Paccar Financial 10-Q 2021 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2021

or

☐ 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 – 106th Ave. N.E., Bellevue, Washington	98004
(Address of principal executive offices)	(Zip code)

(425) 468-7100

(Registrant’s telephone number, including area code)

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 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 the definitions 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 registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Common Stock, $100 par value—145,000 shares as of April 30, 2021

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

PACCAR FINANCIAL CORP.

INDEX

		Page
PART I.	FINANCIAL INFORMATION:
ITEM 1.	FINANCIAL STATEMENTS:
	Statements of Comprehensive Income and Retained Earnings — Three Months Ended March 31, 2021 and 2020 (Unaudited)	3
	Balance Sheets — March 31, 2021 (Unaudited) and December 31, 2020	4
	Statements of Cash Flows — Three Months Ended March 31, 2021 and 2020 (Unaudited)	5
	Statements of Stockholder’s Equity — Three Months Ended March 31, 2021 and 2020 (Unaudited)	6
	Notes to Financial Statements (Unaudited)	7
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20
ITEM 4.	CONTROLS AND PROCEDURES	26
PART II.	OTHER INFORMATION:
ITEM 1.	LEGAL PROCEEDINGS	27
ITEM 1A.	RISK FACTORS	27
ITEM 6.	EXHIBITS	27
EXHIBIT INDEX		28
SIGNATURES		29

PACCAR FINANCIAL CORP.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STATEMENTS OF COMPREHENSIVE INCOME AND RETAINED EARNINGS (Unaudited)

	Three Months Ended
	March 31
(Millions of Dollars)	2021		2020
Interest and fee income	$	77.1	$	88.4
Operating lease and rental revenues		85.8		96.8
Used truck sales and other revenues		17.3		7.3
TOTAL INTEREST AND OTHER REVENUES		180.2		192.5
Interest and other borrowing costs		36.0		45.2
Depreciation and other rental expenses		81.2		92.5
Cost of used truck sales and other expenses		15.6		6.3
Selling, general and administrative expenses		13.6		14.6
Provision for losses on receivables		.6		10.2
TOTAL EXPENSES		147.0		168.8
INCOME BEFORE INCOME TAXES		33.2		23.7
Income taxes		7.7		5.8
NET INCOME	$	25.5	$	17.9
COMPREHENSIVE INCOME	$	34.8	$	.3
RETAINED EARNINGS AT BEGINNING OF PERIOD	$	1,668.7	$	1,591.4
RETAINED EARNINGS AT END OF PERIOD	$	1,594.2	$	1,605.8

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

See Notes to Financial Statements.

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PACCAR FINANCIAL CORP.

BALANCE SHEETS	March 31			December 31
	2021			2020*
(Millions of Dollars)	(Unaudited)
ASSETS
Cash	$	40.6		$	48.0
Finance and other receivables, net of allowance for losses    (2021 - $68.6 and 2020 - $68.2)		6,764.6			6,773.6
Due from PACCAR and affiliates		1,649.3			1,860.5
Equipment on operating leases, net of accumulated depreciation    (2021 - $631.5 and 2020 - $624.6)		1,182.5			1,238.3
Other assets		277.4			290.1
TOTAL ASSETS	$	9,914.4		$	10,210.5
LIABILITIES
Accounts payable, accrued expenses and other	$	421.6		$	396.3
Due to PACCAR and affiliates		69.2			31.0
Commercial paper		1,295.4			1,305.9
Medium-term notes		5,739.1			5,990.8
Deferred taxes and other liabilities		612.6			649.7
TOTAL LIABILITIES		8,137.9			8,373.7
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		152.8			147.9
Retained earnings		1,594.2			1,668.7
Accumulated other comprehensive loss		(16.0	)		(25.3	)
TOTAL STOCKHOLDER'S EQUITY		1,776.5			1,836.8
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	9,914.4		$	10,210.5

* The December 31, 2020 balance sheet has been derived from audited financial statements.

See Notes to Financial Statements.

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PACCAR FINANCIAL CORP.

