Paccar Financial 10K 2020 Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from __________ to __________

Commission File No. 001-11677

PACCAR FINANCIAL CORP.

(Exact name of Registrant as specified in its charter)

Washington		91-6029712
(State of incorporation)		(I.R.S. Employer Identification No.)

777 106^th Avenue N.E., Bellevue, Washington		98004
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code is (425) 468-7100

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Series O Medium-Term Notes
$250.0 Million Due August 11, 2021

PCAR21

The NASDAQ Stock Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: ☒ No: ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: ☐ No: ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ☒ No: ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: ☒ No: ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes: ☐ No: ☒

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2020: NaN

The number of shares outstanding of the registrant’s classes of common stock as of January 31, 2021:

Common Stock, $100 par value—145,000 shares

THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF PACCAR INC AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I) (1) (a) AND (b) OF FORM 10-K AND IS, THEREFORE, FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

INDEX

PART I

Item 1.	Business	3
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Mine Safety Disclosures	12

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	22
Item 8.	Financial Statements and Supplementary Data	22
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	45
Item 9A.	Controls and Procedures	45
Item 9B.	Other Information	45

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	46
Item 11.	Executive Compensation	46
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	46
Item 13.	Certain Relationships and Related Transactions, and Director Independence	46
Item 14.	Principal Accounting Fees and Services	46

PART IV

Item 15.	Exhibits and Financial Statement Schedules	46

PACCAR Financial Corp.

(Millions of Dollars)

PART I

ITEM 1.

BUSINESS

GENERAL

PACCAR Financial Corp.

PACCAR Financial Corp. (the “Company”), a Washington corporation, was incorporated in 1961 as a wholly owned subsidiary of PACCAR Inc (“PACCAR”) to finance the sale of PACCAR products.

The Company principally provides financing and leasing of PACCAR manufactured trucks and other transportation equipment sold through the Kenworth and Peterbilt independent dealer networks in the United States. The Company also finances dealer inventories of new and used transportation equipment. PACCAR Leasing Company, a division of the Company operating as “PacLease”, franchises Kenworth and Peterbilt dealerships to engage in full-service and finance leasing. In selected markets, PacLease directly engages in full-service leasing with its customers through Company-owned stores and through Kenworth and Peterbilt dealerships.

PACCAR

PACCAR is a multinational company operating in three principal industry segments: (1) the Truck segment includes the design, manufacture and distribution of high-quality, light-, medium- and heavy-duty commercial trucks; (2) the Parts segment includes the distribution of aftermarket parts for trucks and related commercial vehicles; and (3) the Financial Services segment includes finance and leasing products and services provided to customers and dealers. Heavy-duty trucks have a gross vehicle weight (GVW) of over 33,000 lbs (Class 8) in North America and over 16 metric tonnes in Europe and South America. Medium-duty trucks have a GVW ranging from 19,500 to 33,000 lbs (Class 6 to 7) in North America, and in Europe, light- and medium-duty trucks range between 6 and 16 metric tonnes. PACCAR’s finance and leasing activities are principally related to PACCAR products and associated equipment. PACCAR’s Other business includes the manufacturing and marketing of industrial winches.

PACCAR’s trucks are marketed under the Kenworth, Peterbilt and DAF nameplates. These trucks, which are built in three plants in the United States, three in Europe and one each in Australia, Brasil, Canada and Mexico, are used worldwide for over-the-road and off-highway hauling of commercial and consumer goods. PACCAR also manufactures engines, primarily for use in PACCAR’s trucks, at its facilities in Columbus, Mississippi; Eindhoven, the Netherlands; and Ponta Grossa, Brasil. PACCAR competes in the North American Class 8 market, primarily with Kenworth and Peterbilt conventional models. These trucks are assembled at facilities in Chillicothe, Ohio; Denton, Texas; Renton, Washington; Mexicali, Mexico and Ste. Therese, Canada. PACCAR also competes in the North American Class 6 to 7 markets primarily with Kenworth and Peterbilt conventional models. These trucks are assembled at facilities in Ste. Therese, Canada; Denton, Texas and Mexicali, Mexico. PACCAR competes in the European light/medium market with DAF cab-over-engine (COE) trucks assembled in the United Kingdom by Leyland, one of PACCAR’s wholly owned subsidiaries, and participates in the European heavy market with DAF COE trucks assembled in the Netherlands and the United Kingdom. PACCAR competes in the Brazilian heavy truck market with DAF models assembled at Ponta Grossa in the state of Paraná, Brasil. PACCAR competes in the Australian medium and heavy truck markets with Kenworth conventional and COE models and certain DAF COE models assembled at its facility at Bayswater in the state of Victoria, Australia, and DAF COE models primarily assembled in the United Kingdom. Commercial truck manufacturing comprises the largest segment of PACCAR’s business and accounted for 70% of total 2020 net sales and revenues.

Substantially all trucks are sold to independent dealers. The Kenworth and Peterbilt nameplates are marketed and distributed by separate divisions in the U.S. and a foreign subsidiary in Canada. The Kenworth nameplate is also marketed and distributed by foreign subsidiaries in Mexico and Australia. The DAF nameplate is marketed and distributed worldwide by a foreign subsidiary headquartered in the Netherlands and is also marketed and distributed by foreign subsidiaries in Brasil and Australia. The decision to operate as a subsidiary or as a division is incidental to PACCAR’s Truck segment operations and reflects legal, tax and regulatory requirements in the various countries where PACCAR operates.

There are four principal competitors in the U.S. and Canada commercial truck market. PACCAR’s share of the U.S. and Canadian Class 8 market was 30.1% of retail sales in 2020, and PACCAR’s medium-duty market share was 22.6% in 2020. In Europe, there are six principal competitors in the commercial truck market, including parent companies to three competitors of PACCAR in the U.S. In 2020, DAF had a 16.3% share of the European heavy-duty market and a 9.5% share of the light/medium duty market. These markets are highly competitive in price, quality and service. PACCAR is not dependent on any single customer for its sales. There are no significant seasonal variations in sales.

PACCAR Financial Corp.

(Millions of Dollars)

Aftermarket truck parts are sold and delivered to PACCAR’s independent dealers through PACCAR’s 18 strategically located parts distribution centers (PDCs) in the U.S., Canada, Europe, Australia, Mexico and Central and South America. Parts are primarily purchased from various suppliers and also manufactured by PACCAR. Aftermarket parts inventory levels are determined largely by anticipated customer demand and the need for timely delivery. The Parts segment accounted for 21% of total 2020 net sales and revenues.

In addition to the Company, which provides financing, leasing and full-service truck leasing in the United States, PACCAR offers similar financing programs for PACCAR products in Canada, Mexico, Australia, Europe and South America through other wholly owned finance subsidiaries. PACCAR also conducts full-service leasing operations through wholly owned subsidiaries in Canada, Mexico, Germany and Australia.

PACCAR’s common stock is traded on the NASDAQ Stock Market under the symbol PCAR. PACCAR and the Company are subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, file reports and other information with the Securities and Exchange Commission (the “Commission”). All reports, proxy statements and other information filed by PACCAR and the Company with the Commission may be inspected and copied at the public reference facility maintained by the Commission at 100 F Street, N.E., Washington, D.C. 20549 or through the Commission’s internet site at www.sec.gov.

BUSINESS OF THE COMPANY

The Company operates primarily in the industry segment of finance and leasing services provided to customers and dealers in the United States for new Kenworth and Peterbilt trucks, used trucks, truck trailers and allied equipment. The Company’s PacLease division franchises Kenworth and Peterbilt dealerships to engage in full-service and finance leasing. In selected markets, PacLease directly engages in full-service leasing with its customers through Company-owned stores and on a limited basis through Kenworth and Peterbilt dealerships.

The Company conducts business with most Kenworth and Peterbilt dealers in the United States. The volume of the Company’s business is significantly affected by PACCAR’s sales of trucks to its dealers and competition from other financing sources.

The Company is primarily responsible for managing the sales of used trucks in the United States. The Company sells used trucks returned from matured operating leases in the ordinary course of business and trucks acquired from repossessions. The Company also obtains used trucks from Kenworth and Peterbilt in trades related to new truck sales. Certain gains and losses from the sale of used trucks are shared with Kenworth and Peterbilt. The Company records revenue on the sale of used trucks received in trade.

As of December 31, 2020, the Company employed 356 full-time employees, none of whom are represented by a collective bargaining agent.

Human Capital Management

The Company is committed to a strong, diverse and inclusive culture and the company’s excellent financial results reflect its human centered philosophy. The Company’s employees have access to robust benefits packages, comprehensive training programs, tuition assistance and a work environment that promotes safety and diversity.

The Company’s benefit packages support employee physical, emotional and financial well-being. Employee satisfaction and engagement are measured through periodic surveys. Employee training and development programs are extensive and comprehensive, including professional and technical skills training, compliance training, leadership development and management training. The Company has diversity councils that set goals to enhance business success through diverse and inclusive workplaces.

Safety is a key priority at the Company’s facilities. In response to the COVID-19 pandemic, the Company adapted its facilities for social distancing and implemented strong procedures to maintain appropriate health and safety protocols. The Company’s managers continuously address safety enhancements; provide regular and ongoing safety training; and use displays located in facilities to provide all employees with safety-related information.

PACCAR Financial Corp.

(Millions of Dollars)

THE COMPANY’S PRODUCTS

The Company offers the following products to retail customers:

Retail Contracts and Loans

The Company purchases retail installment contracts from dealers and receives assignments of the contracts and a first lien security interest in the vehicles financed (“Retail Contracts”). Certain Retail Contracts with third party leasing companies may also include an assignment to the Company of the related lease and rental payments due. Retail Contracts purchased by the Company have fixed or floating interest rates.

The Company also makes loans to the end users of the vehicles financed that are secured by a first lien security interest in the vehicles. These loans have fixed or floating interest rates.

Financing Leases

The Company offers financing lease contracts where it is treated as the owner of the equipment for tax purposes and generally retains the tax depreciation (“Financing Leases”). The lessee is responsible for the payment of property and sales taxes, licenses, maintenance and other operating costs.

The lessee is obligated to maintain the equipment and to insure the equipment against physical damage and liability losses.

Most of the Company’s Financing Leases contain a Terminal Rental Adjustment Clause, which requires the lessee to guarantee to the Company a stated residual value upon disposition of the equipment at the end of the financing lease term.

Operating Leases

The Company offers operating lease contracts (“Operating Leases”) where the Company owns the equipment. The lessee is responsible for the payment of property and sales taxes, licenses, maintenance and other operating costs. The lessee is obligated to maintain the equipment and to insure the equipment against physical damage and liability losses.

At the end of the operating lease term, the lessee has the option to return the equipment to the Company or purchase the equipment at its fair market value.

The Company offers the following products to Kenworth and Peterbilt dealers and PacLease franchisees:

Master Notes

Master note contracts (“Master Notes”) are offered to select dealers for new and used trucks. Retail installment contracts originated by the dealer for new or used trucks which meet the Company’s requirements as to form, terms and creditworthiness for Retail Contracts are pledged to the Company as collateral for direct, full recourse loans by the Company to the dealer. The dealer may pay the loans early or make additional draws up to specified balances of the contracts pledged to the Company. Master Notes have fixed or floating interest rates.

Wholesale Contracts

The Company provides wholesale financing for new and used truck inventories for dealers (“Wholesale Contracts”). Wholesale Contracts are secured by the inventories financed. The amount of credit extended by the Company for each truck is generally limited to the invoice price of new equipment and to the wholesale value of used equipment. Wholesale Contracts have floating interest rates.

Dealer Loans

The Company makes secured loans to selected Kenworth and Peterbilt dealers (“Dealer Loans”). The purpose of these loans includes the financing of real estate, fixed assets, working capital and dealership acquisitions. Dealer Loans have fixed or floating interest rates.

PACCAR Financial Corp.

(Millions of Dollars)

Full-Service Leasing

The Company also conducts full-service leasing operations under the PacLease trade name. Selected dealers are franchised to provide full-service leasing, which includes the equipment, maintenance, parts, taxes and licenses in one combined contract with the customer. The Company provides the franchisees with equipment financing and managerial support. The Company also operates full-service lease outlets in selected markets.

Insurance

The Company offers insurance coverage through an unrelated regulated insurance carrier for a fee on new trucks and used trucks inventory to dealers that have Wholesale Contracts with the Company.

CUSTOMER CONCENTRATION, PAST DUE ACCOUNTS AND LOSS EXPERIENCE

Customer Concentration

The Company’s customers are principally concentrated in the transportation industry in the United States. The Company’s portfolio assets are diversified over a large number of customers and dealers with no single customer or dealer balance representing over 10% of the total portfolio assets as of December 31, 2020 and 2019. There is no single customer or dealer representing over 10% of Interest and other revenues for the years ended December 31, 2020, 2019 and 2018.

Past Due Receivables and Allowance for Credit Losses

An account is considered past due by the Company if any portion of an installment is due and unpaid for more than 30 days. In periods of adverse economic conditions, past due levels, repossessions and credit losses generally increase.

