Cat Financial financing activities

Allowance for credit losses

The allowance for credit losses is an estimate of the losses inherent in Cat Financial’s 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 Cat Financial’s 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, Cat Financial estimates the current fair market value of the collateral less selling costs. Cat Financial also considers 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 the 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.

Cat Financial’s allowance for credit losses is segregated into two portfolio segments:

•Customer - Finance receivables with retail customers.

•Dealer - Finance receivables with Caterpillar dealers.

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

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. Typically, Cat Financial’s finance receivables within a geographic area have similar credit risk profiles and methods 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 or 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.

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




(Millions of dollars)	September 30, 2018
Allowance for Credit Losses:	Customer			Dealer			Total
Balance at beginning of year	$	353		$	9		$	362
Receivables written off	(181		)	—			(181		)
Recoveries on receivables previously written off	31			—			31
Provision for credit losses	216			(2		)	214
Other	(14		)	—			(14		)
Balance at end of period	$	405		$	7		$	412

Individually evaluated for impairment	$	229		$	—		$	229
Collectively evaluated for impairment	176			7			183
Ending Balance	$	405		$	7		$	412

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	802		$	—		$	802
Collectively evaluated for impairment	18,193			3,467			21,660
Ending Balance	$	18,995		$	3,467		$	22,462




(Millions of dollars)	December 31, 2017
Allowance for Credit Losses:	Customer			Dealer			Total
Balance at beginning of year	$	331		$	10		$	341
Receivables written off	(157		)	—			(157		)
Recoveries on receivables previously written off	43			—			43
Provision for credit losses	129			(1		)	128
Other	7			—			7
Balance at end of year	$	353		$	9		$	362

Individually evaluated for impairment	$	149		$	—		$	149
Collectively evaluated for impairment	204			9			213
Ending Balance	$	353		$	9		$	362

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	942		$	—		$	942
Collectively evaluated for impairment	18,226			3,464			21,690
Ending Balance	$	19,168		$	3,464		$	22,632

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-rating agency ratings, loan-to-value ratios and other internal metrics. On an ongoing basis, Cat Financial monitors 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, Cat Financial considers the entire recorded investment in finance receivables past due when any installment is over 30 days past due. The tables below summarize the recorded investment in finance receivables by aging category.




	September 30, 2018
(Millions of dollars)	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	$	74	$	17	$	46	$	137	$	7,834	$	7,971	$	7
Europe	19		9		122		150		2,848		2,998		6
Asia Pacific	30		14		8		52		2,399		2,451		5
Mining	5		—		9		14		1,623		1,637		—
Latin America	35		15		84		134		1,380		1,514		—
Caterpillar Power Finance	116		45		298		459		1,965		2,424		8
Dealer
North America	—		—		—		—		1,978		1,978		—
Europe	—		—		—		—		321		321		—
Asia Pacific	—		—		—		—		473		473		—
Mining	—		—		—		—		4		4		—
Latin America	—		—		79		79		610		689		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Total	$	279	$	100	$	646	$	1,025	$	21,437	$	22,462	$	26




	December 31, 2017
(Millions of dollars)	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	$	7,950	$	8,078	$	8
Europe	21		10		46		77		2,718		2,795		13
Asia Pacific	13		7		14		34		2,009		2,043		5
Mining	3		1		60		64		1,751		1,815		9
Latin America	37		55		142		234		1,531		1,765		—
Caterpillar Power Finance	20		32		144		196		2,476		2,672		1
Dealer
North America	—		—		—		—		1,920		1,920		—
Europe	—		—		—		—		222		222		—
Asia Pacific	—		—		—		—		553		553		—
Mining	—		—		—		—		4		4		—
Latin America	—		72		—		72		691		763		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Total	$	165	$	192	$	448	$	805	$	21,827	$	22,632	$	36

Impaired finance receivables

For all classes, a finance receivable is considered impaired, based on current information and events, if it is probable that Cat Financial 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 restructurings.

There were no impaired finance receivables as of September 30, 2018 or December 31, 2017, for the Dealer portfolio segment. Cat Financial’s recorded investment in impaired finance receivables and the related unpaid principal balances and allowance for the Customer portfolio segment were as follows:



	September 30, 2018						December 31, 2017
(Millions of dollars)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired Finance Receivables With No Allowance Recorded
North America	$	17	$	17	$	—	$	19	$	19	$	—
Europe	2		1		—		45		45		—
Asia Pacific	28		28		—		34		33		—
Mining	34		34		—		121		121		—
Latin America	31		31		—		45		45		—
Caterpillar Power Finance	61		74		—		160		172		—
Total	$	173	$	185	$	—	$	424	$	435	$	—

Impaired Finance Receivables With An Allowance Recorded
North America	$	41	$	39	$	18	$	44	$	43	$	17
Europe	66		66		36		9		8		5
Asia Pacific	2		2		1		8		8		2
Mining	58		58		22		—		—		—
Latin America	61		61		34		95		106		42
Caterpillar Power Finance	401		408		118		362		365		83
Total	$	629	$	634	$	229	$	518	$	530	$	149

