
C.	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 - Finance receivables originated in the United States or Canada.


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


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


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


•	Latin America - Finance receivables originated in Central and South American countries and Mexico.


•	Caterpillar Power Finance - 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)	December 31, 2016
	Customer			Dealer		Total
Allowance for Credit Losses:
Balance at beginning of year	$	327		$	9	$	336
Receivables written off	(158		)	—		(158		)
Recoveries on receivables previously written off	35			—		35
Provision for credit losses	132			1		133
Other	(5		)	—		(5		)
Balance at end of year	$	331		$	10	$	341

Individually evaluated for impairment	$	85		$	—	$	85
Collectively evaluated for impairment	246			10		256
Ending Balance	$	331		$	10	$	341

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	786		$	—	$	786
Collectively evaluated for impairment	18,236			3,375		21,611
Ending Balance	$	19,022		$	3,375	$	22,397



(Millions of dollars)	December 31, 2015
	Customer			Dealer			Total
Allowance for Credit Losses:
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.



(Millions of dollars)	December 31, 2016
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables		91+ Still Accruing
Customer
North America	$	50	$	16	$	59	$	125	$	7,938	$	8,063	$	5
Europe	16		12		39		67		2,388		2,455		6
Asia Pacific	17		7		15		39		1,435		1,474		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	—		—		—		—		1,916		1,916		—
Europe	—		—		—		—		161		161		—
Asia Pacific	—		—		—		—		541		541		—
Mining	—		—		—		—		3		3		—
Latin America	—		—		—		—		752		752		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Total	$	137	$	79	$	463	$	679	$	21,718	$	22,397	$	18



(Millions of dollars)	December 31, 2015
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total 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 December 31, 2016, 2015 and 2014 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:



	December 31, 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	$	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



	Years ended December 31,
	2016				2015				2014
(Millions of dollars)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Finance Receivables With No Allowance Recorded
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		35		2		22		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	$	268	$	10	$	274	$	12

Total Impaired Finance Receivables
North America	$	52	$	1	$	21	$	1	$	29	$	1
Europe	57		2		56		2		68		2
Asia Pacific	39		3		37		2		25		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	$	600	$	20	$	607	$	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 receivable on non-accrual status for the Dealer portfolio segment.

The recorded investment in customer finance receivable on non-accrual status was as follows:



	December 31,
(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 or 2014 for the Dealer portfolio segment. Finance receivables in the Customer portfolio segment modified as TDRs during the years ended December 31, 2016, 2015 and 2014 were as follows:



(Millions of dollars)	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	51	32		31
Caterpillar Power Finance	18	137		139
Total	164	$	373	$	360


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:



(Millions of dollars)	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