Finance Receivables

A summary of finance receivables included in the Consolidated Statements of Financial Position was as follows:



(Millions of dollars)	June 30, 2018			December 31, 2017
Finance leases and installment sale contracts – Retail	$	15,340		$	14,647
Retail notes receivable	8,736			9,417
Wholesale notes receivable	4,874			4,161
Finance leases and installment sale contracts – Wholesale	125			119
	29,075			28,344
Less: Unearned income	(920		)	(853		)
Recorded investment in finance receivables	28,155			27,491
Less: Allowance for credit losses	(416		)	(365		)
Total finance receivables, net⁽¹⁾	$	27,739		$	27,126

⁽¹⁾ Includes $240 million of finance receivables classified as held for sale as of June 30, 2018.

Allowance for Credit Losses

The allowance for credit losses is an estimate of the losses inherent in our 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 our 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, we estimate the current fair market value of the collateral less selling costs. We also consider 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 our 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.

Our allowance for credit losses is segregated into three portfolio segments:


•	Customer - Finance receivables with retail customers.


•	Dealer - Finance receivables with Caterpillar dealers.


•	Caterpillar Purchased Receivables - Trade receivables purchased from Caterpillar entities.

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

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 and 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.

Our allowance for credit losses as of June 30, 2018 was $416 million or 1.48 percent of our recorded investment in finance receivables compared with $365 million or 1.33 percent as of December 31, 2017. An analysis of the allowance for credit losses was as follows:



(Millions of dollars)
	June 30, 2018
Allowance for Credit Losses:	Customer			Dealer			Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	353		$	9		$	3	$	365
Receivables written off	(130		)	—			—		(130		)
Recoveries on receivables previously written off	20			—			—		20
Provision for credit losses	170			(1		)	1		170
Adjustment due to sale of receivables	(3		)	—			—		(3		)
Foreign currency translation adjustment	(6		)	—			—		(6		)
Balance at end of period	$	404		$	8		$	4	$	416

Individually evaluated for impairment	$	205		$	—		$	—	$	205
Collectively evaluated for impairment	199			8			4		211
Ending Balance	$	404		$	8		$	4	$	416

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	828		$	—		$	—	$	828
Collectively evaluated for impairment	18,922			4,299			4,106		27,327
Ending Balance	$	19,750		$	4,299		$	4,106	$	28,155



(Millions of dollars)
	December 31, 2017
Allowance for Credit Losses:	Customer			Dealer			Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	331		$	10		$	2	$	343
Receivables written off	(157		)	—			—		(157		)
Recoveries on receivables previously written off	43			—			—		43
Provision for credit losses	129			(1		)	1		129
Adjustment due to sale of receivables	(1		)	—			—		(1		)
Foreign currency translation adjustment	8			—			—		8
Balance at end of year	$	353		$	9		$	3	$	365

Individually evaluated for impairment	$	149		$	—		$	—	$	149
Collectively evaluated for impairment	204			9			3		216
Ending Balance	$	353		$	9		$	3	$	365

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	942		$	—		$	—	$	942
Collectively evaluated for impairment	18,847			4,241			3,461		26,549
Ending Balance	$	19,789		$	4,241		$	3,461	$	27,491

Credit quality of finance receivables

At origination, we evaluate 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, we monitor 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, we consider the entire recorded investment in finance receivable past due when any installment is over 30 days past due. The tables below summarize our recorded investment in finance receivables by aging category.



