NOTE D – Finance and Other Receivables

Finance and other receivables include the following:


	March 31 2012			December 31 2011
Loans	$	3,233.0		$	3,114.8
Retail direct financing leases		2,270.2			2,187.8
Sales-type finance leases		796.4			795.8
Dealer wholesale financing		1,805.9			1,517.1
Interest and other receivables		109.5			111.0
Unearned interest on finance leases		(339.1	)		(327.8	)

		7,875.9			7,398.7
Less allowance for losses:
Loans, leases and other		(126.7	)		(127.3	)
Dealer wholesale financing		(14.6	)		(11.7	)

	$	7,734.6		$	7,259.7

Recognition of interest income and rental revenue is suspended (put on non-accrual status) when the receivable becomes more than 90 days past the contractual due date or earlier if some other event causes the Company to determine that collection is not probable. Accordingly, there were no finance receivables more than 90 days past due still accruing interest at March 31, 2012 or December 31, 2011. Recognition is resumed if the receivable becomes contractually current by the payment of all amounts due under the terms of the existing contract and collection of remaining amounts is considered probable (if not modified), or after the customer has made scheduled payments for three months and collection of remaining amounts is considered probable (if contractually modified). Payments received while the finance receivable is impaired or on non-accrual status are applied to interest and principal in accordance with the contractual terms.

Allowance for Credit Losses

The Company continuously monitors the payment performance of all its finance receivables. The Company evaluates its finance receivables collectively and, in some cases, individually. For large 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 may modify loans and finance leases for commercial reasons or for credit reasons for customers having difficulty making payments under the contract terms. When considering whether to modify customer accounts, the Company thoroughly evaluates the creditworthiness of the customers and modifies accounts that the Company considers likely to perform under the modified terms. It is rare for the Company to grant credit modifications for customers that do not meet minimum underwriting standards since the Company normally repossesses the financed equipment in these circumstances. The Company’s credit modifications for customers that do not meet minimum underwriting standards are classified as troubled debt restructurings (TDRs). On average, modifications extend contractual terms less than three months. Modifications did not have a significant effect on the weighted average term or interest rate of the portfolio. When granting modifications, the Company rarely forgives principal or interest or reduces interest rates.

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 includes retail loans and direct and sales-type finance leases, net of unearned interest. The wholesale segment includes wholesale financing loans to dealers that are collateralized by the trucks being financed. The wholesale segment generally has less risk than the retail segment. Wholesale receivables are shorter in duration than retail receivables, and the Company requires monthly reporting of the wholesale dealer’s financial condition, conducts periodic audits of the trucks being financed and in many cases, obtains personal guarantees or other security such as dealership assets. The allowance for credit losses consists of both specific and general reserves.

The Company individually evaluates certain finance receivables for impairment. Finance receivables which are evaluated individually consist of customers on non-accrual status, all wholesale accounts, certain large retail accounts with past-due balances or that otherwise are determined to be at a higher risk of credit loss, and loans and leases which have been modified as TDRs. A receivable is considered impaired if it is probable the Company will be unable to collect all contractual interest and principal payments as scheduled. Large balance impaired receivables are individually evaluated to determine the appropriate reserve for losses. Wholesale accounts are individually evaluated and when there are no indicators of impairment, the allowance for losses is determined collectively. Small balance impaired receivables with similar risk characteristics are evaluated as a separate pool. Impaired receivables are considered collateral dependent. Accordingly, the evaluation of individual reserves considers the fair value of the associated collateral (estimated sales proceeds less the cost to sell). When the underlying collateral fair value exceeds the Company’s loss exposure, no individual reserve is recorded. The Company uses a pricing model to assist in valuing the underlying collateral and categorizes the fair value as Level 2 in the hierarchy of fair value measurement. The pricing model is reviewed quarterly and updated as appropriate. The pricing model considers the make, model and year of the equipment as well as recent sales prices of comparable equipment. The fair value of the collateral is determined based on management’s evaluation of numerous factors such as the pricing model value, overall condition of the equipment, whether the Company will dispose of the equipment through its principal market, as well as economic trends affecting used equipment values.

For finance receivables that are evaluated collectively, the Company determines the general allowance for credit losses for both retail and wholesale receivables based on historical loss information, using past-due account data and current market conditions. Information used includes assumptions regarding the likelihood of collecting current and past-due accounts, repossession rates, 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 as probable based on current market conditions and other factors impacting the creditworthiness of the Company’s borrowers and their ability to repay. The amount is then compared to the allowance for credit loss balance (after charge-offs for the current period) and an appropriate adjustment is made. In determining the general allowance for credit losses, 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 36 to 60 months and they are secured by the same type of collateral.

