Allowance for Credit Losses and Credit Quality of Receivables

12 Months Ended

Nov. 01, 2020

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 still accruing finance income 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 based on delinquency status. Non-performing Receivables represent loans for which the Company has ceased accruing finance income. Generally, when retail notes, revolving charge accounts, and financing lease accounts are 90 days delinquent, accrual of finance income and lease revenue is suspended. 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. Finance income for non-performing Receivables is recognized on a cash basis. Accrual of finance income is generally resumed when the receivable becomes contractually current and collections are reasonably assured.

Receivable balances are written off to the allowance for credit losses when, in the judgment of management, they are considered uncollectible. Generally, when retail notes and financing lease accounts are 120 days delinquent, 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 generally deemed to be uncollectible and written off to the allowance for credit losses when delinquency reaches 120 days. Generally, when a wholesale account becomes 60 days delinquent, the Company determines whether the collateral should be repossessed or the account designated for litigation, and the estimated uncollectible amount is written off to the allowance for credit losses.

Due to the significant, negative effects of COVID, the Company provided short-term relief to dealers and retail customers during 2020. The relief was provided in regional programs and on a case-by-case basis with customers that were generally current in their payment obligations. For retail receivable customers, which include retail notes, financing leases, and revolving charge accounts, the relief generally included payment deferrals of three months or less. The retail receivables granted relief, which were primarily construction accounts, represented approximately 4 percent of the retail receivables balance at November 1, 2020. The relief provided to dealers generally included payment deferrals of three months or less and short-term interest rate reductions in certain markets. The wholesale receivables granted relief, which primarily related to agriculture and turf dealers, represented approximately 1 percent of the wholesale receivables balance at November 1, 2020. The delinquency status of receivables granted relief is based on the modified payment schedule.

An age analysis of past due Receivables that are still accruing interest and non-performing Receivables at November 1, 2020 was as follows (in millions of dollars):

					90 Days or
	30-59 Days		60-89 Days		Greater		Total
	Past Due		Past Due		Past Due		Past Due
Retail notes:
Agriculture and turf	$	101.2	$	43.6	$	.5	$	145.3
Construction and forestry		80.0		38.1		1.9		120.0
Revolving charge accounts:
Agriculture and turf		11.5		3.5				15.0
Construction and forestry		2.4		1.1				3.5
Wholesale receivables:
Agriculture and turf		3.9		4.4		1.1		9.4
Construction and forestry		.3						.3
Financing leases:
Agriculture and turf		10.2		4.0		1.5		15.7
Construction and forestry		2.0		.7				2.7
Total Receivables	$	211.5	$	95.4	$	5.0	$	311.9

	Total		Total Non-				Total
	Past Due		Performing		Current		Receivables
Retail notes:
Agriculture and turf	$	145.3	$	158.3	$	17,727.4	$	18,031.0
Construction and forestry		120.0		73.5		3,622.7		3,816.2
Revolving charge accounts:
Agriculture and turf		15.0		5.4		3,710.3		3,730.7
Construction and forestry		3.5		.9		92.3		96.7
Wholesale receivables:
Agriculture and turf		9.4		4.0		5,693.7		5,707.1
Construction and forestry		.3				1,385.9		1,386.2
Financing leases:
Agriculture and turf		15.7		14.4		613.8		643.9
Construction and forestry		2.7		6.0		136.8		145.5
Total Receivables	$	311.9	$	262.5	$	32,982.9	$	33,557.3

An age analysis of past due Receivables that are still accruing interest and non-performing Receivables at November 3, 2019 was as follows (in millions of dollars):

					90 Days or
	30-59 Days		60-89 Days		Greater		Total
	Past Due		Past Due		Past Due		Past Due
Retail notes:
Agriculture and turf	$	120.0	$	64.2	$	1.5	$	185.7
Construction and forestry		73.9		26.6				100.5
Revolving charge accounts:
Agriculture and turf		19.1		9.2				28.3
Construction and forestry		3.2		1.2				4.4
Wholesale receivables:
Agriculture and turf		4.1		1.9		.8		6.8
Construction and forestry		.1		.3		.3		.7
Financing leases:
Agriculture and turf		14.6		7.8		.5		22.9
Construction and forestry		2.8		.7				3.5
Total Receivables	$	237.8	$	111.9	$	3.1	$	352.8