STATEMENTS OF CASH FLOWS (Unaudited)	Three Months Ended
	March 31
(Millions of Dollars)	2021			2020
OPERATING ACTIVITIES
Net income	$	25.5		$	17.9
Items included in net income not affecting cash:
Depreciation and amortization		77.6			87.3
Provision for losses on receivables		.6			10.2
Deferred taxes		(38.1	)		(9.5	)
Administrative fees for services from PACCAR		4.9			5.1
Change in tax-related balances with PACCAR		37.1			39.1
Decrease in payables and other		(3.8	)		(43.4	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		103.8			106.7
INVESTING ACTIVITIES
Finance and other receivables originated		(643.9	)		(507.9	)
Collections on finance and other receivables		582.3			467.2
Net decrease (increase) in wholesale receivables		69.0			(30.9	)
Loans to PACCAR and affiliates		(90.0	)		(15.0	)
Collections on loans from PACCAR and affiliates		211.0			70.0
Net decrease (increase) in other receivables to PACCAR and affiliates		84.5			(393.9	)
Acquisition of equipment for operating leases		(45.5	)		(93.9	)
Proceeds from disposal of equipment		111.2			31.2
Other		(28.5	)		(11.4	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		250.1			(484.6	)
FINANCING ACTIVITIES
Net (decrease) increase in short-term commercial paper		(10.5	)		381.6
Proceeds from medium-term notes and other commercial paper		399.2			376.7
Payments of medium-term notes and other commercial paper		(650.0	)		(400.0	)
Dividends paid		(100.0	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(361.3	)		358.3
NET DECREASE IN CASH		(7.4	)		(19.6	)
CASH AT BEGINNING OF PERIOD		48.0			53.3
CASH AT END OF PERIOD	$	40.6		$	33.7

See Notes to Financial Statements.

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PACCAR FINANCIAL CORP.

STATEMENTS OF STOCKHOLDER'S EQUITY (Unaudited)	Three Months Ended
	March 31
(Millions of Dollars)	2021			2020
PREFERRED STOCK, $100 par value
Balance at beginning of period	$	31.0		$	31.0
Balance at end of period		31.0			31.0
COMMON STOCK, $100 par value
Balance at beginning of period		14.5			14.5
Balance at end of period		14.5			14.5
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period		147.9			140.9
Investments from PACCAR		4.9			5.1
Balance at end of period		152.8			146.0
RETAINED EARNINGS
Balance at beginning of period		1,668.7			1,591.4
Net income		25.5			17.9
Cumulative effect of change in accounting principle					(3.5	)
Dividends paid		(100.0	)
Balance at end of period		1,594.2			1,605.8
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated unrealized net (loss) gain on derivative contracts:
Balance at beginning of period		(25.3	)		(12.4	)
Net unrealized gain (loss)		9.3			(17.6	)
Balance at end of period		(16.0	)		(30.0	)
TOTAL STOCKHOLDER'S EQUITY	$	1,776.5		$	1,767.3
See Notes to Financial Statements.

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PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (Millions of Dollars)

NOTE A – 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.

The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. For further information, refer to the financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

NOTE B – Finance and Other Receivables

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

	March 31			December 31
	2021			2020
Retail loans	$	4,225.3		$	4,133.1
Retail financing leases		1,447.2			1,489.3
Dealer wholesale financing		952.1			1,021.1
Dealer master notes		122.9			131.1
Operating lease receivables and other		85.7			67.2
		6,833.2			6,841.8
Less allowance for credit losses:
Loans and leases		(65.5	)		(65.2	)
Dealer wholesale financing		(1.3	)		(1.3	)
Operating lease receivables and other		(1.8	)		(1.7	)
	$	6,764.6		$	6,773.6

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 $14.1 and $13.3 as of March 31, 2021 and December 31, 2020, respectively.

Interest income recognized on finance leases was $16.3 and $16.5 for the three months ended March 31, 2021 and 2020, respectively. 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 March 31, 2021 or December 31, 2020. 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.

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.

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

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PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (Millions of Dollars)

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 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 Financial Accounting Standards Board statement, Prudential Regulator Guidance Concerning Troubled Debt Restructurings, issued on March 22, 2020, short-term modifications granted to customers were not considered as TDRs if they were not past-due and were seeking to manage their liquidity needs because of the effects of the COVID-19 pandemic.

On average, modifications extended contractual terms by approximately four months in 2021 and three months in 2020, and did not have a significant effect on the weighted average term or interest rate of the total portfolio at March 31, 2021 or December 31, 2020.

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.

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.

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PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (Millions of Dollars)

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.

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.

The allowance for credit losses is summarized as follows:

	2021
	Dealer					Customer
	Wholesale		Retail			Retail			Other*		Total
Balance at January 1	$	1.3	$	7.5		$	57.7		$	1.7	$	68.2
(Benefit) provision for losses				(.2	)		.7			.1		.6
Charge-offs							(.7	)				(.7	)
Recoveries							.5					.5
Balance at March 31	$	1.3	$	7.3		$	58.2		$	1.8	$	68.6

	2020
	Dealer				Customer
	Wholesale		Retail		Retail			Other*			Total**
Balance at January 1	$	1.9	$	7.9	$	53.8		$	1.8		$	65.4
Provision (benefit) for losses				.2		10.2			(.2	)		10.2
Charge-offs						(7.2	)		(.1	)		(7.3	)
Recoveries						.4			.1			.5
Balance at March 31	$	1.9	$	8.1	$	57.2		$	1.6		$	68.8

* Operating lease and other trade receivables.

