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Ford Credit Finance Receivables (Notes)

3 Months Ended

Mar. 31, 2020

FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

Ford Credit manages finance receivables as “consumer” and “non-consumer” portfolios. The receivables are generally secured by the vehicles, inventory, or other property being financed.

Finance receivables are recorded at the time of origination or purchase at fair value and are subsequently reported at amortized cost, net of any allowance for credit losses.

For all finance receivables, Ford Credit defines "past due" as any payment, including principal and interest, that is at least 31 days past the contractual due date.

Ford Credit finance receivables, net were as follows (in millions):



	December 31, 2019			March 31, 2020
Consumer
Retail installment contracts, gross	$	68,905		$	66,116
Finance leases, gross	8,566			8,107
Retail financing, gross	77,471			74,223
Unearned interest supplements	(3,589		)	(3,402		)
Consumer finance receivables	73,882			70,821
Non-Consumer
Dealer financing	33,985			36,440
Non-Consumer finance receivables	33,985			36,440
Total recorded investment	$	107,867		$	107,261

Recorded investment in finance receivables	$	107,867		$	107,261
Allowance for credit losses	(513		)	(1,231		)
Finance receivables, net	$	107,354		$	106,030

Current portion	$	53,651		$	54,889
Non-current portion	53,703			51,141
Total finance receivables, net	$	107,354		$	106,030

Net finance receivables subject to fair value (a)	$	99,168		$	98,332
Fair value (b)	99,297			98,513

__________


(a)	Net finance receivables subject to fair value exclude finance leases.


(b)	The fair value of finance receivables is categorized within Level 3 of the fair value hierarchy.

Ford Credit’s finance leases are comprised of sales-type and direct financing leases. Financing revenue from finance leases for the first quarter of 2019 and 2020 was $92 million and $95 million, respectively, and is included in Ford Credit revenues on our consolidated income statement.

At December 31, 2019 and March 31, 2020, accrued interest was $251 million and $239 million, respectively, which we report in Other assets in the current assets section of our consolidated balance sheet.

Included in the recorded investment in finance receivables at December 31, 2019 and March 31, 2020, were consumer receivables of $38.3 billion and $37 billion, respectively, and non-consumer receivables of $26.8 billion and $25.7 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. The receivables are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations or the claims of Ford Credit’s other creditors. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions.

The value of finance receivables considered held for sale at December 31, 2019 was $1.5 billion, primarily made up of $1.2 billion of Forso Nordic AB (“Forso”) finance receivables. At March 31, 2020, there were $36 million of certain wholesale finance receivables specifically identified as held for sale. These held-for-sale values are reported in Assets held for sale on our consolidated balance sheet. See Note 17 for more information.

NOTE 8. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Credit Quality

Consumer Portfolio. Credit quality ratings for consumer receivables are based on aging. Consumer receivables credit quality ratings are as follows:


•	Pass – current to 60 days past due;


•	Special Mention – 61 to 120 days past due and in intensified collection status; and


•	Substandard – greater than 120 days past due and for which the uncollectible portion of the receivables has already been charged off, as measured using the fair value of collateral less costs to sell.

The credit quality analysis of consumer receivables at December 31, 2019 was as follows (in millions):



	Total
Consumer
31 - 60 days past due	$	839
61 - 120 days past due	166
Greater than 120 days past due	35
Total past due	1,040
Current	72,842
Total	$	73,882

The credit quality analysis of consumer receivables at March 31, 2020 was as follows (in millions):



	Amortized Cost Basis by Origination Year
	Prior to 2016		2016		2017		2018		2019		2020		Total
Consumer
31 - 60 days past due	$	79	$	95	$	139	$	185	$	143	$	10	$	651
61 - 120 days past due	13		21		36		43		35		1		149
Greater than 120 days past due	16		7		6		6		2		—		37
Total past due	108		123		181		234		180		11		837
Current	2,181		5,080		11,048		19,267		26,210		6,198		69,984
Total	$	2,289	$	5,203	$	11,229	$	19,501	$	26,390	$	6,209	$	70,821

Non-Consumer Portfolio. Ford Credit uses a proprietary model to assign each dealer a risk rating. This model uses historical dealer performance data to identify key factors about a dealer that are considered most significant in predicting a dealer’s ability to meet its financial obligations. Ford Credit also considers numerous other financial and qualitative factors of the dealer’s operations, including capitalization and leverage, liquidity and cash flow, profitability, and credit history with Ford Credit and other creditors. The credit quality of dealer financing receivables is evaluated based on an internal dealer risk rating analysis.

Dealers are assigned to one of four groups according to risk ratings as follows:


•	Group I – strong to superior financial metrics;


•	Group II – fair to favorable financial metrics;


•	Group III – marginal to weak financial metrics; and


•	Group IV – poor financial metrics, including dealers classified as uncollectible.