The provision for losses on finance and other receivables is charged to income as necessary to reflect management’s estimate of expected credit losses, net of recoveries, inherent in the portfolio. Receivables are charged off against the allowance for credit losses when, in the judgment of management, they are considered uncollectible (generally upon repossession of the collateral).

For further discussion of the allowance for credit losses, see “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

COMPETITION AND ECONOMIC FACTORS

The commercial truck and trailer finance and leasing business is highly competitive among banks, commercial finance companies, captive finance companies and leasing companies. Some of these institutions have substantially greater financial resources than the Company and may borrow funds at lower rates.

The dealers are the primary source of contracts acquired by the Company. Dealers are not required to obtain financing from the Company and they have a variety of other sources that may be used for wholesale and customer financing of trucks. Retail purchasers also have a variety of sources available to finance truck purchases.

The ability of the Company to compete in its market is principally based on the rates, terms and conditions that the Company offers dealers and retail purchasers, as well as the specialized services it provides. Rates, terms and conditions are based on the Company’s desire to provide flexible financing and services to satisfy dealer and customer needs, the ability of the Company to borrow funds at competitive rates and the Company’s need to earn an adequate return on its invested capital. The Company’s business is also affected by changes in market interest rates and used truck values, which in turn are related to general economic conditions, demand for credit, inflation and governmental policies. Seasonality is not a significant factor in the Company’s business.

The volume of receivables available to be acquired by the Company from dealers is largely dependent upon the number of Kenworth and Peterbilt trucks sold in the United States. Sales of medium- and heavy-duty trucks depend on the capital equipment requirements of the transportation industry, which are influenced by growth and cyclical variations in the economy. Medium- and heavy-duty truck sales are also sensitive to economic factors such as fuel costs, interest rates, insurance premiums, federal excise and highway use taxes, taxation on the acquisition and use of capital goods, as well as government regulations.

PACCAR Financial Corp.

(Millions of Dollars)

REGULATION AND SIMILAR MATTERS

In certain states, the Company is subject to retail installment sales or installment loan statutes and related regulations, the terms of which vary from state to state. These laws may require the Company to be licensed as a sales finance company and may regulate disclosure of finance charges and other terms of retail installment contracts. The Company is subject to substantive state franchise regulations and federal and state uniform franchise disclosure laws in connection with the offering of PacLease full-service truck leasing and rental franchises to Kenworth and Peterbilt truck dealers. The Company owns and operates several truck leasing and rental business locations, which are subject to applicable state licensing laws. The Company is also subject to certain provisions of federal law relating to non-discrimination in the granting of credit.

SOURCES OF FUNDS

The Company’s primary sources of funds are medium-term note borrowings and commercial paper proceeds in the public capital markets, collections on loans and leases, retained earnings and to a lesser extent borrowings from PACCAR, bank loans and capital contributions. The Company’s investment in additional receivables is dependent upon its ability to raise funds at competitive rates in the public and private debt markets. The receivables and leases that are financed are either fixed rate or floating rate with terms that generally range from 36 to 60 months.

To reduce the risk of changes in interest rates that could affect interest margins, the Company obtains funding with interest rate characteristics similar to the corresponding assets. Fixed rate assets are primarily funded with fixed and floating rate medium-term notes and commercial paper. Floating rate assets are funded primarily with commercial paper with maturities of three months or less and floating rate medium-term notes. Interest-rate swaps may be combined with commercial paper or medium-term notes to achieve the Company’s matched funding objectives.

As of December 31, 2020, the total notional amount of interest-rate swap contracts outstanding was $924.9. These swap contracts are accounted for as cash flow or fair value hedges.

The notional amounts are used to measure the volume of these contracts and do not represent exposure to credit loss. The permitted types of interest-rate swap contracts, counterparties’ transaction limits and related approval authorizations have been established by the Company’s senior management and Board of Directors. The interest-rate contracts outstanding are regularly reported to, and reviewed by, the Company’s senior management.

The Company periodically registers debt securities under the Securities Act of 1933 for offering to the public. In November 2018, the Company filed a shelf registration statement to issue medium-term notes. In February 2021, the Company issued $400.0 of medium-term notes under this registration. The shelf registration statement expires in November 2021 and does not limit the principal amount of debt securities that may be issued during the period. The Company intends to renew the registration prior to its expiration. The total principal amount of medium-term notes outstanding for the Company as of December 31, 2020 was $6,000.0. See “Note G – Borrowings” in the Notes to the Financial Statements for further information on the Company’s medium-term notes.

The Company participated with PACCAR and certain other PACCAR affiliates in committed bank facilities of $3,000.0 at December 31, 2020. Of this amount, $1,000.0 expires in June 2021, $1,000.0 expires in June 2023 and $1,000.0 expires in June 2024. PACCAR and the Company intend to replace these credit facilities on or before expiration with facilities of similar amounts and duration.

Of the $3,000.0 credit facilities, $2,087.0 is available for use by the Company and/or PACCAR and PACCAR Financial Europe. The remaining $913.0 is allocated to PACCAR and other non-U.S. PACCAR financial subsidiaries. These credit facilities are used to provide backup liquidity for the Company’s commercial paper and maturing medium-term notes. The Company is liable only for its own borrowings under these credit facilities. There were no borrowings under these credit facilities in 2020.

RELATIONSHIP WITH PACCAR AND AFFILIATES

General

The operations of the Company are dependent on its relationship with PACCAR. Sales of PACCAR products are the Company’s principal source of its financing business. The Company receives administrative support from and pays dividends to its parent company and periodically borrows funds from or lends money to PACCAR and/or its affiliates. The Company’s principal office is located in the corporate headquarters building of PACCAR (owned by PACCAR).

PACCAR Financial Corp.

(Millions of Dollars)

The Company also leases office space from one facility owned by PACCAR and four facilities leased by PACCAR. Since the directors of the Company are all executives of PACCAR and PACCAR is the sole owner of the Company’s outstanding voting common stock, PACCAR can determine the course of the Company’s business.

Periodically, the Company makes loans to, borrows from and has intercompany transactions with PACCAR. The Company had $1,151.6 and $861.0 outstanding in loans due from PACCAR as of December 31, 2020 and 2019, respectively. In addition, the Company periodically loans funds to certain foreign finance and leasing affiliates of PACCAR. The Company had $669.5 and $651.5 outstanding in loans due from foreign finance affiliates of PACCAR as of December 31, 2020 and 2019, respectively. These affiliates have Support Agreements with PACCAR, similar to the Company’s Support Agreement with PACCAR described below. The foreign affiliates operate in the United Kingdom, the Netherlands, Mexico, Canada, Australia and Brasil. Loans to these foreign affiliates during 2020 and 2019 were denominated in United States dollars. The foreign affiliates primarily provide financing and leasing of PACCAR manufactured trucks and related equipment sold through the DAF, Kenworth and Peterbilt independent dealer networks in Europe, Mexico, Canada, Australia and Brasil. The Company will not make loans to the foreign affiliates in excess of the equivalent of $750.0 United States dollars, unless the amount in excess of such limit is guaranteed by PACCAR. The Company periodically reviews the funding alternatives for these affiliates, and these limits may be revised in the future.

PACCAR charges the Company for certain administrative services it provides. These costs were charged to the Company based upon the Company’s use of the services and PACCAR’s cost. See “Note D – Transactions with PACCAR and Affiliates” in the Notes to the Financial Statements.

Support Agreement

The Company and PACCAR are parties to a Support Agreement that obligates PACCAR to provide, when required, financial assistance to the Company to ensure that the Company maintains a ratio of earnings to fixed charges (as defined in the Support Agreement) of at least 1.25 to 1 for any fiscal year. The required ratio for the years ended December 31, 2020, 2019 and 2018 was met without assistance. The Support Agreement also requires PACCAR to own, directly or indirectly, all outstanding voting stock of the Company. See “Note D – Transactions with PACCAR and Affiliates” in the Notes to the Financial Statements.

The Company and PACCAR may amend or terminate any or all of the provisions of the Support Agreement upon 30 days notice, with copies of the notice being sent to all nationally recognized statistical rating organizations (“NRSROs”) which have issued ratings with respect to debt of the Company (“Rated Debt”). Such amendment or termination will be effective only if (i) two NRSROs confirm in writing that their ratings with respect to any Rated Debt would remain the same after such amendment or termination, or (ii) the notice of amendment or termination provides that the Support Agreement will continue in effect with respect to Rated Debt outstanding on the effective date of such amendment or termination unless such debt has been paid or defeased pursuant to the indenture or other agreement applicable to such debt, or (iii) the holders of at least two-thirds of the aggregate principal amount of all outstanding Rated Debt with an original maturity in excess of 270 days consent in writing to such amendment or termination, provided that the holders of Rated Debt having an original maturity of 270 days or less shall continue to have the benefits of the Support Agreement until the maturity of such debt.

The Support Agreement expressly states that PACCAR’s commitments to the Company thereunder do not constitute a PACCAR guarantee of payment of any indebtedness or liability of the Company to others and do not create rights against PACCAR in favor of persons other than the Company. There are no guarantees, direct or indirect, by PACCAR of payment of any indebtedness of the Company.

OTHER DISCLOSURES

The Company’s filings on Forms 10-K, 10-Q and 8-K and any amendments to those reports can be obtained through a link on the Company’s website, www.paccarfinancial.com, or PACCAR’s website, www.paccar.com, free of charge as soon as reasonably practicable after the report is electronically filed with, or furnished to, the Commission. The information on the websites is not incorporated by reference into this report.

PACCAR Financial Corp.

(Millions of Dollars)

ITEM 1A.

RISK FACTORS

The Company is exposed to certain risks and uncertainties that could have a material adverse impact to the Company’s financial condition and operating results, including:

Sales of PACCAR Products

The Company’s business is substantially dependent upon the sale of PACCAR products and its ability to offer competitive financing in the United States. Changes in the volume of sales of PACCAR products due to a variety of reasons could impact the level of business of the Company. Refer to the “Relationship with PACCAR and Affiliates” section in “Item 1. – Business” and “Note D – Transactions with PACCAR and Affiliates” in the Notes to the Financial Statements for further discussion regarding the Company’s relationship with PACCAR.

Liquidity Risks, Credit Ratings and Costs of Funds

Disruptions or volatility in U.S. financial markets could limit the Company’s sources of liquidity, or the liquidity of customers and dealers. A lowering of the Company’s credit ratings could increase the cost of borrowing and adversely affect access to capital markets. The Company obtains funds for its operations from commercial paper and medium-term note debt. If the markets for commercial paper and medium-term notes do not provide the necessary liquidity in the future, the Company may experience increased costs or may have to limit its financing of retail and wholesale assets.

Competitive Risk

The Company competes with banks, other commercial finance companies and financial services firms which may have lower costs of borrowing, higher leverage or market share goals that result in a willingness to offer lower interest rates, which may lead to decreased margins, lower market share or both for the Company.

Credit Risk

The Company is exposed to the risk of loss arising from the failure of a customer, dealer or counterparty to meet the terms of the loans, leases and derivative contracts with the Company. Although most of the financial assets of the Company are secured by underlying equipment collateral, in the event a customer cannot meet its obligations to the Company, there is a risk that the value of the underlying collateral will not be sufficient to recover the amounts owed to the Company, resulting in credit losses.

Interest-Rate Risk

The Company is subject to interest-rate risks, because increases in interest rates could reduce demand for its products, increase borrowing costs and potentially reduce interest margins. The Company uses derivative contracts to match the interest rate characteristics of its debt to the interest rate characteristics of its finance receivables in order to mitigate the risk of changing interest rates.

Residual Value Risk

Residual value risk is the risk that the estimated residual value of leased assets, established at lease origination for the Company’s operating leases and certain finance leases, will not be recoverable when the leased asset is returned to the Company. When the market value of these leased assets at contract maturity or at early termination is less than its contractual residual value, the Company will be exposed to a greater risk of loss on the sales of the returned equipment. Refer to the Critical Accounting Policy on “Equipment on Operating Leases” in “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion regarding the Company’s exposure to residual value risk.

Accounting Estimates

In the preparation of the Company’s financial statements, in accordance with U.S. generally accepted accounting principles, management uses estimates and makes judgments and assumptions that affect asset and liability values and the amounts reported as income and expense during the periods presented. Certain of these estimates, judgments and assumptions, such as residual values on operating leases, the allowance for credit losses and the provision for income taxes, are particularly sensitive. If actual results are different from estimates used by management, they may have a material impact on the financial statements.

PACCAR Financial Corp.

(Millions of Dollars)

Information Technology

The Company relies on information technology systems and networks to process, transmit and store electronic information, and to manage or support a variety of its business processes and activities. These computer systems and networks may be subject to disruptions during the process of upgrading or replacing software, databases or components; power outages; hardware failures; computer viruses; or outside parties attempting to disrupt the Company’s business or gain unauthorized access to the Company’s electronic data. The Company maintains and continues to invest in protections to guard against such events. Examples of these protections include conducting third-party penetration tests, implementing software detection and prevention tools, event monitoring, and disaster recoverability. Additionally the Company maintains a cybersecurity insurance policy. Despite these safeguards, there remains a risk of system disruptions, unauthorized access and data loss.