(Millions of dollars)
	June 30, 2018
	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	$	72	$	16	$	43	$	131	$	8,138	$	8,269	$	7
Europe	31		12		106		149		2,659		2,808		42
Asia/Pacific	31		12		8		51		2,920		2,971		3
Mining	2		—		10		12		1,631		1,643		—
Latin America	42		17		102		161		1,418		1,579		—
Caterpillar Power Finance	37		61		250		348		2,132		2,480		30
Dealer
North America	—		—		—		—		2,374		2,374		—
Europe	—		—		—		—		546		546		—
Asia/Pacific	—		—		—		—		519		519		—
Mining	—		—		—		—		3		3		—
Latin America	—		1		77		78		777		855		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Caterpillar Purchased Receivables⁽¹⁾
North America	15		6		15		36		2,608		2,644
Europe	1		—		1		2		396		398
Asia/Pacific	—		2		3		5		739		744
Mining	—		—		—		—		—		—
Latin America	—		—		—		—		311		311
Caterpillar Power Finance	—		—		—		—		9		9
Total	$	231	$	127	$	615	$	973	$	27,182	$	28,155	$	82

⁽¹⁾Caterpillar Purchased Receivables are non-interest bearing trade receivables purchased at a discount.



(Millions of dollars)
	December 31, 2017
	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	$	71	$	15	$	42	$	128	$	8,040	$	8,168	$	8
Europe	21		10		46		77		2,718		2,795		13
Asia/Pacific	18		7		14		39		2,520		2,559		5
Mining	3		1		60		64		1,751		1,815		9
Latin America	37		55		142		234		1,546		1,780		—
Caterpillar Power Finance	20		32		144		196		2,476		2,672		1
Dealer
North America	—		—		—		—		2,394		2,394		—
Europe	—		—		—		—		417		417		—
Asia/Pacific	—		—		—		—		578		578		—
Mining	—		—		—		—		5		5		—
Latin America	—		72		—		72		773		845		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Caterpillar Purchased Receivables⁽¹⁾
North America	24		5		2		31		2,010		2,041
Europe	1		2		1		4		344		348
Asia/Pacific	—		—		—		—		630		630
Mining	—		—		—		—		—		—
Latin America	—		—		—		—		437		437
Caterpillar Power Finance	—		—		—		—		5		5
Total	$	195	$	199	$	451	$	845	$	26,646	$	27,491	$	36

⁽¹⁾Caterpillar Purchased Receivables are non-interest bearing trade receivables purchased at a discount.

Impaired finance receivables

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

There were no impaired finance receivables as of June 30, 2018 and December 31, 2017, for the Dealer and Caterpillar Purchased Receivables portfolio segments. Our recorded investment in impaired finance receivables and the related unpaid principal balances and allowance for the Customer portfolio segment were as follows:



(Millions of dollars)
	As of June 30, 2018						As of December 31, 2017
Impaired Finance Receivables With No Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
North America	$	20	$	20	$	—	$	19	$	19	$	—
Europe	6		6		—		45		45		—
Asia/Pacific	30		30		—		34		33		—
Mining	38		38		—		121		121		—
Latin America	40		40		—		45		45		—
Caterpillar Power Finance	139		159		—		160		172		—
Total	$	273	$	293	$	—	$	424	$	435	$	—
Impaired Finance Receivables With An Allowance Recorded
North America	$	49	$	47	$	23	$	44	$	43	$	17
Europe	48		47		24		9		8		5
Asia/Pacific	3		3		1		8		8		2
Mining	62		62		21		—		—		—
Latin America	50		50		37		95		106		42
Caterpillar Power Finance	343		345		99		362		365		83
Total	$	555	$	554	$	205	$	518	$	530	$	149
Total Impaired Finance Receivables
North America	$	69	$	67	$	23	$	63	$	62	$	17
Europe	54		53		24		54		53		5
Asia/Pacific	33		33		1		42		41		2
Mining	100		100		21		121		121		—
Latin America	90		90		37		140		151		42
Caterpillar Power Finance	482		504		99		522		537		83
Total	$	828	$	847	$	205	$	942	$	965	$	149



