Finance and Other Receivables

9 Months Ended

Sep. 30, 2023

NOTE E - Finance and Other Receivables

Finance and other receivables include the following:


	September 30			December 31
	2023			2022
Loans	$	8,022.1		$	7,229.1
Finance leases		4,428.6			3,786.4
Dealer wholesale financing		3,783.2			2,772.1
Operating lease receivables and other		151.3			125.4
		16,385.2			13,913.0
Less allowance for losses:
Loans and leases		(119.6	)		(114.8	)
Dealer wholesale financing		(2.6	)		(3.4	)
Operating lease receivables and other		(2.6	)		(2.9	)
	$	16,260.4		$	13,791.9

Included in Finance and other receivables, net on the Consolidated Balance Sheets is accrued interest receivable (net of allowance for credit losses) of $73.6 and $44.1 as of September 30, 2023 and December 31, 2022, respectively. The net activity of dealer direct loans and dealer wholesale financing on new trucks is shown in the operating section of the Condensed Consolidated Statements of Cash Flows since those receivables finance the sale of Company inventory.

Allowance for Credit Losses

The Company continuously monitors the payment performance of its finance receivables. For large retail finance customers and dealers with wholesale financing, the Company regularly reviews their financial statements and makes site visits and phone contact as appropriate. If the Company becomes aware of circumstances that could cause those customers or dealers to face financial difficulty, whether or not they are past due, the customers are placed on a watch list.

The Company modifies loans and finance leases in the normal course of its Financial Services operations. The Company may modify loans and finance leases for commercial reasons or for credit reasons. Modifications for commercial reasons are changes to contract terms for customers that are not considered to be in financial difficulty. Insignificant delays are modifications extending terms up to three months for customers experiencing some short-term financial stress, but not considered to be in financial difficulty. Modifications for credit reasons are changes to contract terms for customers considered to be in financial difficulty. The Company’s modifications typically result in granting more time to pay the contractual amounts owed and charging a fee and interest for the term of the modification.

When considering whether to modify customer accounts for credit reasons, the Company evaluates the creditworthiness of the customers and modifies those accounts that the Company considers likely to perform under the modified terms. The Company does not typically grant credit modifications for customers that do not meet minimum underwriting standards since the Company normally repossesses the financed equipment in these circumstances.

On average, commercial and other modifications extended contractual terms by approximately four months in 2023 and three months in 2022, and did not have a significant effect on the weighted average term or interest rate of the total portfolio at September 30, 2023 and December 31, 2022.

The Company has developed a systematic methodology for determining the allowance for credit losses for its two portfolio segments, retail and wholesale. The retail segment consists of retail loans and sales-type finance leases, net of unearned interest. The wholesale segment consists of truck inventory financing loans to dealers that are collateralized by trucks and other collateral. The wholesale segment generally has less risk than the retail segment. Wholesale receivables generally are shorter in duration than retail receivables, and the Company requires periodic reporting of the wholesale dealer’s financial condition, conducts periodic audits of the trucks being financed and in many cases, obtains guarantees or other security such as dealership assets. In determining the allowance for credit losses, retail loans and finance leases are evaluated together since they relate to a similar customer base, their contractual terms require regular payment of principal and interest, generally over three to five years, and they are secured by the same type of collateral. The allowance for credit losses consists of both specific and general reserves.

The Company individually evaluates certain finance receivables for expected credit losses. Finance receivables that are evaluated individually consist of all wholesale accounts and certain large retail accounts with past due balances or otherwise determined to be at a higher risk of loss. In general, finance receivables that are 90 days past due are placed on non-accrual status. Finance receivables on non-accrual status which have been performing for 90 consecutive days are placed on accrual status if it is deemed probable that the Company will collect all principal and interest payments.

Individually evaluated receivables on non-accrual status are generally considered collateral dependent. Large balance retail and all wholesale receivables on non-accrual status are individually evaluated to determine the appropriate reserve for losses. The determination of reserves for large balance receivables on non-accrual status considers the fair value of the associated collateral. When the underlying collateral fair value exceeds the Company’s amortized cost basis, no reserve is recorded. Small balance receivables on non-accrual status with similar risk characteristics are evaluated as a separate pool to determine the appropriate reserve for losses using the historical loss information discussed below.

The Company evaluates finance receivables that are not individually evaluated and share similar risk characteristics on a collective basis and determines the general allowance for credit losses for both retail and wholesale receivables based on historical loss information, using past due account data, current market conditions, and expected changes in future macroeconomic conditions that affect collectability. Historical credit loss data provides relevant information of expected credit losses. The historical information used includes assumptions regarding the likelihood of collecting current and past due accounts, repossession rates, and the recovery rate on the underlying collateral based on used truck values and other pledged collateral or recourse.