** The beginning balance has been adjusted for the adoption of Accounting Standards Update 2016-13.  

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PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (Millions of Dollars)

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

	Dealer				Customer
At March 31, 2021	Wholesale		Retail		Retail		Total
Amortized cost basis for impaired finance receivables evaluated    individually					$	36.5	$	36.5
Allowance for impaired finance receivables determined    individually					$	.9	$	.9
Amortized cost basis for finance receivables evaluated collectively	$	952.1	$	1,418.1	$	4,340.8	$	6,711.0
Allowance for finance receivables determined collectively	$	1.3	$	7.3	$	57.3	$	65.9

	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

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

	March 31		December 31
	2021		2020
Fleet	$	34.5	$	35.1
Owner/Operator		2.0		2.0
	$	36.5	$	37.1

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PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (Millions of Dollars)

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 March 31, 2021 and December 31, 2020 was not significantly different than the unpaid principal balance.

	Dealer		Customer Retail
						Owner/
At March 31, 2021	Wholesale	Retail	Fleet			Operator			Total
Impaired loans with a specific reserve			$	9.8		$	1.9		$	11.7
Associated allowance				(.3	)		(.3	)		(.6	)
Net carrying amount of impaired loans with a specific reserve				9.5			1.6			11.1
Impaired loans with no specific reserve				5.4			.1			5.5
Net carrying amount of impaired loans			$	14.9		$	1.7		$	16.6
Average amortized cost basis for impaired loans*			$	20.2		$	2.2		$	22.4

* Represents the average during the 12 months ended March 31, 2021

	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*	$	4.9		$	12.8		$	2.7		$	20.4

* Represents the average during the 12 months ended March 31, 2020

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

	Three Months Ended
	March 31
	2021		2020
Fleet	$	.2	$	.3
Owner/Operator
	$	.2	$	.3

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PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (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 balance representing over 10% of the total portfolio assets as of March 31, 2021 or December 31, 2020. The Company retains as collateral a security interest in the related equipment.

At the inception of each contract, the Company considers the credit risk based on a variety of credit quality factors including prior payment experience, customer financial information, credit-rating agency ratings, loan-to-value ratios and other internal metrics. On an ongoing basis, the Company monitors credit quality based on past due status and collection experience as 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 table below summarizes the amortized cost basis of the Company’s finance receivables within each credit quality indicator by year of origination and portfolio class.

At March 31, 2021	Revolving Loans		2021		2020		2019		2018		2017		Prior		Total
Dealer:
Wholesale:
Performing	$	946.0													$	946.0
Watch		6.1														6.1
At-risk
	$	952.1													$	952.1
Retail:
Performing	$	19.0	$	56.4	$	360.5	$	414.4	$	212.9	$	147.1	$	186.6	$	1,396.9
Watch				.4		4.2		10.2		5.1		1.3				21.2
At-risk
	$	19.0	$	56.8	$	364.7	$	424.6	$	218.0	$	148.4	$	186.6	$	1,418.1
Total Dealer	$	971.1	$	56.8	$	364.7	$	424.6	$	218.0	$	148.4	$	186.6	$	2,370.2
Customer Retail:
Fleet:
Performing			$	385.5	$	1,429.7	$	977.2	$	538.9	$	216.2	$	126.0	$	3,673.5
Watch				1.5		6.7		9.7		3.7		1.5		1.1		24.2
At-risk				3.9		.4		14.4		9.1		5.2		1.5		34.5
			$	390.9	$	1,436.8	$	1,001.3	$	551.7	$	222.9	$	128.6	$	3,732.2
Owner/Operator:
Performing			$	93.4	$	271.0	$	151.0	$	79.5	$	32.3	$	15.7	$	642.9
Watch						.2										.2
At-risk						.1		.5		.8		.3		.3		2.0
			$	93.4	$	271.3	$	151.5	$	80.3	$	32.6	$	16.0	$	645.1
Total Customer Retail			$	484.3	$	1,708.1	$	1,152.8	$	632.0	$	255.5	$	144.6	$	4,377.3
Total	$	971.1	$	541.1	$	2,072.8	$	1,577.4	$	850.0	$	403.9	$	331.2	$	6,747.5

- 12 -

PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (Millions of Dollars)

At December 31, 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

The tables below summarize the Company’s finance receivables by aging category. In determining past due status, the Company considers the entire contractual account balance past due when any installment is over 30 days past due. Substantially all customer accounts that were greater than 30 days past due prior to credit modification became current upon modification for aging purposes.