If the Company’s computer systems were to be damaged, disrupted or breached, it could impact data availability and integrity, result in a theft of the Company’s intellectual property or lead to unauthorized disclosure of confidential information of the Company’s customers, suppliers and employees. Security breaches could also result in a violation of U.S. and international privacy and other laws and subject the Company to various litigations and governmental proceedings. These events could have an adverse impact on the Company’s results of operations and financial condition, damage its reputation, disrupt operations and negatively impact competitiveness in the marketplace.

Litigation and Regulatory Actions

On July 19, 2016, the European Commission (EC) concluded its investigation of all major European truck manufacturers and reached a settlement with DAF Trucks N.V., its subsidiary DAF Trucks Deutschland GmbH (collectively, “DAF”) and PACCAR Inc as their parent. Following the settlement, claims and lawsuits have been filed against PACCAR Inc, DAF and certain DAF subsidiaries and other truck manufacturers in various European jurisdictions. These claims and lawsuits include a number of collective proceedings, including proposed class actions in the United Kingdom, alleging EC-related claims and seeking unspecified damages. Others may bring EC-related claims and lawsuits against PACCAR Inc or its subsidiaries.

While PACCAR Inc believes it has meritorious defenses, such claims and lawsuits will likely take a significant period of time to resolve. PACCAR Inc cannot reasonably estimate a range of loss, if any, that may result given the early stage of these claims and lawsuits. An adverse outcome of such proceedings could have a material impact on PACCAR Inc’s results of operations.

COVID-19 Pandemic

The COVID-19 pandemic and various governmental responses to contain the outbreak have resulted in a significant reduction in global economic activity. National and local governments have issued various stay-at-home orders, travel restrictions and border closures affecting consumers and businesses. These restrictions have been lifted to various degrees in different locations, but are subject to being re-imposed. PACCAR’s operations have been designated as essential businesses in many jurisdictions as they support the transport of food, medical supplies and other essential materials which means PACCAR and the Company may operate under certain conditions including ensuring employee health and safety is maintained.

The full extent and duration of the adverse effect on the Company’s business is uncertain and depends on the severity of the pandemic and how quickly and to what extent global and local economies are able to recover from the effects of the pandemic. Prolonged unemployment, changes in consumer behavior as a result of COVID-19, as well as other pandemic related economic factors such as business failures, lower housing and construction starts, lower automobile sales and disruptions in financial markets could have further adverse effects on PACCAR’s truck production, resulting in lower new business volume for the Company, and may also cause higher finance portfolio past dues, credit losses and used truck losses. Other unforeseen impacts of the COVID-19 pandemic could also impact the Company’s business and results of operations.

PACCAR Financial Corp.

(Millions of Dollars)

London Inter-Bank Offered Rate (LIBOR) Transition

Certain financing provided by the Company to dealers and retail customers, as well as financing extended to the Company, are based on variable interest rate contracts which utilize LIBOR to establish applicable contract interest rates. The Company also utilizes hedging instruments and has line of credit arrangements which reference LIBOR. In July 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced it intends to stop compelling banks to submit rates for calculation of LIBOR after 2021. At this time it is not clear if LIBOR will continue to exist, and if not, what alternative benchmark rate(s) will replace LIBOR in the marketplace. Any new benchmark rate will likely not replicate LIBOR exactly, which could impact currently active contracts which terminate after 2021, or after such other date when LIBOR may cease to exist.

Substantially all of the Company’s contracts which reference LIBOR, including dealer wholesale financing contracts, medium-term notes, hedging instruments and line of credit arrangements, include fall-back language that specifies the methods to establish contract interest rates in the absence of LIBOR, or provide for the use of an alternative benchmark rate should LIBOR be discontinued. The Company has efforts underway to offer new finance contracts which make use of alternative benchmark rates in replacement of all instances where LIBOR was previously used. These efforts are expected to be completed prior to December 31, 2021.

The Company has retail loan and lease contracts with a December 31, 2020 balance of approximately $103, or 1% of the Company’s assets, referencing LIBOR that extend beyond 2021 and do not contain fall-back language or provide for the use of an alternative benchmark rate. The Company will seek to amend these contracts to allow for the use of an alternative benchmark rate.

Changes to benchmark rates will have an uncertain impact on finance receivables and other financial obligations, our current or future cost of funds and/or access to capital markets. The Company will attempt to minimize the impact of differences between the current and replacement benchmark rates through pricing adjustments on the financing provided by the Company, but it is not certain the Company will be able to do so. Based on the current balance of finance contracts referencing LIBOR, it is estimated that for a 10 basis point difference between the current and replacement benchmark rates that the Company is unable to recover through pricing adjustments, income before income taxes would decrease by approximately $1. Accordingly, the Company does not expect the anticipated changes to the use of LIBOR as a benchmark rate will have a material impact on the results of operations.

PACCAR Financial Corp.

(Millions of Dollars)

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.

PROPERTIES

The Company’s principal office is located in the corporate headquarters building of PACCAR (owned by PACCAR) at 777 106th Avenue N.E., Bellevue, Washington 98004. The Company owns two full-service leasing facilities in Texas. The Company owns used truck sales facilities in South Carolina, Illinois, Texas and Utah, and leases one facility in California.

Other offices and leasing facilities of the Company are located in premises owned or leased by PACCAR. The Company considers all its properties to be suitable for their intended purpose. Annual lease rentals for these premises in the aggregate are not material in relation to expenses as a whole.

ITEM 3.

LEGAL PROCEEDINGS

The Company is a party to various routine legal proceedings incidental to its business involving the collection of accounts and other matters. The Company does not consider such matters to be material with respect to the business or financial condition of the Company as a whole.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PACCAR Financial Corp.

(Millions of Dollars)

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

All outstanding common stock is owned by PACCAR; therefore, there is no trading market in the Company’s common stock.

No dividends were declared in 2020, 2019 and 2018. A dividend of $100.0 was declared and paid to PACCAR in January 2021.

ITEM 6.

SELECTED FINANCIAL DATA

The following table summarizes selected financial data for the Company.

Balance Sheet Data

	As of December 31
	2020		2019		2018		2017		2016
Total Assets	$	10,210.5	$	10,440.8	$	9,295.3	$	8,352.6	$	8,330.5
Total Liabilities		8,373.7		8,675.4		7,626.9		6,782.3		7,157.5
Total Stockholder’s Equity		1,836.8		1,765.4		1,668.4		1,570.3		1,173.0

Income Statement Data

	Year ended December 31
		2020		2019		2018		2017			2016
Total interest and other revenues	$	746.2	$	762.0	$	707.5	$	672.4		$	623.7
Total expenses		639.7		624.2		586.7		581.1			484.5
Income before income taxes		106.5		137.8		120.8		91.3			139.2
Income tax expense (benefit) (1)		25.7		34.6		28.3		(299.9	)		50.3
Net income	$	80.8	$	103.2	$	92.5	$	391.2		$	88.9

(1)	The Company’s 2017 income tax benefit was $299.9, primarily due to the change in U.S. tax law in 2017.

PACCAR Financial Corp.

(Millions of Dollars)

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The Company’s results of operations for the years ended December 31, 2020 and 2019 are presented below. For information on the year ended December 31, 2018 refer to Part II, Item 7 in the 2019 Annual Report on Form 10-K.

	Year ended December 31
		2020		2019	% Change
New business volume by product:
Retail loans and finance leases	$	2,263.2	$	2,399.7		(6	)
Equipment on operating leases		344.6		556.1		(38	)
Dealer master notes		154.4		152.5		1
	$	2,762.2	$	3,108.3		(11	)

Average earning assets by product:
Retail loans and finance leases	$	5,352.8	$	5,020.8		7
Equipment on operating leases		1,383.9		1,494.0		(7	)
Dealer wholesale financing		1,405.1		1,512.9		(7	)
Dealer master notes		118.2		67.3		76
	$	8,260.0	$	8,095.0		2

Revenue by product:
Retail loans and finance leases	$	286.6	$	285.9
Equipment on operating leases		369.8		389.9		(5	)
Dealer wholesale financing		36.9		56.8		(35	)
Dealer master notes		3.9		3.0		30
Used truck sales, other revenues and fees		49.0		26.4		86
	$	746.2	$	762.0		(2	)

Income before income taxes	$	106.5	$	137.8		(23	)

New Business Volume

New business volume from retail loans and finance leases in 2020 decreased 6% from 2019 due to lower retail sales of PACCAR trucks in 2020. Equipment on operating leases new business volume decreased 38% in 2020 from 2019, attributable to lower fleet business in 2020. Dealer master notes new business volume in 2020 increased 1% from 2019 due to increased finance volume from dealers.

Market share on financing of new PACCAR trucks increased to 24.5% in 2020 from 20.7% in 2019.

The Company has programs to assign new lease and loan contracts to third parties to generate new business and to limit the risk of portfolio concentration with certain large customers. These transactions are accounted for as sales of the related retail loans, finance leases, or equipment on operating leases, and are excluded from new business volume. The Company sold retail loans and finance leases with a book value of $41.9 and $38.6 in 2020 and 2019, and received cash proceeds of $44.6 and $40.0 in 2020 and 2019, respectively. The Company sold equipment under operating leases with a book value of $.3 and $2.4 in 2020 and 2019, and received cash proceeds of $.3 and $2.5 in 2020 and 2019, respectively. The Company retains servicing responsibilities for these retail loans and leases, and fees received for servicing are deferred and recognized over the contract term.

PACCAR Financial Corp.

(Millions of Dollars)

Income Before Income Taxes

The Company’s income before income taxes was $106.5 in 2020 compared to $137.8 in 2019. The decrease in income before income taxes in 2020 was primarily the result of lower operating lease margin of $30.0, lower results from used trucks and other of $4.1 and higher provision for losses of $3.3, partially offset by lower selling, general and administrative expenses (SG&A) of $9.2.

Included in Other assets on the Company’s Balance Sheets are used trucks held for sale, net of impairments, of $210.3 at December 31, 2020 and $180.3 at December 31, 2019. These trucks are primarily units returned from matured operating leases in the ordinary course of business, and also include trucks acquired from repossessions or through acquisitions of used trucks in trades related to new truck sales.

The Company recognized losses on used trucks, excluding repossessions, of $55.5 in 2020 and $26.1 in 2019, including losses on multiple unit transactions of $22.6 in 2020 and $8.6 in 2019. Used truck losses (gains) related to repossessions, which are recognized as credit losses, were $.4 in 2020 compared to $(.6) in 2019.

Revenue and Expenses

The major factors for the changes in interest and fee income, interest and other borrowing costs and finance margin in 2020 compared to 2019 are summarized below:

				Interest and
	Interest and			Other Borrowing			Finance
	Fee Income			Costs			Margin
2019	$	347.8		$	179.7		$	168.1
Increase (decrease)
Average finance receivables		11.6						11.6
Average receivables from PACCAR and affiliates		4.7						4.7
Average debt balances					6.2			(6.2	)
Yields		(34.8	)					(34.8	)
Borrowing rates					(21.6	)		21.6
Total decrease		(18.5	)		(15.4	)		(3.1	)
2020	$	329.3		$	164.3		$	165.0

•

Average finance receivables increased $275.1 in 2020 as a result of a larger retail portfolio.

•

Average receivables from PACCAR and affiliates increased $212.0 in 2020 as a result of new loans to affiliated companies exceeding collections.

•

Average debt balances increased $275.5 in 2020, reflecting funding requirements for the portfolio and affiliated companies. The average debt balances reflect funding for the average earning asset portfolio, including retail loans, finance leases, wholesale financing and equipment on operating leases.

•

Yields decreased due to lower yields on receivables from customers and PACCAR and affiliates. Yields on customer finance receivables were 4.2% in 2020, compared to 4.6% in 2019. Yields on receivables from PACCAR and affiliates were 2.2% in 2020, compared to 2.7% in 2019.

•

Average borrowing rates in 2020 were 2.2% compared to 2.5% in 2019 due to lower debt market interest rates.

PACCAR Financial Corp.

(Millions of Dollars)

The major factors for the changes in operating lease and rental revenues, depreciation and other rental expenses and operating lease margin in 2020 compared to 2019 are summarized below:

	Operating Lease			Depreciation
	and Rental			and Other			Operating
	Revenues			Rental Expenses			Lease Margin
2019	$	389.9		$	351.6		$	38.3
(Decrease) increase
Operating lease impairments					5.2			(5.2	)
Results on returned lease assets					18.5			(18.5	)
Average operating lease assets		(25.0	)		(20.3	)		(4.7	)
Revenue and cost per asset		4.9			6.5			(1.6	)
Total (decrease) increase		(20.1	)		9.9			(30.0	)
2020	$	369.8		$	361.5		$	8.3

•

Operating lease impairments increased in 2020 due to higher used truck inventory resulting from higher lease returns and lower used truck market prices.

•

Results on returned lease assets were lower in 2020 compared to 2019, primarily due to higher losses on sales of returned lease units.

•

Average operating lease assets decreased due to the volume of expiring leases exceeding new business volume for leased vehicles.

