Finance Receivables

Effective January 1, 2020, we implemented the new credit loss guidance using a modified retrospective approach. Prior period comparative information has not been recast and continues to be reported under the accounting guidance in effect for those periods. See Note 2 for additional information.

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



(Millions of dollars)	June 30, 2020			December 31, 2019
Retail loans, net⁽¹⁾	$	15,063		$	15,424
Retail leases, net	7,466			7,660
Caterpillar purchased receivables, net	3,514			4,448
Wholesale loans, net⁽¹⁾	773			664
Wholesale leases, net	40			60
Total finance receivables	26,856			28,256
Less: Allowance for credit losses	(515		)	(424		)
Total finance receivables, net	$	26,341		$	27,832

⁽¹⁾Includes failed sale leasebacks.

Finance leases

Revenues from finance leases were $119 million and $135 million for the three months ended June 30, 2020 and 2019, respectively, and $244 million and $253 million for the six months ended June 30, 2020 and 2019, respectively, and are included in retail and wholesale finance revenue in the Consolidated Statements of Profit. The residual values for leases classified as finance leases are included in Finance receivables, net in the Consolidated Statements of Financial Position. For finance leases, residual value adjustments are recognized through a reduction of finance revenue over the remaining lease term.

Allowance for credit losses

Portfolio segments

A portfolio segment is the level at which we develop a systematic methodology for determining our allowance for credit losses. Our portfolio segments and related methods for estimating expected credit losses are as follows:

Customer

We provide 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. We also provide financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. The average original term of our customer finance receivable portfolio was approximately 48 months with an average remaining term of approximately 23 months as of June 30, 2020.

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

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

As of June 30, 2020, our forecasts for the markets in which we operate continued to reflect a decline in economic conditions resulting from a contracting economy, elevated unemployment rates and an increase in the level and trend of delinquencies due to the COVID-19 pandemic. We believe the economic forecasts employed represent reasonable and supportable forecasts, followed by a reversion to long-term trends.

Dealer

We provide financing to Caterpillar dealers in the form of wholesale financing plans. Our wholesale financing plans provide assistance to dealers by financing their new Caterpillar equipment inventory and rental fleets and are generally secured by the financed equipment. In addition, we provide unsecured loans to Caterpillar dealers for working capital.

We estimate 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.

Although forecasts continued to indicate a decline in economic conditions, our Dealer portfolio segment has not historically experienced increased credit losses during prior economic downturns due to our close working relationships with the dealers and their financial strength. Therefore, no adjustments to historical loss rates were made during the three and six months ended June 30, 2020.

Caterpillar Purchased Receivables

We purchase receivables from Caterpillar, primarily related to the sale of equipment and parts to dealers. Caterpillar purchased receivables are non-interest-bearing short-term trade receivables that are purchased at a discount.

We estimate the allowance for credit losses for Caterpillar purchased receivables based on historical loss rates with consideration of current economic conditions and reasonable and supportable forecasts.

Although forecasts continued to indicate a decline in economic conditions, our Caterpillar Purchased Receivables portfolio segment has not historically experienced increased credit losses during prior economic downturns due to the short-term maturities of the receivables, our close working relationships with the dealers and their financial strength. Therefore, no adjustments to historical loss rates were made during the three and six months ended June 30, 2020.

Classes of finance receivables

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.


•	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.

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



(Millions of dollars)	June 30, 2020
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables			Total
Balance at beginning of year	$	375		$	45	$	4		$	424
Adjustment to adopt new accounting guidance⁽¹⁾	12			—		—			12
Receivables written off	(73		)	—		—			(73		)
Recoveries on receivables previously written off	13			—		—			13
Provision for credit losses	146			—		(1		)	145
Foreign currency translation adjustment	(6		)	—		—			(6		)
Balance at end of period	$	467		$	45	$	3		$	515

Individually evaluated	$	184		$	39	$	—		$	223
Collectively evaluated	283			6		3			292
Ending Balance	$	467		$	45	$	3		$	515

Finance Receivables:
Individually evaluated	$	601		$	78	$	—		$	679
Collectively evaluated	18,538			4,125		3,514			26,177
Ending Balance	$	19,139		$	4,203	$	3,514		$	26,856

⁽¹⁾See Note 2 regarding new accounting guidance related to credit losses.



(Millions of dollars)	December 31, 2019
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	486		$	21	$	4	$	511
Receivables written off	(281		)	—		—		(281		)
Recoveries on receivables previously written off	44			—		—		44
Provision for credit losses	138			24		—		162
Adjustment due to sale of receivables	(11		)	—		—		(11		)
Foreign currency translation adjustment	(1		)	—		—		(1		)
Balance at end of year	$	375		$	45	$	4	$	424

Individually evaluated	$	178		$	39	$	—	$	217
Collectively evaluated	197			6		4		207
Ending Balance	$	375		$	45	$	4	$	424

Finance Receivables:
Individually evaluated	$	594		$	78	$	—	$	672
Collectively evaluated	18,770			4,366		4,448		27,584
Ending Balance	$	19,364		$	4,444	$	4,448	$	28,256

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, probabilities of default, industry trends, macroeconomic factors and other internal metrics. On an ongoing basis, we monitor 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, we consider the entire finance receivable past due when any installment is over 30 days past due.

