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Ford Credit Finance Receivables and Allowance for Credit Losses (Notes)

6 Months Ended

Jun. 30, 2021

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, 2020		June 30, 2021
Consumer
Retail installment contracts, gross	$	73,631	$	70,434
Finance leases, gross	8,431		8,132
Retail financing, gross	82,062		78,566
Unearned interest supplements	(3,987)		(3,358)
Consumer finance receivables	78,075		75,208
Non-Consumer
Dealer financing	20,908		12,028
Non-Consumer finance receivables	20,908		12,028
Total recorded investment	$	98,983	$	87,236

Recorded investment in finance receivables	$	98,983	$	87,236
Allowance for credit losses	(1,305)		(1,061)
Total finance receivables, net	$	97,678	$	86,175

Current portion	$	42,401	$	34,339
Non-current portion	55,277		51,836
Total finance receivables, net	$	97,678	$	86,175

Net finance receivables subject to fair value (a)	$	89,651	$	78,427
Fair value (b)	91,238		79,987

__________

(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 second quarter of 2020 and 2021 was $77 million and $88 million, respectively, and for the first half of 2020 and 2021 was $172 million and $178 million, respectively, and is included in Ford Credit revenues on our consolidated income statements.

At December 31, 2020 and June 30, 2021, accrued interest was $181 million and $133 million, respectively, which we report in Other assets in the current assets section of our consolidated balance sheets.

Included in the recorded investment in finance receivables at December 31, 2020 and June 30, 2021, were consumer receivables of $43.7 billion and $38.7 billion, respectively, and non-consumer receivables of $16.4 billion and $12 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.

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 Ford Credit’s aging analysis. 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, 2020 was as follows (in millions):


	Amortized Cost Basis by Origination Year
	Prior to 2016		2016		2017		2018		2019		2020		Total		Percent
Consumer
31 - 60 days past due	$	45	$	62	$	103	$	162	$	166	$	143	$	681	0.9	%
61 - 120 days past due	7		12		24		44		45		31		163		0.2
Greater than 120 days past due	11		6		7		8		7		2		41		—
Total past due	63		80		134		214		218		176		885		1.1
Current	782		2,518		6,648		13,704		20,822		32,716		77,190		98.9
Total	$	845	$	2,598	$	6,782	$	13,918	$	21,040	$	32,892	$	78,075	100.0	%

The credit quality analysis of consumer receivables at June 30, 2021 was as follows (in millions):


	Amortized Cost Basis by Origination Year
	Prior to 2017		2017		2018		2019		2020		2021		Total		Percent
Consumer
31 - 60 days past due	$	52	$	60	$	98	$	114	$	134	$	24	$	482	0.6	%
61 - 120 days past due	9		13		23		29		31		7		112		0.2
Greater than 120 days past due	13		7		9		10		8		—		47		0.1
Total past due	74		80		130		153		173		31		641		0.9
Current	1,747		4,419		9,952		16,768		28,228		13,453		74,567		99.1
Total	$	1,821	$	4,499	$	10,082	$	16,921	$	28,401	$	13,484	$	75,208	100.0	%

Non-Consumer Portfolio. The credit quality of dealer financing receivables is evaluated based on Ford Credit’s internal dealer risk rating analysis. 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.

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, 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		Percent
Group I	$	503	$	129	$	110	$	188	$	70	$	248	$	1,248	$	13,160	$	14,408	68.9	%
Group II	38		20		11		35		3		87		194		4,680		4,874		23.3
Group III	9		—		3		19		3		35		69		1,464		1,533		7.3
Group IV	2		—		—		—		2		6		10		83		93		0.5
Total (a)	$	552	$	149	$	124	$	242	$	78	$	376	$	1,521	$	19,387	$	20,908	100.0	%

__________

(a)Total past due dealer financing receivables at December 31, 2020 were $99 million.

The credit quality analysis of dealer financing receivables at June 30, 2021 was as follows (in millions):


	Amortized Cost Basis by Origination Year														Wholesale Loans
	Dealer Loans
	Prior to 2017		2017		2018		2019		2020		2021		Total				Total		Percent
Group I	$	530	$	87	$	178	$	52	$	115	$	175	$	1,137	$	6,993	$	8,130	67.6	%
Group II	15		7		33		3		15		96		169		2,806		2,975		24.7
Group III	17		1		5		2		3		35		63		797		860		7.2
Group IV	—		—		—		4		1		5		10		53		63		0.5
Total (a)	$	562	$	95	$	216	$	61	$	134	$	311	$	1,379	$	10,649	$	12,028	100.0	%

__________

(a)Total past due dealer financing receivables at June 30, 2021 were $56 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.

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.

Adjustments to the allowance for credit losses are made by recording charges to Ford Credit interest, operating, and other expenses on our consolidated income statements. The uncollectible portion of a finance receivable is 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.

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

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 sheets.

An analysis of the allowance for credit losses related to finance receivables for the periods ended June 30 was as follows (in millions):


	Second Quarter 2020						First Half 2020
	Consumer		Non-Consumer		Total		Consumer		Non-Consumer		Total
Allowance for credit losses
Beginning balance	$	1,157	$	74	$	1,231	$	496	$	17	$	513
Adoption of ASU 2016-13 (a)	—		—		—		247		5		252
Charge-offs	(80)		—		(80)		(225)		(1)		(226)
Recoveries	33		1		34		76		3		79
Provision for credit losses	94		(1)		93		628		51		679
Other (b)	7		—		7		(11)		(1)		(12)
Ending balance	$	1,211	$	74	$	1,285	$	1,211	$	74	$	1,285


	Second Quarter 2021						First Half 2021
	Consumer		Non-Consumer		Total		Consumer		Non-Consumer		Total
Allowance for credit losses
Beginning balance	$	1,170	$	53	$	1,223	$	1,245	$	60	$	1,305
Charge-offs	(55)		(3)		(58)		(152)		(3)		(155)
Recoveries	55		2		57		108		5		113
Provision for credit losses	(154)		(12)		(166)		(184)		(22)		(206)
Other (b)	6		(1)		5		5		(1)		4
Ending balance	$	1,022	$	39	$	1,061	$	1,022	$	39	$	1,061

__________

(a)Cumulative pre-tax adjustments related to the adoption of ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments, were recorded in retained earnings as of January 1, 2020.

(b)Primarily represents amounts related to translation adjustments.

The allowance for credit losses considers economic conditions attributable to the COVID-19 pandemic. The allowance reflects economic uncertainty and an expectation of continued higher unemployment, which increases the probability of default and loss given default rates used in Ford Credit’s estimate of the lifetime expected credit losses for its consumer portfolio, especially in the United States.

During the second quarter and first half of 2021, the allowance for credit losses decreased $162 million and $244 million, respectively, primarily reflecting improvement in the economic outlook that caused Ford Credit to lower its expectation of lifetime losses attributable to macroeconomic assumptions driven by COVID-19. Although net charge-offs remained low in the second quarter and first half ended June 30, 2021, due in part to government stimulus, changes in consumer spending behavior, and high vehicle collateral values, the impact of COVID-19 on future credit losses remains uncertain. Ford Credit will continue to monitor economic trends and conditions and portfolio performance and will adjust the reserve accordingly.