•

Revenue per asset increased by $4.9 primarily due to higher lease rates, cost per asset increased by $6.5 primarily due to higher depreciation.

Used truck sales and other revenues and cost of used truck sales and other expenses are summarized below for 2020 compared to 2019:

	Year ended December 31
		2020		2019
Used truck sales	$	35.2	$	12.2
Insurance, franchise and other revenues		11.9		12.1
Used truck sales and other revenues		47.1		24.3

Cost of used truck sales		39.9		14.2
Insurance, franchise and other expenses		4.0		2.8
Cost of used truck sales and other expenses		43.9		17.0

Results from used trucks and other	$	3.2	$	7.3

Results from used trucks and other decreased by $4.1 in 2020, primarily due to higher impairments on used trucks resulting from lower used truck market prices.

The Company’s SG&A decreased to $55.0 in 2020 from $64.2 in 2019. The decrease was due to lower personnel and related expenses as a result of cost controls. As a percentage of average earning assets, the Company’s SG&A decreased to .7% in 2020 from .8% in 2019.

PACCAR Financial Corp.

(Millions of Dollars)

Allowance for Credit Losses

The following table summarizes information on the Company’s allowance for credit losses on receivables and asset portfolio and presents related ratios:

	Year ended December 31
	2020*				2019
Balance at beginning of period	$	65.4		$	60.7
Provision for losses		15.0			11.7
Charge-offs		(14.0	)		(13.9	)
Recoveries		1.8			2.2
Balance at end of period	$	68.2		$	60.7

Ratios:
Charge-offs, net of recoveries ($12.2 in 2020) to average total portfolio ($6,876.1 in 2020)		.18	%		.18	%

Allowance for credit losses ($68.2 in 2020) to year-end total portfolio ($6,841.8 in 2020)		1.00	%		.84	%

Year-end retail loan and lease receivables past due over 30 days ($4.3 in 2020) to year-end retail loan and lease receivables ($5,622.4 in 2020)		.08	%		.43	%

* See page 32 New Accounting Pronouncements in "Note A - Significant Accounting Policies."

The provision for losses on receivables was $15.0 in 2020 compared to $11.7 in 2019, primarily due to a loss on one fleet customer.

Charge-offs, net of recoveries, were $12.2 in 2020 compared to $11.7 in 2019, reflecting continued good portfolio performance.

Retail loan and lease receivables past due over 30 days was .08% at December 31, 2020 compared to .43% at December 31, 2019, reflecting fleet customers that were past due in 2019 and are current as of December 31, 2020. The Company continues to focus on maintaining low past due balances.

The estimation methods and factors considered for determining the allowance during the periods included in this filing have been consistently applied in accordance with ASU 2016-13 which the Company adopted on January 1, 2020. See “Critical Accounting Policies”, “Note A – Significant Accounting Policies” and “Note B – Finance and Other Receivables” for additional discussion regarding the Allowance for Credit Losses.

Modifications

The Company modifies loans and finance leases in the normal course of its 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. Insignificant delays are modifications extending terms up to three months for customers experiencing some short-term financial stress, but 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 (TDR).

PACCAR Financial Corp.

(Millions of Dollars)

The post-modification balances of accounts modified during 2020 and 2019 are summarized below:

	Year ended December 31
	2020					2019
	Amortized Cost Basis		% of Total Portfolio*			Amortized Cost Basis		% of Total Portfolio*

Commercial	$	190.5		2.8	%	$	258.4		3.6	%
Insignificant Delay		1,423.2		20.8	%		66.0		.9	%
Credit - No Concession		13.8		.2	%		.5
Credit - TDR		43.5		.6	%		1.3
	$	1,671.0		24.4	%	$	326.2		4.5	%

*	Amortized cost basis immediately after modification as a percentage of the year-end portfolio balance.

Modification activity increased in 2020 compared to 2019, primarily due to the increase in Insignificant Delay modifications reflecting an increase in customers requesting payment relief for up to three months. Of the $1,423.2 Insignificant Delay modifications, $1,371.5 or 96% were payment relief for customers that were not past-due and were seeking to manage their liquidity needs because of the effects of the COVID-19 pandemic. The Credit – TDR modifications increased in 2020 compared to 2019, primarily due to the contract modification for two fleet customers.

When the Company modifies a 30+ days past due account, the customer is then generally considered current under the revised contractual terms. The Company modified nil accounts during the fourth quarter of 2020 and $.5 of accounts during the fourth quarter of 2019 that were 30+ days past due and became current at the time of modification. Had these accounts not been modified and had they continued to not make payments, the pro forma percentage of retail loan and lease accounts 30+ days past due would have been as follows:

	As of December 31
	2020			2019
Pro forma percentage of retail loan and lease accounts 30+ days past due		.08	%		.44	%

Modification of accounts in prior quarters that were 30+ days past due at the time of modification are included in past dues if they were not performing under the modified terms at December 31, 2020 and 2019. The effect on the allowance for credit losses from such modifications was not significant at December 31, 2020 and 2019.

Portfolio

The Company’s portfolio is concentrated with customers in the heavy- and medium-duty truck transportation industry. The portfolio is comprised of retail loans and leases, dealer wholesale financing and dealer master notes as follows:

	December 31				December 31
	2020				2019
Retail loans	$	4,133.1	60	%	$	3,774.3	52	%
Retail leases		1,489.3	22	%		1,492.7	21	%
Dealer wholesale financing		1,021.1	15	%		1,766.7	25	%
Dealer master notes		131.1	2	%		88.7	1	%
Operating lease receivables and other		67.2	1	%		65.0	1	%
Total portfolio	$	6,841.8	100	%	$	7,187.4	100	%

Retail loans increased to $4,133.1 at December 31, 2020 from $3,774.3 at December 31, 2019, reflecting new business volume exceeding collections.

Retail leases decreased to $1,489.3 at December 31, 2020 from $1,492.7 at December 31, 2019, reflecting collections exceeding new business volume.

PACCAR Financial Corp.

(Millions of Dollars)

Dealer wholesale financing balances decreased to $1,021.1 at December 31, 2020 from $1,766.7 at December 31, 2019 due to lower dealer new truck inventory.

Dealer master notes were $131.1 at December 31, 2020 compared to $88.7 at December 31, 2019. Dealers may pay the loans early or make additional draws up to specified balances of the contracts pledged to the Company. As of December 31, 2020, the underlying pledged contracts were $189.6 of which the dealers have $43.9 as potential additional borrowing capacity.

Income Taxes

The Company’s effective income tax rate was 24.1% for 2020 compared to 25.1% for 2019, reflecting lower state tax expense in 2020 compared to 2019.

The Company is included in the consolidated federal income tax return of PACCAR. Federal income taxes for the Company are determined on a separate return basis. State income taxes, where the Company files combined tax returns with PACCAR, are determined on a blended statutory rate, which is substantially the same as the rate computed on a separate return basis.

During 2020, the Company’s deferred income tax benefit was $35.1 compared to $50.6 deferred income tax provision during 2019. The Company’s net deferred tax liability decreased to $639.4 at December 31, 2020 from $679.9 at December 31, 2019 primarily due to lower benefits from accelerated depreciation. Deferred taxes are impacted by new business volume and the accelerated depreciation deduction rate under U.S. federal and state tax law. The difference in the timing of depreciation for financial statement and income tax purposes does not impact operating results and is not expected to have a significant impact on liquidity in 2021.

Company Outlook

Average earning assets in 2021 are expected to be comparable to 2020. Current high levels of freight tonnage, freight rates and fleet utilization are contributing to customers’ profitability and cash flow. If current freight transportation conditions decline due to weaker economic conditions, then past due accounts, truck repossessions and credit losses would likely increase from the current low levels and new business volume would likely decline. See the Forward-Looking Statements section of Management’s Discussion and Analysis for factors that may affect this outlook.

Funding and Liquidity

The Company’s debt ratings at December 31, 2020 are as follows:

	Standard
	and Poor's	Moody's
Commercial paper	A-1	P-1
Senior unsecured debt	A+	A1

A decrease in these credit ratings could negatively impact the Company’s ability to access capital markets at competitive interest rates and the Company’s ability to maintain liquidity and financial stability.

PACCAR Financial Corp.

(Millions of Dollars)

The Company issues commercial paper and medium-term notes to fund its financing and leasing operations. The total principal amounts of commercial paper and medium-term notes outstanding for the Company as of December 31, 2020 were $1,306.1 and $6,000.0, respectively.

The Company believes its current investment grade credit ratings of A+/A1, committed bank facilities, collections on existing loans and leases and its ability to borrow from PACCAR, if necessary, will continue to provide it with sufficient resources and access to capital markets at competitive interest rates to maintain its liquidity and financial stability. In the event of a decrease in the Company’s credit ratings or a disruption in the financial markets, the Company may not be able to refinance its maturing debt in the financial markets. In such circumstances, the Company would be exposed to liquidity risk to the degree that the timing of debt maturities differs from the timing of receivable collections from customers. The Company believes its various sources of liquidity, including committed bank facilities, would continue to provide it with sufficient funding resources to service its maturing debt obligations.

The following summarizes the Company’s contractual cash commitments at December 31, 2020:

	Maturity
	Within						More than
	1 Year		1-3 Years		3-5 Years		5 Years	Total
Borrowings*	$	3,106.1	$	3,500.0	$	700.0		$	7,306.1
Interest on debt**		96.8		85.6		11.9			194.3
Operating leases		.5		.4					.9
Total	$	3,203.4	$	3,586.0	$	711.9		$	7,501.3

*	Commercial paper included in borrowings is at par value.

**	Interest on floating rate debt is based on the applicable market rates at December 31, 2020.

As described in “Note G – Borrowings” in the Notes to the Financial Statements, borrowings consist of medium-term notes and commercial paper. The Company has operating leases for office space.

In addition, the Company had loan and lease commitments of $403.2 expiring within one year. These commitments represent commitments to fund new retail loan and lease contracts.

Critical Accounting Policies

The Company’s significant accounting policies are disclosed in “Note A – Significant Accounting Policies” in the Notes to the Financial Statements. In the preparation of the Company’s financial statements, in accordance with U.S. generally accepted accounting principles, management uses estimates and makes judgments and assumptions that affect asset and liability values and the amounts reported as income and expense during the periods presented. The following are accounting policies which, in the opinion of management, are particularly sensitive and which, if actual results are different from estimates used by management, may have a material impact on the financial statements.

Operating Leases

Trucks sold pursuant to agreements accounted for as operating leases are disclosed in “Note C – Equipment on Operating Leases” in the Notes to the Financial Statements. In determining its estimate of the residual value of such vehicles, the Company considers the length of the lease term, the truck model, the expected usage of the truck and anticipated market demand. Operating lease terms generally range from three to five years. The resulting residual values on operating leases generally range between 30% and 60% of original equipment cost. If the sales price of the trucks at the end of the term of the agreement differs from the Company’s estimated residual value, a gain or loss will result.

Future market conditions, changes in government regulations and other factors outside the Company’s control could impact the ultimate sales price of trucks returned under these contracts. Residual values are reviewed regularly and adjusted if market conditions warrant. A decrease in the estimated equipment residual values would increase annual depreciation expense over the remaining lease term.

PACCAR Financial Corp.

(Millions of Dollars)

During 2020 and 2019, market values on equipment returning upon operating lease maturity were generally lower than the residual values on the equipment, resulting in additional depreciation expense of $28.7 and $16.4, respectively.

At December 31, 2020, the aggregate residual value of equipment on operating leases was $693.7. If a 10% decrease in used truck values persisted over the remaining maturities of the Company's operating leases, it would reduce residual value estimates and result in the Company recording additional depreciation expense of approximately $17.7 in 2021, $18.1 in 2022, $17.4 in 2023, $12.4 in 2024 and $3.7 in 2025 and thereafter.

Allowance for Credit Losses

The allowance for credit losses related to the Company’s loans and finance leases is disclosed in “Note B – Finance and Other Receivables” in the Notes to the Financial Statements. 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 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 periodic reporting of the wholesale dealer’s financial condition, conducts periodic audits of the trucks being financed and in many cases, obtains 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 that 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 generally 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 amortized cost basis, 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 and economic forecasts discussed below.

The Company evaluates finance receivables that are not individually impaired and share similar risk characteristics on a collective basis and determines the general allowance for credit losses for both retail and wholesale receivables based on historical loss information, using past due account data, current market conditions, and expected changes in future macroeconomic conditions that affect collectability. Historical credit loss information provides relevant information of expected credit losses. The historical information used includes assumptions regarding the likelihood of collecting current and past due accounts, repossession rates, and 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 of its portfolio 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 based on current market conditions and other factors impacting the creditworthiness of the Company’s borrowers and their ability to repay. Adjustments to historical loss information are made for changes in forecasted economic conditions that are specific to the industry and market in which the Company conducts business. The Company utilizes economic forecasts from third party sources and determines expected losses based on historical experience under similar market conditions. After determining the appropriate level of the allowance for credit losses, a provision for losses on finance receivables is charged to income as necessary to reflect management’s estimate of expected credit losses, net of recoveries, inherent in the portfolio.

