Finance Receivables

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



(Millions of dollars)	September 30, 2017			December 31, 2016
Finance leases and installment sale contracts – Retail ⁽¹⁾	$	14,172		$	13,565
Retail notes receivable	9,711			10,195
Wholesale notes receivable	3,753			3,457
Finance leases and installment sale contracts – Wholesale	118			103
	27,754			27,320
Less: Unearned income	(814		)	(765		)
Recorded investment in finance receivables	26,940			26,555
Less: Allowance for credit losses	(343		)	(343		)
Total finance receivables, net	$	26,597		$	26,212

⁽¹⁾ Includes $0 and $4 million of finance receivables classified as held for sale as of September 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 and 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 September 30, 2017 was $343 million or 1.27 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)
	September 30, 2017
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	331		$	10	$	2	$	343
Receivables written off	(119		)	—		—		(119		)
Recoveries on receivables previously written off	31			—		—		31
Provision for credit losses	80			—		—		80
Adjustment due to sale of receivables	(1		)	—		—		(1		)
Foreign currency translation adjustment	9			—		—		9
Balance at end of period	$	331		$	10	$	2	$	343

Individually evaluated for impairment	$	100		$	—	$	—	$	100
Collectively evaluated for impairment	231			10		2		243
Ending Balance	$	331		$	10	$	2	$	343

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	869		$	—	$	—	$	869
Collectively evaluated for impairment	18,704			4,544		2,823		26,071
Ending Balance	$	19,573		$	4,544	$	2,823	$	26,940



(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)
	September 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	$	64	$	17	$	49	$	130	$	7,916	$	8,046	$	8
Europe	27		9		56		92		2,642		2,734		4
Asia/Pacific	27		13		17		57		2,299		2,356		9
Mining	8		4		52		64		1,682		1,746		1
Latin America	53		28		180		261		1,672		1,933		—
Caterpillar Power Finance	11		34		124		169		2,589		2,758		11
Dealer
North America	—		—		—		—		2,816		2,816		—
Europe	—		—		—		—		350		350		—
Asia/Pacific	—		—		—		—		580		580		—
Mining	—		—		—		—		5		5		—
Latin America	5		—		3		8		783		791		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Caterpillar Purchased Receivables
North America	13		5		3		21		1,666		1,687		3
Europe	2		—		—		2		333		335		—
Asia/Pacific	1		—		—		1		396		397		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		400		400		—
Caterpillar Power Finance	—		—		—		—		4		4		—
Total	$	211	$	110	$	484	$	805	$	26,135	$	26,940	$	36



(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 September 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 September 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	$	16	$	21	$	—	$	10	$	10	$	—
Europe	47		47		—		49		48		—
Asia/Pacific	32		31		—		3		2		—
Mining	127		125		—		129		129		—
Latin America	60		60		—		68		68		—
Caterpillar Power Finance	187		200		—		271		271		—
Total	$	469	$	484	$	—	$	530	$	528	$	—
Impaired Finance Receivables With An Allowance Recorded
North America	$	36	$	35	$	13	$	61	$	60	$	22
Europe	8		8		5		7		7		3
Asia/Pacific	25		25		3		50		50		8
Mining	—		—		—		—		—		—
Latin America	92		104		35		93		104		34
Caterpillar Power Finance	239		241		44		45		44		18
Total	$	400	$	413	$	100	$	256	$	265	$	85
Total Impaired Finance Receivables
North America	$	52	$	56	$	13	$	71	$	70	$	22
Europe	55		55		5		56		55		3
Asia/Pacific	57		56		3		53		52		8
Mining	127		125		—		129		129		—
Latin America	152		164		35		161		172		34
Caterpillar Power Finance	426		441		44		316		315		18
Total	$	869	$	897	$	100	$	786	$	793	$	85



(Millions of dollars)
	Three Months Ended September 30, 2017				Three Months Ended September 30, 2016
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
North America	$	14	$	1	$	24	$	—
Europe	47		—		49		1
Asia/Pacific	30		1		1		—
Mining	128		1		90		2
Latin America	68		1		58		—
Caterpillar Power Finance	171		1		282		3
Total	$	458	$	5	$	504	$	6
Impaired Finance Receivables With An Allowance Recorded
North America	$	44	$	—	$	42	$	—
Europe	6		—		10		—
Asia/Pacific	28		1		35		—
Mining	—		—		19		—
Latin America	102		1		67		1
Caterpillar Power Finance	251		3		43		—
Total	$	431	$	5	$	216	$	1
Total Impaired Finance Receivables
North America	$	58	$	1	$	66	$	—
Europe	53		—		59		1
Asia/Pacific	58		2		36		—
Mining	128		1		109		2
Latin America	170		2		125		1
Caterpillar Power Finance	422		4		325		3
Total	$	889	$	10	$	720	$	7



(Millions of dollars)
	Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016
Impaired Finance Receivables With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
North America	$	12	$	1	$	19	$	1
Europe	48		1		45		1
Asia/Pacific	22		2		2		—
Mining	128		5		84		3
Latin America	69		2		39		—
Caterpillar Power Finance	233		7		269		8
Total	$	512	$	18	$	458	$	13
Impaired Finance Receivables With An Allowance Recorded
North America	$	52	$	1	$	28	$	—
Europe	6		—		11		—
Asia/Pacific	35		2		34		2
Mining	—		—		15		—
Latin America	101		3		59		2
Caterpillar Power Finance	141		4		50		1
Total	$	335	$	10	$	197	$	5
Total Impaired Finance Receivables
North America	$	64	$	2	$	47	$	1
Europe	54		1		56		1
Asia/Pacific	57		4		36		2
Mining	128		5		99		3
Latin America	170		5		98		2
Caterpillar Power Finance	374		11		319		9
Total	$	847	$	28	$	655	$	18

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, 2017 and December 31, 2016, there were finance receivables on non-accrual status for the Dealer portfolio segment of $3 million and $-, respectively, all of which were in the Latin America finance receivable class. As of September 30, 2017 and December 31, 2016, there were finance receivables on non-accrual status for the Caterpillar Purchased Receivables portfolio segment of $- and $1 million, respectively, all of which were 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, 2017		December 31, 2016
North America	$	48	$	66
Europe	56		35
Asia/Pacific	11		12
Mining	55		69
Latin America	242		307
Caterpillar Power Finance	277		90
Total	$	689	$	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 September 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 nine months ended September 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 September 30, 2017					Three Months Ended September 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	11	$	4	$	5	2	$	—	$	—
Europe	1	—		—		—	—		—
Asia/Pacific	—	—		—		4	1		1
Mining	—	—		—		1	33		30
Latin America⁽¹⁾	3	21		22		341	105		74
Caterpillar Power Finance	5	51		44		4	13		13
Total	20	$	76	$	71	352	$	152	$	118

	Nine Months Ended September 30, 2017					Nine Months Ended September 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	37	$	13	$	13	15	$	16	$	16
Europe	2	—		—		3	11		8
Asia/Pacific	6	39		30		8	4		4
Mining	2	57		56		2	43		35
Latin America	17	26		27		431	117		87
Caterpillar Power Finance⁽²⁾	59	319		305		34	196		177
Total	123	$	454	$	431	493	$	387	$	327

⁽¹⁾ For the three months ended September 30, 2016, 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.

⁽²⁾For 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 are related to four customers.

During the nine months ended September 30, 2017, there were 241 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.