Cat Financial Financing Activities Detail C

3 Months Ended

Mar. 31, 2022

Cat Financial financing activities

Allowance for credit losses

Portfolio segments

A portfolio segment is the level at which Cat Financial develops a systematic methodology for determining its allowance for credit losses. Cat Financial's portfolio segments and related methods for estimating expected credit losses are as follows:

Customer

Cat Financial provides loans and finance leases to end-user customers primarily for the purpose of financing new and used Caterpillar machinery, engines and equipment for commercial use, the majority of which operate in construction-related industries. Cat Financial also provides financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. The average original term of Cat Financial's customer finance receivable portfolio was approximately 50 months with an average remaining term of approximately 27 months as of March 31, 2022.

Cat Financial typically maintains a security interest in financed equipment and requires physical damage insurance coverage on the financed equipment, both of which provide Cat Financial with certain rights and protections. If Cat Financial's collection efforts fail to bring a defaulted account current, Cat Financial generally can repossess the financed equipment, after satisfying local legal requirements, and sell it within the Caterpillar dealer network or through third-party auctions.

Cat Financial estimates the allowance for credit losses related to its customer finance receivables based on loss forecast models utilizing probabilities of default and the estimated loss given default based on past loss experience adjusted for current conditions and reasonable and supportable forecasts capturing country and industry-specific economic factors.

During the three months ended March 31, 2022, Cat Financial's forecasts for the markets in which it operates reflected a continuation of the trend of a growing economy, improved unemployment rates and relatively low delinquencies. However, an increase in inflation, exacerbated by an increase in commodity prices, dampened the expectations of global economic growth. The company believes the economic forecasts employed represent reasonable and supportable forecasts, followed by a reversion to long-term trends.

Dealer

Cat Financial provides financing to Caterpillar dealers in the form of wholesale financing plans. Cat Financial's wholesale financing plans provide assistance to dealers by financing their mostly new Caterpillar equipment inventory and rental fleets on a secured and unsecured basis. In addition, Cat Financial provides a variety of secured and unsecured loans to Caterpillar dealers.

Cat Financial estimates the allowance for credit losses for dealer finance receivables based on historical loss rates with consideration of current economic conditions and reasonable and supportable forecasts.

In general, Cat Financial's Dealer portfolio segment has not historically experienced large increases or decreases in credit losses based on changes in economic conditions due to its close working relationships with the dealers and their financial strength. Therefore, Cat Financial made no adjustments to historical loss rates during the three months ended March 31, 2022.

Classes of finance receivables

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. Cat Financial's classes, which align with management reporting for credit losses, are as follows:

•North America - Finance receivables originated in the United States and Canada.

•EAME - 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, Southeast Asia and India.

•Mining - Finance receivables related to large mining customers worldwide.

•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.

Receivable balances, including accrued interest, are written off against the allowance for credit losses when, in the judgment of management, they are considered uncollectible (generally upon repossession of the collateral). The amount of the write-off is determined by comparing the fair value of the collateral, less cost to sell, to the amortized cost. Subsequent recoveries, if any, are credited to the allowance for credit losses when received.

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



(Millions of dollars)	Three Months Ended March 31, 2022							Three Months Ended March 31, 2021
	Customer			Dealer		Total		Customer		Dealer		Total
Beginning balance	$	251		$	82	$	333	$	431	$	44	$	475
Write-offs	(20)			—		(20)		(34)		—		(34)
Recoveries	12			—		12		10		—		10
Provision for credit losses	26		1	(1)		25		(10)		—		(10)
Other	2			—		2		(4)		—		(4)
Ending balance	$	271		$	81	$	352	$	393	$	44	$	437


















Finance Receivables	$	20,289		$	1,722	$	22,011	$	19,103	$	2,633	$	21,736


1 Included a higher reserve for the Russia and Ukraine portfolios.

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 ratings, loan-to-value ratios, probabilities of default, industry trends, macroeconomic factors and other internal metrics. On an ongoing basis, Cat Financial monitors credit quality based on past-due status 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 finance receivable past due when any installment is over 30 days past due.