The adequacy of the allowance is evaluated quarterly based on the most recent past due account information and current and future market conditions. As accounts become past due, the likelihood that they will not be fully collected increases.

PACCAR Financial Corp.

(Millions of Dollars)

The Company’s experience indicates the probability of not fully collecting past due accounts ranges between 30% and 65%. Over the past two years, the Company’s year-end 30+ days past due accounts of loan and lease receivables were .08% in 2020 and .43% in 2019.

Historically, a 100 basis point increase in the 30+ days past due percentage has resulted in an increase in credit losses of 1 to 45 basis points of receivables. As of December 31, 2020, 30+ days past dues were .08%. If past dues were 100 basis points higher or 1.08% as of December 31, 2020, the Company’s estimate of credit losses would likely have increased by a range of $1 million to $25 million depending on the extent of the past dues, the estimated value of the collateral as compared to amounts owed and general economic factors.

Forward-Looking Statements

This Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements relating to future results of operations or financial position and any other statement that does not relate to any historical or current fact. Such statements are based on currently available operating, financial and other information and are subject to risks and uncertainties that may affect actual results. Risks and uncertainties include, but are not limited to: national and local economic, political and industry conditions; changes in the levels of new business volume due to unit fluctuations in new PACCAR truck sales or reduced market share; changes in competitive factors; changes affecting the profitability of truck owners and operators; price changes impacting equipment costs and residual values; changes in interest rates and other operating costs; insufficient liquidity in the capital markets and availability of other funding sources; cybersecurity risks to the Company’s information technology systems; pandemics; litigation involving the Company or affiliated entities; and legislation and governmental regulation.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk and Derivative Financial Instruments

In the normal course of business, the Company issues various financial instruments that expose the Company to market risk associated with market interest rates. Policies and procedures have been established by the Company to manage these market risks through the use of various derivative financial instruments. The Company does not engage in derivatives trading, market-making or other speculative activities.

The following is a sensitivity analysis for the Company’s assets and liabilities that have interest-rate risk. The Company measures its interest-rate risk by estimating the amount by which the fair value of interest rate sensitive assets and liabilities, including derivative financial instruments, would change assuming an immediate 100 basis point increase across the yield curve as shown in the following table:

Fair Value (Losses) Gains

	Year ended December 31
		2020		2019
Assets
Fixed rate loans	$	(81.6	)	$	(73.6	)
Due from PACCAR		(24.8	)		(18.5	)
Due from foreign finance affiliates		(6.4	)		(7.2	)
Interest rate swaps related to debt		(1.2	)		1.9

Liabilities
Fixed rate debt		102.3			96.4
Interest rate swaps related to debt		16.3			15.9
Total	$	4.6		$	14.9

The Company’s debt as of December 31, 2020 and 2019 consisted of commercial paper and floating and fixed rate medium-term notes.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the Company and related schedules described under “Item 15 – Exhibits and Financial Statement Schedules” are included following this page.

Report of Independent Registered Public Accounting Firm

Board of Directors

PACCAR Inc and PACCAR Financial Corp.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of PACCAR Financial Corp. (a wholly-owned subsidiary of PACCAR Inc) (the Company) as of December 31, 2020 and 2019, the related statements of income, comprehensive income, stockholder’s equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

	Used trucks held for sale

Description of the Matter	Included in Other assets on the Company’s Balance Sheet are used trucks held for sale of $210.3 million as of December 31, 2020. As discussed in Note J to the financial statements, the carrying amount of used trucks held for sale is written down as necessary to reflect the fair value less costs to sell. The Company determines the fair value of used trucks from a pricing matrix, which is based on the market approach. The significant observable inputs into the valuation model are recent sales prices of comparable units sold individually, which is the lowest unit of account, and the condition of the vehicles. Auditing management’s estimate of the impairments for used trucks held for sale was complex and required judgment in evaluating management’s assumptions used in determining the fair value of units held for sale.
How We Addressed the Matter in Our Audit	We evaluated and tested the design and operating effectiveness of internal controls over the used trucks held for sale process, including management’s assessment of the assumptions and data underlying the fair value of units held for sale. Our audit procedures included, among others, assessing the inputs, which are based on historical sales data, in the used truck pricing matrix used to determine the fair value of units held for sale. We evaluated whether this historical data was representative of current circumstances and of the recent sales trends for similar units by comparing the data to sales of similar units at or subsequent to period end. We tested the completeness and accuracy of used truck sales data and unit specifications from underlying systems and data warehouses that are used in the pricing matrix. We also evaluated the unit specification adjustments in the used truck pricing matrix and compared management’s internal pricing matrix to sales data from third-party sources.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1961.

Seattle, Washington

February 17, 2021

PACCAR Financial Corp.

STATEMENTS OF INCOME
	Year ended December 31
(Millions of Dollars)		2020		2019		2018
Interest and fee income	$	329.3	$	347.8	$	277.2
Operating lease and rental revenues		369.8		389.9		406.9
Used truck sales and other revenues		47.1		24.3		23.4
TOTAL INTEREST AND OTHER REVENUES		746.2		762.0		707.5

Interest and other borrowing costs		164.3		179.7		138.5
Depreciation and other rental expenses		361.5		351.6		365.4
Cost of used truck sales and other expenses		43.9		17.0		17.8
Selling, general and administrative expenses		55.0		64.2		56.4
Provision for losses on receivables		15.0		11.7		8.6
TOTAL EXPENSES		639.7		624.2		586.7

INCOME BEFORE INCOME TAXES		106.5		137.8		120.8

Income taxes		25.7		34.6		28.3
NET INCOME	$	80.8	$	103.2	$	92.5

Earnings per share and dividends per share are not reported because the Company is a wholly owned subsidiary of PACCAR.

STATEMENTS OF COMPREHENSIVE INCOME
	Year ended December 31
(Millions of Dollars)		2020			2019			2018
Net income	$	80.8		$	103.2		$	92.5
Other comprehensive (loss) income
Unrealized (losses) income on derivative contracts
(Losses) income arising during the period		(27.2	)		(16.2	)		.7
Tax effect		6.7			4.0			(.2	)
Reclassification adjustment		10.1			(1.3	)		(2.7	)
Tax effect		(2.5	)		.3			.7
Net other comprehensive loss		(12.9	)		(13.2	)		(1.5	)
Reclassification to retained earnings in accordance with ASU 2018-02								.4
TOTAL COMPREHENSIVE INCOME	$	67.9		$	90.0		$	91.4

See Notes to Financial Statements.

PACCAR Financial Corp.

BALANCE SHEETS
	December 31			December 31
(Millions of Dollars)		2020			2019
ASSETS

Cash	$	48.0		$	53.3
Finance and other receivables, net of allowance for losses (2020 - $68.2 and 2019 - $60.7)		6,773.6			7,126.7
Due from PACCAR and affiliates		1,860.5			1,557.2
Equipment on operating leases, net of accumulated depreciation (2020 - $624.6 and 2019 - $605.9)		1,238.3			1,427.6
Other assets		290.1			276.0
TOTAL ASSETS	$	10,210.5		$	10,440.8

LIABILITIES

Accounts payable, accrued expenses and other	$	396.3		$	457.1
Due to PACCAR and affiliates		31.0			13.9
Commercial paper		1,305.9			1,975.0
Medium-term notes		5,990.8			5,535.2
Deferred taxes and other liabilities		649.7			694.2
TOTAL LIABILITIES		8,373.7			8,675.4

STOCKHOLDER'S EQUITY

Preferred stock, par value $100 per share, 6% noncumulative and nonvoting, 450,000 shares authorized, 310,000 shares issued and outstanding		31.0			31.0
Common Stock, par value $100 per share, 200,000 shares authorized, 145,000 shares issued and outstanding		14.5			14.5
Additional paid-in capital		147.9			140.9
Retained earnings		1,668.7			1,591.4
Accumulated other comprehensive loss		(25.3	)		(12.4	)
TOTAL STOCKHOLDER'S EQUITY		1,836.8			1,765.4
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	10,210.5		$	10,440.8

See Notes to Financial Statements.

PACCAR Financial Corp.

STATEMENTS OF CASH FLOWS
	Year ended December 31
(Millions of Dollars)		2020			2019			2018
OPERATING ACTIVITIES

Net income	$	80.8		$	103.2		$	92.5
Items included in net income not affecting cash:
Depreciation and amortization		342.3			327.7			337.0
Provision for losses on receivables		15.0			11.7			8.6
Deferred taxes		(35.1	)		50.6			36.2
Administrative fees for services from PACCAR		7.0			7.0			7.1
Change in tax-related balances with PACCAR		26.9			6.6			96.4
(Decrease) increase in payables and other		(113.8	)		65.5			85.9

NET CASH PROVIDED BY OPERATING ACTIVITIES		323.1			572.3			663.7

INVESTING ACTIVITIES

Finance and other receivables originated		(2,469.0	)		(2,593.4	)		(2,318.8	)
Collections on finance and other receivables		2,075.8			2,063.4			1,760.2
Net decrease (increase) in wholesale receivables		745.6			(587.7	)		(265.2	)
Loans to PACCAR and affiliates		(737.0	)		(420.0	)		(656.0	)
Collections on loans from PACCAR and affiliates		442.0			477.0			225.5
Net increase in other receivables and leases to PACCAR and affiliates		(13.6	)		(26.0	)		(12.6	)
Acquisition of equipment for operating leases		(324.5	)		(523.8	)		(398.6	)
Proceeds from disposal of equipment		158.8			163.6			283.6
Other		20.6			(32.8	)		(8.2	)

NET CASH USED IN INVESTING ACTIVITIES		(101.3	)		(1,479.7	)		(1,390.1	)

FINANCING ACTIVITIES

Net (decrease) increase in short-term commercial paper		(670.9	)		243.2			295.1
Proceeds from medium-term notes and other commercial paper		1,622.3			2,042.7			1,743.4
Payments of medium-term notes and other commercial paper		(1,178.5	)		(1,400.0	)		(1,300.0	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(227.1	)		885.9			738.5
NET (DECREASE) INCREASE IN CASH		(5.3	)		(21.5	)		12.1
CASH AT BEGINNING OF YEAR		53.3			74.8			62.7
CASH AT END OF YEAR	$	48.0		$	53.3		$	74.8

See Notes to Financial Statements.

PACCAR Financial Corp.

STATEMENTS OF STOCKHOLDER’S EQUITY
	Year ended December 31
(Millions of Dollars)		2020			2019			2018
PREFERRED STOCK, $100 par value

Balance at beginning of year	$	31.0		$	31.0		$	31.0
Balance at end of year		31.0			31.0			31.0

COMMON STOCK, $100 par value

Balance at beginning of year		14.5			14.5			14.5
Balance at end of year		14.5			14.5			14.5

ADDITIONAL PAID-IN CAPITAL

Balance at beginning of year		140.9			133.9			126.8
Investments from PACCAR		7.0			7.0			7.1
Balance at end of year		147.9			140.9			133.9

RETAINED EARNINGS

Balance at beginning of year		1,591.4			1,488.2			1,396.1
Net income		80.8			103.2			92.5
Cumulative effect of change in accounting principles		(3.5	)					(.4	)
Balance at end of year		1,668.7			1,591.4			1,488.2

ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

Accumulated unrealized net (loss) gain on derivative contracts:
Balance at beginning of year		(12.4	)		.8			1.9
Net unrealized loss		(12.9	)		(13.2	)		(1.5	)
Reclassification to retained earnings in accordance with ASU 2018-02								.4
Balance at end of year		(25.3	)		(12.4	)		.8
TOTAL STOCKHOLDER’S EQUITY	$	1,836.8		$	1,765.4		$	1,668.4

See Notes to Financial Statements.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

NOTE A – SIGNIFICANT ACCOUNTING POLICIES

Description of Operations and Basis of Presentation:

PACCAR Financial Corp. (the “Company”), is a wholly owned subsidiary of PACCAR Inc (“PACCAR”). The Company primarily provides financing of PACCAR manufactured trucks and related equipment sold by authorized dealers. The Company also finances dealer inventories of transportation equipment and franchises Kenworth and Peterbilt dealerships to engage in full-service and finance leasing. The operations of the Company are fundamentally affected by its relationship with PACCAR.

Due to the nature of the Company’s business, customers are concentrated in the transportation industry throughout the United States. Generally, all receivables are collateralized by the equipment being financed. The risk of credit losses related to this concentration has been considered in establishing the allowance for credit losses.

Use of Estimates:

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Finance and Other Receivables:

Loans – Loans represent fixed or floating rate loans to customers or dealers collateralized by the vehicles purchased and are recorded at amortized cost.

Finance leases – Finance leases represent equipment leases to retail customers and dealers. These leases are reported as the sum of minimum lease payments receivable and estimated residual value of the property subject to the contracts, reduced by unearned interest which is shown separately.

Dealer wholesale financing – Dealer wholesale financing is floating-rate wholesale loans to Kenworth and Peterbilt dealers for new and used trucks and are recorded at amortized cost. The loans are collateralized by the trucks being financed.

Operating lease receivables and other – Operating lease receivables and other include monthly rentals due on operating leases, unamortized loan and lease origination costs, interest on loans and other amounts due within one year in the normal course of business.

