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PACCAR FINANCIAL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Millions of Dollars)

August 7, 2014

Results of Operations Three Months Ended Six Months Ended June 30 June 30 % % 2014 2013 Change 2014 2013 Change New business volume by product: Retail loans and direct financing leases $ 422.6$ 416.4 1 $ 727.8$ 691.4 5 Equipment on operating leases 178.0 121.3 47 247.1 194.3 27 Dealer master notes 75.0 63.4 18 124.4 123.0 1 $ 675.6$ 601.1 12 $ 1,099.3$ 1,008.7 9 Average earning assets by product: Retail loans and direct financing leases $ 3,951.9$ 3,632.4 9 $ 3,922.6$ 3,613.1 9 Equipment on operating leases 1,210.2 1,062.3 14 1,193.9 1,048.0 14 Dealer wholesale financing 624.8 619.3 1 616.2 615.6 Dealer master notes 79.7 76.8 4 79.0 82.4 (4 ) $ 5,866.6$ 5,390.8 9 $ 5,811.7$ 5,359.1 8 Revenue by product: Retail loans and direct financing leases $ 48.0$ 44.8 7 $ 93.7$ 89.2 5 Equipment on operating leases 80.9 71.8 13 158.4 141.1 12 Dealer wholesale financing 4.2 4.6 (9 ) 8.1 9.1 (11 ) Dealer master notes .6 .6 1.2 1.3 (8 )



Used truck sales, other revenues and fees 6.0 10.8

(44 ) 13.1 32.8 (60 ) $ 139.7$ 132.6 5 $ 274.5$ 273.5 Income before income taxes $ 42.0$ 36.1 16 $ 81.9$ 72.7 13



New Business Volume

New business volume in the second quarter and first half of 2014 increased 12% and 9% from the second quarter and first half of 2013 due to higher sales of PACCAR trucks in 2014. Equipment on operating lease new business volume in the second quarter and first half of 2014 increased $56.7 and $52.8 from the second quarter and first half of 2013, attributable to higher operating lease fleet business in the first half of 2014. Dealer master note new business volume increased $11.6 and $1.4 from the second quarter and first half of 2013 due to higher new truck sales resulting in increased finance volume from dealers. In the second quarter of 2014, the Company began a program of assigning certain new operating lease contracts to third parties to limit concentration of portfolio risk with certain large customers. These transactions are accounted for as sales of the related equipment under operating leases and excluded from new business volume. The Company sold equipment with a book value of $16.5 and received cash proceeds of $16.9. The Company maintains servicing responsibilities for the leases and fees received for servicing are capitalized and recognized over the contract term.



Income Before Income Taxes

The Company's income before income taxes was $42.0 for the second quarter of 2014 compared to $36.1 for the second quarter of 2013. The increase in income before income taxes for the quarter was primarily the result of a higher finance margin of $3.3, a higher operating lease margin of $1.9 and higher results from used trucks and other of $.9. -22-



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Table of Contents PACCAR FINANCIAL CORP. - FORM 10-Q The Company's income before income taxes was $81.9 for the first half of 2014 compared to $72.7 for the first half of 2013. The increase in income before income taxes for the first half was primarily the result of a higher finance margin of $3.9, a higher operating lease margin of $2.8 and higher results from used trucks and other of $1.9.



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 June 30, 2014 are outlined in the table below: Interest Interest and Other Finance and Fee Income Borrowing Costs Margin Three Months Ended June 30, 2013 $ 51.4 $ 16.4 $ 35.0 Increase (decrease) Average finance receivables 3.5 3.5 Average receivables from PACCAR and affiliates .4 .4 Average debt balances 1.5 (1.5 ) Yields (2.6 ) (2.6 ) Borrowing rates (3.5 ) 3.5 Total increase (decrease) 1.3 (2.0 ) 3.3 Three Months Ended June 30, 2014 $ 52.7 $ 14.4 $ 38.3



Average finance receivables increased $327.9 in the second quarter of 2014

as a result of retail portfolio new business volume exceeding repayments.

Average receivables from PACCAR and affiliates increased $209.1 in the



second quarter of 2014 as a result of new loans to affiliated companies

exceeding repayments. Average debt balances increased $574.8 in the second quarter of 2014. The



higher average debt balances reflect funding for the higher average

earning asset portfolio, including loans, finance leases and operating

leases and increased intercompany loans to affiliated companies.



