Allowance for Credit Losses and Credit Quality of Receivables

12 Months Ended

Oct. 31, 2012

Allowance for Credit Losses and Credit Quality of Receivables

Allowance for Credit Losses and Credit Quality of Receivables

Note 5.  Allowance for Credit Losses and Credit Quality of Receivables

Delinquencies

Past due balances of Receivables represent the total balance held (principal plus accrued interest) with any payment amounts 30 days or more past the contractual payment due date.

The Company monitors the credit quality of Receivables as either performing or non-performing monthly. Non-performing Receivables represent loans for which the Company has ceased accruing finance income. Generally, when retail notes are approximately 120 days delinquent, accrual of finance income is suspended, the collateral is repossessed or the account is designated for litigation and the estimated uncollectible amount, after charging the dealer’s withholding account, if any, is written off to the allowance for credit losses. Revolving charge accounts are deemed to be uncollectible and written off to the allowance for credit losses when delinquency reaches 120 days. Generally, when a wholesale receivable becomes 60 days delinquent, the Company determines whether the accrual of finance income on interest-bearing wholesale receivables should be suspended, the collateral should be repossessed or the account should be designated for litigation and the estimated uncollectible amount written off to the allowance for credit losses. When a financing lease account becomes 120 days delinquent, the accrual of lease revenue is suspended, the equipment is repossessed or the account is designated for litigation, and the estimated uncollectible amount, after charging the dealer’s withholding account, if any, is written off to the allowance for credit losses. Finance income for non-performing Receivables is recognized on a cash basis. Accrual of finance income is resumed when the receivable becomes contractually current and collections are reasonably assured.

An aging of past due and non-performing Receivables at October 31, 2012 was as follows (in millions of dollars):

	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due *		Total Past Due
Retail notes:
Agriculture and turf equipment	$	52.6	$	21.8	$	14.3	$	88.7
Construction and forestry equipment	38.6		17.0		8.7		64.3
Revolving charge accounts:
Agriculture and turf equipment	12.3		3.6		1.6		17.5
Construction and forestry equipment	2.4		.7		.3		3.4
Wholesale receivables:
Agriculture and turf equipment	2.3		3.8		6.6		12.7
Construction and forestry equipment	1.2				1.5		2.7
Financing leases:
Agriculture and turf equipment	7.0		1.7		.7		9.4
Construction and forestry equipment	.8		.3				1.1
Operating loans:
Agriculture and turf equipment
Total Receivables	$	117.2	$	48.9	$	33.7	$	199.8

	Total Past Due		Total Non- Performing		Current		Total Receivables
Retail notes:
Agriculture and turf equipment	$	88.7	$	37.8	$	14,207.3	$	14,333.8
Construction and forestry equipment	64.3		13.1		1,317.6		1,395.0
Revolving charge accounts:
Agriculture and turf equipment	17.5		.8		2,343.0		2,361.3
Construction and forestry equipment	3.4				63.0		66.4
Wholesale receivables:
Agriculture and turf equipment	12.7		.4		5,394.4		5,407.5
Construction and forestry equipment	2.7				1,072.9		1,075.6
Financing leases:
Agriculture and turf equipment	9.4		9.2		356.5		375.1
Construction and forestry equipment	1.1		1.9		144.3		147.3
Operating loans:
Agriculture and turf equipment					42.3		42.3
Total Receivables	$	199.8	$	63.2	$	24,941.3	$	25,204.3

*Receivables that are 90 days or greater past due and still accruing finance income.

An aging of past due and non-performing Receivables at October 31, 2011 was as follows (in millions of dollars):

	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due *		Total Past Due
Retail notes:
Agriculture and turf equipment	$	76.1	$	25.4	$	20.3	$	121.8
Construction and forestry equipment	43.6		19.0		11.2		73.8
Recreational products
Revolving charge accounts:
Agriculture and turf equipment	15.2		5.7		2.8		23.7
Construction and forestry equipment	2.1		.8		.4		3.3
Wholesale receivables:
Agriculture and turf equipment	1.5		3.0		.6		5.1
Construction and forestry equipment	.4				.2		.6
Financing leases:
Agriculture and turf equipment	4.7		3.4		1.1		9.2
Construction and forestry equipment	.8		1.1		.3		2.2
Operating loans:
Agriculture and turf equipment
Total Receivables	$	144.4	$	58.4	$	36.9	$	239.7