After determining the appropriate level of the allowance for credit losses, the provision for losses on finance receivables is charged to income as necessary to reflect management’s estimate of incurred credit losses, net of recoveries, inherent in the portfolio. Accounts are charged-off against the allowance for credit losses when, in the judgment of management, they are considered uncollectable (generally 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 partial charge-offs. The charge-off is determined by comparing the fair value of the collateral, less cost to sell, to the recorded investment.

The allowance for credit losses is summarized as follows:

2012

WHOLESALE

RETAIL

TOTAL

Balance at January 1

11.7

127.3

139.0

Provision for losses

2.7

4.8

7.5

Charge-offs

(8.8

)

(8.8

)

Recoveries

1.4

Currency translation

2.0

2.2

Balance at March 31

14.6

126.7

141.3


	2011
	WHOLESALE			RETAIL			TOTAL
Balance at January 1	$	7.5		$	137.5		$	145.0
Provision for losses		.5			10.0			10.5
Charge-offs		(.5	)		(10.3	)		(10.8	)
Recoveries					1.5			1.5
Currency translation		.2			2.6			2.8

Balance at March 31	$	7.7		$	141.3		$	149.0

Information regarding finance receivables evaluated and determined individually and collectively is as follows:


At March 31, 2012	WHOLESALE		RETAIL		TOTAL
Recorded investment for impaired finance receivables evaluated individually	$	18.1	$	89.9	$	108.0
Allowance for impaired finance receivables determined individually	$	2.8	$	23.1	$	25.9
Recorded investment for finance receivables evaluated collectively	$	1,787.8	$	5,870.6	$	7,658.4
Allowance for finance receivables determined collectively	$	11.8	$	103.6	$	115.4

At December 31, 2011	WHOLESALE		RETAIL		TOTAL
Recorded investment for impaired finance receivables evaluated individually	$	18.4	$	96.0	$	114.4
Allowance for finance receivables determined individually	$	2.2	$	25.7	$	27.9
Recorded investment for finance receivables evaluated collectively	$	1,498.7	$	5,674.6	$	7,173.3
Allowance for finance receivables determined collectively	$	9.5	$	101.6	$	111.1

The recorded investment for finance receivables that are on non-accrual status in the wholesale segment and the fleet and owner/operator portfolio classes (see impaired loans below) as of March 31, 2012 was $17.6, $57.3 and $16.3 and as of December 31, 2011 was $18.4, $63.9 and $17.6.

Impaired Loans

The Company’s impaired loans are segregated by portfolio class. A portfolio class of receivables is a subdivision of a portfolio segment with similar measurement attributes and risk characteristics and common methods to monitor and assess credit risk. The Company’s retail segment is subdivided into the fleet and owner/operator classes. Fleet consists of retail accounts with customers operating more than five trucks. All others are owner/operator.

All impaired loans have a specific reserve and are summarized below. The impaired loans with specific reserve represent the unpaid principal loan balance.


At March 31, 2012	WHOLESALE			FLEET			OWNER / OPERATOR			TOTAL
Impaired loans with specific reserve	$	18.1		$	26.9		$	9.7		$	54.7
Associated allowance		(2.8	)		(6.0	)		(2.0	)		(10.8	)

Net carrying amount of impaired loans	$	15.3		$	20.9		$	7.7		$	43.9


At December 31, 2011	WHOLESALE			FLEET			OWNER / OPERATOR			TOTAL
Impaired loans with specific reserve	$	18.4		$	27.9		$	11.5		$	57.8
Associated allowance		(2.2	)		(6.0	)		(2.6	)		(10.8	)

Net carrying amount of impaired loans	$	16.2		$	21.9		$	8.9		$	47.0


Three Months Ended March 31, 2012	WHOLESALE			FLEET			OWNER / OPERATOR			TOTAL
Average recorded investment*	$	17.9		$	31.9		$	11.4		$	61.2
Interest income recognized on a cash basis**				$	.4		$	.3		$	.7

Three Months Ended March 31, 2011	WHOLESALE			FLEET			OWNER / OPERATOR			TOTAL
Average recorded investment*	$	5.7		$	36.9		$	22.7		$	65.3
Interest income recognized on a cash basis**				$	.3		$	.1		$	.4

*	Represents the average during the 12 months ended March 31, 2012 and 2011.

