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 end-user 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, Southeast Asia and India.


•	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 December 31, 2018 was $511 million or 1.80 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)
	December 31, 2018
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	353		$	9	$	3	$	365
Receivables written off	(235		)	—		—		(235		)
Recoveries on receivables previously written off	46			—		—		46
Provision for credit losses	337			12		1		350
Adjustment due to sale of receivables	(7		)	—		—		(7		)
Foreign currency translation adjustment	(8		)	—		—		(8		)
Balance at end of year	$	486		$	21	$	4	$	511

Individually evaluated for impairment	$	288		$	14	$	—	$	302
Collectively evaluated for impairment	198			7		4		209
Ending Balance	$	486		$	21	$	4	$	511

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	859		$	78	$	—	$	937
Collectively evaluated for impairment	18,724			4,082		4,691		27,497
Ending Balance	$	19,583		$	4,160	$	4,691	$	28,434



(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 receivables 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)
	December 31, 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	$	65	$	18	$	84	$	167	$	7,883	$	8,050	$	14
Europe	19		9		153		181		2,850		3,031		5
Asia/Pacific	25		9		8		42		2,923		2,965		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	—		—		—		—		2,210		2,210		—
Europe	—		—		—		—		619		619		—
Asia/Pacific	—		—		—		—		514		514		—
Mining	—		—		—		—		4		4		—
Latin America	—		—		78		78		731		809		—
Caterpillar Power Finance	—		—		—		—		4		4		—
Caterpillar Purchased Receivables⁽¹⁾
North America	22		12		18		52		2,982		3,034
Europe	1		—		1		2		546		548
Asia/Pacific	5		1		1		7		756		763
Mining	—		—		—		—		—		—
Latin America	—		—		—		—		338		338
Caterpillar Power Finance	—		—		—		—		8		8
Total	$	213	$	80	$	807	$	1,100	$	27,334	$	28,434	$	24

⁽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 $78 million in impaired finance receivables, as of December 31, 2018, for the Dealer portfolio segment. There were no impaired finance receivables, as of December 31, 2017 and 2016, for the Dealer portfolio segment. There were no impaired finance receivables as of December 31, 2018, 2017 and 2016 for the Caterpillar Purchased Receivables portfolio segment. 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 December 31, 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	$	10	$	10	$	—	$	19	$	19	$	—
Europe	1		1		—		45		45		—
Asia/Pacific	1		1		—		34		33		—
Mining	33		33		—		121		121		—
Latin America	29		29		—		45		45		—
Caterpillar Power Finance	69		83		—		160		172		—
Total	$	143	$	157	$	—	$	424	$	435	$	—
Impaired Finance Receivables With An Allowance Recorded
North America	$	40	$	41	$	14	$	44	$	43	$	17
Europe	92		92		57		9		8		5
Asia/Pacific	4		4		2		8		8		2
Mining	56		55		26		—		—		—
Latin America	75		75		25		95		106		42
Caterpillar Power Finance	449		455		164		362		365		83
Total	$	716	$	722	$	288	$	518	$	530	$	149
Total Impaired Finance Receivables
North America	$	50	$	51	$	14	$	63	$	62	$	17
Europe	93		93		57		54		53		5
Asia/Pacific	5		5		2		42		41		2
Mining	89		88		26		121		121		—
Latin America	104		104		25		140		151		42
Caterpillar Power Finance	518		538		164		522		537		83
Total	$	859	$	879	$	288	$	942	$	965	$	149



(Millions of dollars)
	Year Ended December 31, 2018				Year Ended December 31, 2017				Year Ended December 31, 2016
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
North America	$	16	$	1	$	13	$	1	$	18	$	1
Europe	14		—		48		1		46		1
Asia/Pacific	28		3		24		2		2		—
Mining	57		2		126		7		98		4
Latin America	38		2		64		3		47		1
Caterpillar Power Finance	130		7		221		9		270		11
Total	$	283	$	15	$	496	$	23	$	481	$	18
Impaired Finance Receivables With An Allowance Recorded
North America	$	49	$	2	$	49	$	1	$	34	$	—
Europe	53		2		6		—		11		1
Asia/Pacific	5		—		31		2		37		3
Mining	46		3		—		—		13		—
Latin America	67		3		99		4		66		2
Caterpillar Power Finance	378		12		180		6		50		1
Total	$	598	$	22	$	365	$	13	$	211	$	7
Total Impaired Finance Receivables
North America	$	65	$	3	$	62	$	2	$	52	$	1
Europe	67		2		54		1		57		2
Asia/Pacific	33		3		55		4		39		3
Mining	103		5		126		7		111		4
Latin America	105		5		163		7		113		3
Caterpillar Power Finance	508		19		401		15		320		12
Total	$	881	$	37	$	861	$	36	$	692	$	25

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 December 31, 2018, there were $78 million in finance receivables on non-accrual status for the Dealer portfolio segment. 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 as of December 31, was as follows:



(Millions of dollars)
	2018		2017
North America	$	77	$	38
Europe	154		37
Asia/Pacific	4		10
Mining	50		63
Latin America	106		192
Caterpillar Power Finance	416		343
Total	$	807	$	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 December 31, 2018 and 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 years ended December 31, 2018, 2017 and 2016 for the Dealer or Caterpillar Purchased Receivables portfolio segments. Our recorded investment in finance receivables in the Customer portfolio segment modified as TDRs during the years ended December 31, 2018, 2017 and 2016, were as follows:



(Dollars in millions)	Year Ended December 31, 2018
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	38	$	21	$	21
Europe	—	—		—
Asia/Pacific	—	—		—
Mining	1	29		29
Latin America	1	3		3
Caterpillar Power Finance	12	133		99
Total	52	$	186	$	152

	Year Ended December 31, 2017
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	43	$	34	$	35
Europe	4	1		1
Asia/Pacific	10	39		31
Mining	2	57		56
Latin America	17	26		27
Caterpillar Power Finance⁽¹⁾	68	422		407
Total	144	$	579	$	557

	Year Ended December 31, 2016
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	25	$	25	$	25
Europe	43	12		9
Asia/Pacific	31	29		28
Mining	4	74		66
Latin America⁽²⁾	437	118		82
Caterpillar Power Finance	34	196		177
Total	574	$	454	$	387

⁽¹⁾ In Caterpillar Power Finance, 48 contracts with a pre-TDR recorded investment of $265 million and a post-TDR recorded investment of $258 million were related to six customers.

⁽²⁾ In Latin America, 321 contracts with a pre-TDR recorded investment of $94 million and a post-TDR recorded investment of $64 million were related to four customers.

TDRs in the Customer portfolio segment with a payment default (defined as 91+ days past due) during the years ended December 31, 2018, 2017 and 2016, which had been modified within twelve months prior to the default date, were as follows:



(Dollars in millions)	Year Ended December 31, 2018			Year Ended December 31, 2017			Year Ended December 31, 2016
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
North America	10	$	10	4	$	3	5	$	2
Europe	—	—		1	—		5	2
Asia/Pacific	—	—		4	1		1	—
Latin America⁽¹⁾	3	1		243	17		4	1
Caterpillar Power Finance	3	33		—	—		—	—
Total	16	$	44	252	$	21	15	$	5

⁽¹⁾ In Latin America, 238 contracts with a post-TDR recorded investment of $16 million were related to two customers for the year ended December 31, 2017.