Note 4. Receivables

Retail Notes Receivable

The Company provides and administers financing for retail purchases of new equipment manufactured by John Deere’s agriculture and turf and construction and forestry operations and used equipment taken in trade for this equipment. The Company generally purchases retail installment sales and loan contracts (retail notes) from John Deere. These retail notes are acquired by John Deere through John Deere equipment retail dealers. The Company also purchases and finances a limited amount of retail notes unrelated to John Deere.

Retail notes receivable by product category at October 31 were as follows (in millions of dollars):


	2016				2015
	Unrestricted		Securitized		Unrestricted		Securitized

Agriculture and turf – new	$	6,683.4	$	1,983.7	$	7,221.9	$	1,786.5
Agriculture and turf – used		4,093.1		2,631.1		5,126.9		2,449.4
Construction and forestry – new		1,669.4		544.3		1,603.1		600.2
Construction and forestry – used		281.6		75.6		241.8		86.0
Total		12,727.5		5,234.7		14,193.7		4,922.1
Unearned finance income		(400.5)		(93.5)		(383.1)		(73.7)
Retail notes receivable	$	12,327.0	$	5,141.2	$	13,810.6	$	4,848.4

Retail notes acquired by the Company during the years ended October 31, 2016, 2015 and 2014 had an average original term (based on dollar amounts) of 55 months, 55 months and 54 months, respectively. Historically, because of prepayments, the average actual life of retail notes has been considerably shorter than the average original term. The average actual life for retail notes liquidated in 2016, 2015 and 2014 was 37 months, 33 months and 30 months, respectively.

Gross retail note installments at October 31 were scheduled to be received as follows (in millions of dollars):


	2016				2015
	Unrestricted		Securitized		Unrestricted		Securitized
Due in:
0-12 months	$	4,224.6	$	2,268.6	$	4,568.6	$	2,057.1
13-24 months		3,258.3		1,535.5		3,606.8		1,417.5
25-36 months		2,503.7		931.3		2,873.6		921.4
37-48 months		1,665.0		407.8		1,944.6		425.9
49-60 months		869.4		84.2		1,007.8		94.9
Over 60 months		206.5		7.3		192.3		5.3
Total	$	12,727.5	$	5,234.7	$	14,193.7	$	4,922.1

Company guidelines relating to down payment requirements and contract terms on retail notes are generally as follows:


	Down	Contract
	Payment	Terms
Agriculture and turf (new and used):
Seasonal payments	10% - 30%	3 - 7 years
Monthly payments	10% - 20%	36 - 84 months
Construction and forestry:
New	10%	48 - 60 months
Used	15%	36 - 48 months

Finance income is recognized over the lives of the retail notes using the interest method. During 2016, the average effective yield on retail notes held by the Company was approximately 3.9 percent, compared with 3.9 percent in 2015 and 4.0 percent in 2014. Finance income on variable-rate retail notes is adjusted monthly based on fluctuations in the base rate of a specified bank. Net costs incurred in the acquisition of retail notes are deferred and recognized over the expected lives of the retail notes using the interest method.

A portion of the finance income earned by the Company arises from financing of retail sales of John Deere equipment on which finance charges are waived or reduced by John Deere for a period from the date of the retail sale to a specified subsequent date. The Company receives compensation from John Deere equal to competitive market interest rates for periods during which finance charges have been waived or reduced. The Company computes the compensation from John Deere for waived or reduced finance charges based on the Company’s estimated funding costs, administrative and operating expenses, credit losses, and required return on equity. The financing rate following the waiver or interest reduction period is not significantly different from the compensation rate from John Deere. The portions of the Company’s finance income earned that were received from John Deere on retail notes containing waiver of finance charges or reduced rates were 30 percent, 26 percent and 24 percent in 2016, 2015 and 2014, respectively. During 2016, 2015 and 2014, the finance income earned from John Deere on retail notes containing waiver of finance charges or reduced rates was $211.0 million, $184.9 million and $178.2 million, respectively.

A deposit is withheld by the Company on certain John Deere agriculture and turf equipment retail notes originating from dealers. Any subsequent retail note losses are charged against the withheld deposits. At the end of each calendar quarter, the balance of each dealer’s withholding account in excess of a specified percent (ranging from one-half to three percent based on dealer qualifications) of the total balance outstanding on retail notes originating with that dealer is remitted to the dealer. To the extent that these deposits withheld from the dealer from whom the retail note was acquired cannot absorb a loss on a retail note, it is charged against the Company’s allowance for credit losses. There is generally no withholding of dealer deposits on John Deere construction and forestry equipment retail notes.

The Company generally requires that theft and physical damage insurance be carried on all goods leased or securing retail notes and wholesale receivables. The customer may, at the customer’s own expense, have the Company or the seller of the goods purchase this insurance or obtain it from other sources.