	Dealer				Customer Retail
							Owner/
At March 31, 2021	Wholesale		Retail		Fleet		Operator		Total
Current and up to 30 days past due	$	952.1	$	1,418.1	$	3,730.1	$	644.1	$	6,744.4
31 – 60 days past due						.6		.5		1.1
Greater than 60 days past due						1.5		.5		2.0
	$	952.1	$	1,418.1	$	3,732.2	$	645.1	$	6,747.5

	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

- 13 -

PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (Millions of Dollars)

Troubled Debt Restructurings

The balance of TDRs was $29.5 at March 31, 2021 and $32.5 at December 31, 2020. At modification date, the pre-modification and post-modification amortized cost basis balances for finance receivables modified during the periods by portfolio class are as follows:

	Three Months Ended				Three Months Ended
	March 31, 2021				March 31, 2020
	Amortized cost basis				Amortized cost basis
	Pre-Modification		Post-Modification		Pre-Modification		Post-Modification
Fleet	$	.7	$	.6	$	21.5	$	21.5
Owner/Operator		.1		.1		.1		.1
	$	.8	$	.7	$	21.6	$	21.6

The effect on the allowance for credit losses from such modifications was not significant at March 31, 2021 and 2020.

The post-modification amortized cost basis of finance receivables modified as TDRs during the previous twelve months that subsequently defaulted (i.e., became more than 30 days past due) during the periods by portfolio class are as follows:

	Three Months Ended
	March 31
	2021		2020
Fleet	$	.1
Owner/Operator			$	.1
	$	.1	$	.1

There were 0 finance receivables modified as TDRs in the last twelve months that subsequently defaulted and were charged off in the three months ended March 31, 2021 and 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 the loans, finance leases and equipment under operating lease. The Company records the vehicles as used truck inventory included in Other assets on the Balance Sheets. The balance of repossessed units was $3.4 at March 31, 2021 and $10.9 at December 31, 2020.

Proceeds from sales of repossessed assets were $9.9 and $7.1 for the three months ended March 31, 2021 and 2020, respectively. These amounts are included in Proceeds from disposal of equipment on the Statements of Cash Flows. Write-downs of repossessed equipment on operating leases are recorded as impairments and included in Depreciation and other rental expenses on the Statements of Comprehensive Income and Retained Earnings.

NOTE C – Transactions with PACCAR and Affiliates

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 three months ended March 31, 2021 and full year 2020 was met without assistance. The Support Agreement also requires PACCAR to own, directly or indirectly, all outstanding voting stock of the Company.

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 various 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 2021 and 2020 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 aggregate loans to the foreign affiliates in excess of the equivalent of $750.0 U.S.

- 14 -

PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (Millions of Dollars)

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 March 31, 2021 and December 31, 2020, including balances with foreign finance affiliates operating in the United Kingdom, the Netherlands, Mexico, Canada, Australia and Brasil, are summarized below: 

	March 31		December 31
	2021		2020
Due from PACCAR and affiliates
Loans due from PACCAR	$	1,098.6	$	1,151.6
Loans due from foreign finance affiliates		517.0		669.5
Receivables		33.7		39.4
	$	1,649.3	$	1,860.5
Due to PACCAR and affiliates
Tax-related payable due to PACCAR	$	47.5	$	10.4
Payables		21.7		20.6
	$	69.2	$	31.0

The Company is included in the consolidated federal income tax return of PACCAR. The tax-related payable due to PACCAR represents the related tax provision to be settled with PACCAR.

PACCAR charges the Company for certain administrative services it provides. These costs were charged to the Company based upon the Company’s specific use of the services and PACCAR’s cost.

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.

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 sheet 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 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 incurred by the Company for the defined contribution plan benefits are based on the actual contribution made on behalf of the participating employees and are included in selling, general and administrative expenses.

NOTE D – Stockholder’s Equity

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.

