PACCAR 2012 Annual Report Download - page 58

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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
December 31, 2012, 2011 and 2010 (currencies in millions)
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 seven 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
December 31, 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 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 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. Generally, impaired accounts are on non-accrual status. Impaired accounts classified as
TDRs 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.
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