Finance Receivables

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



(Millions of dollars)	June 30, 2017			December 31, 2016
Finance leases and installment sale contracts – Retail ⁽¹⁾	$	13,969		$	13,565
Retail notes receivable	9,838			10,195
Wholesale notes receivable	3,948			3,457
Finance leases and installment sale contracts – Wholesale	114			103
	27,869			27,320
Less: Unearned income	(800		)	(765		)
Recorded investment in finance receivables	27,069			26,555
Less: Allowance for credit losses	(338		)	(343		)
Total finance receivables, net	$	26,731		$	26,212

⁽¹⁾ Includes $2 million and $4 million of finance receivables classified as held for sale as of June 30, 2017 and December 31, 2016, respectively.

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, 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 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 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 June 30, 2017 was $338 million or 1.25 percent of our recorded investment in finance receivables compared with $343 million or 1.29 percent as of December 31, 2016. An analysis of the allowance for credit losses was as follows:



(Millions of dollars)
	June 30, 2017
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	331		$	10	$	2	$	343
Receivables written off	(62		)	—		—		(62		)
Recoveries on receivables previously written off	21			—		—		21
Provision for credit losses	31			—		1		32
Adjustment due to sale of receivables	(1		)	—		—		(1		)
Foreign currency translation adjustment	5			—		—		5
Balance at end of period	$	325		$	10	$	3	$	338

Individually evaluated for impairment	$	113		$	—	$	—	$	113
Collectively evaluated for impairment	212			10		3		225
Ending Balance	$	325		$	10	$	3	$	338

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	898		$	—	$	—	$	898
Collectively evaluated for impairment	18,721			4,448		3,002		26,171
Ending Balance	$	19,619		$	4,448	$	3,002	$	27,069



(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

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 receivable 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)
	June 30, 2017
	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	$	57	$	13	$	52	$	122	$	7,949	$	8,071	$	7
Europe	23		8		57		88		2,533		2,621		8
Asia/Pacific	24		13		12		49		2,211		2,260		4
Mining	—		—		52		52		1,726		1,778		—
Latin America	54		30		224		308		1,692		2,000		—
Caterpillar Power Finance	27		5		135		167		2,722		2,889		41
Dealer
North America	—		—		—		—		2,756		2,756		—
Europe	—		—		—		—		318		318		—
Asia/Pacific	—		—		—		—		578		578		—
Mining	—		—		—		—		5		5		—
Latin America	—		—		—		—		789		789		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Caterpillar Purchased Receivables
North America	13		8		1		22		1,745		1,767		1
Europe	—		—		1		1		327		328		—
Asia/Pacific	1		—		—		1		515		516		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		387		387		—
Caterpillar Power Finance	—		—		—		—		4		4		—
Total	$	199	$	77	$	534	$	810	$	26,259	$	27,069	$	61



(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

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 June 30, 2017 and December 31, 2016, 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 June 30, 2017						As of December 31, 2016
Impaired Finance Receivables With No Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
North America	$	13	$	13	$	—	$	10	$	10	$	—
Europe	48		47		—		49		48		—
Asia/Pacific	29		29		—		3		2		—
Mining	130		130		—		129		129		—
Latin America	68		67		—		68		68		—
Caterpillar Power Finance	158		162		—		271		271		—
Total	$	446	$	448	$	—	$	530	$	528	$	—
Impaired Finance Receivables With An Allowance Recorded
North America	$	49	$	48	$	20	$	61	$	60	$	22
Europe	4		4		2		7		7		3
Asia/Pacific	29		29		3		50		50		8
Mining	—		—		—		—		—		—
Latin America	107		119		43		93		104		34
Caterpillar Power Finance	263		261		45		45		44		18
Total	$	452	$	461	$	113	$	256	$	265	$	85
Total Impaired Finance Receivables
North America	$	62	$	61	$	20	$	71	$	70	$	22
Europe	52		51		2		56		55		3
Asia/Pacific	58		58		3		53		52		8
Mining	130		130		—		129		129		—
Latin America	175		186		43		161		172		34
Caterpillar Power Finance	421		423		45		316		315		18
Total	$	898	$	909	$	113	$	786	$	793	$	85



