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 March 31, 2013 and December 31, 2012, 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 months ended March 31, 2013 and 2012.

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



(Millions of dollars)
	As of March 31, 2013						As of December 31, 2012
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	$	25	$	23	$	—	$	28	$	27	$	—
Europe	44		44		—		45		45		—
Asia/Pacific	5		5		—		2		2		—
Mining	—		—		—		1		1		—
Latin America	8		8		—		7		7		—
Caterpillar Power Finance	285		285		—		295		295		—
Total	$	367	$	365	$	—	$	378	$	377	$	—
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	39	$	36	$	12	$	47	$	43	$	10
Europe	37		34		11		40		37		14
Asia/Pacific	48		48		11		35		35		8
Mining	40		39		9		23		23		5
Latin America	60		60		18		43		43		12
Caterpillar Power Finance	145		141		40		116		112		24
Total	$	369	$	358	$	101	$	304	$	293	$	73
Total Impaired Loans and Finance Leases
Customer
North America	$	64	$	59	$	12	$	75	$	70	$	10
Europe	81		78		11		85		82		14
Asia/Pacific	53		53		11		37		37		8
Mining	40		39		9		24		24		5
Latin America	68		68		18		50		50		12
Caterpillar Power Finance	430		426		40		411		407		24
Total	$	736	$	723	$	101	$	682	$	670	$	73



(Millions of dollars)
	Three Months Ended March 31, 2013				Three Months Ended March 31, 2012
Impaired Loans and Finance Leases With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Customer
North America	$	28	$	1	$	67	$	1
Europe	45		—		46		—
Asia/Pacific	4		—		3		—
Mining	—		—		8		—
Latin America	9		—		6		—
Caterpillar Power Finance	285		—		185		1
Total	$	371	$	1	$	315	$	2

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	42	$	—	$	72	$	—
Europe	41		1		40		—
Asia/Pacific	43		1		20		1
Mining	32		—		13		—
Latin America	54		1		26		—
Caterpillar Power Finance	131		—		87		—
Total	$	343	$	3	$	258	$	1

Total Impaired Loans and Finance Leases
Customer
North America	$	70	$	1	$	139	$	1
Europe	86		1		86		—
Asia/Pacific	47		1		23		1
Mining	32		—		21		—
Latin America	63		1		32		—
Caterpillar Power Finance	416		—		272		1
Total	$	714	$	4	$	573	$	3

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 March 31, 2013 and December 31, 2012, 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)
	March 31, 2013		December 31, 2012
Customer
North America	$	48	$	59
Europe	41		38
Asia/Pacific	53		36
Mining	12		12
Latin America	167		148
Caterpillar Power Finance	196		220
Total	$	517	$	513

Aging related to loans and finance leases was as follows:



(Millions of dollars)
	March 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	$	27	$	7	$	43	$	77	$	5,921	$	5,998	$	1
Europe	33		16		41		90		2,411		2,501		6
Asia/Pacific	62		34		81		177		3,256		3,433		30
Mining	5		—		12		17		2,102		2,119		—
Latin America	87		26		152		265		2,592		2,857		—
Caterpillar Power Finance	8		31		92		131		3,082		3,213		2
Dealer
North America	—		—		—		—		2,776		2,776		—
Europe	—		—		—		—		684		684		—
Asia/Pacific	—		—		—		—		983		983		—
Mining	—		—		—		—		1		1		—
Latin America	—		—		—		—		1,049		1,049		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Caterpillar Purchased Receivables
North America	17		3		1		21		1,487		1,508		1
Europe	2		—		—		2		452		454		—
Asia/Pacific	—		—		—		—		761		761		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		433		433		—
Caterpillar Power Finance	—		1		—		1		9		10		—
Total	$	241	$	118	$	422	$	781	$	27,999	$	28,780	$	40



(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	$	5,889	$	5,984	$	—
Europe	23		9		36		68		2,487		2,555		6
Asia/Pacific	53		19		54		126		3,354		3,480		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	—		—		—		—		2,931		2,931		—
Europe	—		—		—		—		652		652		—
Asia/Pacific	—		—		—		—		945		945		—
Mining	—		—		—		—		1		1		—
Latin America	—		—		—		—		1,057		1,057		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Caterpillar Purchased Receivables
North America	17		3		2		22		1,334		1,356		2
Europe	1		—		—		1		331		332		—
Asia/Pacific	—		—		—		—		868		868		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		547		547		—
Caterpillar Power Finance	—		—		1		1		10		11		1
Total	$	206	$	73	$	421	$	700	$	27,883	$	28,583	$	31

Allowance for credit losses

In estimating the Allowance for credit losses, we review 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)
	March 31, 2013
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	414		$	9	$	3	$	426
Receivables written off	(22		)	—		—		(22		)
Recoveries on receivables previously written off	12			—		—		12
Provision for credit losses	15			1		—		16
Adjustment due to sale of receivables	(1		)	—		—		(1		)
Foreign currency translation adjustment	(2		)	—		—		(2		)
Balance at end of period	$	416		$	10	$	3	$	429