**	Represents the amounts recognized during the three months ended March 31, 2012 and 2011. All interest income recognized during the period these loans were considered impaired was recorded on a cash basis.

Credit Quality

The Company’s customers are principally concentrated in the transportation industry in North America, Europe and Australia. On a geographic basis, there is a proportionate concentration of credit risk in each area. 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 indicators 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 the Company has found 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 are not impaired and include past due and large high-risk accounts. At-risk accounts are accounts that are impaired including TDRs, accounts over 90 days past-due and other accounts on non-accrual status. The Company uses historical data and expectations about the future to estimate default rates for each credit quality indicator. The table below summarizes the Company’s finance receivables by credit quality indicator and portfolio class.

At March 31, 2012

WHOLESALE

FLEET

OWNER /
OPERATOR

TOTAL

Performing

1,744.1

4,459.3

1,369.2

7,572.6

Watch

43.7

28.8

13.3

85.8

At-risk

18.1

72.5

17.4

108.0

1,805.9

4,560.6

1,399.9

7,766.4


At December 31, 2011	WHOLESALE		FLEET		OWNER / OPERATOR		TOTAL
Performing	$	1,451.9	$	4,262.8	$	1,361.0	$	7,075.7
Watch		46.7		37.2		13.7		97.6
At-risk		18.4		76.5		19.5		114.4

	$	1,517.0	$	4,376.5	$	1,394.2	$	7,287.7

The table below summarizes 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. Customer accounts that were greater than 30 days past due prior to modification become current upon modification for aging purposes.


At March 31, 2012	WHOLESALE		FLEET		OWNER / OPERATOR		TOTAL
Current and up to 30 days past due	$	1,786.3	$	4,500.2	$	1,373.2	$	7,659.7
31 – 60 days past due		1.5		17.7		11.6		30.8
Greater than 60 days past due		18.1		42.7		15.1		75.9

	$	1,805.9	$	4,560.6	$	1,399.9	$	7,766.4


At December 31, 2011	WHOLESALE		FLEET		OWNER / OPERATOR		TOTAL
Current and up to 30 days past due	$	1,490.0	$	4,321.8	$	1,365.2	$	7,177.0
31 – 60 days past due		9.1		8.7		11.9		29.7
Greater than 60 days past due		17.9		46.0		17.1		81.0

	$	1,517.0	$	4,376.5	$	1,394.2	$	7,287.7

Troubled Debt Restructurings

The Company modifies loans and finance leases as a normal part of its Financial Services operations. The Company’s modifications typically result in granting more time to pay the contractual amounts owed and charging a fee and additional interest for the modification. The Company rarely forgives principal or accrued interest and may require principal and accrued interest payments at the time of modification. When the Company modifies loans and finance leases for customers in financial difficulty and grants a concession, the modifications are classified as TDRs. For the three months ended March 31, 2012, the decrease in the recorded investment for loans and leases modified as TDRs was $.7, resulting in post-modification recorded investment of $12.2. At modification date, the pre-modification and post-modification recorded investment balances by portfolio class are as follows:

Three Months Ended March 31, 2012

FLEET

OWNER /
OPERATOR

TOTAL

Pre-Modification Recorded Investment

11.9

1.0

12.9

Post-Modification Recorded Investment

11.2

1.0

12.2

The balance of TDRs was $27.7 at March 31, 2012 and $26.0 at December 31, 2011.

The recorded investment in finance receivables modified as TDRs during the previous twelve months that subsequently defaulted (i.e., became more than 30 days past-due) in the three months ended March 31, 2012 was $.9 and $.1 for fleet and owner/operator, respectively. The TDRs that subsequently defaulted did not significantly impact the Company’s allowance for credit losses at March 31, 2012.

Repossessions

When the Company determines that a past-due customer is not likely to meet their contractual commitments, the Company repossesses the vehicles which serve as collateral for loans, finance leases and equipment under operating lease. The Company records the repossessed vehicles as used truck inventory which is included in Financial Services other assets on the Consolidated Balance Sheets. The balance of repossessed inventory at March 31, 2012 and December 31, 2011 was $13.8 and $16.0, respectively. Proceeds from the sales of repossessed assets were $16.2 and $21.6 for the three months ended March 31, 2012 and 2011, respectively. These amounts are included in proceeds from asset disposals on the Condensed Statements of Cash Flows. Write-downs of repossessed equipment on operating leases are recorded as impairments and included in Financial Services depreciation and other expense on the Consolidated Statements of Comprehensive Income.