The Company has developed a range of loss estimates for each of its country portfolios based on historical experience, taking into account loss frequency and severity in both strong and weak truck market conditions. A projection is made of the range of estimated credit losses inherent in the portfolio from which an amount is determined based on current market conditions and other factors impacting the creditworthiness of the Company’s borrowers and their ability to repay. Adjustments to historical loss information are made for changes in forecasted economic conditions that are specific to the industry and markets in which the Company conducts business. The Company utilizes economic forecasts from third-party sources and determines expected losses based on historical experience under similar market conditions. After determining the appropriate level of the allowance for credit losses, a provision for losses on finance receivables is charged to income as necessary to reflect management’s estimate of expected credit losses, net of recoveries, inherent in the portfolio.

In determining the fair value of the collateral, the Company uses a pricing matrix and categorizes the fair value as Level 2 in the hierarchy of fair value measurement. The pricing matrix is reviewed quarterly and updated as appropriate. The pricing matrix considers the make, model and year of the equipment as well as recent sales prices of comparable equipment sold individually, which is the lowest unit of account, through wholesale channels to the Company’s dealers (principal market). The fair value of the collateral also considers the overall condition of the equipment.

Accounts are charged off against the allowance for credit losses when, in the judgment of management, they are considered uncollectible, which generally occurs upon repossession of the collateral. Typically the timing between the repossession and charge-off is not significant. In cases where repossession is delayed (e.g., for legal proceedings), the Company records a partial charge-off. The charge-off is determined by comparing the fair value of the collateral, less cost to sell, to the amortized cost basis.

For the following credit quality disclosures, finance receivables are classified into two portfolio segments, wholesale and retail. The retail portfolio is further segmented into dealer retail and customer retail. The dealer wholesale segment consists of truck inventory financing to PACCAR dealers. The dealer retail segment consists of loans and leases to participating dealers and franchises that use the proceeds to fund customers’ acquisition of commercial vehicles and related equipment. The customer retail segment consists of loans and leases directly to customers for the acquisition of commercial vehicles and related equipment. Customer retail receivables are further segregated between fleet and owner/operator classes. The fleet class consists of customer retail accounts operating five or more trucks. All other customer retail accounts are considered owner/operator. These two classes have similar measurement attributes, risk characteristics and common methods to monitor and assess credit risk.

The allowance for credit losses is summarized as follows:


	2023
	DEALER						CUSTOMER
	WHOLESALE			RETAIL			RETAIL			OTHER*			TOTAL
Balance at January 1	$	3.4		$	2.2		$	112.6		$	2.9		$	121.1
Provision for losses		(.8	)		(.8	)		16.3			(.6	)		14.1
Charge-offs								(16.0	)		(1.2	)		(17.2	)
Recoveries								4.3			1.3			5.6
Currency translation and other								1.0			.2			1.2
Balance at September 30	$	2.6		$	1.4		$	118.2		$	2.6		$	124.8


	2022
	DEALER						CUSTOMER
	WHOLESALE			RETAIL			RETAIL			OTHER*			TOTAL
Balance at January 1	$	3.3		$	7.1		$	104.4		$	2.1		$	116.9
Provision for losses		.4			(3.3	)		8.1			(1.4	)		3.8
Charge-offs								(6.3	)		(.1	)		(6.4	)
Recoveries		.1						5.2			1.8			7.1
Currency translation and other		(.3	)					(3.9	)		.7			(3.5	)
Balance at September 30	$	3.5		$	3.8		$	107.5		$	3.1		$	117.9

* Operating leases and other trade receivables.

Credit Quality

The Company's customers are principally concentrated in the transportation industry in North America, Europe, Australia and Brasil. The Company’s portfolio assets are diversified over a large number of customers and dealers with no single customer or dealer balances representing over 5% of the total portfolio assets. The Company retains as collateral a security interest in the related equipment.

At the inception of each contract, the Company considers the 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, the Company 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.

The Company has three credit quality indicators: performing, watch and at-risk. Performing accounts pay in accordance with the contractual terms and are not considered high-risk. Watch accounts include accounts 31 to 90 days past due and large accounts that are performing but are considered to be high‑risk. Watch accounts are not collateral dependent. At-risk accounts are collateral dependent, including accounts over 90 days past due and other accounts on non-accrual status.

The tables below summarize the amortized cost basis of the Company’s finance receivables within each credit quality indicator by year of origination and portfolio class and current period gross charge-offs of the Company’s finance receivables by year of origination and portfolio class.