Individually evaluated for impairment	$	101		$	—	$	—	$	101
Collectively evaluated for impairment	315			10		3		328
Ending Balance	$	416		$	10	$	3	$	429

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	736		$	—	$	—	$	736
Collectively evaluated for impairment	19,385			5,493		3,166		28,044
Ending Balance	$	20,121		$	5,493	$	3,166	$	28,780



(Millions of dollars)
	December 31, 2012
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	360		$	6	$	3	$	369
Receivables written off	(149		)	—		—		(149		)
Recoveries on receivables previously written off	47			—		—		47
Provision for credit losses	157			3		—		160
Adjustment due to sale of receivables	(2		)	—		—		(2		)
Foreign currency translation adjustment	1			—		—		1
Balance at end of year	$	414		$	9	$	3	$	426

Individually evaluated for impairment	$	73		$	—	$	—	$	73
Collectively evaluated for impairment	341			9		3		353
Ending Balance	$	414		$	9	$	3	$	426

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	682		$	—	$	—	$	682
Collectively evaluated for impairment	19,201			5,586		3,114		27,901
Ending Balance	$	19,883		$	5,586	$	3,114	$	28,583

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. 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)
	March 31, 2013
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	5,950	$	2,776	$	1,508	$	10,234
Europe	2,460		684		454		3,598
Asia/Pacific	3,380		983		761		5,124
Mining	2,107		1		—		2,108
Latin America	2,690		1,049		433		4,172
Caterpillar Power Finance	3,017		—		10		3,027
Total Performing	$	19,604	$	5,493	$	3,166	$	28,263
Non-Performing
North America	$	48	$	—	$	—	$	48
Europe	41		—		—		41
Asia/Pacific	53		—		—		53
Mining	12		—		—		12
Latin America	167		—		—		167
Caterpillar Power Finance	196		—		—		196
Total Non-Performing	$	517	$	—	$	—	$	517
Total Performing and Non-Performing
North America	$	5,998	$	2,776	$	1,508	$	10,282
Europe	2,501		684		454		3,639
Asia/Pacific	3,433		983		761		5,177
Mining	2,119		1		—		2,120
Latin America	2,857		1,049		433		4,339
Caterpillar Power Finance	3,213		—		10		3,223
Total	$	20,121	$	5,493	$	3,166	$	28,780



(Millions of dollars)
	December 31, 2012
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	5,925	$	2,931	$	1,356	$	10,212
Europe	2,517		652		332		3,501
Asia/Pacific	3,444		945		868		5,257
Mining	1,961		1		—		1,962
Latin America	2,571		1,057		547		4,175
Caterpillar Power Finance	2,952		—		11		2,963
Total Performing	$	19,370	$	5,586	$	3,114	$	28,070
Non-Performing
North America	$	59	$	—	$	—	$	59
Europe	38		—		—		38
Asia/Pacific	36		—		—		36
Mining	12		—		—		12
Latin America	148		—		—		148
Caterpillar Power Finance	220		—		—		220
Total Non-Performing	$	513	$	—	$	—	$	513
Total Performing and Non-Performing
North America	$	5,984	$	2,931	$	1,356	$	10,271
Europe	2,555		652		332		3,539
Asia/Pacific	3,480		945		868		5,293
Mining	1,973		1		—		1,974
Latin America	2,719		1,057		547		4,323
Caterpillar Power Finance	3,172		—		11		3,183
Total	$	19,883	$	5,586	$	3,114	$	28,583

Troubled debt restructurings

A restructuring of a loan 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, we estimate the current fair market value of the collateral. 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 modified as TDRs during the three months ended March 31, 2013 and 2012 for the Dealer or Caterpillar Purchased Receivables portfolio segments.

Loans in the Customer portfolio segment modified as TDRs during the three months ended March 31, 2013 and 2012, were as follows:



(Dollars in millions)
	Three Months Ended March 31, 2013					Three Months Ended March 31, 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	10	$	2	$	2	23	$	2	$	2
Europe	—	—		—		7	7		7
Caterpillar Power Finance⁽¹⁾	4	36		37		5	32		32
Total⁽²⁾	14	$	38	$	39	35	$	41	$	41

⁽¹⁾During the three months ended March 31, 2013, $5 million of additional funds were subsequently loaned to a borrower whose terms had been modified in a TDR. The $5 million of additional funds is not reflected in the table above as no incremental modifications have been made with the borrower during the period presented. At March 31, 2013, remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR were $30 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 months ended March 31, 2013 and 2012, which had been modified within twelve months prior to the default date, were as follows:



(Dollars in millions)
	Three Months Ended March 31, 2013			Three Months Ended March 31, 2012
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	8	$	2	11	$	1
Caterpillar Power Finance	2	3		14	19
Total	10	$	5	25	$	20