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FINANCING RECEIVABLES

9 Months Ended

Aug. 01, 2021

(11) Financing Receivables

The Company monitors the credit quality of financing receivables based on delinquency status. Past due balances of financing 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. Non-performing financing receivables represent loans for which the Company has ceased accruing finance income. The Company ceases accruing finance income, and accrued finance income previously recognized is reversed when these receivables are generally 90 days delinquent. Generally, when receivables are 120 days delinquent the estimated uncollectible amount from the customer is written off to the allowance for credit losses. 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.

Due to the economic effects of COVID, the Company provided short-term payment relief to dealers and retail customers during 2020, and to a much lesser extent in 2021. The relief was provided in regional programs and on a case-by-case basis with customers that were generally current in their payment obligations. Financing receivables granted relief since the beginning of the pandemic that remained outstanding at August 1, 2021 represented approximately 3 percent of the financing receivables balance. The majority of financing receivables granted short-term relief are beyond the deferral period and have either resumed making payments or are reported as delinquent based on the modified payment schedule.

While the Company implemented a new operating model in fiscal year 2021 resulting in new operating segments, assets managed by financial services, including most financing receivables and equipment on operating leases, continue to be evaluated by market (agriculture and turf or construction and forestry).

The credit quality analysis of retail notes, financing leases, and revolving charge accounts (collectively, customer receivables) was as follows in millions of dollars at August 1, 2021:


	Year of Origination
	2021		2020		2019		2018		2017		Prior		Revolving Charge Accounts		Total
Customer receivables:
Agriculture and turf
Current	$	9,159	$	7,516	$	3,938	$	2,053	$	910	$	317	$	3,658	$	27,551
30-59 days past due		38		54		35		19		7		3		13		169
60-89 days past due		14		28		15		6		3		1		4		71
90+ days past due				1												1
Non-performing		12		58		63		42		22		30		6		233
Construction and forestry
Current		2,327		1,845		938		357		84		13		86		5,650
30-59 days past due		35		44		26		9		4		1		3		122
60-89 days past due		13		19		10		5		1		1		1		50
90+ days past due		4		2		9		5		6		2				28
Non-performing		12		47		41		19		8		4		1		132
Total customer receivables	$	11,614	$	9,614	$	5,075	$	2,515	$	1,045	$	372	$	3,772	$	34,007

The credit quality analysis of customer receivables was as follows in millions of dollars at November 1, 2020 and August 2, 2020:


	November 1, 2020						August 2, 2020
	Retail Notes & Financing Leases		Revolving Charge Accounts		Total		Retail Notes & Financing Leases		Revolving Charge Accounts		Total
Customer receivables:
Agriculture and turf
Current	$	21,597	$	3,787	$	25,384	$	20,261	$	3,876	$	24,137
30-59 days past due		135		13		148		148		20		168
60-89 days past due		64		4		68		77		3		80
90+ days past due		2				2		4				4
Non-performing		263		6		269		329		8		337
Construction and forestry
Current		4,859		88		4,947		4,582		85		4,667
30-59 days past due		111		2		113		90		3		93
60-89 days past due		55		1		56		40		1		41
90+ days past due		14				14		12				12
Non-performing		106		1		107		139		1		140
Total customer receivables	$	27,206	$	3,902	$	31,108	$	25,682	$	3,997	$	29,679

The credit quality analysis of wholesale receivables was as follows in millions of dollars at August 1, 2021:


	Year of Origination
	2021		2020		2019		2018		2017		Prior		Revolving		Total
Wholesale receivables:
Agriculture and turf
Current	$	263	$	110	$	38	$	13	$	3	$	1	$	2,256	$	2,684
30-59 days past due
60-89 days past due
90+ days past due
Non-performing						18										18
Construction and forestry
Current		8		8		8		1		1		1		287		314
30-59 days past due												1				1
60-89 days past due
90+ days past due
Non-performing
Total wholesale receivables	$	271	$	118	$	64	$	14	$	4	$	3	$	2,543	$	3,017

The credit quality analysis of wholesale receivables was as follows in millions of dollars at November 1, 2020 and August 2, 2020:


	November 1		August 2
	2020		2020
Wholesale receivables:
Agriculture and turf
Current	$	3,010	$	3,279
30-59 days past due
60-89 days past due
90+ days past due
Non-performing		47		50
Construction and forestry
Current		472		473
30-59 days past due
60-89 days past due
90+ days past due
Non-performing				2
Total wholesale receivables	$	3,529	$	3,804

The allowance for credit losses is an estimate of the credit losses expected over the life of the Company’s receivable portfolio. The Company measures expected credit losses on a collective basis when similar risk characteristics exist. Risk characteristics

considered by the Company include finance product category, market, geography, credit risk, and remaining duration. Receivables that do not share risk characteristics with other receivables in the portfolio are evaluated on an individual basis. Non-performing financing receivables are included in the estimate of expected credit losses.