Customer

The tables below summarize the aging category of Cat Financial's amortized cost of finance receivables in the Customer portfolio segment by origination year:



(Millions of dollars)	March 31, 2022
	2022		2021		2020		2019		2018		Prior		Revolving Finance Receivables		Total Finance Receivables
North America
Current	$	1,204	$	4,442	$	2,323	$	1,213	$	503	$	154	$	188	$	10,027
31-60 days past due	5		29		22		15		7		3		6		87
61-90 days past due	—		8		4		4		2		1		2		21
91+ days past due	—		10		13		10		11		8		5		57

EAME
Current	307		1,369		739		496		295		136		—		3,342
31-60 days past due	1		12		6		5		1		—		—		25
61-90 days past due	—		4		4		1		1		1		—		11
91+ days past due	—		4		11		3		2		2		—		22

Asia/Pacific
Current	333		1,145		667		225		53		13		—		2,436
31-60 days past due	1		14		18		9		1		—		—		43
61-90 days past due	—		4		8		5		1		—		—		18
91+ days past due	—		7		9		7		2		—		—		25

Mining
Current	195		780		312		274		167		167		48		1,943
31-60 days past due	—		—		—		—		—		—		—		—
61-90 days past due	—		—		—		—		—		—		—		—
91+ days past due	—		1		1		8		12		8		—		30

Latin America
Current	204		607		270		137		45		29		—		1,292
31-60 days past due	—		6		7		5		16		—		—		34
61-90 days past due	—		5		1		1		1		—		—		8
91+ days past due	—		9		14		9		5		18		—		55

Caterpillar Power Finance
Current	12		105		144		92		65		236		115		769
31-60 days past due	2		—		—		—		—		—		—		2
61-90 days past due	—		—		—		—		—		—		—		—
91+ days past due	—		—		—		—		—		42		—		42


Totals by Aging Category
Current	$	2,255	$	8,448	$	4,455	$	2,437	$	1,128	$	735	$	351	$	19,809
31-60 days past due	9		61		53		34		25		3		6		191
61-90 days past due	—		21		17		11		5		2		2		58
91+ days past due	—		31		48		37		32		78		5		231
Total Customer	$	2,264	$	8,561	$	4,573	$	2,519	$	1,190	$	818	$	364	$	20,289



(Millions of dollars)	December 31, 2021
	2020		2019		2018		2017		2016		Prior		Revolving Finance Receivables		Total Finance Receivables
North America
Current	$	4,792	$	2,596	$	1,426	$	630	$	182	$	32	$	182	$	9,840
31-60 days past due	27		32		20		12		4		1		5		101
61-90 days past due	7		8		5		3		1		1		5		30
91+ days past due	9		17		12		13		5		4		5		65

EAME
Current	1,499		836		577		352		140		26		—		3,430
31-60 days past due	5		4		3		1		1		—		—		14
61-90 days past due	3		3		3		1		—		—		—		10
91+ days past due	3		11		2		2		—		2		—		20

Asia/Pacific
Current	1,271		803		307		71		16		2		—		2,470
31-60 days past due	10		14		10		2		—		—		—		36
61-90 days past due	3		7		4		1		—		—		—		15
91+ days past due	2		10		10		3		—		—		—		25

Mining
Current	851		347		307		193		36		161		36		1,931
31-60 days past due	6		—		—		—		—		—		—		6
61-90 days past due	1		—		—		—		4		—		—		5
91+ days past due	—		1		8		9		3		1		—		22

Latin America
Current	617		299		160		70		17		18		—		1,181
31-60 days past due	4		7		3		3		1		—		—		18
61-90 days past due	3		3		1		1		—		—		—		8
91+ days past due	4		9		9		7		7		14		—		50

Caterpillar Power Finance
Current	117		145		97		70		180		104		101		814
31-60 days past due	—		—		—		—		—		—		—		—
61-90 days past due	—		—		—		—		—		—		—		—
91+ days past due	—		—		—		—		—		44		—		44


Totals by Aging Category
Current	$	9,147	$	5,026	$	2,874	$	1,386	$	571	$	343	$	319	$	19,666
31-60 days past due	52		57		36		18		6		1		5		175
61-90 days past due	17		21		13		6		5		1		5		68
91+ days past due	18		48		41		34		15		65		5		226
Total Customer	$	9,234	$	5,152	$	2,964	$	1,444	$	597	$	410	$	334	$	20,135

Finance receivables in the Customer portfolio segment are substantially secured by collateral, primarily in the form of Caterpillar and other machinery. For those contracts where the borrower is experiencing financial difficulty, repayment of the outstanding amounts is generally expected to be provided through the operation or repossession and sale of the machinery.

