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 using 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 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, 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 - 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.

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




(Millions of dollars)	September 30, 2016
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	327		$	9	$	336
Receivables written off	(118		)	—		(118		)
Recoveries on receivables previously written off	25			—		25
Provision for credit losses	93			2		95
Other	6			—		6
Balance at end of period	$	333		$	11	$	344

Individually evaluated for impairment	$	85		$	—	$	85
Collectively evaluated for impairment	248			11		259
Ending Balance	$	333		$	11	$	344

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	819		$	—	$	819
Collectively evaluated for impairment	18,522			3,534		22,056
Ending Balance	$	19,341		$	3,534	$	22,875




(Millions of dollars)	December 31, 2015
Allowance for Credit Losses:	Customer			Dealer			Total
Balance at beginning of year	$	388		$	10		$	398
Receivables written off	(196		)	—			(196		)
Recoveries on receivables previously written off	41			—			41
Provision for credit losses	119			(1		)	118
Other	(25		)	—			(25		)
Balance at end of year	$	327		$	9		$	336

Individually evaluated for impairment	$	65		$	—		$	65
Collectively evaluated for impairment	262			9			271
Ending Balance	$	327		$	9		$	336

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	601		$	—		$	601
Collectively evaluated for impairment	18,788			3,570			22,358
Ending Balance	$	19,389		$	3,570		$	22,959

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




	September 30, 2016
(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	$	66	$	18	$	72	$	156	$	7,903	$	8,059	$	10
Europe	21		16		83		120		2,424		2,544		47
Asia Pacific	28		10		20		58		1,506		1,564		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	—		—		—		—		2,069		2,069		—
Europe	—		—		—		—		127		127		—
Asia Pacific	—		—		—		—		599		599		—
Mining	—		—		—		—		4		4		—
Latin America	—		—		—		—		733		733		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Total	$	177	$	89	$	532	$	798	$	22,077	$	22,875	$	73




	December 31, 2015
(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	$	45	$	12	$	30	$	87	$	7,850	$	7,937	$	4
Europe	18		7		44		69		2,358		2,427		9
Asia Pacific	21		12		21		54		1,647		1,701		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	—		—		—		—		2,209		2,209		—
Europe	—		—		—		—		149		149		—
Asia Pacific	—		—		—		—		552		552		—
Mining	—		—		—		—		4		4		—
Latin America	—		—		—		—		653		653		—
Caterpillar Power Finance	—		—		—		—		3		3		—
Total	$	135	$	64	$	397	$	596	$	22,363	$	22,959	$	22

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, 2016 or December 31, 2015, 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, 2016						December 31, 2015
(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	$	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



	Three Months Ended September 30, 2016				Three Months Ended September 30, 2015
(Millions of dollars)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Finance Receivables With No Allowance Recorded
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		—		41		—
Mining	19		—		9		—
Latin America	67		1		69		1
Caterpillar Power Finance	43		—		125		2
Total	$	216	$	1	$	269	$	3

Total Impaired Finance Receivables
North America	$	66	$	—	$	20	$	1
Europe	59		1		58		—
Asia Pacific	36		—		42		—
Mining	109		2		72		—
Latin America	125		1		101		1
Caterpillar Power Finance	325		3		290		3
Total	$	720	$	7	$	583	$	5



	Nine Months Ended September 30, 2016				Nine Months Ended September 30, 2015
(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	$	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		33		1
Mining	15		—		47		1
Latin America	59		2		56		2
Caterpillar Power Finance	50		1		128		3
Total	$	197	$	5	$	286	$	8

Total Impaired Finance Receivables
North America	$	47	$	1	$	19	$	1
Europe	56		1		58		1
Asia Pacific	36		2		35		1
Mining	99		3		127		4
Latin America	98		2		88		2
Caterpillar Power Finance	319		9		285		6
Total	$	655	$	18	$	612	$	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.

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 or 2015 for the Dealer portfolio segment. Finance receivables in the Customer portfolio segment modified as TDRs during the three and nine months ended September 30, 2016 and 2015, were as follows:




	Three Months Ended September 30, 2016					Three Months Ended September 30, 2015
(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	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		19	1		1
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	76	$	217	$	200


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:




	Three Months Ended September 30, 2016			Three Months Ended September 30, 2015
(Millions of dollars)	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