(Millions of dollars)
	Three Months Ended June 30, 2017				Three Months Ended June 30, 2016
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
North America	$	11	$	—	$	24	$	1
Europe	48		1		44		—
Asia/Pacific	30		1		3		—
Mining	130		3		80		—
Latin America	67		—		29		—
Caterpillar Power Finance	257		3		273		2
Total	$	543	$	8	$	453	$	3
Impaired Finance Receivables With An Allowance Recorded
North America	$	52	$	1	$	25	$	—
Europe	5		—		12		—
Asia/Pacific	30		—		36		1
Mining	—		—		13		—
Latin America	107		1		57		—
Caterpillar Power Finance	125		—		45		1
Total	$	319	$	2	$	188	$	2
Total Impaired Finance Receivables
North America	$	63	$	1	$	49	$	1
Europe	53		1		56		—
Asia/Pacific	60		1		39		1
Mining	130		3		93		—
Latin America	174		1		86		—
Caterpillar Power Finance	382		3		318		3
Total	$	862	$	10	$	641	$	5



(Millions of dollars)
	Six Months Ended June 30, 2017				Six Months Ended June 30, 2016
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
North America	$	11	$	—	$	19	$	1
Europe	48		1		43		—
Asia/Pacific	18		1		2		—
Mining	129		4		80		1
Latin America	70		1		29		—
Caterpillar Power Finance	258		6		262		5
Total	$	534	$	13	$	435	$	7
Impaired Finance Receivables With An Allowance Recorded
North America	$	56	$	1	$	20	$	—
Europe	6		—		12		—
Asia/Pacific	38		1		35		2
Mining	—		—		12		—
Latin America	101		2		54		1
Caterpillar Power Finance	96		1		53		1
Total	$	297	$	5	$	186	$	4
Total Impaired Finance Receivables
North America	$	67	$	1	$	39	$	1
Europe	54		1		55		—
Asia/Pacific	56		2		37		2
Mining	129		4		92		1
Latin America	171		3		83		1
Caterpillar Power Finance	354		7		315		6
Total	$	831	$	18	$	621	$	11

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 June 30, 2017 and December 31, 2016, there were no finance receivables on non-accrual status for the Dealer portfolio segment. As of June 30, 2017 and December 31, 2016, there was $1 million in recorded investment 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)
	June 30, 2017		December 31, 2016
North America	$	57	$	66
Europe	51		35
Asia/Pacific	11		12
Mining	56		69
Latin America	284		307
Caterpillar Power Finance	244		90
Total	$	703	$	579

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 June 30, 2017, there were no additional funds committed to lend to a borrower whose terms have been modified in a TDR. As of December 31, 2016, there were $11 million 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 six months ended June 30, 2017 and 2016 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 June 30, 2017					Three Months Ended June 30, 2016
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	17	$	8	$	7	2	$	6	$	6
Europe	—	—		—		3	11		8
Asia/Pacific	1	—		—		—	—		—
Mining	—	—		—		1	10		5
Latin America	7	3		3		88	12		13
Caterpillar Power Finance⁽¹⁾	48	243		237		26	144		137
Total	73	$	254	$	247	120	$	183	$	169

	Six Months Ended June 30, 2017					Six Months Ended June 30, 2016
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
North America	26	$	9	$	8	13	$	16	$	16
Europe	1	—		—		3	11		8
Asia/Pacific	6	39		30		4	3		3
Mining	2	57		56		1	10		5
Latin America	14	5		5		90	12		13
Caterpillar Power Finance	54	268		261		30	183		164
Total	103	$	378	$	360	141	$	235	$	209

⁽¹⁾In Caterpillar Power Finance, 42 contracts with a pre-TDR recorded investment of $175 million and a post-TDR recorded investment of $175 million are related to three customers.

During the three and six months ended June 30, 2017, there were 240 contracts, primarily related to two customers, with a recorded investment of $16 million with a payment default (defined as 91+ days past due) which had been modified within twelve months prior to the default date in the Customer portfolio segment, all of which were in the Latin America finance receivable class.