NOTE 8. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The credit quality analysis of dealer financing receivables at December 31, 2019 was as follows (in millions):



	Total
Dealer financing
Group I	$	26,281
Group II	5,407
Group III	2,108
Group IV	189
Total (a)	$	33,985

__________


(a)	Total past due dealer financing receivables at December 31, 2019 were $62 million.

The credit quality analysis of dealer financing receivables at March 31, 2020 was as follows (in millions):



	Amortized Cost Basis by Origination Year														Wholesale Loans
	Dealer Loans
	Prior to 2016		2016		2017		2018		2019		2020		Total				Total
Group I	$	676	$	147	$	154	$	276	$	120	$	122	$	1,495	$	26,774	$	28,269
Group II	31		30		28		14		24		45		172		5,886		6,058
Group III	9		—		4		17		22		17		69		1,943		2,012
Group IV	2		1		—		—		2		4		9		92		101
Total (a)	$	718	$	178	$	186	$	307	$	168	$	188	$	1,745	$	34,695	$	36,440

__________


(a)	Total past due dealer financing receivables at March 31, 2020 were $34 million.

Non-Accrual of Revenue. The accrual of financing revenue is discontinued at the time a receivable is determined to be uncollectible or when it is 90 days past due. Accounts may be restored to accrual status only when a customer settles all past-due deficiency balances and future payments are reasonably assured. For receivables in non-accrual status, subsequent financing revenue is recognized only to the extent a payment is received. Payments are generally applied first to outstanding interest and then to the unpaid principal balance.

Troubled Debt Restructuring (“TDR”). A restructuring of debt constitutes a TDR if a concession is granted to a debtor for economic or legal reasons related to the debtor’s financial difficulties that Ford Credit otherwise would not consider. Consumer and non-consumer receivables that have a modified interest rate below market rate or that were modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code, except non-consumer receivables that are current with minimal risk of loss, are considered to be TDRs. Ford Credit does not grant concessions on the principal balance of the receivables. If a receivable is modified in a reorganization proceeding, all payment requirements of the reorganization plan need to be met before remaining balances are forgiven.

Ford Credit has offered several programs to provide relief to customers and dealers during the COVID-19 pandemic. These programs, which were broadly available to customers and dealers, included payment extensions. Ford Credit concluded that these programs did not meet TDR criteria.

NOTE 8. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Allowance for Credit Losses

The allowance for credit losses represents an estimate of the lifetime expected credit losses inherent in finance receivables as of the balance sheet date.

Additions to the allowance for credit losses are made by recording charges to Ford Credit interest, operating, and other expenses on our consolidated income statement. The uncollectible portion of finance receivables are charged to the allowance for credit losses at the earlier of when an account is deemed to be uncollectible or when an account is 120 days delinquent, taking into consideration the financial condition of the customer or borrower, the value of the collateral, recourse to guarantors, and other factors.

Charge-offs on finance receivables include uncollected amounts related to principal, interest, late fees, and other allowable charges. Recoveries on finance receivables previously charged off as uncollectible are credited to the allowance for credit losses. In the event Ford Credit repossesses the collateral, the receivable is charged off and the collateral is recorded at its estimated fair value less costs to sell and reported in Other assets on our consolidated balance sheet.

Consumer Portfolio

Receivables in this portfolio include products offered to individuals and businesses that finance the acquisition of Ford and Lincoln vehicles from dealers for personal or commercial use. Retail financing includes retail installment contracts for new and used vehicles and finance leases with retail customers, government entities, daily rental companies, and fleet customers.

For consumer receivables that share similar risk characteristics such as product type, initial credit risk, term, vintage, geography, and other relevant factors, Ford Credit estimates the lifetime expected credit loss allowance based on a collective assessment using measurement models and management judgment. The lifetime expected credit losses for the receivables is determined by applying probability of default and loss given default models to monthly expected exposures, then discounting these cash flows to present value using the receivable’s original effective interest rate or the current effective interest rate for a variable rate receivable. Probability of default models are developed from internal risk scoring models taking into account the expected probability of payment and time to default, adjusted for macroeconomic outlook and recent performance. The models consider factors such as risk evaluation at the time of origination, historical trends in credit losses (which include the impact of TDRs), and the composition and recent performance of the present portfolio (including vehicle brand, term, risk evaluation, and new / used vehicles). The loss given default is the percentage of the expected balance due at default that is not recoverable, taking into account the expected collateral value and trends in recoveries (including key metrics such as delinquencies, repossessions, and bankruptcies). Monthly exposures are equal to the receivables’ expected outstanding principal and interest balance.

