Cat Financial Financing Activities

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 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 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 except in locations where local regulatory requirements dictate a different method, or in 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, Cat Financial 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 have been revised throughout Notes 16 and 18.

There were no impaired loans or finance leases as of September 30, 2013 or December 31, 2012, 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, 2013 and 2012.

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



	September 30, 2013						December 31, 2012
(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	$	20	$	19	$	—	$	28	$	27	$	—
Europe	53		52		—		45		45		—
Asia Pacific	2		2		—		2		2		—
Mining	127		127		—		1		1		—
Latin America	16		16		—		7		7		—
Caterpillar Power Finance	305		304		—		295		295		—
Total	$	523	$	520	$	—	$	378	$	377	$	—

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	16	$	14	$	4	$	25	$	23	$	7
Europe	19		15		7		28		26		11
Asia Pacific	22		22		6		19		19		4
Mining	—		—		—		—		—		—
Latin America	62		62		18		30		30		8
Caterpillar Power Finance	94		89		25		113		109		24
Total	$	213	$	202	$	60	$	215	$	207	$	54

Total Impaired Loans and Finance Leases
Customer
North America	$	36	$	33	$	4	$	53	$	50	$	7
Europe	72		67		7		73		71		11
Asia Pacific	24		24		6		21		21		4
Mining	127		127		—		1		1		—
Latin America	78		78		18		37		37		8
Caterpillar Power Finance	399		393		25		408		404		24
Total	$	736	$	722	$	60	$	593	$	584	$	54



	Three Months Ended September 30, 2013				Three Months Ended September 30, 2012
(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	$	23	$	—	$	41	$	1
Europe	52		—		45		—
Asia Pacific	3		—		3		—
Mining	96		2		9		1
Latin America	14		—		6		—
Caterpillar Power Finance	280		1		219		—
Total	$	468	$	3	$	323	$	2

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	14	$	—	$	25	$	—
Europe	21		—		27		1
Asia Pacific	18		—		15		—
Mining	—		—		—		—
Latin America	53		1		37		1
Caterpillar Power Finance	156		1		106		—
Total	$	262	$	2	$	210	$	2

Total Impaired Loans and Finance Leases
Customer
North America	$	37	$	—	$	66	$	1
Europe	73		—		72		1
Asia Pacific	21		—		18		—
Mining	96		2		9		1
Latin America	67		1		43		1
Caterpillar Power Finance	436		2		325		—
Total	$	730	$	5	$	533	$	4



	Nine Months Ended September 30, 2013				Nine Months Ended September 30, 2012
(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	$	26	$	3	$	56	$	2
Europe	48		—		45		—
Asia Pacific	4		—		4		—
Mining	40		2		8		1
Latin America	11		—		6		—
Caterpillar Power Finance	285		2		204		2
Total	$	414	$	7	$	323	$	5

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	18	$	—	$	25	$	—
Europe	23		1		26		1
Asia Pacific	18		1		13		1
Mining	1		—		—		—
Latin America	44		2		26		1
Caterpillar Power Finance	143		1		87		—
Total	$	247	$	5	$	177	$	3

Total Impaired Loans and Finance Leases
Customer
North America	$	44	$	3	$	81	$	2
Europe	71		1		71		1
Asia Pacific	22		1		17		1
Mining	41		2		8		1
Latin America	55		2		32		1
Caterpillar Power Finance	428		3		291		2
Total	$	661	$	12	$	500	$	8

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 except in locations where local regulatory requirements dictate a different method, or in 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, 2013 and December 31, 2012, 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, 2013		December 31, 2012
Customer
North America	$	39	$	59
Europe	41		38
Asia Pacific	51		36
Mining	31		12
Latin America	194		148
Caterpillar Power Finance	141		220
Total	$	497	$	513

Aging related to loans and finance leases was as follows:



(Millions of dollars)
	September 30, 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	$	33	$	9	$	29	$	71	$	6,256	$	6,327	$	—
Europe	32		16		36		84		2,682		2,766		8
Asia Pacific	65		42		60		167		2,826		2,993		16
Mining	—		—		12		12		2,281		2,293		—
Latin America	63		34		189		286		2,491		2,777		5
Caterpillar Power Finance	7		18		69		94		3,025		3,119		1
Dealer
North America	—		—		—		—		2,349		2,349		—
Europe	—		—		—		—		176		176		—
Asia Pacific	—		—		—		—		565		565		—
Mining	—		—		—		—		1		1		—
Latin America	—		—		1		1		778		779		1
Total	$	200	$	119	$	396	$	715	$	23,430	$	24,145	$	31