Customer

The table below summarizes the aging category of our amortized cost of finance receivables in the Customer portfolio segment by origination year.



(Millions of dollars)	June 30, 2020
	2020		2019		2018		2017		2016		Prior		Revolving Finance Receivables		Total Finance Receivables
North America
Current	$	1,863	$	3,035	$	1,836	$	814	$	374	$	97	$	102	$	8,121
31-60 days past due	13		28		20		15		5		2		—		83
61-90 days past due	4		15		14		8		3		1		—		45
91+ days past due	3		24		31		19		15		6		—		98
EAME
Current	545		1,104		727		336		113		33		—		2,858
31-60 days past due	5		13		12		5		2		—		—		37
61-90 days past due	6		7		2		2		—		—		—		17
91+ days past due	—		11		14		15		51		62		—		153
Asia/Pacific
Current	790		1,153		609		195		50		20		29		2,846
31-60 days past due	4		22		18		5		—		—		—		49
61-90 days past due	2		11		8		3		—		—		—		24
91+ days past due	1		19		18		5		1		—		—		44
Mining
Current	213		655		375		236		124		190		270		2,063
31-60 days past due	—		—		13		5		—		—		—		18
61-90 days past due	—		1		3		—		—		—		—		4
91+ days past due	—		12		3		25		—		—		1		41
Latin America
Current	286		440		214		74		22		27		—		1,063
31-60 days past due	2		6		8		1		1		1		—		19
61-90 days past due	—		3		9		5		1		—		—		18
91+ days past due	—		19		40		29		8		6		—		102
Caterpillar Power Finance
Current	106		279		172		278		119		143		134		1,231
31-60 days past due	—		—		2		—		—		—		—		2
61-90 days past due	—		—		—		—		—		2		—		2
91+ days past due	—		—		20		13		33		135		—		201
Total	$	3,843	$	6,857	$	4,168	$	2,088	$	922	$	725	$	536	$	19,139

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 June 30, 2020, our 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. These past due receivables were originated in 2017.

Caterpillar Purchased Receivables

The table below summarizes the aging category of our amortized cost of finance receivables in the Caterpillar Purchased Receivables portfolio segment.



(Millions of dollars)
	June 30, 2020
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables
North America	$	15	$	8	$	16	$	39	$	1,789	$	1,828
EAME	1		—		1		2		633		635
Asia/Pacific	2		—		1		3		579		582
Mining	—		—		—		—		—		—
Latin America	1		—		—		1		459		460
Caterpillar Power Finance	2		—		1		3		6		9
Total	$	21	$	8	$	19	$	48	$	3,466	$	3,514

The table below summarizes our recorded investment in finance receivables by aging category.



(Millions of dollars)
	December 31, 2019
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables
Customer
North America	$	72	$	23	$	55	$	150	$	8,085	$	8,235
EAME	30		31		141		202		2,882		3,084
Asia/Pacific	40		14		29		83		2,733		2,816
Mining	5		—		19		24		2,266		2,290
Latin America	41		23		80		144		1,131		1,275
Caterpillar Power Finance	10		10		225		245		1,419		1,664
Dealer
North America	—		—		—		—		2,514		2,514
EAME	—		—		—		—		600		600
Asia/Pacific	—		—		—		—		487		487
Mining	—		—		—		—		4		4
Latin America	—		—		78		78		758		836
Caterpillar Power Finance	—		—		—		—		3		3
Caterpillar Purchased Receivables
North America	15		6		18		39		2,450		2,489
EAME	1		—		2		3		574		577
Asia/Pacific	1		—		—		1		891		892
Mining	—		—		—		—		—		—
Latin America	—		—		—		—		475		475
Caterpillar Power Finance	—		—		—		—		15		15
Total	$	215	$	107	$	647	$	969	$	27,287	$	28,256

Impaired finance receivables

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.

In our Customer portfolio segment, impaired finance receivables and the related unpaid principal balances and allowance were as follows:



(Millions of dollars)
	As of December 31, 2019
Impaired Finance Receivables With No Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance
North America	$	6	$	6	$	—
EAME	—		—		—
Asia/Pacific	—		—		—
Mining	22		22		—
Latin America	8		8		—
Caterpillar Power Finance	58		58		—
Total	$	94	$	94	$	—
Impaired Finance Receivables With An Allowance Recorded
North America	$	30	$	30	$	11
EAME	61		61		29
Asia/Pacific	8		8		2
Mining	37		36		9
Latin America	58		58		20
Caterpillar Power Finance	306		319		107
Total	$	500	$	512	$	178
Total Impaired Finance Receivables
North America	$	36	$	36	$	11
EAME	61		61		29
Asia/Pacific	8		8		2
Mining	59		58		9
Latin America	66		66		20
Caterpillar Power Finance	364		377		107
Total	$	594	$	606	$	178



