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 December 31, 2016 was $343 million or 1.29 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)
	December 31, 2016
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	327		$	9	$	2	$	338
Receivables written off	(158		)	—		—		(158		)
Recoveries on receivables previously written off	35			—		—		35
Provision for credit losses	132			1		—		133
Adjustment due to sale of receivables	(8		)	—		—		(8		)
Foreign currency translation adjustment	3			—		—		3
Balance at end of year	$	331		$	10	$	2	$	343

Individually evaluated for impairment	$	85		$	—	$	—	$	85
Collectively evaluated for impairment	246			10		2		258
Ending Balance	$	331		$	10	$	2	$	343

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	786		$	—	$	—	$	786
Collectively evaluated for impairment	18,859			4,479		2,431		25,769
Ending Balance	$	19,645		$	4,479	$	2,431	$	26,555



(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)
	December 31, 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	$	50	$	16	$	59	$	125	$	8,051	$	8,176	$	5
Europe	16		12		39		67		2,388		2,455		6
Asia/Pacific	18		7		15		40		1,944		1,984		4
Mining	3		2		63		68		1,756		1,824		2
Latin America	40		33		214		287		1,808		2,095		—
Caterpillar Power Finance	11		9		73		93		3,018		3,111		1
Dealer
North America	—		—		—		—		2,705		2,705		—
Europe	—		—		—		—		336		336		—
Asia/Pacific	—		—		—		—		582		582		—
Mining	—		—		—		—		6		6		—
Latin America	—		—		—		—		848		848		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Caterpillar Purchased Receivables
North America	11		3		1		15		1,303		1,318		1
Europe	—		—		1		1		268		269		—
Asia/Pacific	—		—		—		—		475		475		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		366		366		—
Caterpillar Power Finance	—		—		—		—		3		3		—
Total	$	149	$	82	$	465	$	696	$	25,859	$	26,555	$	19



(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 December 31, 2016, 2015 and 2014, 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 December 31, 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	$	10	$	10	$	—	$	12	$	12	$	—
Europe	49		48		—		41		41		—
Asia/Pacific	3		2		—		1		1		—
Mining	129		129		—		84		84		—
Latin America	68		68		—		28		28		—
Caterpillar Power Finance	271		271		—		242		241		—
Total	$	530	$	528	$	—	$	408	$	407	$	—
Impaired Finance Receivables With An Allowance Recorded
North America	$	61	$	60	$	22	$	14	$	13	$	4
Europe	7		7		3		11		10		5
Asia/Pacific	50		50		8		34		34		4
Mining	—		—		—		11		11		3
Latin America	93		104		34		53		53		21
Caterpillar Power Finance	45		44		18		70		70		28
Total	$	256	$	265	$	85	$	193	$	191	$	65
Total Impaired Finance Receivables
North America	$	71	$	70	$	22	$	26	$	25	$	4
Europe	56		55		3		52		51		5
Asia/Pacific	53		52		8		35		35		4
Mining	129		129		—		95		95		3
Latin America	161		172		34		81		81		21
Caterpillar Power Finance	316		315		18		312		311		28
Total	$	786	$	793	$	85	$	601	$	598	$	65



(Millions of dollars)
	Year Ended December 31, 2016				Year Ended December 31, 2015				Year Ended December 31, 2014
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	$	18	$	1	$	12	$	1	$	20	$	1
Europe	46		1		42		1		47		1
Asia/Pacific	2		—		2		—		3		—
Mining	98		4		75		3		69		3
Latin America	47		1		31		—		30		—
Caterpillar Power Finance	270		11		170		5		164		6
Total	$	481	$	18	$	332	$	10	$	333	$	11
Impaired Finance Receivables With An Allowance Recorded
North America	$	34	$	—	$	9	$	—	$	9	$	—
Europe	11		1		14		1		21		1
Asia/Pacific	37		3		44		2		23		1
Mining	13		—		39		1		90		7
Latin America	66		2		56		3		36		1
Caterpillar Power Finance	50		1		115		3		96		2
Total	$	211	$	7	$	277	$	10	$	275	$	12
Total Impaired Finance Receivables
North America	$	52	$	1	$	21	$	1	$	29	$	1
Europe	57		2		56		2		68		2
Asia/Pacific	39		3		46		2		26		1
Mining	111		4		114		4		159		10
Latin America	113		3		87		3		66		1
Caterpillar Power Finance	320		12		285		8		260		8
Total	$	692	$	25	$	609	$	20	$	608	$	23

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, 2016 and 2015, there were no finance receivables on non-accrual status for the Dealer portfolio segment. As of December 31, 2016 and 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 as of December 31, was as follows:



(Millions of dollars)
	2016		2015
North America	$	66	$	31
Europe	35		39
Asia/Pacific	12		15
Mining	69		106
Latin America	307		217
Caterpillar Power Finance	90		77
Total	$	579	$	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 December 31, 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 years ended December 31, 2016, 2015 and 2014 for the Dealer or Caterpillar Purchased Receivables portfolio segments. Finance receivables in the Customer portfolio segment modified as TDRs during the years ended December 31, 2016, 2015 and 2014, were as follows:



(Dollars in millions)	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⁽¹⁾	437	118		82
Caterpillar Power Finance	34	196		177
Total	574	$	454	$	387

	Year Ended December 31, 2015
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	14	$	1	$	1
Europe	23	2		2
Asia/Pacific	21	26		26
Mining	4	65		65
Latin America	11	1		2
Caterpillar Power Finance	21	259		242
Total	94	$	354	$	338

	Year Ended December 31, 2014
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	34	$	12	$	7
Europe	8	7		7
Asia/Pacific	2	—		—
Mining	51	185		176
Latin America	35	31		30
Caterpillar Power Finance	18	137		139
Total	148	$	372	$	359

⁽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 years ended December 31, 2016, 2015 and 2014, which had been modified within twelve months prior to the default date, were as follows:



(Dollars in millions)	Year Ended December 31, 2016			Year Ended December 31, 2015			Year Ended December 31, 2014
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
North America	17	$	3	12	$	1	11	$	1
Europe	16	9		—	—		46	2
Asia/Pacific	3	—		—	—		—	—
Latin America	7	3		12	1		11	1
Total	43	$	15	24	$	2	68	$	4