Allowance for Credit Losses:

The Company continuously monitors the payment performance of 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.

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 a loan or finance lease for credit reasons and grants a concession, the modification is classified as a troubled debt restructuring (TDR). 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. In accordance with FASB statement, Prudential Regulator Guidance Concerning Troubled Debt Restructurings, issued on March 22, 2020, short-term modifications granted to customers were not considered TDRs if they were not past-due and were seeking to manage their liquidity needs because of the effects of the COVID-19 pandemic.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

On average, modifications extended contractual terms by approximately three months in 2020 and four months in 2019 and did not have a significant effect on the weighted average term or interest rate of the total portfolio at December 31, 2020 or 2019.

The Company has developed a systematic methodology for determining the allowance for credit losses for its 2 portfolio segments, retail and wholesale. The retail segment consists of retail loans and 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 periodic reporting of the wholesale dealer’s financial condition, conducts periodic audits of the trucks being financed and, in many cases, obtains 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.

In determining the fair value of the collateral, the Company uses a pricing matrix and categorizes the fair value as Level 2 in the hierarchy of fair value measurement. The pricing matrix is reviewed quarterly and updated as appropriate. The pricing matrix considers the make, model and year of the equipment as well as recent sales prices of comparable equipment sold individually, which is the lowest unit of account, 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 uncollectible, which generally occurs 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 a partial charge-off. The charge-off is determined by comparing the fair value of the collateral, less cost to sell, to the amortized cost basis.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

Revenue Recognition:

Interest income from finance and other receivables is recognized using the interest method. Certain loan and lease origination costs are deferred and amortized to interest income over the expected life of the contracts, generally 36 to 60 months, using the straight-line method which approximates the interest method. For operating leases, rental revenue is recognized on a straight-line basis over the lease term.

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, 0 finance receivables more than 90 days past due were accruing interest at December 31, 2020 or December 31, 2019. 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 if the customer makes scheduled payments for three months and collection of remaining amounts is considered probable (if contractually modified). Payments received while the finance receivable is on non-accrual status are applied to interest and principal in accordance with the contractual terms.

The Company recognizes revenue on the sale of used trucks acquired from PACCAR truck division customers as part of new truck sales packages when the used trucks are invoiced and delivered to a customer.

Equipment on Operating Leases:

Equipment on operating leases is recorded at cost and is depreciated on the straight-line basis to its estimated residual value. Residual values are reviewed regularly and adjusted if market conditions warrant.

Derivative Financial Instruments:

As part of its risk management strategy, the Company enters into derivative contracts to hedge against interest-rate risk. Certain derivative instruments designated as either cash flow hedges or fair value hedges are subject to hedge accounting. Derivative instruments that are not subject to hedge accounting are held as economic hedges. The Company’s policies prohibit the use of derivatives for speculation or trading. At the inception of each hedge relationship, the Company documents its risk management objectives, procedures and accounting treatment.

All of the Company’s interest-rate contracts are transacted under International Swaps and Derivatives Association (ISDA) master agreements. Each agreement permits the net settlement of amounts owed in the event of default and certain other termination events. The Company has elected not to offset derivative positions in the balance sheet with the same counterparty under the same agreements and is not required to post or receive collateral. Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default. The Company’s maximum exposure to potential default of its swap counterparties is limited to the asset position of its swap portfolio. The asset position of the Company’s swap portfolio was $1.6 at December 31, 2020.

The Company uses regression analysis to assess effectiveness of interest-rate contracts at inception and uses quantitative or qualitative analysis to assess subsequent effectiveness on a quarterly basis. All components of the derivative instrument’s gain or loss are included in the assessment of hedge effectiveness. Hedge accounting is discontinued prospectively when the Company determines that a derivative financial instrument has ceased to be a highly effective hedge. Cash flows from derivative instruments are included in operating activities in the Statements of Cash Flows.

Income Taxes:

The Company is included in the consolidated federal income tax return of PACCAR. Federal income taxes for the Company are determined on a separate return basis, and any related tax liability is paid by the Company to PACCAR and any related tax benefit is paid by PACCAR to the Company. State income taxes, where the Company files combined tax returns with PACCAR, are determined on a blended statutory rate, which is substantially the same as the rate computed on a separate return basis. As of December 31, 2020, the United States Internal Revenue Service has completed examinations of PACCAR’s tax returns for all years through 2014. PACCAR’s tax returns remain subject to examination in other jurisdictions for the years ranging from 2013 through 2019.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

Preferred Stock:

The Company’s Articles of Incorporation provide that the 6%, noncumulative, nonvoting preferred stock (100% owned by PACCAR) is redeemable only at the option of the Company’s Board of Directors.

New Accounting Pronouncements:

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, including subsequently issued ASUs to clarify the implementation guidance in ASU 2016-13. The amendment introduces new guidance for credit losses on financial assets measured at amortized cost, including finance receivables and trade receivables. Under this new model, expected credit losses are based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectability, replacing the previous incurred loss model. The ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company adopted this ASU on January 1, 2020 on a modified retrospective basis as required, with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption.

The cumulative effect of the changes made to the Company’s Balance Sheet on January 1, 2020 for the adoption of ASU 2016-13 was as follows:

	BALANCE AT DECEMBER 31, 2019		CHANGE DUE TO NEW STANDARD			BALANCE AT JANUARY 1, 2020
BALANCE SHEETS
ASSETS
Finance and other receivables, net of allowance for credit losses	$	7,126.7	$	(4.7	)	$	7,122.0
LIABILITIES
Deferred taxes and other liabilities	$	694.2	$	(1.2	)	$	693.0
STOCKHOLDER'S EQUITY
Retained earnings	$	1,591.4	$	(3.5	)	$	1,587.9

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying Generally Accepted Accounting Principles (GAAP) to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period and will be in effect for a limited time through December 31, 2022. The Company adopted this ASU as of October 1, 2020. The Company will apply the accounting relief as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period. The Company does not expect the standard to have a material impact on its financial statements.

The Company adopted the following standards on January 1, 2020, which had no material impact on the Company’s financial statements.

STANDARD		DESCRIPTION
2018-13		Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.
2018-15		Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
2019-12		Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

NOTE B – FINANCE AND OTHER RECEIVABLES

The Company’s finance and other receivables include the following:

	December 31			December 31
		2020			2019
Retail loans	$	4,133.1		$	3,774.3
Retail financing leases		1,489.3			1,492.7
Dealer wholesale financing		1,021.1			1,766.7
Dealer master notes		131.1			88.7
Operating lease receivables and other		67.2			65.0
		6,841.8			7,187.4
Less allowance for credit losses:
Loans and leases		(65.2	)		(57.0	)
Dealer wholesale financing		(1.3	)		(1.9	)
Operating lease receivables and other		(1.7	)		(1.8	)
	$	6,773.6		$	7,126.7

Annual minimum payments due on loans and finance leases and a reconciliation of the undiscounted cash flows to the amortized cost basis of finance leases are as follows:

	Loans		Finance Leases
2021	$	1,218.9	$	474.1
2022		1,044.0		359.7
2023		900.2		316.7
2024		696.4		215.1
2025		297.4		128.6
Thereafter		107.3		72.2
	$	4,264.2		1,566.4
Unguaranteed residual values				66.4
Unearned interest on finance leases				(143.5	)
Amortized cost basis of finance leases			$	1,489.3

Included in Finance and other receivables, net of allowance for credit losses, on the Balance Sheets is accrued interest receivable, net of allowance for credit losses, of $13.3 and $18.3 as of December 31, 2020 and 2019, respectively.

Interest income recognized on finance leases was $65.1 and $64.5 for the years ended December 31, 2020 and 2019, respectively. Estimated residual values included with finance leases amounted to $66.4 in 2020 and $70.8 in 2019. Experience indicates substantially all of dealer wholesale financing will be repaid within one year. In addition, collection experience indicates that some loans, leases and other finance receivables will be paid prior to contract maturity, while other may be extended or modified.

For the following credit quality disclosures, finance receivables are classified into 2 portfolio segments, wholesale and retail. The retail portfolio is further segmented into dealer retail and customer retail. The dealer wholesale segment consists of truck inventory financing to PACCAR dealers. The dealer retail segment consists of loans and leases to participating dealers and franchises that use the proceeds to fund customers’ acquisition of commercial vehicles and related equipment. The customer retail segment consists of loans and leases directly to customers for the acquisition of commercial vehicles and related equipment. Customer retail receivables are further segregated between fleet and owner/operator classes. The fleet class consists of retail accounts of customers operating more than five trucks. All other customer retail accounts are considered owner/operator. These two classes have similar measurement attributes, risk characteristics and common methods to monitor and assess credit risk.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

Allowance for Credit Losses

The allowance for credit losses is summarized as follows:

	2020
	Dealer						Customer
	Wholesale			Retail			Retail			Other*			Total**
Balance at January 1	$	1.9		$	7.9		$	53.7		$	1.9		$	65.4
(Benefit) provision for losses		(.6	)		(.4	)		15.9			.1			15.0
Charge-offs								(13.5	)		(.5	)		(14.0	)
Recoveries								1.6			.2			1.8
Balance at December 31	$	1.3		$	7.5		$	57.7		$	1.7		$	68.2

	2019
	Dealer						Customer
	Wholesale			Retail			Retail			Other*			Total
Balance at January 1	$	3.1		$	8.4		$	47.7		$	1.5		$	60.7
(Benefit) provision for losses		(.8	)		(.5	)		10.3			2.7			11.7
Charge-offs		(.4	)					(11.1	)		(2.4	)		(13.9	)
Recoveries								2.2						2.2
Balance at December 31	$	1.9		$	7.9		$	49.1		$	1.8		$	60.7

	2018
	Dealer				Customer
	Wholesale		Retail		Retail			Other*			Total
Balance at January 1	$	2.4	$	7.9	$	46.9		$	1.2		$	58.4
Provision for losses		.7		.5		6.2			1.2			8.6
Charge-offs						(7.9	)		(.9	)		(8.8	)
Recoveries						2.5						2.5
Balance at December 31	$	3.1	$	8.4	$	47.7		$	1.5		$	60.7

*	Operating lease and other trade receivables.

**	The beginning balance has been adjusted for the adoption of ASU 2016-13.

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

	Dealer				Customer
At December 31, 2020	Wholesale		Retail		Retail		Total
Amortized cost basis for impaired finance receivables evaluated individually					$	37.1	$	37.1

Allowance for impaired finance receivables determined individually					$	1.2	$	1.2

Amortized cost basis for finance receivables evaluated collectively	$	1,021.1	$	1,461.3	$	4,255.1	$	6,737.5

Allowance for finance receivables determined collectively	$	1.3	$	7.5	$	56.5	$	65.3

	Dealer				Customer
At December 31, 2019	Wholesale		Retail		Retail		Total
Amortized cost basis for impaired finance receivables evaluated individually					$	25.2	$	25.2

Allowance for impaired finance receivables determined individually					$	2.3	$	2.3

Amortized cost basis for finance receivables evaluated collectively	$	1,766.7	$	1,411.4	$	3,919.1	$	7,097.2

Allowance for finance receivables determined collectively	$	1.9	$	7.9	$	46.8	$	56.6

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

The amortized cost basis for finance receivables that are on non-accrual status is as follows:

	December 31		December 31
		2020		2019
Fleet	$	35.1	$	21.8
Owner/Operator		2.0		3.4
	$	37.1	$	25.2

Impaired Loans

Impaired loans are summarized below. The impaired loans with a specific reserve represent the unpaid principal balance. The amortized cost basis of impaired loans as of December 31, 2020 and 2019 was not significantly different than the unpaid principal balance.

	Dealer		Customer Retail
						Owner/
At December 31, 2020	Wholesale	Retail	Fleet			Operator			Total
Impaired loans with a specific reserve			$	13.1		$	1.9		$	15.0
Associated allowance				(.6	)		(.3	)		(.9	)
Net carrying amount of impaired loans with a specific reserve				12.5			1.6			14.1
Impaired loans with no specific reserve							.1			.1
Net carrying amount of impaired loans			$	12.5		$	1.7		$	14.2

Average amortized cost basis for impaired loans			$	19.4		$	2.5		$	21.9

	Dealer			Customer Retail
							Owner/
At December 31, 2019	Wholesale		Retail	Fleet			Operator			Total
Impaired loans with a specific reserve				$	4.6		$	2.9		$	7.5
Associated allowance					(.9	)		(.6	)		(1.5	)
Net carrying amount of impaired loans with a specific reserve					3.7			2.3			6.0
Impaired loans with no specific reserve					6.7			.4			7.1
Net carrying amount of impaired loans				$	10.4		$	2.7		$	13.1

Average amortized cost basis for impaired loans	$	4.9		$	9.3		$	2.9		$	17.1

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

		2020		2019		2018
Fleet	$	1.2	$	.6	$	1.1
Owner/Operator		.2		.2		.2
	$	1.4	$	.8	$	1.3

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

Credit Quality

The Company’s customers are principally concentrated in the transportation industry in the United States. The Company’s portfolio assets are diversified over a large number of customers and dealers with no single customer or dealer balances representing over 10% of the total portfolio assets as of December 31, 2020 and 2019. The Company retains as collateral a security interest in the related equipment. There is 0 single customer or dealer representing over 10% of Interest and other revenues for the years ended December 31, 2020, 2019 and 2018.

