NOTE D - Finance and Other Receivables

Finance and other receivables include the following:


	September 30 2012			December 31 2011
Loans	$	3,554.8		$	3,114.8
Retail direct financing leases		2,401.7			2,187.8
Sales-type finance leases		857.9			795.8
Dealer wholesale financing		1,702.4			1,517.1
Accrued rents and other trade receivables		111.5			111.0
Unearned interest on finance leases		(356.2	)		(327.8	)

		8,272.1			7,398.7
Less allowance for losses:
Loans and leases		(120.6	)		(118.5	)
Dealer wholesale financing		(12.4	)		(11.7	)
Accrued rents and other trade receivables		(6.1	)		(8.8	)

	$	8,133.0		$	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 September 30, 2012 or December 31, 2011. Recognition is resumed if the receivable becomes 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 contractually 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. 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 as a normal part 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. 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. When the Company modifies loans and finance leases for credit reasons and grants a concession, the modifications are classified as troubled debt restructurings (TDRs). 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. When such modifications do occur, they are considered TDRs.

On average, modifications extended contractual terms by approximately eight months in 2012 and nine months in 2011 and did not have a significant effect on the weighted average term or interest rate of the total portfolio at September 30, 2012 and December 31, 2011.

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 direct and sales-type finance leases, net of unearned interest. The wholesale segment consists of wholesale 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 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. 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 36 to 60 months 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 impairment. Finance receivables which are evaluated individually for impairment 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. A finance receivable is impaired if it is considered probable the Company will be unable to collect all contractual interest and principal payments as scheduled. In addition, all retail loans and leases which have been classified as TDRs and all customer accounts over 90 days past due are considered impaired. All impaired accounts are on non-accrual status.

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

For finance receivables that are not individually impaired, the Company collectively evaluates and 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. 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.

In determining the fair value of the collateral, the Company uses a pricing model 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 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 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			OTHER*			TOTAL
Balance at January 1	$	11.7		$	118.5		$	8.8		$	139.0
Provision for losses		2.3			10.5			2.4			15.2
Charge-offs					(17.1	)		(4.8	)		(21.9	)
Recoveries		.1			4.6			.3			5.0
Currency translation and other		(1.7	)		4.1			(.6	)		1.8

Balance at September 30	$	12.4		$	120.6		$	6.1		$	139.1


	2011
	WHOLESALE			RETAIL			OTHER*			TOTAL
Balance at January 1	$	7.5		$	131.5		$	6.0		$	145.0
Provision for losses		4.4			17.1			10.7			32.2
Charge-offs		(1.0	)		(29.6	)		(8.7	)		(39.3	)
Recoveries					7.0			.8			7.8
Currency translation		(.1	)		(2.9	)		.7			(2.3	)

Balance at September 30	$	10.8		$	123.1		$	9.5		$	143.4

*	Accrued rents and other trade receivables.

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


At September 30, 2012	WHOLESALE		RETAIL		TOTAL
Recorded investment for impaired finance receivables evaluated individually	$	3.3	$	82.9	$	86.2
Allowance for impaired finance receivables determined individually	$	2.2	$	19.3	$	21.5
Recorded investment for finance receivables evaluated collectively	$	1,699.1	$	6,375.3	$	8,074.4
Allowance for finance receivables determined collectively	$	10.2	$	101.3	$	111.5


At December 31, 2011	WHOLESALE		RETAIL		TOTAL
Recorded investment for impaired finance receivables evaluated individually	$	18.4	$	96.0	$	114.4
Allowance for impaired 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	$	92.8	$	102.3

The recorded investment for finance receivables that are on non-accrual status in the wholesale segment and the fleet and owner/operator portfolio classes (as defined in impaired loans below) as of September 30, 2012 was $2.9, $57.4 and $12.8, respectively, and as of December 31, 2011 was $18.4, $63.9 and $17.6, respectively.

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.

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


At September 30, 2012	WHOLESALE			FLEET			OWNER / OPERATOR			TOTAL
Impaired loans with specific reserve	$	3.3		$	42.4		$	8.3		$	54.0
Associated allowance		(2.2	)		(8.5	)		(1.7	)		(12.4	)

Net carrying amount of impaired loans	$	1.1		$	33.9		$	6.6		$	41.6


Average recorded investment*	$	12.9		$	23.6		$	10.2		$	46.7

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


Average recorded investment*	$	11.7		$	30.9		$	15.1		$	57.7

*	Represents the average during the 12 months ended September 30, 2012 and 2011.

During the period the loans above were considered impaired, all interest income recognized was recorded on a cash basis:


	Three Months Ended September 30				Nine Months Ended September 30
	2012		2011		2012		2011
Interest income recognized:
Wholesale					$	.1	$	.3
Fleet	$	.2	$	.3		.9		1.2
Owner / Operator		.2		.2		.6		.7

	$	.4	$	.5	$	1.6	$	2.2

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 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 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 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 impaired. 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 known trends to estimate default rates for each credit quality indicator. The tables below summarize the Company’s finance receivables by credit quality indicator and portfolio class.


At September 30, 2012	WHOLESALE		FLEET		OWNER / OPERATOR		TOTAL
Performing	$	1,663.8	$	4,984.4	$	1,355.9	$	8,004.1
Watch		35.3		21.9		13.1		70.3
At-risk		3.3		68.8		14.1		86.2

	$	1,702.4	$	5,075.1	$	1,383.1	$	8,160.6


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 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.


At September 30, 2012	WHOLESALE		FLEET		OWNER / OPERATOR		TOTAL
Current and up to 30 days past due	$	1,697.3	$	5,037.5	$	1,359.4	$	8,094.2
31 – 60 days past due		1.3		7.2		10.7		19.2
Greater than 60 days past due		3.8		30.4		13.0		47.2

	$	1,702.4	$	5,075.1	$	1,383.1	$	8,160.6


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

For the three and nine months ended September 30, 2012, the decrease in the recorded investment for loans and leases modified as TDRs was $.8 and $1.5, respectively, resulting in post-modification recorded investment of $14.5 and $45.9, respectively. At modification date, the pre-modification and post-modification recorded investment balances by portfolio class are as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2012				September 30, 2012
	Recorded Investment				Recorded Investment
	Pre- Modification		Post- Modification		Pre- Modification		Post- Modification
Fleet	$	14.7	$	13.9	$	45.3	$	43.8
Owner / Operator		.6		.6		2.1		2.1

	$	15.3	$	14.5	$	47.4	$	45.9


	Three Months Ended				Nine Months Ended
	September 30, 2011				September 30, 2011
	Recorded Investment				Recorded Investment
	Pre- Modification		Post- Modification		Pre- Modification		Post- Modification
Fleet	$	3.4	$	3.4	$	24.5	$	24.3
Owner / Operator		.7		.7		5.2		5.2

	$	4.1	$	4.1	$	29.7	$	29.5

The balance of TDRs was $44.0 at September 30, 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 nine months ended September 30, 2012 was $7.7 and $.5 for fleet and owner/operator, respectively. Included in the $7.7 of fleet redefaults is $4.8 from one customer, for which the Company had a specific reserve of $1.8 as of September 30, 2012. The TDRs that subsequently defaulted did not significantly impact the Company’s allowance for credit losses at September 30, 2012.

Repossessions

When the Company determines that a past-due customer is not likely to meet its 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 September 30, 2012 and December 31, 2011 was $10.8 and $16.0, respectively. Proceeds from the sales of repossessed assets were $48.7 and $65.7 for the nine months ended September 30, 2012 and 2011, respectively. These amounts are included in proceeds from asset disposals on 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 expense on the Consolidated Statements of Comprehensive Income.