	REVOLVING
At September 30, 2023	LOANS		2023		2022		2021		2020		2019		PRIOR		TOTAL
Amortized cost:
Dealer:
Wholesale:
Performing	$	3,782.1													$	3,782.1
Watch		1.1														1.1
	$	3,783.2													$	3,783.2
Retail:
Performing	$	164.3	$	556.1	$	542.8	$	315.3	$	177.2	$	182.7	$	152.5	$	2,090.9
	$	164.3	$	556.1	$	542.8	$	315.3	$	177.2	$	182.7	$	152.5	$	2,090.9
Total dealer	$	3,947.5	$	556.1	$	542.8	$	315.3	$	177.2	$	182.7	$	152.5	$	5,874.1

Customer retail:
Fleet:
Performing			$	3,460.9	$	2,866.1	$	1,455.3	$	836.6	$	294.9	$	91.8	$	9,005.6
Watch				34.4		14.9		2.6		1.0		1.1		.9		54.9
At-risk				8.6		23.2		11.5		6.0		11.6		.3		61.2
			$	3,503.9	$	2,904.2	$	1,469.4	$	843.6	$	307.6	$	93.0	$	9,121.7
Owner/operator:
Performing			$	325.4	$	357.4	$	293.9	$	167.2	$	66.6	$	15.1	$	1,225.6
Watch				.3		2.1		1.8		1.1		.1		.2		5.6
At-risk				.1		1.5		2.2		2.1		.7		.3		6.9
			$	325.8	$	361.0	$	297.9	$	170.4	$	67.4	$	15.6	$	1,238.1
Total customer retail			$	3,829.7	$	3,265.2	$	1,767.3	$	1,014.0	$	375.0	$	108.6	$	10,359.8

Total	$	3,947.5	$	4,385.8	$	3,808.0	$	2,082.6	$	1,191.2	$	557.7	$	261.1	$	16,233.9


	REVOLVING
At September 30, 2023	LOANS	2023		2022		2021		2020		2019		PRIOR		TOTAL
Gross charge-offs:
Customer retail:
Fleet				$	4.4	$	4.4	$	3.6	$	.4	$	.4	$	13.2
Owner/operator		$	.2		1.0		1.0		.3				.3		2.8
Total		$	.2	$	5.4	$	5.4	$	3.9	$	.4	$	.7	$	16.0


	REVOLVING
At December 31, 2022	LOANS		2022		2021		2020		2019		2018		PRIOR		TOTAL
Amortized cost:
Dealer:
Wholesale:
Performing	$	2,766.0													$	2,766.0
Watch		6.1														6.1
	$	2,772.1													$	2,772.1
Retail:
Performing	$	206.2	$	609.7	$	348.6	$	223.1	$	241.7	$	120.8	$	121.1	$	1,871.2
At-risk														.7		.7
	$	206.2	$	609.7	$	348.6	$	223.1	$	241.7	$	120.8	$	121.8	$	1,871.9
Total dealer	$	2,978.3	$	609.7	$	348.6	$	223.1	$	241.7	$	120.8	$	121.8	$	4,644.0

Customer retail:
Fleet:
Performing			$	3,558.0	$	1,981.9	$	1,306.5	$	603.7	$	203.4	$	65.6	$	7,719.1
Watch				7.5		7.3		1.8		3.4		2.4		.5		22.9
At-risk				6.7		17.7		18.8		17.2		5.9		.5		66.8
			$	3,572.2	$	2,006.9	$	1,327.1	$	624.3	$	211.7	$	66.6	$	7,808.8
Owner/operator:
Performing			$	478.2	$	425.9	$	251.2	$	120.9	$	45.3	$	6.0	$	1,327.5
Watch				1.8		.9		.4		.3				.1		3.5
At-risk				.4		.8		1.1		.8		.7				3.8
			$	480.4	$	427.6	$	252.7	$	122.0	$	46.0	$	6.1	$	1,334.8
Total customer retail			$	4,052.6	$	2,434.5	$	1,579.8	$	746.3	$	257.7	$	72.7	$	9,143.6

Total	$	2,978.3	$	4,662.3	$	2,783.1	$	1,802.9	$	988.0	$	378.5	$	194.5	$	13,787.6

The tables below summarize the Company’s finance receivables by aging category. In determining past due status, the Company considers the entire contractual account balance past due when any installment is over 30 days past due. Substantially all customer accounts that were greater than 30 days past due prior to credit modification became current upon modification for aging purposes.


