Cat Financial financing activities

Allowance for credit losses

The allowance for credit losses is an estimate of the losses inherent in Cat Financial’s finance receivable portfolio and includes consideration of accounts that have been individually identified as impaired, as well as pools of finance receivables where it is probable that certain receivables in the pool are impaired but the individual accounts cannot yet be identified. In identifying and measuring impairment, management takes into consideration past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of underlying collateral and current economic conditions.

Accounts are identified for individual review based on past-due status and information available about the customer, such as financial statements, news reports and published credit ratings, as well as general information regarding industry trends and the economic environment in which Cat Financial’s customers operate. The allowance for credit losses attributable to finance receivables that are individually evaluated and determined to be impaired is based on the present value of expected future cash flows discounted at the receivables' effective interest rate, the fair value of the collateral for collateral-dependent receivables or the observable market price of the receivable. In determining collateral value, Cat Financial estimates the current fair market value of the collateral less selling costs. Cat Financial also considers credit enhancements such as additional collateral and contractual third-party guarantees. The allowance for credit losses attributable to the remaining accounts not yet individually identified as impaired is estimated based on loss forecast models utilizing probabilities of default, our estimate of the loss emergence period and the estimated loss given default. In addition, qualitative factors not able to be fully captured in the loss forecast models including industry trends, macroeconomic factors and model imprecision are considered in the evaluation of the adequacy of the allowance for credit losses. These qualitative factors are subjective and require a degree of management judgment.

Cat Financial’s allowance for credit losses is segregated into two portfolio segments:

•Customer - Finance receivables with retail customers.

•Dealer - Finance receivables with Caterpillar dealers.

A portfolio segment is the level at which the company develops a systematic methodology for determining its allowance for credit losses.

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, the Middle East and the Commonwealth of Independent States.


•	Asia Pacific - Finance receivables originated in Australia, New Zealand, China, Japan and Southeast Asia.


•	Mining - Finance receivables related to large mining customers worldwide and project financing in various countries.


•	Latin America - Finance receivables originated in Mexico, and Central and South American countries.


•	Caterpillar Power Finance - Finance receivables originated worldwide related to marine vessels with Caterpillar engines and Caterpillar electrical power generation, gas compression and co-generation systems and non-Caterpillar equipment that is powered by these systems.

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




(Millions of dollars)	March 31, 2019
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	486		$	21	$	507
Receivables written off	(38		)	—		(38		)
Recoveries on receivables previously written off	8			—		8
Provision for credit losses	39			13		52
Balance at end of period	$	495		$	34	$	529

Individually evaluated for impairment	$	302		$	27	$	329
Collectively evaluated for impairment	193			7		200
Ending Balance	$	495		$	34	$	529

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	813		$	78	$	891
Collectively evaluated for impairment	17,881			3,347		21,228
Ending Balance	$	18,694		$	3,425	$	22,119




(Millions of dollars)	December 31, 2018
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	353		$	9	$	362
Receivables written off	(235		)	—		(235		)
Recoveries on receivables previously written off	46			—		46
Provision for credit losses	337			12		349
Other	(15		)	—		(15		)
Balance at end of year	$	486		$	21	$	507

Individually evaluated for impairment	$	288		$	14	$	302
Collectively evaluated for impairment	198			7		205
Ending Balance	$	486		$	21	$	507

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	858		$	78	$	936
Collectively evaluated for impairment	18,152			3,338		21,490
Ending Balance	$	19,010		$	3,416	$	22,426

Credit quality of finance receivables

At origination, Cat Financial evaluates credit risk based on a variety of credit quality factors including prior payment experience, customer financial information, credit-rating agency ratings, loan-to-value ratios and other internal metrics. On an ongoing basis, Cat Financial monitors credit quality based on past-due status and collection experience as there is a meaningful correlation between the past-due status of customers and the risk of loss.

In determining past-due status, Cat Financial considers the entire recorded investment in finance receivables past due when any installment is over 30 days past due. The tables below summarize the recorded investment in finance receivables by aging category.




	March 31, 2019
(Millions of dollars)	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Recorded Investment in Finance Receivables		91+ Still Accruing
Customer
North America	$	89	$	18	$	44	$	151	$	7,786	$	7,937	$	10
Europe	31		17		158		206		2,794		3,000		7
Asia Pacific	28		13		12		53		2,450		2,503		8
Mining	—		—		20		20		1,663		1,683		10
Latin America	48		42		73		163		1,385		1,548		—
Caterpillar Power Finance	14		8		365		387		1,636		2,023		2
Dealer
North America	—		—		—		—		1,911		1,911		—
Europe	—		—		—		—		332		332		—
Asia Pacific	—		—		—		—		466		466		—
Mining	—		—		—		—		3		3		—
Latin America	1		1		78		80		631		711		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Total	$	211	$	99	$	750	$	1,060	$	21,059	$	22,119	$	37




	December 31, 2018
(Millions of dollars)	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Recorded Investment in Finance Receivables		91+ Still Accruing
Customer
North America	$	65	$	18	$	84	$	167	$	7,825	$	7,992	$	14
Europe	19		9		153		181		2,850		3,031		5
Asia Pacific	24		9		8		41		2,409		2,450		5
Mining	28		1		9		38		1,642		1,680		—
Latin America	38		29		71		138		1,421		1,559		—
Caterpillar Power Finance	10		1		384		395		1,903		2,298		—
Dealer
North America	—		—		—		—		1,895		1,895		—
Europe	—		—		—		—		333		333		—
Asia Pacific	—		—		—		—		466		466		—
Mining	—		—		—		—		4		4		—
Latin America	—		—		78		78		638		716		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Total	$	184	$	67	$	787	$	1,038	$	21,388	$	22,426	$	24

Impaired finance receivables

For all classes, a finance receivable 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. Impaired finance receivables include finance receivables that have been restructured and are considered to be troubled debt restructurings.