Revolving Charge Accounts Receivable

Revolving charge account income is generated primarily by three revolving credit products: John Deere Financial multi-use, PowerPlanâ and the John Deere Financial Revolving Plan. John Deere Financial multi-use is primarily used by farmers and ranchers to finance day-to-day operating expenses, such as parts and services. Merchants, including agribusinesses and dealers, offer John Deere Financial multi-use as an alternative to carrying in-house accounts receivable, and can initially sell existing balances to the Company under a recourse arrangement. John Deere Financial multi-use income includes a discount paid by merchants for transaction processing and support and finance charges paid by customers on their outstanding account balances. PowerPlanâ is primarily used by construction companies to finance day-to-day operating expenses, such as parts and services, and is otherwise similar to John Deere Financial multi-use. John Deere construction and forestry dealers offer PowerPlanâ as an alternative to carrying in-house accounts receivable, and can initially sell existing balances to the Company under a recourse arrangement. PowerPlanâ income includes a discount paid by dealers for transaction processing and support and finance charges paid by customers on their outstanding account balances. The John Deere Financial Revolving Plan is used primarily by retail customers of John Deere dealers to finance turf and utility equipment. Income includes a discount paid by dealers on most transactions and finance charges paid by customers on their outstanding account balances. Revolving charge account income is also generated through waiver of finance charges or reduced rates from sponsoring merchants.

During 2016, 2015 and 2014, the finance income earned from John Deere on revolving charge accounts containing waiver of finance charges or reduced rates was $11.3 million, $11.4 million and $11.3 million, respectively. Revolving charge accounts receivable at October 31, 2016 and 2015 totaled $3,078.5 million and $2,680.8 million, respectively. Generally, account holders may pay the account balance in full at any time, or make payments over a number of months according to a payment schedule.

Wholesale Receivables

The Company also finances wholesale inventories of John Deere agriculture and turf equipment and construction and forestry equipment owned by dealers of those products in the form of wholesale receivables. Wholesale finance income related to these notes is generally recognized monthly based on the daily balance of wholesale receivables outstanding and the applicable effective interest rate. Interest rates vary with a bank base rate, the type of equipment financed and the balance outstanding. Substantially all wholesale receivables are secured by equipment financed or other financial securities. The average actual life for wholesale receivables is less than 12 months. Wholesale receivables at October 31, 2016 and 2015 totaled $6,562.5 million and $7,185.5 million, respectively.

The Company purchases certain wholesale trade receivables from John Deere. These trade receivables arise from John Deere’s sales of goods to independent dealers. Under the terms of the sales to dealers, interest is primarily charged to dealers on outstanding balances, from the earlier of the date when goods are sold to retail customers by the dealer or the expiration of certain interest-free periods granted at the time of the sale to the dealer, until payment is received by the Company. Dealers cannot cancel purchases after the equipment is shipped and are responsible for payment even if the equipment is not sold to retail customers. The interest-free periods are determined based on the type of equipment sold and the time of year of the sale. These periods range from one to twelve months for most equipment. Interest-free periods may not be extended. Interest charged may not be forgiven and the past due interest rates exceed market rates. The Company receives compensation from John Deere at approximate market interest rates for these interest-free periods. The Company computes the compensation from John Deere for interest-free periods based on the Company’s estimated funding costs, administrative and operating expenses, credit losses and required return on equity. During 2016, 2015 and 2014, the compensation earned from John Deere on wholesale receivables for waiver of finance charges or reduced rates was $209.7 million, $196.9 million and $203.4 million, respectively.

Financing Leases

The Company leases agriculture and turf equipment and construction and forestry equipment directly to retail customers. At the time of accepting a lease that qualifies as a financing lease, the Company records the gross amount of lease payments receivable, estimated residual value of the leased equipment and unearned finance income. The unearned finance income is equal to the excess of the gross lease receivable plus the estimated residual value over the cost of the equipment. The unearned finance income is recognized as revenue over the lease term using the interest method. Net costs incurred in the acquisition of financing leases are deferred and recognized over the expected lives of the financing leases using the interest method.

Financing leases receivable by product category at October 31 were as follows (in millions of dollars):


	2016		2015
Agriculture and turf	$	351.2	$	338.9
Construction and forestry		173.3		184.2
Total		524.5		523.1
Estimated residual values		136.2		95.1
Unearned finance income		(55.4)		(51.1)
Financing leases receivable	$	605.3	$	567.1

Initial lease terms for financing leases generally range from 4 months to 60 months. Payments on financing leases receivable at October 31 were scheduled as follows (in millions of dollars):


	2016		2015
Due in:
0-12 months	$	208.4	$	206.6
13-24 months		147.6		145.0
25-36 months		88.9		95.4
37-48 months		52.2		48.5
Over 48 months		27.4		27.6
Total	$	524.5	$	523.1

Deposits withheld from John Deere dealers and related losses on financing leases are handled in a manner similar to the procedures for retail notes. As with retail notes, there are generally no deposits withheld from dealers on financing leases related to construction and forestry equipment. In addition, a lease payment discount program, allowing reduced payments over the term of the lease, is administered in a manner similar to finance waiver on retail notes. During 2016, 2015 and 2014, the finance income earned from John Deere on financing leases containing waiver of finance charges or reduced rates was $2.3 million, $2.0 million and $2.3 million, respectively.

Equipment returned to the Company upon termination of leases and held for subsequent sale or lease is recorded at the lower of net book value or estimated fair value of the equipment less cost to sell and is not depreciated.

Concentration of Credit Risk

Receivables have significant concentrations of credit risk in the agriculture and turf and construction and forestry sectors as shown in the previous tables. On a geographic basis, there is not a disproportionate concentration of credit risk in any area. The Company generally secures its Receivables, other than certain revolving charge accounts, by retaining as collateral a security interest in the goods associated with those Receivables or with the use of other financial securities.