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

9 Months Ended

Sep. 30, 2022

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, 2021		September 30, 2022
Consumer
Retail installment contracts, gross	$	69,148	$	64,529
Finance leases, gross	7,318		6,196
Retail financing, gross	76,466		70,725
Unearned interest supplements	(3,020)		(2,311)
Consumer finance receivables	73,446		68,414
Non-Consumer
Dealer financing	11,278		13,931
Non-Consumer finance receivables	11,278		13,931
Total recorded investment	$	84,724	$	82,345

Recorded investment in finance receivables	$	84,724	$	82,345
Allowance for credit losses	(925)		(760)
Total finance receivables, net	$	83,799	$	81,585

Current portion	$	32,543	$	33,902
Non-current portion	51,256		47,683
Total finance receivables, net	$	83,799	$	81,585

Net finance receivables subject to fair value (a)	$	76,796	$	75,674
Fair value (b)	77,648		73,216

__________

(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 third quarter of 2021 and 2022 was $86 million and $73 million, respectively, and for the first nine months of 2021 and 2022 was $264 million and $223 million, respectively, and is included in Ford Credit revenues on our consolidated income statements.

At December 31, 2021 and September 30, 2022, accrued interest was $125 million and $132 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, 2021 and September 30, 2022, were consumer receivables of $39 billion and $40.7 billion, respectively, and non-consumer receivables of $12 billion and $14.3 billion, respectively, (including Automotive receivables sold to Ford Credit, which we report in Trade and other receivables) 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, 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	$	39	$	52	$	98	$	120	$	186	$	91	$	586	0.8	%
61 - 120 days past due	7		10		20		29		40		21		127		0.2
Greater than 120 days past due	10		6		6		9		11		1		43		—
Total past due	56		68		124		158		237		113		756		1.0
Current	812		2,607		6,559		12,689		22,701		27,322		72,690		99.0
Total	$	868	$	2,675	$	6,683	$	12,847	$	22,938	$	27,435	$	73,446	100.0	%

The credit quality analysis of consumer receivables at September 30, 2022 was as follows (in millions):


	Amortized Cost Basis by Origination Year
	Prior to 2018		2018		2019		2020		2021		2022		Total		Percent
Consumer
31 - 60 days past due	$	46	$	60	$	85	$	165	$	120	$	63	$	539	0.8	%
61 - 120 days past due	9		12		19		34		30		14		118		0.2
Greater than 120 days past due	10		5		6		7		7		2		37		—
Total past due	65		77		110		206		157		79		694		1.0
Current	1,273		3,320		7,282		15,402		19,954		20,489		67,720		99.0
Total	$	1,338	$	3,397	$	7,392	$	15,608	$	20,111	$	20,568	$	68,414	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, 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	$	391	$	68	$	151	$	45	$	109	$	345	$	1,109	$	6,751	$	7,860	69.7	%
Group II	11		7		26		2		4		54		104		2,689		2,793		24.8
Group III	8		—		1		—		1		20		30		529		559		4.9
Group IV	—		—		4		—		—		6		10		56		66		0.6
Total (a)	$	410	$	75	$	182	$	47	$	114	$	425	$	1,253	$	10,025	$	11,278	100.0	%

__________

(a)Total past due dealer financing receivables at December 31, 2021 were $62 million.

The credit quality analysis of dealer financing receivables at September 30, 2022 was as follows (in millions):


	Amortized Cost Basis by Origination Year														Wholesale Loans
	Dealer Loans
	Prior to 2018		2018		2019		2020		2021		2022		Total				Total		Percent
Group I	$	418	$	153	$	37	$	65	$	196	$	209	$	1,078	$	9,892	$	10,970	78.7	%
Group II	2		22		1		5		—		39		69		2,596		2,665		19.1
Group III	—		—		—		—		—		10		10		250		260		1.9
Group IV	—		—		1		—		—		3		4		32		36		0.3
Total (a)	$	420	$	175	$	39	$	70	$	196	$	261	$	1,161	$	12,770	$	13,931	100.0	%

__________

(a)Total past due dealer financing receivables at September 30, 2022 were $5 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 Ford Credit grants a concession 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. The adequacy of the allowance for credit losses is assessed quarterly.

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 September 30 was as follows (in millions):


	Third Quarter 2021						First Nine Months 2021
	Consumer		Non-Consumer		Total		Consumer		Non-Consumer		Total
Allowance for credit losses
Beginning balance	$	1,022	$	39	$	1,061	$	1,245	$	60	$	1,305
Charge-offs	(58)		(2)		(60)		(210)		(5)		(215)
Recoveries	50		1		51		158		6		164
Provision for/(Benefit from) credit losses	(58)		(1)		(59)		(242)		(23)		(265)
Other (a)	(9)		—		(9)		(4)		(1)		(5)
Ending balance	$	947	$	37	$	984	$	947	$	37	$	984


	Third Quarter 2022						First Nine Months 2022
	Consumer		Non-Consumer		Total		Consumer		Non-Consumer		Total
Allowance for credit losses
Beginning balance	$	754	$	9	$	763	$	903	$	22	$	925
Charge-offs	(73)		—		(73)		(196)		(1)		(197)
Recoveries	39		1		40		126		3		129
Provision for/(Benefit from) credit losses	40		(1)		39		(67)		(14)		(81)
Other (a)	(9)		—		(9)		(15)		(1)		(16)
Ending balance	$	751	$	9	$	760	$	751	$	9	$	760

__________

(a) Primarily represents amounts related to translation adjustments.

During the third quarter and first nine months of 2022, the allowance for credit losses decreased $3 million and $165 million, respectively, primarily due to Ford Credit’s current expectation that COVID-related losses have been avoided. Although net charge-offs remained low in the third quarter and first nine months of 2022 due, in part, to high vehicle auction values, the impact of rising inflation, high energy prices, and higher interest rates 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.