There were $78 million of impaired finance receivables with a related allowance of $27 million and $14 million as of March 31, 2019 and December 31, 2018, respectively, for the Dealer portfolio segment, all of which was in Latin America. Cat Financial’s recorded investment in impaired finance receivables and the related unpaid principal balances and allowance for the Customer portfolio segment were as follows:



	March 31, 2019						December 31, 2018
(Millions of dollars)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired Finance Receivables With No Allowance Recorded
North America	$	9	$	9	$	—	$	10	$	10	$	—
Europe	1		1		—		1		1		—
Asia Pacific	—		—		—		—		—		—
Mining	29		29		—		33		33		—
Latin America	20		20		—		29		29		—
Caterpillar Power Finance	48		48		—		69		83		—
Total	$	107	$	107	$	—	$	142	$	156	$	—

Impaired Finance Receivables With An Allowance Recorded
North America	$	41	$	38	$	16	$	40	$	41	$	14
Europe	93		93		57		92		92		57
Asia Pacific	9		9		3		4		4		2
Mining	32		31		14		56		55		26
Latin America	76		76		27		75		75		25
Caterpillar Power Finance	455		468		185		449		455		164
Total	$	706	$	715	$	302	$	716	$	722	$	288

Total Impaired Finance Receivables
North America	$	50	$	47	$	16	$	50	$	51	$	14
Europe	94		94		57		93		93		57
Asia Pacific	9		9		3		4		4		2
Mining	61		60		14		89		88		26
Latin America	96		96		27		104		104		25
Caterpillar Power Finance	503		516		185		518		538		164
Total	$	813	$	822	$	302	$	858	$	878	$	288



	Three Months Ended March 31, 2019				Three Months Ended March 31, 2018
(Millions of dollars)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Finance Receivables With No Allowance Recorded
North America	$	10	$	—	$	17	$	—
Europe	1		—		36		—
Asia Pacific	—		—		31		1
Mining	31		—		103		1
Latin America	24		—		45		1
Caterpillar Power Finance	60		1		172		2
Total	$	126	$	1	$	404	$	5

Impaired Finance Receivables With An Allowance Recorded
North America	$	40	$	1	$	51	$	1
Europe	94		1		19		—
Asia Pacific	7		—		6		—
Mining	43		1		17		—
Latin America	77		1		87		1
Caterpillar Power Finance	451		3		360		1
Total	$	712	$	7	$	540	$	3

Total Impaired Finance Receivables
North America	$	50	$	1	$	68	$	1
Europe	95		1		55		—
Asia Pacific	7		—		37		1
Mining	74		1		120		1
Latin America	101		1		132		2
Caterpillar Power Finance	511		4		532		3
Total	$	838	$	8	$	944	$	8

Recognition of income is suspended and the finance receivable is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due). Recognition is resumed and previously suspended income is recognized when the finance receivable becomes current and collection of remaining amounts is considered probable. Payments received while the finance receivable is on non-accrual status are applied to interest and principal in accordance with the contractual terms.

As of March 31, 2019 and December 31, 2018, there were $78 million of finance receivables on non-accrual status for the Dealer portfolio segment, respectively. The recorded investment in customer finance receivables on non-accrual status was as follows:




(Millions of dollars)	March 31, 2019		December 31, 2018
North America	$	73	$	77
Europe	171		154
Asia Pacific	6		4
Mining	18		50
Latin America	118		106
Caterpillar Power Finance	442		416
Total	$	828	$	807

Troubled Debt Restructurings

A restructuring of a finance 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, extended skip payment periods and reduction of principal and/or accrued interest.

As of March 31, 2019 and December 31, 2018, there were no additional funds committed to lend to a borrower whose terms have been modified in a TDR.

There were no finance receivables modified as TDRs during the three months ended March 31, 2019 or 2018 for the Dealer portfolio segment. Cat Financial's investment in finance receivables in the Customer portfolio segment modified as TDRs during the three months ended March 31, 2019 and 2018, were as follows:




	Three Months Ended March 31, 2019					Three Months Ended March 31, 2018
(Millions of dollars)	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	—	$	—	$	—	13	$	6	$	6
Europe	19	11		7		—	—		—
Mining	—	—		—		1	29		29
Latin America	—	—		—		1	3		3
Caterpillar Power Finance	8	51		50		3	3		3
Total	27	$	62	$	57	18	$	41	$	41