(Millions of dollars)
	Three Months Ended June 30, 2019				Six Months Ended June 30, 2019
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
North America	$	10	$	—	$	10	$	—
EAME	1		—		1		—
Asia/Pacific	—		—		—		—
Mining	29		1		30		1
Latin America	20		1		23		1
Caterpillar Power Finance	41		—		51		1
Total	$	101	$	2	$	115	$	3
Impaired Finance Receivables With An Allowance Recorded
North America	$	35	$	—	$	37	$	1
EAME	94		—		94		1
Asia/Pacific	9		—		8		—
Mining	39		—		42		1
Latin America	74		2		75		3
Caterpillar Power Finance	443		4		446		7
Total	$	694	$	6	$	702	$	13
Total Impaired Finance Receivables
North America	$	45	$	—	$	47	$	1
EAME	95		—		95		1
Asia/Pacific	9		—		8		—
Mining	68		1		72		2
Latin America	94		3		98		4
Caterpillar Power Finance	484		4		497		8
Total	$	795	$	8	$	817	$	16

There were $78 million in impaired finance receivables with a related allowance of $39 million as of December 31, 2019 for the Dealer portfolio segment, all of which was in Latin America. There were no impaired finance receivables as of December 31, 2019 for the Caterpillar Purchased Receivables portfolio segment.

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 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. 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 our 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:



(Millions of dollars)	June 30, 2020
	Amortized Cost
	Non-accrual With an Allowance		Non-accrual Without an Allowance		91+ Still Accruing
North America	$	78	$	1	$	30
EAME	168		—		5
Asia/Pacific	32		—		12
Mining	43		—		—
Latin America	106		3		2
Caterpillar Power Finance	302		21		—
Total	$	729	$	25	$	49

There was $1 million and $5 million of interest income recognized during the three and six months ended June 30, 2020, respectively, for customer finance receivables on non-accrual status.



(Millions of dollars)	December 31, 2019
	Recorded Investment
	Non-accrual Finance Receivables		91+ Still Accruing
North America	$	44	$	15
EAME	165		4
Asia/Pacific	21		8
Mining	47		—
Latin America	89		2
Caterpillar Power Finance	361		—
Total	$	727	$	29

As of June 30, 2020 and December 31, 2019, there were $78 million in finance receivables on non-accrual status in our Dealer portfolio segment, all of which was in Latin America. There were no finance receivables in our Dealer portfolio segment more than 90 days past due and still accruing income as of June 30, 2020 and no interest income was recognized on dealer finance receivables on non-accrual status during the three and six months ended June 30, 2020.

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.

There were no finance receivables modified as TDRs during the three and six months ended June 30, 2020 and 2019 for the Dealer or Caterpillar Purchased Receivables portfolio segments. Finance receivables in the Customer portfolio segment modified as TDRs were as follows:



(Dollars in millions)	Three Months Ended June 30, 2020					Three Months Ended June 30, 2019
	Number of Contracts	Pre-TDR Amortized Cost		Post-TDR Amortized Cost		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	10	$	9	$	9	8	$	5	$	4
EAME	—	—		—		2	10		10
Asia/Pacific⁽¹⁾	104	8		8		—	—		—
Mining⁽²⁾	40	17		17		1	6		6
Latin America	1	—		—		4	2		2
Caterpillar Power Finance	6	37		37		7	47		47
Total	161	$	71	$	71	22	$	70	$	69

	Six Months Ended June 30, 2020					Six Months Ended June 30, 2019
	Number of Contracts	Pre-TDR Amortized Cost		Post-TDR Amortized Cost		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	10	$	9	$	9	8	$	5	$	4
EAME	—	—		—		19	17		17
Asia/Pacific	104	8		8		—	—		—
Mining	40	17		17		1	6		6
Latin America	6	2		2		4	2		2
Caterpillar Power Finance	6	37		37		15	98		97
Total	166	$	73	$	73	47	$	128	$	126

⁽¹⁾In Asia/Pacific, during the three months ended June 30, 2020, 104 contracts with a pre-TDR amortized cost of $8 million and a post-TDR amortized cost of $8 million were related to four customers.

⁽²⁾ In Mining, during the three months ended June 30, 2020, 40 contracts with a pre-TDR amortized cost of $17 million and a post-TDR amortized cost of $17 million were related to two customers.

TDRs 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:



(Dollars in millions)	Three Months Ended June 30, 2020			Three Months Ended June 30, 2019
	Number of Contracts	Post-TDR Amortized Cost		Number of Contracts	Post-TDR Recorded Investment
North America	1	$	—	—	$	—
Total	1	$	—	—	$	—

	Six Months Ended June 30, 2020			Six Months Ended June 30, 2019
	Number of Contracts	Post-TDR Amortized Cost		Number of Contracts	Post-TDR Recorded Investment
North America	1	$	—	—	$	—
EAME	2	10		—	—
Latin America	3	1		—	—
Total	6	$	11	—	$	—