Comprehensive Income

The components of comprehensive income are as follows:

	Three Months Ended
	March 31
	2021		2020
Net income	$	25.5	$	17.9
Other comprehensive loss
Derivative contracts increase (decrease)		9.3		(17.6	)
Total comprehensive income	$	34.8	$	.3

- 15 -

PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (Millions of Dollars)

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss (AOCL) of $16.0 and $25.3 at March 31, 2021 and December 31, 2020, respectively, is comprised of the unrealized net loss on derivative contracts, net of taxes. Changes in and reclassifications out of AOCL during the periods are as follows:

	Three Months Ended
	March 31
	2021			2020
Balance at beginning of period	$	(25.3	)	$	(12.4	)
Amounts recorded in AOCL
Unrealized gain (loss) on derivative contracts		8.7			(24.2	)
Income tax effect		(2.1	)		5.9
Amounts reclassified out of AOCL
Interest and other borrowing costs		3.5			.9
Income tax effect		(.8	)		(.2	)
Net other comprehensive income (loss)		9.3			(17.6	)
Balance at end of period	$	(16.0	)	$	(30.0	)

NOTE E – 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 three months ended March 31, 2021. 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:

	March 31		December 31
Level 2	2021		2020
Assets:
Impaired loans, net of specific reserves (2021 - nil and 2020 - $.1)			$	1.9
Used trucks held for sale	$	60.1		112.3
Derivative contracts		4.7		1.6
Liabilities:
Derivative contracts	$	23.9	$	30.4

- 16 -

PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (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 and the condition of the vehicles. Used truck impairments related to units held at March 31, 2021 and 2020 were $2.5 and $6.1 during the first three months of 2021 and 2020, 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 amount approximates 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:

	March 31, 2021				December 31, 2020
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Due from PACCAR	$	1,055.0	$	1,077.0	$	1,061.0	$	1,090.9
Due from foreign finance affiliates		390.0		393.2		490.0		496.0
Fixed rate loans		4,044.0		4,100.5		3,961.0		4,051.5
				-
Liabilities:
Fixed rate debt	$	5,149.8	$	5,255.3	$	5,402.4	$	5,548.9

- 17 -

PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (Millions of Dollars)

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 March 31, 2021, the notional amount of these contracts totaled $1,303.0 with amounts expiring over the next 7.3 years. Notional maturities for all interest-rate contracts are $258.1 for the remainder of 2021, $399.6 for 2022, $31.5 for 2023, $159.7 for 2024, $155.0 for 2025 and $299.1 thereafter.

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

	March 31, 2021						December 31, 2020
Interest-rate contracts:	Assets			Liabilities			Assets			Liabilities
Other assets	$	4.7					$	1.6
Accounts payable, accrued expenses and other				$	23.9					$	30.4
Gross amounts recognized in Balance Sheets		4.7			23.9			1.6			30.4
Less amounts not offset in financial instruments		(3.5	)		(3.5	)		(1.1	)		(1.1	)
Pro forma net amount	$	1.2		$	20.4		$	.5		$	29.3

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 7.3 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 March 31, 2021 that is estimated to be reclassified to interest expense in the following 12 months if interest rates remain unchanged is approximately $10.2, 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:

	March 31			December 31
	2021			2020
Medium-term notes
Carrying amount of hedged liabilities	$	178.9		$	90.9
Cumulative basis adjustment included in the carrying amount		(1.1	)		.9

The above table excludes the cumulative basis adjustments on discontinued hedge relationships of $(.3) and $(.4) as of March 31, 2021 and December 31, 2020, respectively.

- 18 -

PACCAR FINANCIAL CORP.

Notes to Financial Statements (Unaudited) (Millions of Dollars)

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

	Three Months Ended
	March 31
	2021			2020
Loss (gain) on fair value hedges
Derivatives	$	2.0		$	(1.4	)
Hedged items		(1.8	)		1.7
Loss on cash flow hedges
Reclassified from AOCI into income		3.5			.9
	$	3.7		$	1.2

NOTE G – Income Taxes

The Company’s effective income tax rate for the first quarter of 2021 was 23.2% compared to 24.5% for the first quarter of 2020, reflecting lower state tax expense in 2021 compared to 2020.

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.

- 19 -

PACCAR FINANCIAL CORP.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Millions of Dollars)

Results of Operations

	Three Months Ended
	March 31
	2021		2020		% Change
New business volume by product:
Retail loans and finance leases	$	583.4	$	472.6		23
Equipment on operating leases		45.9		102.1		(55	)
Dealer master notes		41.4		42.5		(3	)
	$	670.7	$	617.2		9
Average earning assets by product:
Retail loans and finance leases	$	5,645.5	$	5,262.4		7
Equipment on operating leases		1,255.4		1,465.0		(14	)
Dealer wholesale financing		990.2		1,766.9		(44	)
Dealer master notes		127.6		89.3		43
	$	8,018.7	$	8,583.6		(7	)
Revenue by product:
Retail loans and finance leases	$	71.0	$	72.8		(2	)
Equipment on operating leases		85.8		96.8		(11	)
Dealer wholesale financing		4.4		14.6		(70	)
Dealer master notes		.9		.9
Used truck sales, other revenues and fees		18.1		7.4		145
	$	180.2	$	192.5		(6	)
Income before income taxes	$	33.2	$	23.7		40

