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.

During the second quarter of 2013, we 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 reported in Notes 4 and 8 have been revised.

There were no impaired loans or finance leases as of June 30, 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 and six months ended June 30, 2013 and 2012.

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



(Millions of dollars)
	As of June 30, 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	$	27	$	25	$	—	$	28	$	27	$	—
Europe	48		48		—		45		45		—
Asia/Pacific	5		4		—		2		2		—
Mining	1		1		—		1		1		—
Latin America	10		10		—		7		7		—
Caterpillar Power Finance	270		270		—		295		295		—
Total	$	361	$	358	$	—	$	378	$	377	$	—
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	11	$	8	$	3	$	25	$	23	$	7
Europe	22		18		8		28		26		11
Asia/Pacific	14		14		3		19		19		4
Mining	—		—		—		—		—		—
Latin America	35		36		15		30		30		8
Caterpillar Power Finance	166		162		48		113		109		24
Total	$	248	$	238	$	77	$	215	$	207	$	54
Total Impaired Loans and Finance Leases
Customer
North America	$	38	$	33	$	3	$	53	$	50	$	7
Europe	70		66		8		73		71		11
Asia/Pacific	19		18		3		21		21		4
Mining	1		1		—		1		1		—
Latin America	45		46		15		37		37		8
Caterpillar Power Finance	436		432		48		408		404		24
Total	$	609	$	596	$	77	$	593	$	584	$	54



(Millions of dollars)
	Three Months Ended June 30, 2013				Three Months Ended June 30, 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	$	2	$	57	$	—
Europe	45		—		45		—
Asia/Pacific	5		—		3		—
Mining	4		—		8		—
Latin America	9		—		5		—
Caterpillar Power Finance	287		1		203		1
Total	$	378	$	3	$	321	$	1

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	17	$	—	$	26	$	—
Europe	21		—		23		—
Asia/Pacific	16		—		14		—
Mining	2		—		—		—
Latin America	41		—		17		—
Caterpillar Power Finance	151		—		79		—
Total	$	248	$	—	$	159	$	—

Total Impaired Loans and Finance Leases
Customer
North America	$	45	$	2	$	83	$	—
Europe	66		—		68		—
Asia/Pacific	21		—		17		—
Mining	6		—		8		—
Latin America	50		—		22		—
Caterpillar Power Finance	438		1		282		1
Total	$	626	$	3	$	480	$	1



(Millions of dollars)
	Six Months Ended June 30, 2013				Six Months Ended June 30, 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	$	3	$	63	$	1
Europe	45		—		45		—
Asia/Pacific	5		—		3		—
Mining	3		—		8		—
Latin America	9		—		6		—
Caterpillar Power Finance	286		1		191		2
Total	$	376	$	4	$	316	$	3

Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	20	$	—	$	26	$	—
Europe	24		1		24		—
Asia/Pacific	17		1		13		1
Mining	1		—		—		—
Latin America	38		1		18		—
Caterpillar Power Finance	139		—		80		—
Total	$	239	$	3	$	161	$	1

Total Impaired Loans and Finance Leases
Customer
North America	$	48	$	3	$	89	$	1
Europe	69		1		69		—
Asia/Pacific	22		1		16		1
Mining	4		—		8		—
Latin America	47		1		24		—
Caterpillar Power Finance	425		1		271		2
Total	$	615	$	7	$	477	$	4

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 June 30, 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)
	June 30, 2013		December 31, 2012
Customer
North America	$	37	$	59
Europe	38		38
Asia/Pacific	45		36
Mining	12		12
Latin America	197		148
Caterpillar Power Finance	182		220
Total	$	511	$	513

Aging related to loans and finance leases was as follows:



(Millions of dollars)
	June 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	$	26	$	6	$	29	$	61	$	6,077	$	6,138	$	1
Europe	32		13		39		84		2,553		2,637		12
Asia/Pacific	80		29		59		168		3,277		3,445		14
Mining	3		—		12		15		2,183		2,198		—
Latin America	66		33		173		272		2,459		2,731		—
Caterpillar Power Finance	10		40		109		159		3,030		3,189		18
Dealer
North America	—		—		—		—		2,941		2,941		—
Europe	—		—		—		—		635		635		—
Asia/Pacific	1		—		—		1		725		726		—
Mining	—		—		—		—		5		5		—
Latin America	—		—		—		—		997		997		—
Caterpillar Power Finance	—		—		—		—		1		1		—
Caterpillar Purchased Receivables
North America	16		2		—		18		1,730		1,748		—
Europe	6		3		2		11		457		468		2
Asia/Pacific	19		—		—		19		662		681		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		330		330		—
Caterpillar Power Finance	—		1		—		1		8		9		—
Total	$	259	$	127	$	423	$	809	$	28,070	$	28,879	$	47