	Total		Total Non-				Total
	Past Due		Performing		Current		Receivables
Retail notes:
Agriculture and turf	$	185.7	$	168.7	$	15,831.5	$	16,185.9
Construction and forestry		100.5		112.9		3,100.8		3,314.2
Revolving charge accounts:
Agriculture and turf		28.3		6.1		3,727.9		3,762.3
Construction and forestry		4.4		.9		95.4		100.7
Wholesale receivables:
Agriculture and turf		6.8		6.3		6,544.6		6,557.7
Construction and forestry		.7		2.9		2,145.5		2,149.1
Financing leases:
Agriculture and turf		22.9		11.6		569.8		604.3
Construction and forestry		3.5		2.5		141.3		147.3
Total Receivables	$	352.8	$	311.9	$	32,156.8	$	32,821.5

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 in the Company’s major markets and geographies, commodity price trends, and credit risk quality.

An analysis of the allowance for credit losses and investment in Receivables at November 1, 2020, November 3, 2019, and October 28, 2018 was as follows (in millions of dollars):

			Revolving
	Retail		Charge		Wholesale		Financing		Total
	Notes		Accounts		Receivables		Leases		Receivables
2020
Allowance:
Beginning of year balance	$	48.3	$	39.3	$	7.6	$	5.4	$	100.6
Provision (credit) for credit losses		65.2		25.1		(1.9)		1.0		89.4
Write-offs		(46.9)		(51.6)		(.9)		(2.2)		(101.6)
Recoveries		5.9		29.5		1.3		.5		37.2
Other changes		(.1)				3.8		(.2)		3.5
End of year balance	$	72.4	$	42.3	$	9.9	$	4.5	$	129.1
Balance individually evaluated *	$	.8			$	5.0			$	5.8
Receivables:
End of year balance	$	21,847.2	$	3,827.4	$	7,093.3	$	789.4	$	33,557.3
Balance individually evaluated *	$	83.8	$	.9	$	13.0	$	1.9	$	99.6

2019
Allowance:
Beginning of year balance	$	51.6	$	42.3	$	8.0	$	4.8	$	106.7
Provision (credit) for credit losses		18.3		28.6		(4.2)		2.7		45.4
Write-offs		(28.7)		(56.9)		(.3)		(2.4)		(88.3)
Recoveries		7.3		25.3		4.1		.3		37.0
Translation adjustments		(.2)								(.2)
End of year balance	$	48.3	$	39.3	$	7.6	$	5.4	$	100.6
Balance individually evaluated *	$	1.9			$	2.9			$	4.8
Receivables:
End of year balance	$	19,500.1	$	3,863.0	$	8,706.8	$	751.6	$	32,821.5
Balance individually evaluated *	$	65.9	$	.1	$	9.6	$	1.9	$	77.5

2018
Allowance:
Beginning of year balance	$	55.7	$	39.7	$	9.9	$	8.5	$	113.8
Provision (credit) for credit losses		11.9		36.7		(.8)		(.6)		47.2
Write-offs		(22.1)		(54.1)		(1.1)		(3.9)		(81.2)
Recoveries		6.4		20.0		.2		.8		27.4
Translation adjustments		(.3)				(.2)				(.5)
End of year balance	$	51.6	$	42.3	$	8.0	$	4.8	$	106.7
Balance individually evaluated *	$	.1			$	2.8			$	2.9
Receivables:
End of year balance	$	18,110.9	$	3,797.6	$	7,967.6	$	770.6	$	30,646.7
Balance individually evaluated *	$	59.2	$	2.3	$	8.8			$	70.3

*              Remainder is collectively evaluated.

During 2020, the allowance for credit losses increased primarily due to the negative economic effects related to COVID and other macroeconomic issues, which have significantly affected certain retail borrowers, particularly of construction equipment.