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 there is 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 tables below summarizes the amortized cost basis of the Company’s finance receivables by credit quality indicator by year of origination and portfolio class.

At December31, 2020	Revolving Loans		2020		2019		2018		2017		2016		Prior		Total
Dealer:
Wholesale:
Performing	$	1,013.6													$	1,013.6
Watch		7.5														7.5
At-risk
	$	1,021.1													$	1,021.1
Retail:
Performing	$	20.7	$	435.7	$	417.3	$	211.5	$	149.4	$	84.4	$	120.7	$	1,439.7
Watch				5.2		10.5		4.5		1.4						21.6
At-risk
	$	20.7	$	440.9	$	427.8	$	216.0	$	150.8	$	84.4	$	120.7	$	1,461.3
Total Dealer	$	1,041.8	$	440.9	$	427.8	$	216.0	$	150.8	$	84.4	$	120.7	$	2,482.4

Customer Retail:
Fleet:
Performing			$	1,520.9	$	1,066.6	$	607.0	$	255.8	$	132.0	$	39.9	$	3,622.2
Watch				7.2		10.9		5.1		3.1		.2		1.0		27.5
At-risk				.2		15.3		9.9		8.0		1.1		.6		35.1
			$	1,528.3	$	1,092.8	$	622.0	$	266.9	$	133.3	$	41.5	$	3,684.8
Owner/Operator:
Performing			$	285.1	$	166.6	$	91.1	$	39.3	$	18.3	$	4.5	$	604.9
Watch				.1		.2		.2								.5
At-risk				.1		.5		.8		.1		.2		.3		2.0
			$	285.3	$	167.3	$	92.1	$	39.4	$	18.5	$	4.8	$	607.4
Total Customer Retail			$	1,813.6	$	1,260.1	$	714.1	$	306.3	$	151.8	$	46.3	$	4,292.2
Total	$	1,041.8	$	2,254.5	$	1,687.9	$	930.1	$	457.1	$	236.2	$	167.0	$	6,774.6

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

The tables below summarize the amortized cost basis of 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.

	Dealer				Customer Retail
							Owner/
At December 31, 2020	Wholesale		Retail		Fleet		Operator		Total
Current and up to 30 days past-due	$	1,021.1	$	1,461.3	$	3,681.9	$	606.0	$	6,770.3
31 – 60 days past-due						.2		.9		1.1
Greater than 60 days past-due						2.7		.5		3.2
	$	1,021.1	$	1,461.3	$	3,684.8	$	607.4	$	6,774.6

	Dealer				Customer Retail
							Owner/
At December 31, 2019	Wholesale		Retail		Fleet		Operator		Total
Current and up to 30 days past-due	$	1,766.7	$	1,411.4	$	3,425.2	$	496.2	$	7,099.5
31 – 60 days past-due						10.4		2.5		12.9
Greater than 60 days past-due						9.0		1.0		10.0
	$	1,766.7	$	1,411.4	$	3,444.6	$	499.7	$	7,122.4

Troubled Debt Restructurings

The balance of TDRs was $32.5 and $3.2 at December 31, 2020 and 2019, respectively. At modification date, the pre- and post-modification amortized cost basis balances for finance receivables modified during the period by portfolio class are as follows:

	2020				2019
	Amortized cost basis				Amortized cost basis
	Pre-Modification		Post-Modification		Pre-Modification		Post-Modification
Fleet	$	42.8	$	42.8	$	1.2	$	1.2
Owner/Operator		.7		.7		.1		.1
	$	43.5	$	43.5	$	1.3	$	1.3

The effect on the allowance for credit losses from such modifications was not significant at December 31, 2020 and 2019.

There were $2.0 and nil of finance receivables modified as TDRs during the previous twelve months that subsequently defaulted (i.e., became more than 30 days past due) in 2020 and 2019, respectively. The $2.0 represented 1 fleet customer that was charged off in the twelve months ended December 31, 2020. The TDRs that subsequently defaulted during 2020 did not significantly impact the Company’s allowance for credit losses at December 31, 2020.

Repossessions

When the Company determines that a 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 leases. The Company records the vehicles as used truck inventory included in Other assets on the Balance Sheets. The balance of repossessed units at December 31, 2020 and 2019 was $10.9 and $7.8, respectively.

Proceeds from the sales of repossessed assets were $28.7, $19.6 and $18.8 for the years ended December 31, 2020, 2019 and 2018, respectively. These amounts are included in Proceeds from disposal of equipment on the Statements of Cash Flows. Write-downs of repossessed equipment under operating leases are recorded as impairments and included in Depreciation and other rental expenses on the Statements of Income.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

NOTE C – EQUIPMENT ON OPERATING LEASES

Terms of operating leases at origination and the related depreciation, generally range from three to five years. The total future annual minimum rental payments to be received for equipment on non-cancelable operating leases beginning January 1, 2021 of $672.2 are due as follows: $281.7 in 2021, $206.1 in 2022, $123.5 in 2023, $49.5 in 2024 and $11.4 in 2025 and thereafter. Depreciation expense related to equipment on operating leases was $325.5, $311.2 and $319.7 in 2020, 2019 and 2018, respectively. Substantially all equipment on operating leases is manufactured by PACCAR.

NOTE D – TRANSACTIONS WITH PACCAR AND AFFILIATES

Periodically, the Company makes loans to, borrows from and has intercompany transactions with PACCAR. In addition, the Company periodically loans funds to certain foreign finance and leasing affiliates of PACCAR. These affiliates have Support Agreements with PACCAR, similar to the Company’s Support Agreement with PACCAR. The foreign affiliates operate in the United Kingdom, the Netherlands, Mexico, Canada, Australia and Brasil. Loans to these foreign affiliates during 2020 and 2019 were denominated in United States dollars. The foreign affiliates primarily provide financing and leasing of PACCAR manufactured trucks and related equipment sold through the DAF, Kenworth, and Peterbilt independent dealer networks in Europe, Mexico, Canada, Australia and Brasil. The Company will not make loans to the foreign affiliates in excess of the equivalent of $750.0 U.S. dollars, unless the amount in excess of such limit is guaranteed by PACCAR. The Company periodically reviews the funding alternatives for these affiliates, and these limits may be revised in the future.

Amounts outstanding at December 31, 2020 and 2019, including balances with foreign finance affiliates operating in the United Kingdom, the Netherlands, Mexico, Canada, Australia and Brasil, are summarized below:

	December 31		December 31
		2020		2019
Due from PACCAR and affiliates
Loans due from PACCAR	$	1,151.6	$	861.0
Loans due from foreign finance affiliates		669.5		651.5
Tax-related receivable due from PACCAR				16.5
Receivables		39.4		28.2
	$	1,860.5	$	1,557.2

Due to PACCAR and affiliates
Tax-related payable due to PACCAR	$	10.4
Payables		20.6	$	13.9
	$	31.0	$	13.9

The Company is included in the consolidated federal income tax return of PACCAR. The tax-related receivable due from PACCAR and the tax-related payable due to PACCAR represent the related tax benefit or provision to be settled with PACCAR.

PACCAR has issued letters of credit as of December 31, 2020 in the amount of $.7 on behalf of the Company to guarantee funds for payment to insured franchisees and customers for any future insurance losses.

PACCAR charges the Company for certain administrative services it provides. These costs were charged to the Company based upon the Company’s use of the services and PACCAR’s cost. Fees for the services were $7.0 in both 2020 and 2019 and $7.1 in 2018 and are included in Additional paid-in capital.

The Company’s principal office is located in the corporate headquarters building of PACCAR (owned by PACCAR). The Company also leases office space from one facility owned by PACCAR and 4 facilities leased by PACCAR. Lease payments for the use of these facilities are included in the above-mentioned administrative services charged by PACCAR.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

The Company’s employees and PACCAR employees are covered by a defined benefit pension plan sponsored by PACCAR. The assets and liabilities of the plan are reflected on the balance sheets of PACCAR. PACCAR contributes to the plan and allocates the expenses to the Company based principally on the number of eligible plan participants. Expenses for the defined benefit pension plan were $3.5, $3.4 and $3.7 for the years 2020, 2019 and 2018, respectively, and are included in Selling, general and administrative expenses.

The Company’s employees and PACCAR employees are also covered by a defined contribution plan, sponsored by PACCAR. Expenses are based on the actual contribution made on the behalf of participating employees. Expenses incurred by the Company for the defined contribution plan were $1.9 in both 2020 and 2019 and $1.6 in 2018 and are included in Selling, general and administrative expenses.

NOTE E – STOCKHOLDER’S EQUITY

Accumulated other comprehensive income (loss) (AOCI) of $(25.3) and $(12.4) at December 31, 2020 and 2019, respectively, is comprised of the unrealized net (loss) gain on derivative contracts, net of taxes. Changes in and reclassifications out of AOCI during 2020, 2019 and 2018 are as follows:

		2020			2019			2018
Balance at beginning of year	$	(12.4	)	$	.8		$	1.9
Amounts recorded in AOCI
Unrealized (loss) gain on derivative contracts		(27.2	)		(16.2	)		.7
Income tax effect		6.7			4.0			(.2	)
Amounts reclassified out of AOCI
Interest and other borrowing costs		10.1			(1.3	)		(2.7	)
Income taxes		(2.5	)		.3			.7
Net other comprehensive loss		(12.9	)		(13.2	)		(1.5	)
Reclassification to retained earnings in accordance with ASU 2018-02								.4
Balance at end of year	$	(25.3	)	$	(12.4	)	$	.8

NOTE F – DERIVATIVE FINANCIAL INSTRUMENTS

Interest-rate contracts involve the exchange of fixed for floating rate or floating for fixed rate interest payments based on the contractual notional amounts in a single currency. The Company is exposed to interest-rate risk caused by market volatility as a result of its borrowing activities. The objective of these contracts is to mitigate the fluctuations on earnings, cash flows and fair value of borrowings. Net amounts paid or received are reflected as adjustments to interest expense.

At December 31, 2020, the notional amount of these contracts totaled $924.9 with amounts expiring over the next 7.5 years. Notional maturities for all interest-rate contracts are $327.1 for 2021, $399.6 for 2022, $31.5 for 2023, $67.6 for 2024, nil for 2025 and $99.1 thereafter.

The following table presents the balance sheet classification, fair value and gross and net amounts of derivative financial instruments:

	As of December 31
	2020						2019
Interest-rate contracts:	Assets			Liabilities			Assets			Liabilities
Other assets	$	1.6					$	1.8
Accounts payable, accrued expenses and other				$	30.4					$	12.7
Gross amounts recognized in Balance Sheets		1.6			30.4			1.8			12.7

Less amounts not offset in financial instruments		(1.1	)		(1.1	)		(.9	)		(.9	)
Pro forma net amount	$	.5		$	29.3		$	.9		$	11.8

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

Cash Flow Hedges

Certain of the Company’s interest-rate contracts have been designated as cash flow hedges. Changes in the fair value of derivatives designated as cash flow hedges are recorded in Accumulated Other Comprehensive Income (AOCI). The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is 7.5 years.

Amounts in AOCI are reclassified into net income in the same period in which the hedged transaction affects earnings and are presented in the same income statement line as the earnings effect of the hedged transaction. The amount of loss recorded in AOCI at December 31, 2020 that is estimated to be reclassified to interest expense in the following 12 months if interest rates remain unchanged is approximately $10.0, net of taxes. The fixed interest earned on finance receivables will offset the amount recognized in interest expense, resulting in a stable interest margin consistent with the Company’s interest-rate risk management strategy.

Fair Value Hedges

Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings together with the changes in fair value of the hedged item attributable to the risk being hedged. The following table presents the amounts recorded on the Balance Sheets related to cumulative basis adjustments for fair value hedges:


	December 31		December 31
	2020		2019
Medium-term notes
Carrying amount of hedged liabilities	$	90.9	$	90.5
Cumulative basis adjustment included in the carrying amount		.9		.5

The above table excludes the cumulative basis adjustments on discontinued hedge relationships of $(.4) and $(1.5) as of December 31, 2020 and 2019, respectively.