(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)
	June 30, 2013
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	414		$	9	$	3	$	426
Receivables written off	(64		)	—		—		(64		)
Recoveries on receivables previously written off	27			—		—		27
Provision for credit losses	39			1		—		40
Adjustment due to sale of receivables	(1		)	—		—		(1		)
Foreign currency translation adjustment	(6		)	—		—		(6		)
Balance at end of period	$	409		$	10	$	3	$	422

Individually evaluated for impairment	$	77		$	—	$	—	$	77
Collectively evaluated for impairment	332			10		3		345
Ending Balance	$	409		$	10	$	3	$	422

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	609		$	—	$	—	$	609
Collectively evaluated for impairment	19,729			5,305		3,236		28,270
Ending Balance	$	20,338		$	5,305	$	3,236	$	28,879



(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	$	54		$	—	$	—	$	54
Collectively evaluated for impairment	360			9		3		372
Ending Balance	$	414		$	9	$	3	$	426

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	593		$	—	$	—	$	593
Collectively evaluated for impairment	19,290			5,586		3,114		27,990
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)
	June 30, 2013
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	6,101	$	2,941	$	1,748	$	10,790
Europe	2,599		635		468		3,702
Asia/Pacific	3,400		726		681		4,807
Mining	2,186		5		—		2,191
Latin America	2,534		997		330		3,861
Caterpillar Power Finance	3,007		1		9		3,017
Total Performing	$	19,827	$	5,305	$	3,236	$	28,368
Non-Performing
North America	$	37	$	—	$	—	$	37
Europe	38		—		—		38
Asia/Pacific	45		—		—		45
Mining	12		—		—		12
Latin America	197		—		—		197
Caterpillar Power Finance	182		—		—		182
Total Non-Performing	$	511	$	—	$	—	$	511
Total Performing and Non-Performing
North America	$	6,138	$	2,941	$	1,748	$	10,827
Europe	2,637		635		468		3,740
Asia/Pacific	3,445		726		681		4,852
Mining	2,198		5		—		2,203
Latin America	2,731		997		330		4,058
Caterpillar Power Finance	3,189		1		9		3,199
Total	$	20,338	$	5,305	$	3,236	$	28,879



(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 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, 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 or finance lease receivables modified as TDRs during the three and six months ended June 30, 2013 and 2012 for the Dealer or Caterpillar Purchased Receivables portfolio segments.

Loans and finance lease receivables in the Customer portfolio segment modified as TDRs during the three and six months ended June 30, 2013 and 2012, were as follows:



(Dollars in millions)
	Three Months Ended June 30, 2013					Three Months Ended June 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	22	$	2	$	3	18	$	2	$	2
Europe	8	1		1		—	—		—
Latin America	6	1		1		—	—		—
Total⁽²⁾	36	$	4	$	5	18	$	2	$	2

	Six Months Ended June 30, 2013					Six Months Ended June 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	32	$	4	$	5	41	$	4	$	4
Europe	8	1		1		7	7		7
Latin America	6	1		1		—	—		—
Caterpillar Power Finance⁽¹⁾	4	36		37		5	32		32
Total⁽²⁾	50	$	42	$	44	53	$	43	$	43

⁽¹⁾During the three and six months ended June 30, 2013, $7 million and $12 million, respectively, of additional funds were subsequently loaned to a borrower whose terms had been modified in a TDR. The $7 million and $12 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 June 30, 2013, remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR were $19 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 six months ended June 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 June 30, 2013			Three Months Ended June 30, 2012
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	5	$	1	14	$	1
Caterpillar Power Finance	—	—		2	2
Total	5	$	1	16	$	3

	Six Months Ended June 30, 2013			Six Months Ended June 30, 2012
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	13	$	3	25	$	2
Caterpillar Power Finance	2	3		16	21
Total	15	$	6	41	$	23