Finance Receivables

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



(Millions of dollars)	September 30, 2016			December 31, 2015
Finance leases and installment sale contracts – Retail	$	13,766		$	13,728
Retail notes receivable	10,492			10,616
Wholesale notes receivable	3,365			3,887
Finance leases and installment sale contracts – Wholesale	155			289
	27,778			28,520
Less: Unearned income	(776		)	(794		)
Recorded investment in finance receivables	27,002			27,726
Less: Allowance for credit losses	(346		)	(338		)
Total finance receivables, net	$	26,656		$	27,388

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 either on the present value of expected future cash flows discounted at the receivables' effective interest rate or the fair value of the collateral for collateral-dependent receivables. 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 - Includes finance receivables originated in the United States or Canada.


•	Europe - Includes finance receivables originated in Europe, Africa, Middle East and the Commonwealth of Independent States.


•	Asia/Pacific - Includes finance receivables originated in Australia, New Zealand, China, Japan, South Korea and Southeast Asia.


•	Mining - Includes finance receivables related to large mining customers worldwide and project financing in various countries.


•	Latin America - Includes finance receivables originated in Central and South American countries.


•	Caterpillar Power Finance - Includes finance receivables related to marine vessels with Caterpillar engines worldwide and Caterpillar electrical power generation, gas compression and co-generation systems and non-Caterpillar equipment that is powered by these systems worldwide.

Our allowance for credit losses as of September 30, 2016 was $346 million or 1.28 percent of net finance receivables compared with $338 million or 1.22 percent as of December 31, 2015. An analysis of the allowance for credit losses was as follows:



(Millions of dollars)
	September 30, 2016
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	327		$	9	$	2	$	338
Receivables written off	(118		)	—		—		(118		)
Recoveries on receivables previously written off	25			—		—		25
Provision for credit losses	93			2		—		95
Adjustment due to sale of receivables	(1		)	—		—		(1		)
Foreign currency translation adjustment	7			—		—		7
Balance at end of period	$	333		$	11	$	2	$	346

Individually evaluated for impairment	$	85		$	—	$	—	$	85
Collectively evaluated for impairment	248			11		2		261
Ending Balance	$	333		$	11	$	2	$	346

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	819		$	—	$	—	$	819
Collectively evaluated for impairment	19,155			4,795		2,233		26,183
Ending Balance	$	19,974		$	4,795	$	2,233	$	27,002



(Millions of dollars)
	December 31, 2015
Allowance for Credit Losses:	Customer			Dealer			Caterpillar Purchased Receivables			Total
Balance at beginning of year	$	388		$	10		$	3		$	401
Receivables written off	(196		)	—			—			(196		)
Recoveries on receivables previously written off	41			—			—			41
Provision for credit losses	119			(1		)	(1		)	117
Adjustment due to sale of receivables	(2		)	—			—			(2		)
Foreign currency translation adjustment	(23		)	—			—			(23		)
Balance at end of year	$	327		$	9		$	2		$	338

Individually evaluated for impairment	$	65		$	—		$	—		$	65
Collectively evaluated for impairment	262			9			2			273
Ending Balance	$	327		$	9		$	2		$	338

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	601		$	—		$	—		$	601
Collectively evaluated for impairment	19,431			5,093			2,601			27,125
Ending Balance	$	20,032		$	5,093		$	2,601		$	27,726

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 finance receivable balance past due when any installment is over 30 days past due. The tables below summarize our recorded investment of finance receivables by aging category.



(Millions of dollars)
	September 30, 2016
	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	$	66	$	18	$	72	$	156	$	7,983	$	8,139	$	10
Europe	21		16		83		120		2,424		2,544		47
Asia/Pacific	30		10		20		60		2,057		2,117		4
Mining	4		1		63		68		1,802		1,870		—
Latin America	57		39		222		318		1,866		2,184		—
Caterpillar Power Finance	1		5		72		78		3,042		3,120		12
Dealer
North America	—		—		—		—		2,971		2,971		—
Europe	—		—		—		—		337		337		—
Asia/Pacific	—		—		—		—		659		659		—
Mining	—		—		—		—		7		7		—
Latin America	—		—		—		—		819		819		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Caterpillar Purchased Receivables
North America	9		4		2		15		1,292		1,307		2
Europe	1		—		1		2		273		275		—
Asia/Pacific	—		—		—		—		348		348		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		300		300		—
Caterpillar Power Finance	—		—		—		—		3		3		—
Total	$	189	$	93	$	535	$	817	$	26,185	$	27,002	$	75



(Millions of dollars)
	December 31, 2015
	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	$	45	$	12	$	30	$	87	$	8,031	$	8,118	$	4
Europe	18		7		44		69		2,358		2,427		9
Asia/Pacific	22		12		21		55		2,108		2,163		6
Mining	6		1		68		75		1,793		1,868		1
Latin America	45		31		199		275		1,998		2,273		—
Caterpillar Power Finance	—		1		35		36		3,147		3,183		2
Dealer
North America	—		—		—		—		3,387		3,387		—
Europe	—		—		—		—		330		330		—
Asia/Pacific	—		—		—		—		611		611		—
Mining	—		—		—		—		4		4		—
Latin America	—		—		—		—		758		758		—
Caterpillar Power Finance	—		—		—		—		3		3		—
Caterpillar Purchased Receivables
North America	16		5		1		22		1,386		1,408		1
Europe	4		—		4		8		307		315		3
Asia/Pacific	—		—		—		—		407		407		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		454		454		—
Caterpillar Power Finance	—		1		—		1		16		17		—
Total	$	156	$	70	$	402	$	628	$	27,098	$	27,726	$	26

