$	8	$	8	53	$	11	$	11
Europe	21	8		8		6	7		7
Asia Pacific	12	3		3		—	—		—
Latin America	—	—		—		12	10		10
Caterpillar Power Finance ^1,3	20	183		183		31	113		113
Total ⁴	111	$	202	$	202	102	$	141	$	141

During the three and nine months ended September 30, 2012, $4 million and $22 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 September 30, 2012, remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR were $3 million.


²	Four customers comprise $148 million of the $151 million pre-TDR and post-TDR outstanding recorded investment for the three months ended September 30, 2012.


³	Seven customers comprise $180 million of the $183 million pre-TDR and post-TDR outstanding recorded investment for the nine months ended September 30, 2012. Three customers comprise $104 million of the $113 million pre-TDR and post-TDR outstanding recorded investment for the nine months ended September 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 nine months ended September 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 September 30, 2012			Three Months Ended September 30, 2011
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	8	$	1	3	$	16
Asia Pacific	2	1		—	—
Latin America	—	—		7	4
Caterpillar Power Finance	—	—		5	65
Total	10	$	2	15	$	85



	Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	39	$	3	44	$	25
Europe	—	—		1	1
Asia Pacific	2	1		—	—
Latin America	—	—		7	4
Caterpillar Power Finance	16	21		14	70
Total	57	$	25	66	$	100

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 special-purpose entities 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 September 30, 2012 and December 31, 2011.