The loss allowance incorporates forward-looking macroeconomic conditions for baseline, upturn, and downturn scenarios. Three separate credit loss allowances are calculated from these scenarios. They are then probability-weighted to determine the credit loss allowance recognized in the financial statements. Ford Credit uses forecasts from a third party that revert to a long-term historical average after a reasonable and supportable forecasting period, which is specific to the particular macroeconomic variable and which varies by market. Ford Credit updates the forward-looking macroeconomic forecasts quarterly.

If management does not believe these models reflect lifetime expected credit losses for the portfolio, an adjustment is made to reflect management judgment regarding observable changes in recent or expected economic trends and conditions, portfolio composition, and other relevant factors.

On an ongoing basis, Ford Credit reviews its models, including macroeconomic factors, the selection of macroeconomic scenarios, and their weighting, to ensure they reflect the risk of the portfolio.

NOTE 8. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Non-Consumer Portfolio

Dealer financing includes wholesale loans to dealers to finance vehicle inventory, also known as floorplan financing, as well as loans to dealers to finance working capital, improvements to dealership facilities, to finance purchase of dealership real estate, and to finance other dealer programs.

Dealer financing is evaluated on an individual dealer basis by segmenting dealers by risk characteristics (such as the amount of the loans, the nature of the collateral, financial status of the dealer, and TDR modifications) to determine if an individual dealer requires a specific allowance for credit loss. If required, the allowance is based on the present value of the expected future cash flows of the dealer’s receivables discounted at the loans’ original effective interest rate or the fair value of the collateral adjusted for estimated costs to sell.

For the remaining dealer financing, Ford Credit estimates an allowance for credit losses on a collective basis.

Wholesale Loans. Ford Credit estimates the allowance for credit losses for wholesale loans based on historical loss-to-receivable (LTR) ratios, expected future cash flows, and the fair value of collateral. For wholesale loans with similar risk characteristics, the allowance for credit losses is estimated on a collective basis using the LTR model and management judgment. The LTR model is based on the most recent years of history. An LTR is calculated by dividing credit losses (i.e., charge-offs net of recoveries) by average net finance receivables, excluding unearned interest supplements and allowance for credit losses. The average LTR is multiplied by the end-of-period balances, representing the lifetime expected credit loss reserve.

Dealer Loans. Ford Credit uses a weighted-average remaining maturity method to estimate the lifetime expected credit loss reserve for dealer loans. The loss model is based on the industry-wide commercial real estate credit losses, adjusted to factor in the historical credit losses for the dealer loans portfolio. The expected credit loss is calculated under different economic scenarios and are weighted to provide the total lifetime expected credit loss.

After establishing the collective and specific allowance for credit losses, if management believes the allowance does not reflect all losses inherent in the portfolio due to changes in recent economic trends and conditions, or other relevant forward-looking economic factors, an adjustment is made based on management judgment.

NOTE 8. FORD CREDIT FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

An analysis of the allowance for credit losses related to finance receivables for the periods ended March 31 was as follows (in millions):



	First Quarter 2019 (a)
	Consumer			Non-Consumer			Total
Allowance for credit losses
Beginning balance	$	566		$	23		$	589
Charge-offs	(137		)	(17		)	(154		)
Recoveries	43			2			45
Provision for credit losses	24			9			33
Other	—			—			—
Ending balance	$	496		$	17		$	513



	First Quarter 2020
	Consumer			Non-Consumer			Total
Allowance for credit losses
Beginning balance	$	496		$	17		$	513
Adoption of ASU 2016-13 (b)	247			5			252
Charge-offs	(145		)	(1		)	(146		)
Recoveries	43			2			45
Provision for credit losses	534			52			586
Other (c)	(18		)	(1		)	(19		)
Ending balance	$	1,157		$	74		$	1,231

__________


(a)	The comparative information has not been restated and continues to be reported under the accounting standard in effect during 2019.


(b)	Cumulative pre-tax adjustments recorded to retained earnings as of January 1, 2020. See Note 2 for additional information.


(c)	Primarily represents amounts related to translation adjustments.

During the first quarter of 2020, the allowance for credit losses increased $718 million reflecting an increase to the reserve of $252 million related to the adoption of ASU 2016-13 and an increase of $486 million primarily attributable to COVID-19, offset by a decrease for translation adjustments. The economic uncertainty, along with government mandated stay-at-home orders, which resulted in extensive temporary closures of businesses and drove a significant increase in unemployment, is expected to increase the probability of default and loss given default rates in the consumer portfolio over the next twelve months, especially in the United States. These economic trends and conditions are also expected to negatively impact the dealers. While we anticipate government relief programs, Ford Credit’s customer payment deferral programs, and dealer support actions to mitigate these impacts, the overall result on credit losses is expected to be adverse.