Allowance for Credit Losses and Credit Quality of Receivables

12 Months Ended

Oct. 29, 2023

Allowance for Credit Losses and Credit Quality of Receivables

Allowance for Credit Losses and Credit Quality of Receivables

Note 4. Allowance for Credit Losses and Credit Quality of Receivables

Credit Quality

We monitor the credit quality of Receivables based on delinquency status, defined as follows:

● Past due balances represent Receivables still accruing finance income with any payments 30 days or more past the contractual payment due date.

● Non-performing Receivables represent Receivables for which we have stopped accruing finance income, which generally occurs when Customer Receivables are 90 days delinquent and when interest-bearing wholesale receivables become 60 days delinquent. Accrued finance income and lease revenue previously recognized on non-performing Receivables is reversed and subsequently recognized on a cash basis. Accrual of finance income and lease revenue is resumed when the receivable becomes contractually current, and collections are reasonably assured.  

Accrued finance income and lease revenue reversed on non-performing Receivables, and finance income and lease revenue recognized from cash payments on non-performing Receivables were as follows:

	2023		2022		2021
Accrued finance income and lease revenue reversed	$	17.1	$	11.3	$	12.4
Finance income and lease revenue recognized on cash payments		18.4		15.4		17.1

Total Receivable balances represent principal plus accrued interest. Receivable balances are written off to the allowance for credit losses when, in the judgment of management, they are considered uncollectible. Write-offs generally occur when Customer Receivables are 120 days delinquent, and on a case-by-case basis when wholesale receivables are 60 days delinquent. In these situations, collateral is repossessed (for collateral-dependent Receivables) or the account is designated for litigation, and the estimated uncollectible amount is written off to the allowance for credit losses.

The credit quality analysis of Customer Receivables by year of origination was as follows:

	October 29, 2023
	2023		2022		2021		2020		2019		Prior Years		Revolving Charge Accounts		Total
Customer Receivables:
Agriculture and turf
Current	$	12,998.3	$	7,208.2	$	4,459.1	$	1,970.4	$	666.3	$	179.3	$	4,424.8	$	31,906.4
30-59 days past due		46.8		66.6		34.6		18.7		8.2		2.9		28.1		205.9
60-89 days past due		15.8		22.0		14.8		7.8		3.3		1.3		8.6		73.6
90+ days past due		1.4		.8		2.7		2.9		.1		.1				8.0
Non-performing		25.9		63.7		44.5		25.0		12.9		12.0		7.2		191.2
Construction and forestry
Current		2,343.4		1,586.2		859.0		279.2		65.3		27.3		118.6		5,279.0
30-59 days past due		44.4		28.1		24.8		8.6		3.4		.4		4.1		113.8
60-89 days past due		17.8		11.4		11.8		4.5		1.0		.2		1.8		48.5
90+ days past due		.1		1.2		.1		.1								1.5
Non-performing		34.1		67.5		51.2		20.7		7.5		4.0		1.2		186.2
Total Customer Receivables	$	15,528.0	$	9,055.7	$	5,502.6	$	2,337.9	$	768.0	$	227.5	$	4,594.4	$	38,014.1

	October 30, 2022
	2022		2021		2020		2019		2018		Prior Years		Revolving Charge Accounts		Total
Customer Receivables:
Agriculture and turf
Current	$	11,736.1	$	6,939.9	$	3,479.6	$	1,515.8	$	581.3	$	152.9	$	4,022.7	$	28,428.3
30-59 days past due		40.1		55.8		31.4		15.0		6.4		2.7		18.4		169.8
60-89 days past due		11.8		19.5		10.8		4.4		2.0		1.1		4.5		54.1
90+ days past due		.4		.2		.2										.8
Non-performing		24.7		38.4		29.2		13.7		11.2		10.2		7.8		135.2
Construction and forestry
Current		2,373.7		1,526.3		658.1		230.7		57.2		10.5		107.7		4,964.2
30-59 days past due		44.5		40.6		20.7		7.6		1.8		.6		3.1		118.9
60-89 days past due		18.1		11.4		6.0		3.0		.7		.1		1.0		40.3
90+ days past due		.3		1.3				1.4								3.0
Non-performing		19.3		51.2		27.6		15.4		5.5		2.9		.6		122.5
Total Customer Receivables	$	14,269.0	$	8,684.6	$	4,263.6	$	1,807.0	$	666.1	$	181.0	$	4,165.8	$	34,037.1