	Total Past Due		Total Non- Performing		Current		Total Receivables
Retail notes:
Agriculture and turf equipment	$	121.8	$	41.1	$	12,549.8	$	12,712.7
Construction and forestry equipment	73.8		16.9		1,064.8		1,155.5
Recreational products			.1		3.4		3.5
Revolving charge accounts:
Agriculture and turf equipment	23.7		1.5		2,364.7		2,389.9
Construction and forestry equipment	3.3				59.3		62.6
Wholesale receivables:
Agriculture and turf equipment	5.1		4.7		4,350.2		4,360.0
Construction and forestry equipment	.6				851.1		851.7
Financing leases:
Agriculture and turf equipment	9.2		10.2		299.3		318.7
Construction and forestry equipment	2.2		3.0		134.8		140.0
Operating loans:
Agriculture and turf equipment			1.5		82.5		84.0
Total Receivables	$	239.7	$	79.0	$	21,759.9	$	22,078.6

*Receivables that are 90 days or greater past due and still accruing finance income.

Allowance for Credit Losses

Allowances for credit losses on Receivables are maintained in amounts considered to be appropriate in relation to the Receivables outstanding based on historical loss experience by product category, portfolio duration, delinquency trends, economic conditions and credit risk quality.

An analysis of the allowance for credit losses and investment in Receivables during 2012 and 2011 was as follows (in millions of dollars):

	Retail Notes			Revolving Charge Accounts			Wholesale Receivables			Other			Total Receivables
2012
Allowance:
Beginning of year balance	$	67.8		$	39.7		$	6.0		$	12.8		$	126.3
Provision (credit) for credit losses	(10.4		)	7.9			.9			1.4			(.2		)
Write-offs	(7.4		)	(28.8		)	(1.0		)	(3.5		)	(40.7		)
Recoveries	6.8			21.4			.1			.8			29.1
Other changes (primarily translation adjustments)	(.4		)				(.1		)				(.5		)
End of year balance	$	56.4		$	40.2		$	5.9		$	11.5		$	114.0
Balance individually evaluated *				$	.5		$	.1					$	.6
Receivables:
End of year balance	$	15,728.8		$	2,427.7		$	6,483.1		$	564.7		$	25,204.3
Balance individually evaluated *	$	10.6		$	.5		$	.2		$	.3		$	11.6

*Remainder is collectively evaluated.

2011
Allowance:
Beginning of year balance	$	82.1		$	43.3		$	7.4		$	15.8		$	148.6
Provision (credit) for credit losses	(6.9		)	7.3			(1.1		)	2.6			1.9
Write-offs	(14.9		)	(39.1		)	(.6		)	(6.9		)	(61.5		)
Recoveries	7.2			28.2			.1			1.3			36.8
Other changes (primarily translation adjustments)	.3						.2						.5
End of year balance	$	67.8		$	39.7		$	6.0		$	12.8		$	126.3
Balance individually evaluated *	$	.5					$	.2		$	.3		$	1.0
Receivables:
End of year balance	$	13,871.7		$	2,452.5		$	5,211.7		$	542.7		$	22,078.6
Balance individually evaluated *	$	11.0		$	.2		$	4.8		$	2.1		$	18.1

*Remainder is collectively evaluated.

A comparative analysis of the allowance for credit losses on total Receivables follows (in millions of dollars):

	2012			2011			2010
Beginning of year balance	$	126.3		$	148.6		$	158.2
Provision (credit) for credit losses	(.2		)	1.9			79.7
Write-offs	(40.7		)	(61.5		)	(120.2		)
Recoveries	29.1			36.8			30.9
Other changes (primarily translation adjustments)	(.5		)	.5
End of year balance	$	114.0		$	126.3		$	148.6

Investments in non-performing Receivables at October 31, 2012 and 2011 were $63 million and $79 million, respectively. These Receivables as a percentage of Receivables outstanding were .25 percent and .36 percent at October 31, 2012 and 2011, respectively. Total Receivable amounts 30 days or more past due and still accruing finance income were $200 million at October 31, 2012, compared with $240 million at October 31, 2011. These past due amounts represented .79 percent and 1.09 percent of the Receivables financed at October 31, 2012 and 2011, respectively. The allowance for credit losses represented .45 percent and .57 percent of Receivables outstanding at October 31, 2012 and 2011, respectively. In addition, at October 31, 2012 and 2011, the Company had $172 million and $170 million, respectively, of deposits primarily withheld from John Deere dealers and merchants available for potential credit losses.