Average yields in the second quarter of 2014 were 4.3% compared to 4.5% in

the second quarter of 2013. Average borrowing rates in the second quarter

of 2014 were 1.1% compared to 1.4% in the second quarter of 2013. The

decrease in yields and borrowing rates was due to lower market rates.

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Table of Contents PACCAR FINANCIAL CORP. - FORM 10-Q The major factors for the change in interest and fee income, interest and other borrowing costs and finance margin for the six months ended June 30, 2014 are outlined in the table below: Interest Interest and Other Finance and Fee Income Borrowing Costs Margin Six Months Ended June 30, 2013 $ 102.4 $ 32.7 $ 69.7 Increase (decrease) Average finance receivables 6.5 6.5 Average receivables from PACCAR and affiliates .9 .9 Average debt balances 2.9 (2.9 ) Yields (6.1 ) (6.1 ) Borrowing rates (5.5 ) 5.5 Total increase (decrease) 1.3 (2.6 ) 3.9 Six Months Ended June 30, 2014 $ 103.7 $ 30.1 $ 73.6



Average finance receivables increased $306.7 in the first half of 2014 as

a result of retail portfolio new business volume exceeding repayments.

Average receivables from PACCAR and affiliates increased $245.3 in the



first half of 2014 as a result of new loans to affiliated companies

exceeding repayments. Average debt balances increased $509.5 in the first half of 2014. The



higher average debt balances reflect funding for the higher average

earning asset portfolio, including loans, finance leases and operating

leases and increased intercompany loans to affiliated companies. Average yields in the first half of 2014 were 4.3% compared to 4.6% in



first half of 2013. Average borrowing rates in the first half of 2014 were

1.2% compared to 1.4% in the first half of 2013. The decrease in yields and borrowing rates was due to lower market rates.



The major factors for the change in operating lease and rental revenue, depreciation and other rental expenses and operating lease margin for the three months ended June 30, 2014 are outlined in the table below:

Operating Lease and Depreciation and Operating Rental Revenue Other Rental Expenses Lease Margin Three Months Ended June 30, 2013 $ 71.8 $ 58.8 $ 13.0 Increase (decrease) Results on returned lease assets (3.1 ) 3.1 Average operating lease assets 7.0 5.5 1.5 Revenue and cost per asset 2.1 4.8 (2.7 ) Total increase 9.1 7.2 1.9 Three Months Ended June 30, 2014 $ 80.9 $ 66.0 $ 14.9 Results on returned lease assets were higher in 2014 compared to 2013 due

to higher gains on used trucks reflecting improvement in used truck prices.



Average operating lease assets increased as a result of a higher volume of

equipment placed in service from higher demand for leased vehicles.

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Table of Contents PACCAR FINANCIAL CORP. - FORM 10-Q



Revenue and cost per asset increased by $2.1 and $4.8, respectively.

Operating lease margin per asset decreased by $2.7 mainly due to lower fleet utilization and higher vehicle related expenses.



The major factors for the change in operating lease and rental revenue, depreciation and other rental expenses and operating lease margin for the six months ended June 30, 2014 are outlined in the table below:

Operating Lease and Depreciation and Operating Rental Revenue Other Rental Expenses Lease Margin Six Months Ended June 30, 2013 $ 141.1 $ 114.4 $ 26.7 Increase (decrease) Results on returned lease assets (4.4 ) 4.4 Average operating lease assets 15.0 12.2 2.8 Revenue and cost per asset 2.3 6.7 (4.4 ) Total increase 17.3 14.5 2.8 Six Months Ended June 30, 2014 $ 158.4 $ 128.9 $ 29.5 Results on returned lease assets were higher in 2014 compared to 2013 due

to higher gains on used trucks reflecting improvement in used truck prices.



Average operating lease assets increased as a result of a higher volume of

equipment placed in service from higher demand for leased vehicles.

Revenue and cost per asset increased by $2.3 and $6.7, respectively.

Operating lease margin per asset decreased by $4.4 due to lower fleet utilization and higher vehicle related expenses.



