Allowance for Credit Losses and Credit Quality of Receivables

12 Months Ended

Oct. 30, 2022

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

The Company monitors the credit quality of Receivables based on delinquency status. Past due balances of 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 Receivables represent receivables for which the Company has ceased accruing finance income. Generally, when retail notes, revolving charge accounts, and financing lease accounts are 90 days delinquent, accrual of finance income and lease revenue is suspended, and accrued finance income and lease revenue previously recognized is reversed. Generally, when a wholesale receivable becomes 60 days delinquent, the Company determines whether the accrual of finance income on interest-bearing wholesale receivables should be suspended and whether accrued finance income previously recognized should be reversed. During 2022 and 2021, $11.3 million and $12.4 million, respectively, of accrued finance income and lease revenue was reversed on non-performing Receivables. Finance income and lease revenue for non-performing Receivables is 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. During 2022 and 2021, finance income and lease revenue of $15.4 million and $17.1 million, respectively, was recognized from cash payments on non-performing Receivables.

Receivable balances are written off to the allowance for credit losses when, in the judgment of management, they are considered uncollectible. Generally, when retail notes and financing lease accounts are 120 days delinquent, the collateral is repossessed or the account is designated for litigation, and the estimated uncollectible amount from the customer is written off to the allowance for credit losses. Revolving charge accounts are generally deemed to be uncollectible and written off to the allowance for credit losses when delinquency reaches 120 days. Generally, when a wholesale account becomes 60 days delinquent, the Company determines whether the collateral should be repossessed or the account 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 (in millions of dollars):

	October 30, 2022
	2022		2021		2020		2019		2018		Prior Years		Revolving Charge Accounts		Total
Customer Receivables:
Agriculture and turf
Current	$	11,764.5	$	6,958.0	$	3,488.7	$	1,519.7	$	582.8	$	153.2	$	4,022.7	$	28,489.6
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	$	14,297.4	$	8,702.7	$	4,272.7	$	1,810.9	$	667.6	$	181.3	$	4,165.8	$	34,098.4

	October 31, 2021
	2021		2020		2019		2018		2017		Prior Years		Revolving Charge Accounts		Total
Customer Receivables:
Agriculture and turf
Current	$	11,318.1	$	5,719.1	$	2,842.5	$	1,431.0	$	582.8	$	119.9	$	3,620.9	$	25,634.3
30-59 days past due		34.7		47.5		24.2		13.7		5.9		2.9		13.1		142.0
60-89 days past due		12.8		17.4		8.4		5.1		2.4		.7		3.2		50.0
90+ days past due		.5		.5		.1		.2		.1						1.4
Non-performing		20.1		44.5		26.4		22.3		10.6		12.5		6.4		142.8
Construction and forestry
Current		2,356.4		1,198.5		573.5		215.6		42.5		5.4		92.3		4,484.2
30-59 days past due		36.6		33.0		21.1		5.8		2.0		.1		2.7		101.3
60-89 days past due		12.5		8.4		5.0		2.6		.5		.2		1.0		30.2
90+ days past due		.1		.4		.9				.1						1.5
Non-performing		21.9		50.0		33.9		15.1		6.3		2.9		.5		130.6
Total Customer Receivables	$	13,813.7	$	7,119.3	$	3,536.0	$	1,711.4	$	653.2	$	144.6	$	3,740.1	$	30,718.3

The credit quality analysis of wholesale receivables by year of origination was as follows (in millions of dollars):

	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

	October 31, 2021
	2021		2020		2019		2018		2017		Prior Years		Revolving		Total
Wholesale receivables:
Agriculture and turf
Current	$	339.6	$	77.1	$	21.1	$	9.2	$	2.7	$	.4	$	4,233.4	$	4,683.5
30+ days past due														12.0		12.0
Non-performing														6.7		6.7
Construction and forestry
Current		39.4		4.0		3.4		.3						1,199.6		1,246.7
30+ days past due														2.4		2.4
Non-performing
Total wholesale receivables	$	379.0	$	81.1	$	24.5	$	9.5	$	2.7	$	.4	$	5,454.1	$	5,951.3