	DEALER				CUSTOMER RETAIL
							OWNER/
At September 30, 2023	WHOLESALE		RETAIL		FLEET		OPERATOR		TOTAL
Current and up to 30 days past due	$	3,783.2	$	2,090.9	$	9,034.9	$	1,228.3	$	16,137.3
31 – 60 days past due						46.1		4.8		50.9
Greater than 60 days past due						40.7		5.0		45.7
	$	3,783.2	$	2,090.9	$	9,121.7	$	1,238.1	$	16,233.9


	DEALER				CUSTOMER RETAIL
							OWNER/
At December 31, 2022	WHOLESALE		RETAIL		FLEET		OPERATOR		TOTAL
Current and up to 30 days past due	$	2,772.1	$	1,871.9	$	7,768.5	$	1,329.1	$	13,741.6
31 – 60 days past due						14.7		3.1		17.8
Greater than 60 days past due						25.6		2.6		28.2
	$	2,772.1	$	1,871.9	$	7,808.8	$	1,334.8	$	13,787.6

The amortized cost basis of finance receivables that are on non-accrual status was as follows:


	DEALER		CUSTOMER RETAIL
					OWNER/
At September 30, 2023	WHOLESALE	RETAIL	FLEET		OPERATOR		TOTAL
Amortized cost basis with a specific reserve			$	27.9	$	6.2	$	34.1
Amortized cost basis with no specific reserve				26.7		.5		27.2
Total			$	54.6	$	6.7	$	61.3


	DEALER			CUSTOMER RETAIL
						OWNER/
At December 31, 2022	WHOLESALE	RETAIL		FLEET		OPERATOR		TOTAL
Amortized cost basis with a specific reserve				$	33.9	$	3.6	$	37.5
Amortized cost basis with no specific reserve		$	.7		16.2				16.9
Total		$	.7	$	50.1	$	3.6	$	54.4

Interest income recognized on a cash basis for finance receivables that are on non-accrual status was as follows:


	Three Months Ended				Nine Months Ended
	September 30				September 30
	2023		2022		2023		2022
Interest income recognized:
Dealer:
Retail							$	.1
Customer retail:
Fleet	$	.4	$	.6	$	1.0		2.0
Owner/operator		.1		.1		.2		.2
	$	.5	$	.7	$	1.2	$	2.3

Customers Experiencing Financial Difficulty

The Company adopted ASU 2022-02 on January 1, 2023. The amortized cost basis of finance receivables modified for fleet customers experiencing financial difficulty was $.6 and $7.2 for the three and nine months ended September 30, 2023, respectively. The amortized cost basis of finance receivables modified for owner/operator customers experiencing financial difficulty was nil for the three and nine months ended September 30, 2023. Total modifications with customers experiencing financial difficulty represented nil and .1% of the total retail portfolio on an annualized basis for the three and nine months ended September 30, 2023, respectively. The modifications provided term extensions and granted customers additional time to pay, primarily in Brasil. The financial effects of the term extensions added a weighted-average of 5 and 19 months to the life of the modified contracts for the three and nine months ended September 30, 2023, respectively. The effect on the allowance for credit losses from such modifications was not significant for the three and nine months ended September 30, 2023.

All of the finance receivables modified with customers experiencing financial difficulty are current. There were no finance receivables modified with customers experiencing financial difficulty on or after January 1, 2023 that had a payment default in the nine months ended September 30, 2023.

Troubled Debt Restructuring Disclosures Prior to Adoption of ASU 2022-02

Prior to the adoption of ASU 2022-02, when considering whether to modify customer accounts for credit reasons, the Company evaluated the creditworthiness of the customers and modified those accounts that the Company considered likely to perform under the modified terms. When the Company modified a loan or finance lease for credit reasons and granted a concession, the modification was classified as a troubled debt restructuring (TDR). The Company did not typically grant credit modifications for customers that did not meet minimum underwriting standards since the Company normally repossesses the financed equipment in those circumstances. When such modifications did occur, they were considered TDRs.

The balance of TDRs was $31.1 and $34.2 at December 31, 2022 and September 30, 2022, respectively. At modification date, the pre-modification and post-modification amortized cost basis balances for finance receivables modified during the period by portfolio class were as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2022				September 30, 2022
	AMORTIZED COST BASIS				AMORTIZED COST BASIS
	PRE- MODIFICATION		POST- MODIFICATION		PRE- MODIFICATION		POST- MODIFICATION
Fleet	$	1.6	$	1.6	$	9.7	$	9.7

The effect on the allowance for credit losses from such modifications was not significant at September 30, 2022.

Repossessions

When the Company determines a customer is not likely to meet its contractual commitments, the Company repossesses the vehicles which serve as collateral for the loans, finance leases and equipment under operating leases. The Company records the vehicles as used truck inventory included in Financial Services Other assets on the Consolidated Balance Sheets. The balance of repossessed inventory at September 30, 2023 and December 31, 2022 was $17.2 and $9.2, respectively. Proceeds from the sales of repossessed assets were $17.7 and $16.1 for the nine months ended September 30, 2023 and 2022, respectively. These amounts are included in Proceeds from asset disposals in the Condensed Consolidated Statements of Cash Flows. Write-downs of repossessed equipment on operating leases are recorded as impairments and included in Financial Services Depreciation and other expenses on the Consolidated Statements of Comprehensive Income.