Finance Receivables

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



(Millions of dollars)	March 31, 2019			December 31, 2018
Retail loans, net⁽¹⁾	$	15,207		$	15,509
Retail leases, net⁽²⁾	7,483			7,499
Caterpillar purchased receivables, net	4,814			4,691
Wholesale loans, net⁽¹⁾	714			626
Wholesale leases, net	101			109
Recorded investment in finance receivables	28,319			28,434
Less: Allowance for credit losses	(534		)	(511		)
Total finance receivables, net	$	27,785		$	27,923

⁽¹⁾Includes failed sale leasebacks.

⁽²⁾Includes $9 million of finance leases with Caterpillar as of March 31, 2019 and December 31, 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 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 March 31, 2019 was $534 million or 1.89 percent of our recorded investment in finance receivables compared with $511 million or 1.80 percent as of December 31, 2018. An analysis of the allowance for credit losses was as follows:



(Millions of dollars)
	March 31, 2019
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	486		$	21	$	4	$	511
Receivables written off	(38		)	—		—		(38		)
Recoveries on receivables previously written off	8			—		—		8
Provision for credit losses	39			13		1		53
Adjustment due to sale of receivables	—			—		—		—
Foreign currency translation adjustment	—			—		—		—
Balance at end of period	$	495		$	34	$	5	$	534

Individually evaluated for impairment	$	302		$	27	$	—	$	329
Collectively evaluated for impairment	193			7		5		205
Ending Balance	$	495		$	34	$	5	$	534

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	813		$	78	$	—	$	891
Collectively evaluated for impairment	18,443			4,171		4,814		27,428
Ending Balance	$	19,256		$	4,249	$	4,814	$	28,319



(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

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)
	March 31, 2019
	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	$	7,848	$	7,999	$	10
Europe	31		17		158		206		2,794		3,000		7
Asia/Pacific	28		13		12		53		2,950		3,003		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	—		—		—		—		2,309		2,309		—
Europe	—		—		—		—		574		574		—
Asia/Pacific	—		—		—		—		566		566		—
Mining	—		—		—		—		3		3		—
Latin America	1		1		78		80		713		793		—
Caterpillar Power Finance	—		—		—		—		4		4		—
Caterpillar Purchased Receivables⁽¹⁾
North America	14		8		16		38		3,065		3,103
Europe	1		—		1		2		606		608
Asia/Pacific	6		2		1		9		761		770
Mining	—		—		—		—		—		—
Latin America	—		—		—		—		328		328
Caterpillar Power Finance	—		—		—		—		5		5
Total	$	232	$	109	$	768	$	1,109	$	27,210	$	28,319	$	37

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



(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.

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 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. There were no impaired finance receivables as of March 31, 2019 and December 31, 2018, 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 March 31, 2019						As of December 31, 2018
Impaired Finance Receivables With No Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
North America	$	9	$	9	$	—	$	10	$	10	$	—
Europe	1		1		—		1		1		—
Asia/Pacific	—		—		—		1		1		—
Mining	29		29		—		33		33		—
Latin America	20		20		—		29		29		—
Caterpillar Power Finance	48		48		—		69		83		—
Total	$	107	$	107	$	—	$	143	$	157	$	—
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		5		5		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	$	859	$	879	$	288



(Millions of dollars)
	Three Months Ended March 31, 2019				Three Months Ended March 31, 2018
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
North America	$	10	$	—	$	17	$	—
Europe	1		—		36		—
Asia/Pacific	—		—		32		1
Mining	31		—		103		1
Latin America	24		—		45		1
Caterpillar Power Finance	60		1		172		2
Total	$	126	$	1	$	405	$	5
Impaired Finance Receivables With An Allowance Recorded
North America	$	40	$	1	$	51	$	1
Europe	94		1		19		—
Asia/Pacific	7		—		7		—
Mining	43		1		17		—
Latin America	77		1		87		1
Caterpillar Power Finance	451		3		360		1
Total	$	712	$	7	$	541	$	3
Total Impaired Finance Receivables
North America	$	50	$	1	$	68	$	1
Europe	95		1		55		—
Asia/Pacific	7		—		39		1
Mining	74		1		120		1
Latin America	101		1		132		2
Caterpillar Power Finance	511		4		532		3
Total	$	838	$	8	$	946	$	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 in 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)	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 and 2018 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 March 31, 2019					Three Months Ended March 31, 2018
	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		—	—		—
Asia/Pacific	—	—		—		—	—		—
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