New Business Volume

New business volume from retail loans and finance leases in the first quarter of 2021 increased to $583.4 from $472.6 in the first quarter of 2020 due to higher retail sales of PACCAR trucks in 2021. Equipment on operating leases new business volume decreased to $45.9 in the first quarter of 2021 from $102.1 in the first quarter of 2020, attributable to lower fleet business in 2021. Dealer master notes new business volume decreased to $41.4 in the first quarter of 2021 from $42.5 in the first quarter of 2020 due to decreased finance volume from dealers.

In the first quarter of 2021, market share on new PACCAR truck sales was 21.6% compared to 21.5% in the first quarter of 2020.

Income Before Income Taxes

The Company’s income before income taxes was $33.2 for the first quarter of 2021 compared to $23.7 for the first quarter of 2020. The increased income before income taxes in 2021 was primarily the result of lower provision for losses of $9.6 and lower selling, general and administrative expenses (SG&A) of $1.0, partially offset by lower finance margin of $2.1.

Included in Other assets on the Company’s Balance Sheets are used trucks held for sale, net of impairments, of $162.3 at March 31, 2021 and $210.3 at December 31, 2020. 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.

In the first quarter, the Company recognized losses on used trucks, excluding repossessions, of $11.4 in 2021 and $13.1 in 2020, including losses on multiple unit transactions of $6.9 in 2021 and $4.8 in 2020. Used truck gains (losses) related to repossessions, which are recognized as credit losses, were $.2 in the first quarter of 2021 compared to $(.1) in the first quarter of 2020.

- 20 -

PACCAR FINANCIAL CORP.

Revenue and Expenses

The major factors for the change in interest and fee income, interest and other borrowing costs and finance margin for the three months ended March 31, 2021 are outlined in the table below:

				Interest and
	Interest and			Other Borrowing			Finance
	Fee Income			Costs			Margin
Three Months Ended March 31, 2020	$	88.4		$	45.2		$	43.2
(Decrease) increase
Average finance receivables		(3.6	)					(3.6	)
Average receivables from PACCAR and affiliates		.3						.3
Average debt balances					(1.6	)		1.6
Yields		(8.0	)					(8.0	)
Borrowing rates					(7.6	)		7.6
Total decrease		(11.3	)		(9.2	)		(2.1	)
Three Months Ended March 31, 2021	$	77.1		$	36.0		$	41.1

• Average finance receivables decreased $355.3 in the first quarter of 2021 primarily due to lower dealer wholesale financing, partially offset by a larger retail portfolio.

• Average receivables from PACCAR and affiliates increased $50.2 in the first quarter of 2021 as a result of new loans to affiliated companies exceeding collections.

• Average debt balances decreased $321.1 in the first quarter of 2021, 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 lease, 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 4.1% in the first quarter of 2021, compared to 4.5% in the first quarter of 2020. Yields on receivables from PACCAR and affiliates were 2.1% in the first quarter of 2021, compared to 2.4% in the first quarter of 2020.

• Average borrowing rates in the first quarter of 2021 were 2.0% compared to 2.4% in the first quarter of 2020 due to lower debt market interest rates.

The major factors for the change in operating lease and rental revenues, depreciation and other rental expenses and operating lease margin for the three months ended March 31, 2021 are outlined in the table below:

	Operating Lease			Depreciation
	and Rental			and Other			Operating
	Revenues			Rental Expenses			Lease Margin
Three Months Ended March 31, 2020	$	96.8		$	92.5		$	4.3
(Decrease) increase
Operating lease impairments					(4.6	)		4.6
Results on returned lease assets					2.3			(2.3	)
Average operating lease assets		(10.6	)		(8.5	)		(2.1	)
Revenue and cost per asset		(.4	)		(.5	)		.1
Total (decrease) increase		(11.0	)		(11.3	)		.3
Three Months Ended March 31, 2021	$	85.8		$	81.2		$	4.6

• Operating lease impairments decreased in 2021 due to lower used truck inventory and higher used truck market prices.

• Results on returned lease assets were lower in 2021 compared to 2020 primarily due to a higher number of used trucks sold.

• Average operating lease assets decreased in 2021 due to the volume of expiring leases exceeding new business volume for leased vehicles.