Impaired Receivables

Receivables are considered impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms. Receivables reviewed for impairment generally include those that are either past due, or have provided bankruptcy notification, or require significant collection efforts. Receivables that are impaired are generally classified as non-performing.

An analysis of impaired Receivables at October 31, 2012 and 2011 was as follows (in millions of dollars):

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Recorded Investment
2012 *
Receivables with specific allowance:
Revolving charge accounts	$	.5	$	.5	$	.5	$	.5
Wholesale receivables	.2		.2		.1		.2
Total	.7		.7		.6		.7
Receivables without specific allowance:
Retail notes	8.5		8.4				8.4
Total	$	9.2	$	9.1	$	.6	$	9.1
Agriculture and turf	$	6.5	$	6.4	$	.6	$	6.1
Construction and forestry	$	2.7	$	2.7			$	3.0

2011 *
Receivables with specific allowance:
Retail notes	$	.8	$	.8	$	.5	$	.8
Wholesale receivables	4.5		4.5		.2		4.5
Financing leases							.2
Operating loans	.5		.5		.3		2.0
Total	5.8		5.8		1.0		7.5
Receivables without specific allowance:
Retail notes	7.8		7.7				9.9
Wholesale receivables	.3		.3				.3
Total	$	13.9	$	13.8	$	1.0	$	17.7
Agriculture and turf	$	11.0	$	10.9	$	1.0	$	13.5
Construction and forestry	$	2.9	$	2.9			$	4.2

*Finance income recognized was not material.

A troubled debt restructuring is generally the modification of debt in which a creditor grants a concession it would not otherwise consider to a debtor that is experiencing financial difficulties. These modifications may include a reduction of the stated interest rate, an extension of the maturity dates, a reduction of the face amount or maturity amount of the debt, or a reduction of accrued interest. During 2012, the Company identified 138 Receivable contracts, primarily retail notes, as troubled debt restructurings with aggregate balances of $4.8 million pre-modification and $4.3 million post-modification. During 2011, the Company identified 208 Receivable contracts, primarily retail notes, as troubled debt restructurings with aggregate balances of $9.7 million pre-modification and $8.4 million post-modification. During these same periods, there were no significant troubled debt restructurings that subsequently defaulted and were written off. At October 31, 2012, the Company had no commitments to lend additional funds to borrowers whose accounts were modified in troubled debt restructurings.

Write-offs

Total Receivable write-offs and recoveries, by product, and as a percentage of average balances held during the year, were as follows (in millions of dollars):

	2012					2011					2010
	Dollars			Percent		Dollars			Percent		Dollars			Percent
Write-offs:
Retail notes:
Agriculture and turf equipment	$	(3.4	)	(.03	)%	$	(5.3	)	(.05	)%	$	(6.6	)	(.07	)%
Construction and forestry equipment	(4.0		)	(.32	)	(9.5		)	(.84	)	(23.1		)	(1.89	)
Recreational products						(.1		)	(2.38	)	(.4		)	(7.27	)
Total retail notes	(7.4		)	(.05	)	(14.9		)	(.12	)	(30.1		)	(.27	)
Revolving charge accounts	(28.8		)	(1.29	)	(39.1		)	(1.77	)	(70.9		)	(3.38	)
Wholesale receivables	(1.0		)	(.02	)	(.6		)	(.01	)	.7			.02
Financing leases	(1.6		)	(.34	)	(3.6		)	(.84	)	(2.4		)	(.62	)
Operating loans	(1.9		)	(3.12	)	(3.3		)	(1.91	)	(17.5		)	(7.79	)
Total write-offs	(40.7		)	(.18	)	(61.5		)	(.30	)	(120.2		)	(.65	)
Recoveries:
Retail notes:
Agriculture and turf equipment	3.9			.03		3.6			.03		3.8			.04
Construction and forestry equipment	2.9			.23		3.5			.31		3.2			.26
Recreational products						.1			2.38		.2			3.64
Total retail notes	6.8			.05		7.2			.06		7.2			.06
Revolving charge accounts	21.4			.96		28.2			1.28		22.7			1.08
Wholesale receivables	.1			.00		.1			.00		.4			.01
Financing leases	.3			.06		.1			.02		.4			.10
Operating loans	.5			.82		1.2			.69		.2			.09
Total recoveries	29.1			.13		36.8			.18		30.9			.17
Total net write-offs	$	(11.6	)	(.05	)	$	(24.7	)	(.12	)	$	(89.3	)	(.48	)