Investments in non-performing Receivables at November 1, 2020 and November 3, 2019 were $262.5 million and $311.9 million, respectively. These Receivables as a percentage of total Receivables outstanding were .78 percent and .95 percent at November 1, 2020 and November 3, 2019, respectively. Total Receivable amounts 30 days or more past due and still accruing finance income were $311.9 million at November 1, 2020, compared with $352.8 million at November 3, 2019. These past due amounts represented .93 percent and 1.07 percent of total Receivables outstanding at November 1, 2020 and November 3, 2019, respectively. The allowance for credit losses as a percentage of total Receivables outstanding represented .38 percent at November 1, 2020 and .31 percent at November 3, 2019. In addition, at November 1, 2020 and November 3, 2019, the Company had $110.1 million and $126.0 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 past due, have provided bankruptcy notification, or require significant collection efforts. Receivables considered to be impaired are generally classified as non-performing.

An analysis of impaired Receivables at November 1, 2020 and November 3, 2019 was as follows (in millions of dollars):

			Unpaid				Average
	Recorded		Principal		Specific		Recorded
	Investment		Balance		Allowance		Investment
2020 *
Receivables with specific allowance:
Retail notes	$	1.4	$	1.4	$	.8	$	3.0
Wholesale receivables		13.1		13.0		5.0		14.7
Total with specific allowance		14.5		14.4		5.8		17.7
Receivables without specific allowance:
Retail notes		29.4		28.5				31.7
Total without specific allowance		29.4		28.5				31.7
Total	$	43.9	$	42.9	$	5.8	$	49.4
Agriculture and turf	$	40.8	$	39.9	$	5.8	$	46.1
Construction and forestry		3.1		3.0				3.3
Total	$	43.9	$	42.9	$	5.8	$	49.4
(continued)

			Unpaid				Average
	Recorded		Principal		Specific		Recorded
	Investment		Balance		Allowance		Investment
2019 *
Receivables with specific allowance:
Retail notes	$	4.9	$	4.6	$	1.9	$	5.0
Wholesale receivables		5.3		5.3		2.9		5.7
Total with specific allowance		10.2		9.9		4.8		10.7
Receivables without specific allowance:
Retail notes		22.9		22.4				25.0
Wholesale receivables		3.9		3.9				4.1
Total without specific allowance		26.8		26.3				29.1
Total	$	37.0	$	36.2	$	4.8	$	39.8
Agriculture and turf	$	30.3	$	29.7	$	4.6	$	32.0
Construction and forestry		6.7		6.5		.2		7.8
Total	$	37.0	$	36.2	$	4.8	$	39.8

*             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 2020, 2019, and 2018, the Company identified 468, 328, and 378 Receivable contracts, primarily retail notes, as troubled debt restructurings with aggregate balances of $19.0 million, $14.6 million, and $18.0 million pre-modification and $17.4 million, $13.7 million, and $17.3 million post-modification, respectively. The short-term relief related to COVID mentioned on page 44 did not meet the definition of a troubled debt restructuring. In 2020, 2019 and 2018, there were no significant troubled debt restructurings that subsequently defaulted and were written off. At November 1, 2020, 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):

	2020				2019				2018
	Dollars		Percent		Dollars		Percent		Dollars		Percent
Write-offs:
Retail notes:
Agriculture and turf	$	(13.7)	(.08)	%	$	(8.0)	(.05)	%	$	(6.4)	(.04)	%
Construction and forestry		(33.2)	(.96)			(20.7)	(.67)			(15.7)	(.57)
Total retail notes		(46.9)	(.24)			(28.7)	(.15)			(22.1)	(.13)
Revolving charge accounts		(51.6)	(1.51)			(56.9)	(1.65)			(54.1)	(1.67)
Wholesale receivables		(.9)	(.01)			(.3)				(1.1)	(.01)
Financing leases		(2.2)	(.31)			(2.4)	(.34)			(3.9)	(.55)
Total write-offs		(101.6)	(.31)			(88.3)	(.27)			(81.2)	(.27)
Recoveries:
Retail notes:
Agriculture and turf		4.2	.03			6.0	.04			4.7	.03
Construction and forestry		1.7	.05			1.3	.04			1.7	.06
Total retail notes		5.9	.03			7.3	.04			6.4	.04
Revolving charge accounts		29.5	.86			25.3	.73			20.0	.62
Wholesale receivables		1.3	.02			4.1	.04			.2
Financing leases		.5	.07			.3	.04			.8	.11
Total recoveries		37.2	.11			37.0	.11			27.4	.09
Total net write-offs	$	(64.4)	(.20)	%	$	(51.3)	(.16)	%	$	(53.8)	(.18)	%