Used truck sales and other revenue and Cost of used trucks sales and other expenses are summarized below for the second quarter and first half of 2014 compared to the second quarter and first half of 2013:

Three Months Ended Six Months Ended June 30 June 30 2014 2013 2014 2013 Used truck sales and other revenue $ 6.1$ 9.4$ 12.4$ 30.0 Cost of used truck sales and other expenses 4.4 8.6 8.4 27.9 Results from used trucks and other $ 1.7 $



.8 $ 4.0$ 2.1

Results from used trucks and other in the second quarter and first half of 2014 increased by and $.9 and $1.9 from the second quarter and first half of 2013, respectively. This reflects increased margin per truck sold. -25-



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Table of Contents PACCAR FINANCIAL CORP. - FORM 10-Q Allowance for Losses



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

Six Months Ended Year Ended Six Months Ended June 30 December 31 June 30 2014 2013 2013 Balance at beginning of period $ 55.3 $ 52.8 $ 52.8 Provision for losses 2.9 2.3 4.4 Charge-offs (2.7 ) (6.5 ) (3.3 ) Recoveries .8 6.7 1.1 Balance at end of period $ 56.3 $ 55.3 $ 55.0 Ratios: Charge-offs, net of recoveries ($1.9 in 2014) to average total portfolio ($4,617.8 in 2014) annualized at June 30, 2014 .08 % - % .10 % Allowance for losses ($56.3 in 2014) to period-end total portfolio ($4,633.2 in 2014) 1.22 % 1.21 % 1.28 % Period-end retail loan and lease receivables past due, over 30 days, ($6.6 in 2014) to period-end retail loan and lease receivables ($3,946.6 in 2014) .17 % .35 % .31 % The provision for losses on receivables in the first half of 2014 decreased to $2.9 from $4.4 in the first half of 2013 primarily due to improved portfolio performance.



Charge-offs, net of recoveries, decreased $.3 to $1.9 in the first half of 2014 from $2.2 in the first half of 2013 due to customers' favorable operating conditions and cash flows.

Retail loan and lease receivables past-due over 30 days at June 30, 2014 was .17% compared to .35% at December 31, 2013 and .31% at June 30, 2013. At June 30, 2014, the Company had $1.7 of specific loss reserves for all accounts considered to be impaired. The Company continues to focus on maintaining low past-due balances. The Company modifies loans and finance leases as a normal part of 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). -26-



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Table of Contents PACCAR FINANCIAL CORP. - FORM 10-Q



The post-modification balance of accounts modified during the six months ended June 30, 2014 and 2013 are summarized below:

Six Months Ended Six Months Ended June 30, 2014 June 30, 2013 Recorded % of Total Recorded % of Total Investment Portfolio* Investment Portfolio* Commercial $ 84.0 3.6 % $ 111.0 5.2 % Insignificant Delay 32.4 1.4 % 43.6 2.1 % Credit - No Concession 3.7 .2 % 1.7 .1 % Credit - TDR 4.7 .2 % .6 $ 124.8 5.4 % $ 156.9 7.4 %



* Recorded investment immediately after modification as a percentage of ending

portfolio, on an annualized basis

Total modification activity decreased in the first half of 2014 compared to the first half of 2013 primarily due to lower commercial modifications and insignificant delay modifications. Commercial modifications of $84.0 in 2014 compared to $111.0 in 2013 reflect lower volume of end of contract refinancing in 2014. Insignificant delay modifications decreased to $32.4 in 2014 from $43.6 in 2013 primarily due to fewer fleet customers requesting contract modifications. 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 no accounts during the second quarter of 2014, no accounts during the fourth quarter of 2013 and $.2 of accounts during the second quarter of 2013 that were 30+ days past-due and became current at the time of modification. The effect on past-due and allowance for credit losses from such modifications was not significant at June 30, 2014, December 31, 2013 and June 30, 2013. See "Note B - Finance and Other Receivables" for additional discussion regarding the Allowance for Losses. 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: June 30 December 31 June 30 2014 2013 2013 Retail loans $ 2,517.0 54 % $ 2,442.5 53 % $ 2,354.4 54 % Retail leases 1,429.6 31 % 1,421.1 31 % 1,287.7 30 % Dealer wholesale financing 576.0 12 % 578.0 13 % 558.3 13 % Dealer master notes 77.2 2 % 105.1 2 % 75.4 2 % Other* 33.4 1 % 36.7 1 % 32.4 1 % Total portfolio $ 4,633.2 100 % $ 4,583.4 100 % $ 4,308.2 100 %



* Operating lease and other trade receivables

Retail loans increased to $2,517.0 at June 30, 2014 compared to $2,442.5 at December 31, 2013 due to new business volume exceeding collections.