The credit quality analysis of wholesale receivables by year of origination was as follows:

	October 29, 2023
	2023		2022		2021		2020		2019		Prior Years		Revolving		Total
Wholesale receivables:
Agriculture and turf
Current	$	609.5	$	92.6	$	20.0	$	3.9	$	.7	$	159.9	$	9,270.1	$	10,156.7
30+ days past due														45.8		45.8
Non-performing														5.7		5.7
Construction and forestry
Current		19.4		2.5		19.9		.2		.1		75.2		2,987.6		3,104.9
30+ days past due														17.0		17.0
Non-performing
Total wholesale receivables	$	628.9	$	95.1	$	39.9	$	4.1	$	.8	$	235.1	$	12,326.2	$	13,330.1

	October 30, 2022
	2022		2021		2020		2019		2018		Prior Years		Revolving		Total
Wholesale receivables:
Agriculture and turf
Current	$	381.3	$	62.7	$	25.0	$	3.8	$	.3	$	1.1	$	6,238.1	$	6,712.3
30+ days past due				.1										8.3		8.4
Non-performing														5.5		5.5
Construction and forestry
Current		4.8		28.2		1.4		.4		.1				1,633.8		1,668.7
30+ days past due														9.6		9.6
Non-performing
Total wholesale receivables	$	386.1	$	91.0	$	26.4	$	4.2	$	.4	$	1.1	$	7,895.3	$	8,404.5

Allowance for Credit Losses

The allowance for credit losses is an estimate of the credit losses expected over the life of our Receivable portfolio. Non-performing Receivables are included in the estimate of expected credit losses. The allowance is measured on a collective basis for receivables with similar risk characteristics. Receivables that do not share risk characteristics are evaluated on an individual basis. Risk characteristics include:

● product category,

● market,

● geography,

● credit risk, and

● remaining balance.

We utilize the following loss forecast models to estimate expected credit losses:

Customer Receivables:

● Transition matrix models are used for large and complex Customer Receivable pools. These models are used for more than 90 percent of Customer Receivables and estimate credit losses using historical delinquency and default information to assign probabilities that a receivable will pay as contractually scheduled or become delinquent and advance through the various delinquency stages. The model simulates the runoff of the portfolio, month-by-month, over the life of the receivables until the balances are fully repaid or default, using roll rates applied to the outstanding portfolio. The roll rates are applied based on the delinquency status of the customer accounts and are further segmented based on the credit risk and remaining balance of the underlying receivables. Estimated recovery rates are applied to the balance at default to calculate the expected credit losses.

● Weighted-average remaining maturity (WARM) models are used for smaller and less complex Customer Receivable pools, and apply historical average annual loss rates, adjusted for current and forecasted economic conditions, to the projected portfolio runoff.

Wholesale receivables:

● Historical loss rate models are used for wholesale receivables, with consideration of current economic conditions and dealer financial risk. Changes in economic conditions have historically had limited impact on credit losses in this portfolio.

The model output is adjusted for forecasted economic conditions, which may include the economic indicators listed below.

● commodity prices,

● industry equipment sales,

● unemployment rates, and

● housing starts.

Management reviews each model’s output quarterly, and qualitative adjustments are incorporated as necessary.

Recoveries from freestanding credit enhancements, such as dealer deposits and certain credit insurance contracts, are not included in the estimate of expected credit losses. Recoveries from dealer deposits are recognized in “Other income” when the dealer’s withholding account is charged. During 2023, 2022, and 2021, $17.0, $8.5 and $14.3, respectively, was recorded in other income related to recoveries from freestanding credit enhancements. At October 29, 2023 and October 30, 2022, we had $129.6 and $132.7, respectively, of deposits withheld from John Deere dealers and merchants available as credit enhancements for retail notes and financing leases.