(Millions of dollars)
	December 31, 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	$	8	$	52	$	95	$	5,872	$	5,967	$	—
Europe	23		9		36		68		2,487		2,555		6
Asia Pacific	53		19		54		126		2,912		3,038		18
Mining	—		1		12		13		1,960		1,973		—
Latin America	62		19		138		219		2,500		2,719		—
Caterpillar Power Finance	15		14		126		155		3,017		3,172		4
Dealer
North America	—		—		—		—		2,063		2,063		—
Europe	—		—		—		—		185		185		—
Asia Pacific	—		—		—		—		751		751		—
Mining	—		—		—		—		1		1		—
Latin America	—		—		—		—		884		884		—
Total	$	188	$	70	$	418	$	676	$	22,632	$	23,308	$	28

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. An analysis of the allowance for credit losses was as follows:



(Millions of dollars)
	September 30, 2013
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	414		$	9	$	423
Receivables written off	(133		)	—		(133		)
Recoveries on receivables previously written off	38			—		38
Provision for credit losses	76			2		78
Other	(5		)	—		(5		)
Balance at end of period	$	390		$	11	$	401

Individually evaluated for impairment	$	60		$	—	$	60
Collectively evaluated for impairment	330			11		341
Ending Balance	$	390		$	11	$	401

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	736		$	—	$	736
Collectively evaluated for impairment	19,539			3,870		23,409
Ending Balance	$	20,275		$	3,870	$	24,145



(Millions of dollars)
	December 31, 2012
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	360		$	6	$	366
Receivables written off	(149		)	—		(149		)
Recoveries on receivables previously written off	47			—		47
Provision for credit losses	157			3		160
Other	(1		)	—		(1		)
Balance at end of year	$	414		$	9	$	423

Individually evaluated for impairment	$	54		$	—	$	54
Collectively evaluated for impairment	360			9		369
Ending Balance	$	414		$	9	$	423

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	593		$	—	$	593
Collectively evaluated for impairment	18,831			3,884		22,715
Ending Balance	$	19,424		$	3,884	$	23,308

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, 2013						December 31, 2012
	Customer		Dealer		Total		Customer		Dealer		Total
Performing
North America	$	6,288	$	2,349	$	8,637	$	5,908	$	2,063	$	7,971
Europe	2,725		176		2,901		2,517		185		2,702
Asia Pacific	2,942		565		3,507		3,002		751		3,753
Mining	2,262		1		2,263		1,961		1		1,962
Latin America	2,583		779		3,362		2,571		884		3,455
Caterpillar Power Finance	2,978		—		2,978		2,952		—		2,952
Total Performing	$	19,778	$	3,870	$	23,648	$	18,911	$	3,884	$	22,795

Non-Performing
North America	$	39	$	—	$	39	$	59	$	—	$	59
Europe	41		—		41		38		—		38
Asia Pacific	51		—		51		36		—		36
Mining	31		—		31		12		—		12
Latin America	194		—		194		148		—		148
Caterpillar Power Finance	141		—		141		220		—		220
Total Non-Performing	$	497	$	—	$	497	$	513	$	—	$	513

Performing & Non-Performing
North America	$	6,327	$	2,349	$	8,676	$	5,967	$	2,063	$	8,030
Europe	2,766		176		2,942		2,555		185		2,740
Asia Pacific	2,993		565		3,558		3,038		751		3,789
Mining	2,293		1		2,294		1,973		1		1,974
Latin America	2,777		779		3,556		2,719		884		3,603
Caterpillar Power Finance	3,119		—		3,119		3,172		—		3,172
Total	$	20,275	$	3,870	$	24,145	$	19,424	$	3,884	$	23,308

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, 2013 or 2012 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, 2013 and 2012, were as follows:



(Dollars in millions)
	Three Months Ended September 30, 2013					Three Months Ended September 30, 2012
	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	14	$	1	$	—	17	$	4	$	4
Europe	7	5		5		14	1		1
Asia Pacific	—	—		—		12	3		3
Mining	45	123		123		—	—		—
Latin America	10	1		1		—	—		—
Caterpillar Power Finance ¹	6	65		67		15	151		151
Total ²	82	$	195	$	196	58	$	159	$	159



	Nine Months Ended September 30, 2013					Nine Months Ended September 30, 2012
	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	46	$	5	$	5	58	$	8	$	8
Europe	15	6		6		21	8		8
Asia Pacific	—	—		—		12	3		3
Mining	45	123		123		—	—		—
Latin America	16	2		2		—	—		—
Caterpillar Power Finance ¹	10	101		104		20	183		183
Total ²	132	$	237	$	240	111	$	202	$	202

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 period presented. At September 30, 2013, remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR were $4 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 and nine months ended September 30, 2013 and 2012, which had been modified within twelve months prior to the default date, were as follows:



(Dollars in millions)	Three Months Ended September 30, 2013			Three Months Ended September 30, 2012
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	5	$	1	8	$	1
Europe	5	—		—	—
Asia Pacific	—	—		2	1
Total	10	$	1	10	$	2



	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	18	$	4	39	$	3
Europe	5	—		—	—
Asia Pacific	—	—		2	1
Caterpillar Power Finance	2	3		16	21
Total	25	$	7	57	$	25