Dealer

As of March 31, 2022, Cat Financial's total amortized cost of finance receivables within the Dealer portfolio segment was current, with the exception of $74 million. Of these past due receivables, $73 million were 91+ days past due in Latin America and were originated in 2017. As of December 31, 2021, Cat Financial's total amortized cost of finance receivables within the Dealer portfolio segment was current, with the exception of $78 million that was 91+ days past due in Latin America, all of which was originated in 2017.

Non-accrual finance receivables

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. Contracts on non-accrual status are generally more than 120 days past due or have been restructured in a troubled debt restructuring (TDR). Recognition is resumed and previously suspended income is recognized when collection 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. Interest earned but uncollected prior to the receivable being placed on non-accrual status is written off through Provision for credit losses when, in the judgment of management, it is considered uncollectible.

In Cat Financial's Customer portfolio segment, finance receivables which were on non-accrual status and finance receivables over 90 days past due and still accruing income were as follows:



	March 31, 2022						December 31, 2021
	Amortized Cost						Amortized Cost
(Millions of dollars)	Non-accrual With an Allowance		Non-accrual Without an Allowance		91+ Still Accruing		Non-accrual With an Allowance		Non-accrual Without an Allowance		91+ Still Accruing

North America	$	43	$	6	$	13	$	47	$	9	$	12
EAME	20		1		2		18		1		2
Asia/Pacific	13		—		13		19		—		7
Mining	28		1		1		8		1		14
Latin America	51		—		1		52		4		1
Caterpillar Power Finance	31		12		—		40		11		—
Total	$	186	$	20	$	30	$	184	$	26	$	36

There was $1 million and $3 million of interest income recognized during the three months ended March 31, 2022 and 2021, respectively, for customer finance receivables on non-accrual status.

As of March 31, 2022 and December 31, 2021, finance receivables in Cat Financial's Dealer portfolio segment on non-accrual status were $73 million and $78 million, respectively, all of which was in Latin America. There were no finance receivables in Cat Financial's Dealer portfolio segment more than 90 days past due and still accruing income as of March 31, 2022 and December 31, 2021 and no interest income was recognized on dealer finance receivables on non-accrual status during the three months ended March 31, 2022 and 2021.

Troubled debt restructurings

A restructuring of a finance receivable constitutes a 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, payment deferrals and reduction of principal and/or accrued interest. Cat Financial individually evaluates TDR contracts and establishes an allowance based on the present value of expected future cash flows discounted at the receivable's effective interest rate, the fair value of the collateral for collateral-dependent receivables or the observable market price of the receivable.

There were no finance receivables modified as TDRs during the three months ended March 31, 2022 and 2021 for the Dealer portfolio segment. Cat Financial’s finance receivables in the Customer portfolio segment modified as TDRs were as follows:



(Millions of dollars)	Three Months Ended March 31, 2022				Three Months Ended March 31, 2021
	Pre-TDR Amortized Cost		Post-TDR Amortized Cost		Pre-TDR Amortized Cost		Post-TDR Amortized Cost
Customer











EAME	$	1	$	1	$	—	$	—

Mining	—		—		11		5

Caterpillar Power Finance	6		6		—		—
Total	$	7	$	7	$	11	$	5

The Post-TDR amortized costs in the Customer portfolio segment with a payment default (defined as 91+ days past due) which had been modified within twelve months prior to the default date, were as follows:



(Millions of dollars)	Three Months Ended March 31
Customer		2022		2021
North America		$	—	$	1

Asia/Pacific		—		4
Mining		5		—

Caterpillar Power Finance		—		5
Total		$	5	$	10