• Revenue and cost per asset decreased by $.4 and $.5, respectively. Operating lease margin per asset increased by $.1 primarily due to lower vehicle related expenses.

- 21 -

PACCAR FINANCIAL CORP.

Used truck sales and other revenues and cost of used truck sales and other expenses are summarized below for the first quarter of 2021 compared to the first quarter of 2020:

	Three Months Ended
	March 31
	2021		2020
Used truck sales	$	14.8	$	4.0
Insurance, franchise and other revenues		2.5		3.3
Used truck sales and other revenues		17.3		7.3
Cost of used truck sales		14.5		5.2
Insurance, franchise and other expenses		1.1		1.1
Cost of used truck sales and other expenses		15.6		6.3
Results from used trucks and other	$	1.7	$	1.0

Results from used trucks and other in the first quarter of 2021 increased by $.7 from the first quarter of 2020, primarily due to lower impairments on used trucks resulting from higher used truck market prices.

The Company’s SG&A decreased in the first quarter of 2021 to $13.6 from $14.6 in the first quarter of 2020 due to lower personnel and related expenses. As a percentage of average earning assets, the Company’s SG&A was .2% for the first quarter of 2021 and 2020.

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:

	Three Months Ended			Year Ended			Three Months Ended
	March 31			December 31			March 31
	2021			2020			2020
Balance at beginning of period	$	68.2		$	65.4		$	65.4
Provision for losses		.6			15.0			10.2
Charge-offs		(.7	)		(14.0	)		(7.3	)
Recoveries		.5			1.8			.5
Balance at end of period	$	68.6		$	68.2		$	68.8
Ratios:
Charge-offs, net of recoveries ($.2 in 2021) to
average total portfolio ($6,763.3 in 2021)
annualized at March 31, 2021		.01	%		.18	%		.38	%
Allowance for credit losses ($68.6 in 2021) to period-end
total portfolio ($6,833.2 in 2021)		1.00	%		1.00	%		.95	%
Period-end retail loan and lease receivables past
due over 30 days ($3.1 in 2021) to period-end
retail loan and lease receivables ($5,672.5 in 2021)		.05	%		.08	%		.49	%

The provision for losses on receivables was $.6 for the first quarter of 2021 compared to $10.2 for the first quarter of 2020, primarily due to a loss on a fleet customer and higher expected losses resulting from weakening economic conditions related to the COVID-19 pandemic in the first quarter of 2020.  

Charge-offs, net of recoveries, decreased to $.2 in the first quarter of 2021 from $6.8 in the first quarter of 2020, primarily due to the charge-off of the above mentioned fleet customer in the first quarter of 2020, and reflects continued good portfolio performance.

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PACCAR FINANCIAL CORP.

Retail loan and lease receivables past due over 30 days at March 31, 2021 was .05% compared to .08% at December 31, 2020 and .49% at March 31, 2020, reflecting one fleet customer that was past due in the first quarter of  2020 and subsequently charged-off. 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. See “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 a loan or finance lease for credit reasons and grants a concession, the modification is classified as a troubled debt restructuring (TDR).

The post-modification balance of accounts modified during the three months ended March 31, 2021 and 2020 are summarized below:

	Three Months Ended					Three Months Ended
	March 31, 2021					March 31, 2020
	Amortized		% of Total			Amortized		% of Total
	Cost Basis		Portfolio*			Cost Basis		Portfolio*
Commercial	$	57.1		3.3	%	$	68.8		3.8	%
Insignificant Delay		8.0		.5	%		126.3		7.0	%
Credit - No Concession							.2
Credit - TDR		.7					21.6		1.2	%
	$	65.8		3.8	%	$	216.9		12.0	%

* Amortized cost basis immediately after modification as a percentage of period-end portfolio, on an annualized basis.

Modification activity decreased to $65.8 in the first quarter of 2021 compared to $216.9 in the first quarter of 2020. The decrease in Commercial modifications reflects lower volumes of refinancing. The decrease in Insignificant delay modifications reflects a decrease in customers requesting payment relief for up to three months. 2020 included payment relief for customers seeking to manage their liquidity needs during the COVID-19 pandemic. The Credit – TDR modifications decreased in the first quarter of 2021 compared to the first quarter of 2020, primarily due to the contract modification for two fleet customers in the first quarter of 2020.