Retail leases increased to $1,429.6 at June 30, 2014 compared to $1,421.1 at December 31, 2013 due to new business volume exceeding collections.

Dealer master notes decreased to $77.2 at June 30, 2014 compared to $105.1 at December 31, 2013 due to repayments exceeding new business volume. The dealer may pay the loans early or make additional draws up to specified balances of the contracts pledged to the Company. As of June 30, 2014, the underlying pledged contracts were $143.7 upon which the dealers have available $48.7 as potential additional borrowing capacity. -27-



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Table of Contents PACCAR FINANCIAL CORP. - FORM 10-Q



The estimation methods and factors considered for determining the allowance during the periods included in this filing have been consistently applied. There have been no significant changes in customer contract terms during the periods.

The effective income tax rate for the second quarter and first half of 2014 was 38.1% compared to 38.0% for the second quarter and first half of 2013.

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 half of 2014 was $36.9 compared to a deferred income tax provision of $2.5 for the first half of 2013. The Company's net deferred tax liability decreased to $766.0 at June 30, 2014 from $802.9 at December 31, 2013 due to lower benefits from accelerated depreciation. Deferred taxes are impacted by new business volume and the accelerated depreciation deduction rate under U.S. 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 2014. Company Outlook Truck industry retail sales in the U.S. in 2014 are expected to be 200,000 - 220,000 units compared to 184,800 units in 2013. Average earning assets this year are expected to increase 5 - 10% as increased new business financing from truck sales exceeds customer collections. Current 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, past-due accounts, truck repossessions and credit losses would likely increase from the current low levels. 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 June 30, 2014 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 2012, the Company filed a shelf registration statement to issue medium-term notes. The shelf registration statement expires in November 2015 and does not limit the principal amount of debt securities that may be issued during the period. The total notional amount of medium-term notes outstanding for the Company as of June 30, 2014 was $4,050.0.



Loans due to PACCAR were nil at June 30, 2014 compared to $218.0 at December 31, 2013. The $218.0 loan, with an effective fixed interest rate of 6.88%, was repaid upon maturity in February 2014.

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Table of Contents PACCAR FINANCIAL CORP. - FORM 10-Q



The Company believes it will be able to fund receivables, service debt and meet its other payment obligations through internally generated funds, access to public and private debt markets, and advances from PACCAR.

The Company participated with PACCAR and certain other PACCAR affiliates in syndicated credit facilities of $3,000.0 at June 30, 2014. Of this amount, $1,000.0 expires in June 2015, $1,000.0 expires in 2018 and $1,000.0 expires in 2019. PACCAR and the Company intend to replace these credit facilities as they expire with facilities of similar amounts. Credit facilities of $1,916.5 are available for use by the Company and/or PACCAR and certain other PACCAR affiliates. The remaining $1,083.5 is allocated to the following subsidiaries: $382.0 is available for use by PACCAR's United Kingdom and Dutch finance subsidiaries, $285.5 is available for use by PACCAR's Canadian finance subsidiary, $230.0 is available for use by PACCAR's Mexican finance subsidiaries and $186.0 is available for use by PACCAR's Australian finance subsidiary. 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 six months ended June 30, 2014 and the year ended December 31, 2013. The Company issues commercial paper for a portion of its funding. Some of this commercial paper is converted to fixed interest rate debt through the use of interest rate swaps, which are used to manage interest rate risk. In the event of future disruption in the financial markets, the Company may not be able to issue replacement commercial paper. As a result, the Company is exposed to liquidity risk from the maturity of short-term borrowings paid to lenders compared to the timing of receivable collections from customers. The Company believes its collections on existing loans and leases, syndicated bank lines, current investment-grade credit ratings of A+/A1 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 and therefore contribute to the Company maintaining its liquidity and financial stability.



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, 2013 (the "2013 Annual Report") continues to be relevant.

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Table of Contents PACCAR FINANCIAL CORP. - FORM 10-Q



Forward Looking Statements

Certain information presented in this Form 10-Q contains forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995, which 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; and legislation and governmental regulation.



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


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