(Millions of dollars)
	Three Months Ended June 30, 2018				Three Months Ended June 30, 2017
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
North America	$	18	$	1	$	11	$	—
Europe	7		—		48		1
Asia/Pacific	29		—		30		1
Mining	45		1		130		3
Latin America	43		—		67		—
Caterpillar Power Finance	189		1		257		3
Total	$	331	$	3	$	543	$	8
Impaired Finance Receivables With An Allowance Recorded
North America	$	56	$	—	$	52	$	1
Europe	48		1		5		—
Asia/Pacific	5		—		30		—
Mining	64		1		—		—
Latin America	65		1		107		1
Caterpillar Power Finance	356		3		125		—
Total	$	594	$	6	$	319	$	2
Total Impaired Finance Receivables
North America	$	74	$	1	$	63	$	1
Europe	55		1		53		1
Asia/Pacific	34		—		60		1
Mining	109		2		130		3
Latin America	108		1		174		1
Caterpillar Power Finance	545		4		382		3
Total	$	925	$	9	$	862	$	10



(Millions of dollars)
	Six Months Ended June 30, 2018				Six Months Ended June 30, 2017
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
North America	$	18	$	1	$	11	$	—
Europe	23		—		48		1
Asia/Pacific	31		1		18		1
Mining	78		2		129		4
Latin America	44		1		70		1
Caterpillar Power Finance	178		3		258		6
Total	$	372	$	8	$	534	$	13
Impaired Finance Receivables With An Allowance Recorded
North America	$	53	$	1	$	56	$	1
Europe	32		1		6		—
Asia/Pacific	6		—		38		1
Mining	36		1		—		—
Latin America	76		2		101		2
Caterpillar Power Finance	355		4		96		1
Total	$	558	$	9	$	297	$	5
Total Impaired Finance Receivables
North America	$	71	$	2	$	67	$	1
Europe	55		1		54		1
Asia/Pacific	37		1		56		2
Mining	114		3		129		4
Latin America	120		3		171		3
Caterpillar Power Finance	533		7		354		7
Total	$	930	$	17	$	831	$	18

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 June 30, 2018, there were $77 million in finance receivables on non-accrual status for the Dealer portfolio segment, all of which was in Latin America. As of December 31, 2017, there were no finance receivables on non-accrual status for the Dealer portfolio segment. The recorded investment in Customer finance receivables on non-accrual status was as follows:



(Millions of dollars)	June 30, 2018		December 31, 2017
North America	$	42	$	38
Europe	69		37
Asia/Pacific	6		10
Mining	13		63
Latin America	142		192
Caterpillar Power Finance	357		343
Total	$	629	$	683

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 June 30, 2018 and December 31, 2017, 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 and six months ended June 30, 2018 and 2017 for the Dealer or Caterpillar Purchased Receivables portfolio segments. Our recorded investment in finance receivables in the Customer portfolio segment modified as TDRs were as follows:



(Dollars in millions)	Three Months Ended June 30, 2018					Three Months Ended June 30, 2017
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	17	$	7	$	7	17	$	8	$	7
Europe	—	—		—		—	—		—
Asia/Pacific	—	—		—		1	—		—
Mining	—	—		—		—	—		—
Latin America	—	—		—		7	3		3
Caterpillar Power Finance⁽¹⁾	2	50		17		48	243		237
Total	19	$	57	$	24	73	$	254	$	247

	Six Months Ended June 30, 2018					Six Months Ended June 30, 2017
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	30	$	13	$	13	26	$	9	$	8
Europe	—	—		—		1	—		—
Asia/Pacific	—	—		—		6	39		30
Mining	1	29		29		2	57		56
Latin America	1	3		3		14	5		5
Caterpillar Power Finance	5	53		20		54	268		261
Total	37	$	98	$	65	103	$	378	$	360

⁽¹⁾In Caterpillar Power Finance, during the three months ended June 30, 2017, 42 contracts with a pre-TDR recorded investment of $175 million and a post-TDR recorded investment of $175 million were related to three customers.

During the three and six months ended June 30, 2017, there were 240 contracts, primarily related to two customers, with a recorded investment of $16 million with a payment default (defined as 91+ days past due) which had been modified within twelve months prior to the default date in the Customer portfolio segment, all of which were in the Latin America finance receivable class.