Total Impaired Finance Receivables
North America	$	58	$	56	$	18	$	63	$	62	$	17
Europe	68		67		36		54		53		5
Asia Pacific	30		30		1		42		41		2
Mining	92		92		22		121		121		—
Latin America	92		92		34		140		151		42
Caterpillar Power Finance	462		482		118		522		537		83
Total	$	802	$	819	$	229	$	942	$	965	$	149



	Three Months Ended September 30, 2018				Three Months Ended September 30, 2017
(Millions of dollars)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Finance Receivables With No Allowance Recorded
North America	$	19	$	—	$	14	$	1
Europe	4		—		47		—
Asia Pacific	29		1		30		1
Mining	35		—		128		1
Latin America	37		1		68		1
Caterpillar Power Finance	94		2		171		1
Total	$	218	$	4	$	458	$	5

Impaired Finance Receivables With An Allowance Recorded
North America	$	47	$	—	$	44	$	—
Europe	59		—		6		—
Asia Pacific	2		—		28		1
Mining	60		1		—		—
Latin America	51		1		102		1
Caterpillar Power Finance	374		4		251		3
Total	$	593	$	6	$	431	$	5

Total Impaired Finance Receivables
North America	$	66	$	—	$	58	$	1
Europe	63		—		53		—
Asia Pacific	31		1		58		2
Mining	95		1		128		1
Latin America	88		2		170		2
Caterpillar Power Finance	468		6		422		4
Total	$	811	$	10	$	889	$	10



	Nine Months Ended September 30, 2018				Nine Months Ended September 30, 2017
(Millions of dollars)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Finance Receivables With No Allowance Recorded
Customer
North America	$	17	$	1	$	12	$	1
Europe	17		—		48		1
Asia Pacific	30		2		22		2
Mining	65		2		128		5
Latin America	41		2		69		2
Caterpillar Power Finance	149		5		233		7
Total	$	319	$	12	$	512	$	18

Impaired Finance Receivables With An Allowance Recorded
Customer
North America	$	51	$	1	$	52	$	1
Europe	41		1		6		—
Asia Pacific	4		—		35		2
Mining	43		2		—		—
Latin America	69		3		101		3
Caterpillar Power Finance	364		8		141		4
Total	$	572	$	15	$	335	$	10

Total Impaired Finance Receivables
Customer
North America	$	68	$	2	$	64	$	2
Europe	58		1		54		1
Asia Pacific	34		2		57		4
Mining	108		4		128		5
Latin America	110		5		170		5
Caterpillar Power Finance	513		13		374		11
Total	$	891	$	27	$	847	$	28

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 September 30, 2018, there were finance receivables on non-accrual status for the Dealer portfolio segment of $79 million, all of which were in the Latin America finance receivable class. 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)	September 30, 2018		December 31, 2017
North America	$	44	$	38
Europe	124		37
Asia Pacific	4		10
Mining	10		63
Latin America	118		192
Caterpillar Power Finance	451		343
Total	$	751	$	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 September 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 or nine months ended September 30, 2018 or 2017 for the Dealer portfolio segment. Cat Financial's investment in finance receivables in the Customer portfolio segment modified as TDRs during the three and nine months ended September 30, 2018 and 2017, were as follows:




	Three Months Ended September 30, 2018					Three Months Ended September 30, 2017
(Millions of dollars)	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	4	$	—	$	—	11	$	4	$	5
Europe	—	—		—		1	—		—
Latin America	—	—		—		3	21		22
Caterpillar Power Finance	2	40		40		5	51		44
Total	6	$	40	$	40	20	$	76	$	71

	Nine Months Ended September 30, 2018					Nine Months Ended September 30, 2017
	Number of Contracts	Pre-TDR Outstanding Recorded Investment		Post-TDR Outstanding Recorded Investment		Number of Contracts	Pre-TDR Outstanding Recorded Investment		Post-TDR Outstanding Recorded Investment
North America	34	$	13	$	13	37	$	13	$	13
Europe	—	—		—		2	—		—
Asia Pacific	—	—		—		6	39		30
Mining	1	29		29		2	57		56
Latin America	1	3		3		17	26		27
Caterpillar Power Finance ¹	7	93		60		59	319		305
Total	43	$	138	$	105	123	$	454	$	431

¹In Caterpillar Power Finance, during the nine months ended September 30, 2017, 44 contracts with a pre-TDR recorded investment of $200 million and a post-TDR recorded investment of $200 million were related to four 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:




	Three Months Ended September 30, 2018			Three Months Ended September 30, 2017
(Millions of dollars)	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	7	$	9	—	$	—
Latin America	1	—		1	—
Caterpillar Power Finance	3	33		—	—
Total	11	$	42	1	$	—




	Nine Months Ended September 30, 2018			Nine Months Ended September 30, 2017
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	10	$	10	—	$	—
Latin America	3	1		241	16
Caterpillar Power Finance	3	33		—	—
Total	16	$	44	241	$	16