Allowance for Credit Losses

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 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 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 WARM models are used for smaller and less complex Customer Receivable pools. Transition matrix models, which are used for the majority of the Customer Receivables, 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 duration of the underlying receivables. Estimated recovery rates are applied to the balance at default to calculate the expected credit losses. 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. The WARM models apply historical average annual loss rates, adjusted for current and forecasted economic conditions, to the projected portfolio runoff. Expected credit losses on wholesale receivables are based on historical loss rates, with consideration of current economic conditions and dealer financial risk, along with reasonable and supportable forecasts. 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 on the statements of consolidated income when the dealer’s withholding account is charged. During 2022 and 2021, $8.5 million and $14.3 million, respectively, was recorded in other income related to recoveries from freestanding credit enhancements. Prior to the adoption of ASU No. 2016-13, the benefit of credit losses recovered from freestanding credit enhancements was recognized in the provision for credit losses based on estimated recoveries. At October 30, 2022 and October 31, 2021, the Company had $132.7 million and $128.8 million, 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 30, 2022, October 31, 2021, and November 1, 2020 was as follows (in millions of dollars):

	Retail Notes		Revolving
	& Financing		Charge		Wholesale		Total
	Leases		Accounts		Receivables		Receivables
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	$	29,932.6	$	4,165.8	$	8,404.5	$	42,502.9

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	$	26,978.2	$	3,740.1	$	5,951.3	$	36,669.6

2020
Allowance:
Beginning of year balance	$	53.7	$	39.3	$	7.6	$	100.6
Provision (credit) for credit losses		66.2		25.1		(1.9)		89.4
Write-offs		(49.1)		(51.6)		(.9)		(101.6)
Recoveries		6.4		29.5		1.3		37.2
Translation adjustments		(.3)				3.8		3.5
End of year balance	$	76.9	$	42.3	$	9.9	$	129.1
Receivables:
End of year balance	$	22,636.6	$	3,827.4	$	7,093.3	$	33,557.3

*            Excludes provision (credit) for credit losses on unfunded commitments of $(.9) million and $1.8 million for the years ended October 30, 2022 and October 31, 2021, respectively. The estimated credit losses related to unfunded commitments are recorded in accounts payable and accrued expenses on the consolidated balance sheets.

The allowance for credit losses was relatively flat in 2022 compared to 2021. Continued positive agricultural market conditions are having favorable impacts on the allowance, offsetting increases in the allowance due to higher portfolio balances. Strong recovery rates, driven by higher prices on used equipment inventory, are also benefiting the allowance for credit losses. As part of the allowance setting process, the Company continues to monitor the economy, 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 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. The following table includes Receivable contracts identified as troubled debt restructurings, which were primarily retail notes (in millions of dollars):

	2022		2021		2020
Number of receivable contracts		199		326		468
Pre-modification balance	$	7.0	$	12.0	$	19.0
Post-modification balance		5.8		10.7		17.4

Short-term payment relief provided related to COVID (primarily granted in 2020) did not meet the definition of a troubled debt restructuring. In 2022, 2021, and 2020, there were no significant troubled debt restructurings that subsequently defaulted and were written off. At October 30, 2022, the Company 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 (in millions of dollars):

	2022				2021				2020
	Dollars		Percent		Dollars		Percent		Dollars		Percent
Write-offs:
Retail notes & financing leases:
Agriculture and turf	$	(21.4)	(.09)	%	$	(18.6)	(.09)	%	$	(15.2)	(.09)	%
Construction and forestry		(19.3)	(.39)			(18.1)	(.42)			(33.9)	(.94)
Total retail notes & financing leases		(40.7)	(.15)			(36.7)	(.15)			(49.1)	(.24)
Revolving charge accounts		(26.8)	(.77)			(27.8)	(.85)			(51.6)	(1.51)
Wholesale receivables		(.3)				(.3)				(.9)	(.01)
Total write-offs		(67.8)	(.18)			(64.8)	(.19)			(101.6)	(.31)
Recoveries:
Retail notes & financing leases:
Agriculture and turf		10.2	.05			9.2	.05			4.6	.03
Construction and forestry		4.2	.09			2.4	.06			1.8	.05
Total retail notes & financing leases		14.4	.05			11.6	.05			6.4	.03
Revolving charge accounts		29.7	.86			35.5	1.08			29.5	.86
Wholesale receivables		.1								1.3	.02
Total recoveries		44.2	.12			47.1	.14			37.2	.11
Total net write-offs	$	(23.6)	(.06)	%	$	(17.7)	(.05)	%	$	(64.4)	(.20)	%