The following table presents the amount of (income) expense on cash flow and fair value hedges recognized in Interest and other borrowing costs on the Statements of Income:


	As of December 31
		2020			2019
(Gain) loss on fair value hedges
Derivatives	$	(.3	)	$	(1.9	)
Hedged items		1.4			3.3
Loss (gain) on cash flow hedges
Reclassified from AOCI into income		10.1			(1.3	)
	$	11.2		$	.1

NOTE G – BORROWINGS

The carrying amounts of borrowings are summarized as follows:

	As of December 31
	2020					2019
	Effective					Effective
	Rate			Borrowings		Rate			Borrowings
Commercial paper		.6	%	$	1,305.9		1.8	%	$	1,975.0
Medium-term notes		2.2	%		5,990.8		2.5	%		5,535.2
		1.9	%	$	7,296.7		2.3	%	$	7,510.2

Commercial paper and medium-term notes borrowings were $7,296.7 and $7,510.2 at December 31, 2020 and 2019, respectively. Unamortized debt issuance costs, unamortized discounts and the net effect of fair value hedges were $(9.4) and $(16.8) at December 31, 2020 and 2019, respectively. The effective rate is the weighted average rate as of December 31, 2020 and includes the effects of interest-rate swap agreements.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

The annual principal maturities of the borrowings are as follows:

	Commercial		Term
	Paper		Notes		Total
2021	$	1,306.1	$	1,800.0	$	3,106.1
2022				1,750.0		1,750.0
2023				1,750.0		1,750.0
2024				300.0		300.0
2025				400.0		400.0
	$	1,306.1	$	6,000.0	$	7,306.1

Interest expense on borrowings amounted to $153.0, $168.8 and $127.5 for 2020, 2019 and 2018, respectively. Interest paid on borrowings was $145.8, $164.2 and $118.0 in 2020, 2019 and 2018, respectively.

In November 2018, the Company filed a shelf registration statement under the Securities Act of 1933. In February 2021, the Company issued $400.0 of medium-term notes under this registration. The registration expires in November 2021 and does not limit the principal amount of debt securities that may be issued during the period. The Company intends to renew the registration prior to its expiration.

See “Note D – Transactions with PACCAR and Affiliates” for discussion of borrowings from PACCAR.

NOTE H – CREDIT ARRANGEMENTS

Of the $3,000.0 credit facilities, $2,087.0 is available for use by the Company and/or PACCAR and/or PACCAR Financial Europe. The remaining $913.0 is allocated to PACCAR and other non-U.S. PACCAR financial subsidiaries. These credit facilities are used to provide backup liquidity for the Company’s commercial paper and maturing medium-term notes. The Company is liable only for its own borrowings under these credit facilities. There were no borrowings under these credit facilities in 2020.

NOTE I – INCOME TAXES

The Company’s effective income tax rate was 24.1% for 2020 compared to 25.1% for 2019, reflecting lower state tax expense in 2020 compared to 2019.

The components of the Company’s provision for income taxes include the following:

	Year ended December 31
		2020			2019			2018
Current provision (benefit)
Federal	$	54.7		$	(26.0	)	$	(8.1	)
State		6.1			10.0			.2
		60.8			(16.0	)		(7.9	)
Deferred (benefit) provision
Federal		(33.3	)		53.5			33.5
State		(1.8	)		(2.9	)		2.7
		(35.1	)		50.6			36.2
Total provision for income taxes	$	25.7		$	34.6		$	28.3

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

A reconciliation of the statutory U.S. federal tax rate to the effective income tax rate is as follows:

	Year ended December 31
		2020		2019		2018
Statutory rate		21.0	%	21.0	%	21.0	%
Effect of state		3.1	%	4.1	%	2.4	%
		24.1	%	25.1	%	23.4	%

Cash paid for income taxes was nil, $2.6 and $4.1 in 2020, 2019 and 2018, respectively.

The tax effects of temporary differences representing deferred tax assets and liabilities are as follows:

	December 31			December 31
		2020			2019
Deferred tax assets:
Allowance for losses on receivables	$	16.7		$	15.0
Derivative liability		7.2			2.2
Other		11.0			11.6
Deferred tax liabilities:
Depreciation		(674.3	)		(708.7	)
Net deferred tax liability	$	(639.4	)	$	(679.9	)

NOTE J – FAIR VALUE MEASUREMENTS

Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs to valuation techniques used to measure fair value are either observable or unobservable. These inputs have been categorized into the fair value hierarchy described below:

Level 1 – Valuations are based on quoted prices that the Company has the ability to obtain in actively traded markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market or exchange traded market, valuation of these instruments does not require a significant degree of judgment.

Level 2 – Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuations are based on model-based techniques for which some or all of the assumptions are obtained from indirect market information that is significant to the overall fair value measurement and which require a significant degree of management judgment.

There were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2020. The Company’s policy is to recognize transfers between levels at the end of the reporting period.

Assets and Liabilities Subject to Non-recurring and Recurring Fair Value Measurement

Impaired loans and used trucks held for sale are measured on a non-recurring basis. Derivative contracts are measured on a recurring basis. The Company’s assets and liabilities subject to fair value measurements are as follows:

	December 31		December 31
Level 2	2020		2019
Assets:
Impaired loans, net of specific reserves (2020 - $.1 and 2019 - nil)	$	1.9
Used trucks held for sale		112.3	$	121.9
Derivative contracts		1.6		1.8
Liabilities:
Derivative contracts	$	30.4	$	12.7

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

The Company uses the following methods and assumptions to measure fair value for assets and liabilities subject to non-recurring and recurring fair value measurements:

Impaired Loans: Impaired loans that are individually evaluated are generally considered collateral dependent. Accordingly, the evaluation of individual reserves on such loans considers the fair value of the associated collateral (estimated sales proceeds less the costs to sell).

Used Trucks Held for Sale: The carrying amount of used trucks held for sale is written down as necessary to reflect the fair value less costs to sell. The Company determines the fair value of used trucks from a pricing matrix, which is based on the market approach. The significant observable inputs into the valuation model are recent sales prices of comparable units sold individually, which is the lowest unit of account, and the condition of the vehicles. Used truck impairments related to units held at December 31, 2020 and 2019 were $24.2 and $19.9 during 2020 and 2019, respectively. These assets, which are shown in the above table when they are written down to fair value less costs to sell, are categorized as Level 2 and are included in Other assets on the Balance Sheets.

Derivative Financial Instruments: The Company’s derivative financial instruments consist of interest-rate swaps and are carried at fair value. These derivative contracts are traded over the counter and their fair value is determined using industry standard valuation models, which are based on the income approach (i.e., discounted cash flows). The significant observable inputs into the valuation models include interest rates, yield curves and credit default swap spreads. These contracts are categorized as Level 2 and are included in Other assets and Accounts payable, accrued expenses and other on the Balance Sheets.

Fair Value Disclosure of Other Financial Instruments

For financial instruments that are not recognized at fair value, the Company uses the following methods and assumptions to determine the fair value. These instruments are categorized as Level 2, except cash which is categorized as Level 1 and fixed rate loans which are categorized as Level 3.

Cash: Carrying amounts approximate fair value.

Net Receivables: For floating rate loans, dealer wholesale financings and operating lease and other trade receivables, carrying values approximate fair values. For fixed rate loans, fair values are estimated using the income approach by discounting cash flows to their present value based on assumptions regarding credit and liquidity risks to approximate current rates for comparable loans. Finance lease receivables and related allowance for credit losses have been excluded from the accompanying table.

Commercial Paper and Medium-Term Notes: The carrying amounts of the Company’s commercial paper and variable medium-term notes approximate fair value. For fixed rate debt, fair values are estimated using the income approach by discounting cash flows to their present value based on current rates for comparable debt.

The Company’s estimate of fair value for fixed rate loans and debt that are not carried at fair value was as follows:

	December 31				December 31
	2020				2019
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Due from PACCAR	$	1,061.0	$	1,090.9	$	821.0	$	833.9
Due from foreign finance affiliates		490.0		496.0		450.0		458.1
Fixed rate loans		3,961.0		4,051.5		3,667.8		3,725.8
Liabilities:
Fixed rate debt	$	5,402.4	$	5,548.9	$	4,797.1	$	4,848.3

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

NOTE K – QUARTERLY RESULTS (UNAUDITED)

	QUARTER
	First		Second		Third		Fourth
2020
Interest and other revenues	$	192.5	$	181.3	$	187.9	$	184.5
Income before income taxes		23.7		27.0		26.2		29.6
Net income		17.9		20.4		19.8		22.7

2019
Interest and other revenues	$	184.0	$	189.1	$	191.9	$	197.0
Income before income taxes		38.8		39.5		29.5		30.0
Net income		29.6		29.3		21.4		22.9

NOTE L – COMMITMENTS AND CONTINGENCIES

The Company is a party to various routine legal proceedings incidental to its business involving the collection of accounts and other matters. The Company believes that any reasonably possible range of losses with respect to these matters in addition to amounts accrued is not material to the Company’s financial statements.

At December 31, 2020, the Company has loan and lease commitments of $403.2 expiring within one year. These commitments represent commitments to fund new retail loan and lease contracts.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The registrant has not had any disagreements with its independent auditors on accounting or financial disclosure matters.

ITEM 9A.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of December 31, 2020. Based on that evaluation, the principal executive officer and principal financial officer of the Company concluded that the disclosure controls and procedures in place at the Company are effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported on a timely basis in accordance with applicable rules and regulations.

Management’s Report on Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining satisfactory internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Management assessed the Company’s internal control over financial reporting as of December 31, 2020, based on criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2020.

There have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

Not applicable.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

PART III

ITEMS 10, 11, 12 AND 13

These items omitted pursuant to Form 10-K General Instruction (I)(1)(a) and (b).

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Fees

Audit fees charged to the Company were $1.0 and $.9 in 2020 and 2019, respectively.

Other Fees

No other fees were charged to the Company by the principal accountant.

As a wholly owned subsidiary of PACCAR, audit and non-audit services provided by the Company’s independent registered public accounting firm are subject to PACCAR’s Audit Committee pre-approval policies and procedures as described in the PACCAR 2020 proxy statement. During the year ended December 31, 2020, all services provided by the independent registered public accounting firm were pre-approved by the PACCAR Audit Committee.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(1) Listing of financial statements

The following financial statements of the Company are included in Item 8:

Statements of Income – Years Ended December 31, 2020, 2019 and 2018

Statements of Comprehensive Income – Years Ended December 31, 2020, 2019 and 2018

Balance Sheets – December 31, 2020 and 2019

Statements of Cash Flows – Years Ended December 31, 2020, 2019 and 2018

Statements of Stockholder’s Equity – Years Ended December 31, 2020, 2019 and 2018

Notes to Financial Statements – December 31, 2020, 2019 and 2018

(2) Listing of financial statement schedules

All schedules are omitted because the required matter or conditions are not present or because the information required by the schedules is submitted as part of the financial statements and notes thereto.

(3) Listing of Exhibits

The exhibits required by Item 601 of Regulation S-K are listed in the accompanying Exhibit Index.

PACCAR Financial Corp.

EXHIBIT INDEX

Exhibits (in order of assigned index numbers)

Exhibit
Number

Exhibit Description

Form

Date of First

Filing

Exhibit

Number

File Number

(3)

Articles of incorporation and by-laws:

(i)

Restated Articles of Incorporation of the Company, as amended

10-K

February 26, 2015

3(i)

001-11677

(ii)

Restated By-laws of the Company

10-Q

August 7, 2014

3(c)

001-11677

(4)

Instruments defining the rights of security holders, including indentures:

(a)

Indenture for Senior Debt Securities dated as of November 20, 2009 between the Company and The Bank of New York Mellon Trust Company, N.A.

S-3

November 20, 2009

4.1

333-163273

(b)

Forms of Medium-Term Note, Series O

S-3

November 5, 2015

4.2 and 4.3

333-207838

(c)

Forms of Medium-Term Note, Series P

S-3

November 2, 2018

4.2 and 4.3

333-228141

(d)

Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934

10-K

February 19, 2020

4(e)

001-116677

(10)

Material contracts:

(a)

Support Agreement between the Company and PACCAR dated as of June 19, 1989. (P)

S-3

June 23, 1989

28.1

33-29434

(23)

Consent of Independent Registered Public Accounting Firm*

(31)

Rule 13a-14(a)/15d-14(a) Certifications:

(a)

Certification of Principal Executive Officer*

(b)

Certification of Principal Financial Officer*

(32)

Section 1350 Certifications:

(a)

Certification pursuant to rule 13a-14(b) and section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350)*

(101.INS)

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

(101.SCH)

Inline XBRL Taxonomy Extension Schema Document*

(101.CAL)

Inline XBRL Taxonomy Extension Calculation Linkbase Document*

(101.DEF)

Inline XBRL Taxonomy Extension Definition Linkbase Document*

(101.LAB)

Inline XBRL Taxonomy Extension Label Linkbase Document*

(101.PRE)

Inline XBRL Taxonomy Extension Presentation Linkbase Document*

(104)

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)*

*	filed herewith

PACCAR Financial Corp.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		PACCAR Financial Corp.

Date	February 17, 2021	/s/ C. R. Gryniewicz
		C. R. Gryniewicz
		President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant as of the above date and in the capacities indicated.

(1)	Principal Executive Officer

/s/ H.C.A.M. Schippers		Chief Executive Officer
H.C.A.M. Schippers

(2)	Principal Financial Officer

/s/ T. R. Hubbard		Principal Financial Officer
T. R. Hubbard

(3)	Principal Accounting Officer

/s/ Y. Zhang		Controller
Y. Zhang

(4)	A Majority of the Board of Directors

/s/ H.C.A.M. Schippers		Director
H.C.A.M. Schippers

/s/ T. R. Hubbard		Director
T. R. Hubbard

/s/ C. R. Gryniewicz		Director
C. R. Gryniewicz

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Bad

Paccar Financial 10-K2020 FY Annual report

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