The Company utilizes loss forecast models, which are selected based on the size and credit risk of the underlying pool of receivables, to estimate expected credit losses. Transition matrix models are used for large and complex customer receivable pools, while weighted average remaining maturity models are used for smaller and less complex customer receivable pools. Expected credit losses on wholesale receivables are based on historical loss rates, adjusted for current economic conditions. The modeled expected credit losses are adjusted based on reasonable and supportable forecasts, which may include economic indicators such as commodity prices, industry equipment sales, unemployment rates, and housing starts. Management reviews each model’s output quarterly, and qualitative adjustments are incorporated as necessary.

An analysis of the allowance for credit losses and investment in financing receivables follows in millions of dollars during the periods:


	Retail Notes		Revolving
	& Financing		Charge		Wholesale
	Leases		Accounts		Receivables		Total
Three Months Ended August 1, 2021
Allowance:
Beginning of period balance	$	152	$	19	$	7	$	178
Provision		3						3
Write-offs		(14)		(9)				(23)
Recoveries		8		8				16
End of period balance	$	149	$	18	$	7	$	174

Nine Months Ended August 1, 2021
Allowance:
Beginning of period balance	$	133	$	43	$	8	$	184
ASU No. 2016-13 adoption		44		(13)				31
Provision (credit)		(9)		(16)		(1)		(26)
Write-offs		(38)		(23)				(61)
Recoveries		17		27				44
Translation adjustments		2						2
End of period balance	$	149	$	18	$	7	$	174
Financing receivables:
End of period balance	$	30,235	$	3,772	$	3,017	$	37,024


	Retail Notes		Revolving
	& Financing		Charge		Wholesale
	Leases		Accounts		Receivables		Total
Three Months Ended August 2, 2020
Allowance:
Beginning of period balance	$	141	$	43	$	11	$	195
Provision (credit)		6		14		(2)		18
Write-offs		(9)		(22)				(31)
Recoveries		7		8				15
Translation adjustments		3						3
End of period balance	$	148	$	43	$	9	$	200

Nine Months Ended August 2, 2020
Allowance:
Beginning of period balance	$	107	$	40	$	3	$	150
Provision		88		32		4		124
Write-offs		(53)		(51)				(104)
Recoveries		12		22				34
Translation adjustments		(6)				2		(4)
End of period balance	$	148	$	43	$	9	$	200
Financing receivables:
End of period balance	$	25,682	$	3,997	$	3,804	$	33,483

The allowance for credit losses on retail notes and financing lease receivables increased in the first nine months of 2021 due to the impact of adopting ASU No. 2016-13. This was partially offset by lower expected losses on retail notes and financing leases in the construction and forestry market and better than expected performance of accounts granted payment relief due to the economic effects of COVID. The allowance for credit losses on revolving charge accounts decreased in the first nine months of 2021, reflecting strong payment performance due to continued improvement in the agricultural market.

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 date, a reduction of the face amount or maturity amount of the debt, or a reduction of accrued interest. During the first nine months of 2021, the Company identified 304 receivable contracts, primarily retail notes, as troubled debt restructurings with aggregate balances of $12 million pre-modification and $10 million post-modification. During the first nine months of 2020, there were 413 receivable contracts, primarily wholesale receivables in Argentina, identified as troubled debt restructurings with aggregate balances of $99 million pre-modification and $88 million post-modification. The short-term payment relief related to COVID, mentioned earlier, did not meet the definition of a troubled debt restructuring. During these same periods, there were no significant troubled debt restructurings that subsequently defaulted and were written off. At August 1, 2021, the Company had no commitments to lend to borrowers whose accounts were modified in troubled debt restructurings.