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 $.7 of accounts during the first quarter of 2021, nil accounts during the fourth quarter of 2020 and $5.1 of accounts during the first quarter of 2020 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:

	March 31			December 31			March 31
	2021			2020			2020
Pro forma percentage of retail loan and lease accounts 30+ days past due		.07	%		.08	%		.58	%

Modifications of accounts in prior quarters that were more than 30+ days past due at the time of modification are included in past dues if they were not performing under the modified terms at March 31, 2021, December 31, 2020 and March 31, 2020. The effect on the allowance for credit losses from such modifications was not significant at March 31, 2021, December 31, 2020 and March 31, 2020.

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PACCAR FINANCIAL CORP.

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:

	March 31				December 31				March 31
	2021				2020				2020
Retail loans	$	4,225.3	62	%	$	4,133.1	60	%	$	3,788.0	52	%
Retail leases		1,447.2	21	%		1,489.3	22	%		1,466.6	20	%
Dealer wholesale financing		952.1	14	%		1,021.1	15	%		1,797.6	25	%
Dealer master notes		122.9	2	%		131.1	2	%		126.1	2	%
Operating lease receivables and other		85.7	1	%		67.2	1	%		62.8	1	%
Total portfolio	$	6,833.2	100	%	$	6,841.8	100	%	$	7,241.1	100	%

Retail loans increased to $4,225.3 at March 31, 2021 from $4,133.1 at December 31, 2020, reflecting new business volume exceeding collections.

Retail leases decreased to $1,447.2 at March 31, 2021 from $1,489.3 at December 31, 2020, reflecting collections exceeding new business volume.

Dealer wholesale financing balances decreased to $952.1 at March 31, 2021 from $1,021.1 at December 31, 2020 due to lower dealer new truck inventory.

Dealer master notes were $122.9 at March 31, 2021 compared to $131.1 at December 31, 2020. Dealers may pay the loans early or make additional draws up to specified balances of the contracts pledged to the Company. As of March 31, 2021, the underlying pledged contracts were $190.9, upon which the dealers have available $49.1 as potential additional borrowing capacity.

Income Taxes

The Company’s effective income tax rate for the first quarter of 2021 was 23.2% compared to 24.5% for the first quarter of 2020, reflecting lower state tax expense in 2021 compared to 2020.

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.

The Company’s deferred income tax benefit for the first quarter of 2021 was $38.1 compared to $9.5 for the first quarter of 2020. The Company’s net deferred tax liability decreased to $604.2 at March 31, 2021 from $639.4 at December 31, 2020, 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

Truck Industry Class 8 retail sales in the U.S. in 2021 are expected to be 230,000-260,000 units compared to 191,900 in 2020. 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.

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PACCAR FINANCIAL CORP.

Funding and Liquidity

The Company’s debt ratings at March 31, 2021 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.

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. 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 Company participates with PACCAR and certain other PACCAR affiliates in committed bank facilities of $3,000.0 at March 31, 2021. 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 the first quarter of 2021.

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 March 31, 2021 were $1,295.5 and $5,750.0, 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.

Other information on liquidity, sources of capital, and contractual cash commitments as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”) continues to be relevant.

Forward-Looking Statements

This report 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 3 is omitted pursuant to Form 10-Q General Instructions (H)(2)(c).

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PACCAR FINANCIAL CORP.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Principal Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

There have been no significant changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PACCAR FINANCIAL CORP.

PART II – OTHER INFORMATION

ITEM 1. 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 1A. RISK FACTORS

For information regarding risk factors, refer to Part I, Item 1A as presented in the 2020 Annual Report. There have been no material changes in the Company’s risk factors during the three months ended March 31, 2021 except for the following:

Supplier Capacity

The automotive industry is currently experiencing an undersupply of semiconductors. This undersupply along with other supply chain disruptions reduced PACCAR’s truck deliveries approximately 3,000 units in the first quarter of 2021. PACCAR anticipates this supply chain disruption will reduce deliveries in the second quarter and that the situation will improve in the second half of the year if there is adequate semiconductor supply. The anticipated reduction in deliveries could result in lower new business volume for the Company.  

Items 2, 3 and 4 are omitted pursuant to Form 10-Q General Instructions (H)(2)(b).

For Item 5, there was no reportable information during the three months ended March 31, 2021.

ITEM 6. EXHIBITS

Any exhibits filed herewith are listed in the accompanying index to exhibits.

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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 Act of 1934	10-K	February 19, 2020	4(e)	001-11677
(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
(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

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PACCAR FINANCIAL CORP.

SIGNATURES

Pursuant to the requirements 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.
		(Registrant)
Date	May 3, 2021	/s/ Craig R. Gryniewicz
		Craig R. Gryniewicz
		President
		(Authorized Officer)
		/s/ Yi Zhang
		Yi Zhang
		Controller
		(Chief Accounting Officer)

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