An analysis of the allowance for credit losses and investment in Receivables at October 29, 2023, October 30, 2022, and October 31, 2021 was as follows:

	Retail Notes		Revolving
	& Financing		Charge		Wholesale		Total
	Leases		Accounts		Receivables		Receivables
2023
Allowance:
Beginning of year balance	$	95.4	$	21.9	$	11.1	$	128.4
Provision (credit) for credit losses*		67.6		21.2		(.2)		88.6
Write-offs		(60.8)		(44.4)		(.2)		(105.4)
Recoveries		12.9		21.8		.6		35.3
Translation adjustments		(.2)		(.1)		(.2)		(.5)
End of year balance	$	114.9	$	20.4	$	11.1	$	146.4
Receivables:
End of year balance	$	33,419.7	$	4,594.4	$	13,330.1	$	51,344.2

2022
Allowance:
Beginning of year balance	$	96.5	$	20.8	$	11.7	$	129.0
Provision (credit) for credit losses*		26.1		(1.8)		.1		24.4
Write-offs		(40.7)		(26.8)		(.3)		(67.8)
Recoveries		14.4		29.7		.1		44.2
Translation adjustments		(.9)				(.5)		(1.4)
End of year balance	$	95.4	$	21.9	$	11.1	$	128.4
Receivables:
End of year balance	$	29,871.3	$	4,165.8	$	8,404.5	$	42,441.6

2021
Allowance:
Beginning of year balance	$	76.9	$	42.3	$	9.9	$	129.1
ASU No. 2016-13 adoption		32.5		(12.2)		(.6)		19.7
Provision (credit) for credit losses*		11.8		(17.0)		2.5		(2.7)
Write-offs		(36.7)		(27.8)		(.3)		(64.8)
Recoveries		11.6		35.5				47.1
Translation adjustments		.4				.2		.6
End of year balance	$	96.5	$	20.8	$	11.7	$	129.0
Receivables:
End of year balance	$	26,933.3	$	3,740.1	$	5,951.3	$	36,624.7

* Excludes provision (credit) for credit losses on unfunded commitments of $(.1), $(.9), and $1.8 for the years ended October 29, 2023, October 30, 2022, and October 31, 2021, respectively. The estimated credit losses related to unfunded commitments are recorded in “Accounts payable and accrued expenses.”

The allowance for credit losses increased in 2023 compared to 2022, primarily driven by growth in the retail notes and financing lease portfolios and higher expected losses on turf and construction customer accounts. We continue to monitor the economy as part of the allowance setting process, including potential impacts of inflation and interest rates, among other factors, and qualitative adjustments to the allowance are incorporated, as necessary.

Troubled Debt Restructuring

A troubled debt restructuring is a significant modification of debt in which a creditor grants a concession it would not otherwise consider to a debtor that is experiencing financial difficulties. These concessions may include a reduction of the stated interest rate, an extension of the maturity date, a reduction of the face amount or maturity amount of the debt, or a reduction of accrued interest. The following table includes Receivable contracts identified as troubled debt restructurings, which were primarily retail notes:

	2023		2022		2021
Number of receivable contracts		149		199		326
Pre-modification balance	$	7.2	$	7.0	$	12.0
Post-modification balance		6.7		5.8		10.7

In 2023, 2022, and 2021, we had no significant troubled debt restructurings that subsequently defaulted and were written off. At October 29, 2023, we had no commitments to provide additional financing to customers whose accounts were modified in troubled debt restructurings.

Write-offs

Total write-offs and recoveries, by product, and as a percentage of average balances held during the year, were as follows:

	2023				2022				2021
	Dollars		Percent		Dollars		Percent		Dollars		Percent
Write-offs:
Retail notes & financing leases:
Agriculture and turf	$	(31.7)	(.12)	%	$	(21.4)	(.09)	%	$	(18.6)	(.09)	%
Construction and forestry		(29.1)	(.55)			(19.3)	(.39)			(18.1)	(.42)
Total retail notes & financing leases		(60.8)	(.20)			(40.7)	(.15)			(36.7)	(.15)
Revolving charge accounts		(44.4)	(1.17)			(26.8)	(.77)			(27.8)	(.85)
Wholesale receivables		(.2)				(.3)				(.3)
Total write-offs		(105.4)	(.23)			(67.8)	(.18)			(64.8)	(.19)
Recoveries:
Retail notes & financing leases:
Agriculture and turf		8.8	.03			10.2	.05			9.2	.05
Construction and forestry		4.1	.08			4.2	.09			2.4	.06
Total retail notes & financing leases		12.9	.04			14.4	.05			11.6	.05
Revolving charge accounts		21.8	.58			29.7	.86			35.5	1.08
Wholesale receivables		.6	.01			.1
Total recoveries		35.3	.08			44.2	.12			47.1	.14
Total net write-offs	$	(70.1)	(.15)	%	$	(23.6)	(.06)	%	$	(17.7)	(.05)	%