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, or the observable market price of the receivable. 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 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 and Mexico.


•	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, 2017
Allowance for Credit Losses:	Customer			Dealer		Total
Balance at beginning of year	$	331		$	10	$	341
Receivables written off	(119		)	—		(119		)
Recoveries on receivables previously written off	31			—		31
Provision for credit losses	80			—		80
Other	8			—		8
Balance at end of period	$	331		$	10	$	341

Individually evaluated for impairment	$	100		$	—	$	100
Collectively evaluated for impairment	231			10		241
Ending Balance	$	331		$	10	$	341

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	869		$	—	$	869
Collectively evaluated for impairment	18,086			3,533		21,619
Ending Balance	$	18,955		$	3,533	$	22,488




(Millions of dollars)	December 31, 2016
Allowance for Credit Losses:	Customer			Dealer		Total
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

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




	September 30, 2017
(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	$	64	$	17	$	49	$	130	$	7,820	$	7,950	$	8
Europe	27		9		56		92		2,642		2,734		4
Asia Pacific	26		13		17		56		1,793		1,849		9
Mining	8		4		52		64		1,682		1,746		1
Latin America	53		28		180		261		1,657		1,918		—
Caterpillar Power Finance	11		34		124		169		2,589		2,758		11
Dealer
North America	—		—		—		—		2,129		2,129		—
Europe	—		—		—		—		132		132		—
Asia Pacific	—		—		—		—		555		555		—
Mining	—		—		—		—		3		3		—
Latin America	5		—		3		8		704		712		—
Caterpillar Power Finance	—		—		—		—		2		2		—
Total	$	194	$	105	$	481	$	780	$	21,708	$	22,488	$	33




	December 31, 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	$	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

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, 2017 or December 31, 2016, 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, 2017						December 31, 2016
(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	$	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



	Three Months Ended September 30, 2017				Three Months Ended September 30, 2016
(Millions of dollars)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Finance Receivables With No Allowance Recorded
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



	Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016
(Millions of dollars)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Finance Receivables With No Allowance Recorded
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, there were finance receivables on non-accrual status for the Dealer portfolio segment of $3 million, all of which were in the Latin America finance receivable class. As of December 31, 2016, 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, 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 was $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 or 2016 for the Dealer portfolio segment. Our recorded investment in finance receivables in the Customer portfolio segment modified as TDRs during the three and nine months ended September 30, 2017 and 2016, were as follows:




	Three Months Ended September 30, 2017					Three Months Ended September 30, 2016
(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	11	$	4	$	5	2	$	—	$	—
Europe	1	—		—		—	—		—
Asia Pacific	—	—		—		4	1		1
Mining	—	—		—		1	33		30
Latin America¹	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 Finance²	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.