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 September 30, 2016 and December 31, 2015, 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 September 30, 2016						As of December 31, 2015
Impaired Finance Receivables With No Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
North America	$	21	$	21	$	—	$	12	$	12	$	—
Europe	49		48		—		41		41		—
Asia/Pacific	2		2		—		1		1		—
Mining	119		118		—		84		84		—
Latin America	73		73		—		28		28		—
Caterpillar Power Finance	290		289		—		242		241		—
Total	$	554	$	551	$	—	$	408	$	407	$	—
Impaired Finance Receivables With An Allowance Recorded
North America	$	50	$	48	$	19	$	14	$	13	$	4
Europe	9		9		5		11		10		5
Asia/Pacific	33		33		5		34		34		4
Mining	38		38		6		11		11		3
Latin America	91		103		33		53		53		21
Caterpillar Power Finance	44		44		17		70		70		28
Total	$	265	$	275	$	85	$	193	$	191	$	65
Total Impaired Finance Receivables
North America	$	71	$	69	$	19	$	26	$	25	$	4
Europe	58		57		5		52		51		5
Asia/Pacific	35		35		5		35		35		4
Mining	157		156		6		95		95		3
Latin America	164		176		33		81		81		21
Caterpillar Power Finance	334		333		17		312		311		28
Total	$	819	$	826	$	85	$	601	$	598	$	65



(Millions of dollars)
	Three Months Ended September 30, 2016				Three Months Ended September 30, 2015
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
North America	$	24	$	—	$	10	$	1
Europe	49		1		43		—
Asia/Pacific	1		—		1		—
Mining	90		2		63		—
Latin America	58		—		32		—
Caterpillar Power Finance	282		3		165		1
Total	$	504	$	6	$	314	$	2
Impaired Finance Receivables With An Allowance Recorded
North America	$	42	$	—	$	10	$	—
Europe	10		—		15		—
Asia/Pacific	35		—		63		—
Mining	19		—		9		—
Latin America	67		1		69		1
Caterpillar Power Finance	43		—		125		2
Total	$	216	$	1	$	291	$	3
Total Impaired Finance Receivables
North America	$	66	$	—	$	20	$	1
Europe	59		1		58		—
Asia/Pacific	36		—		64		—
Mining	109		2		72		—
Latin America	125		1		101		1
Caterpillar Power Finance	325		3		290		3
Total	$	720	$	7	$	605	$	5



(Millions of dollars)
	Nine Months Ended September 30, 2016				Nine Months Ended September 30, 2015
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
North America	$	19	$	1	$	12	$	1
Europe	45		1		43		—
Asia/Pacific	2		—		2		—
Mining	84		3		80		3
Latin America	39		—		32		—
Caterpillar Power Finance	269		8		157		3
Total	$	458	$	13	$	326	$	7
Impaired Finance Receivables With An Allowance Recorded
North America	$	28	$	—	$	7	$	—
Europe	11		—		15		1
Asia/Pacific	34		2		42		1
Mining	15		—		47		1
Latin America	59		2		56		2
Caterpillar Power Finance	50		1		128		3
Total	$	197	$	5	$	295	$	8
Total Impaired Finance Receivables
North America	$	47	$	1	$	19	$	1
Europe	56		1		58		1
Asia/Pacific	36		2		44		1
Mining	99		3		127		4
Latin America	98		2		88		2
Caterpillar Power Finance	319		9		285		6
Total	$	655	$	18	$	621	$	15

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, 2016 and December 31, 2015, there were no finance receivables on non-accrual status for the Dealer portfolio segment. As of September 30, 2016 and December 31, 2015, there was $1 million in finance receivables on non-accrual status for the Caterpillar Purchased Receivables portfolio segment, all of which was in the Europe finance receivable class. The recorded investment in Customer finance receivables on non-accrual status was as follows:



(Millions of dollars)
	September 30, 2016		December 31, 2015
North America	$	71	$	31
Europe	38		39
Asia/Pacific	16		15
Mining	131		106
Latin America	299		217
Caterpillar Power Finance	69		77
Total	$	624	$	485

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, 2016 and December 31, 2015, there were $11 million and $3 million, respectively, of 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 nine months ended September 30, 2016 and 2015 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 September 30, 2016					Three Months Ended September 30, 2015
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	2	$	—	$	—	6	$	—	$	—
Europe	—	—		—		4	—		—
Asia/Pacific	4	1		1		1	1		1
Mining	1	33		30		2	15		14
Latin America⁽¹⁾	341	105		74		10	1		2
Caterpillar Power Finance	4	13		13		8	93		79
Total	352	$	152	$	118	31	$	110	$	96

	Nine Months Ended September 30, 2016					Nine Months Ended September 30, 2015
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	15	$	16	$	16	10	$	1	$	1
Europe	3	11		8		23	2		2
Asia/Pacific	8	4		4		21	26		26
Mining	2	43		35		2	15		14
Latin America	431	117		87		10	1		2
Caterpillar Power Finance	34	196		177		12	197		180
Total	493	$	387	$	327	78	$	242	$	225

⁽¹⁾ In Latin America, 321 contracts with a pre-TDR recorded investment of $94 million and a post-TDR recorded investment of $64 million are related to four customers.

TDRs in the Customer portfolio segment with a payment default during the three and nine months ended September 30, 2016 and 2015, which had been modified within twelve months prior to the default date, were as follows:



(Dollars in millions)	Three Months Ended September 30, 2016			Three Months Ended September 30, 2015
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
North America	1	$	—	5	$	—
Europe	1	—		—	—
Latin America	2	—		—	—
Total	4	$	—	5	$	—

	Nine Months Ended September 30, 2016			Nine Months Ended September 30, 2015
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
North America	14	$	3	10	$	1
Europe	14	1		—	—
Asia/Pacific	3	—		—	—
Latin America	4	—		1	—
Total	35	$	4	11	$	1