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

9 Months Ended

Sep. 30, 2023

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, 2022		September 30, 2023
Consumer
Retail installment contracts, gross	$	66,954	$	71,134
Finance leases, gross	6,765		7,339
Retail financing, gross	73,719		78,473
Unearned interest supplements	(2,305)		(2,967)
Consumer finance receivables	71,414		75,506
Non-Consumer
Dealer financing	18,054		21,376
Non-Consumer finance receivables	18,054		21,376
Total recorded investment	$	89,468	$	96,882

Recorded investment in finance receivables	$	89,468	$	96,882
Allowance for credit losses	(845)		(876)
Total finance receivables, net	$	88,623	$	96,006

Current portion	$	38,720	$	42,572
Non-current portion	49,903		53,434
Total finance receivables, net	$	88,623	$	96,006

Net finance receivables subject to fair value (a)	$	82,200	$	89,078
Fair value (b)	79,521		86,812

__________

(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 2022 and 2023 was $73 million and $102 million, respectively, and for the first nine months of 2022 and 2023 was $223 million and $276 million, respectively, and is included in Ford Credit revenues on our consolidated income statements.

At December 31, 2022 and September 30, 2023, accrued interest was $187 million and $245 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, 2022 and September 30, 2023, were consumer receivables of $43.9 billion and $45.2 billion, respectively, and non-consumer receivables of $18.2 billion and $17.7 billion, respectively, (including Ford Blue, Ford Model e, and Ford Pro 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, 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	$	41	$	60	$	91	$	181	$	150	$	126	$	649	0.9	%
61 - 120 days past due	9		12		20		39		40		29		149		0.2
Greater than 120 days past due	9		4		5		7		7		6		38		0.1
Total past due	59		76		116		227		197		161		836		1.2
Current	883		2,563		6,137		13,844		18,357		28,794		70,578		98.8
Total	$	942	$	2,639	$	6,253	$	14,071	$	18,554	$	28,955	$	71,414	100.0	%

The credit quality analysis of consumer receivables at September 30, 2023 was as follows (in millions):


	Amortized Cost Basis by Origination Year
	Prior to 2019		2019		2020		2021		2022		2023		Total		Percent
Consumer
31 - 60 days past due	$	50	$	58	$	140	$	129	$	172	$	96	$	645	0.9	%
61 - 120 days past due	9		12		30		35		50		28		164		0.2
Greater than 120 days past due	8		4		6		10		10		3		41		—
Total past due	67		74		176		174		232		127		850		1.1
Current	1,296		3,090		8,787		12,867		22,254		26,362		74,656		98.9
Total	$	1,363	$	3,164	$	8,963	$	13,041	$	22,486	$	26,489	$	75,506	100.0	%

Gross charge-offs	$	38	$	30	$	55	$	61	$	81	$	14	$	279

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, 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	$	402	$	148	$	35	$	67	$	185	$	224	$	1,061	$	13,888	$	14,949	82.8	%
Group II	2		21		—		5		2		42		72		2,751		2,823		15.6
Group III	—		—		—		—		—		10		10		233		243		1.4
Group IV	—		—		1		—		—		3		4		35		39		0.2
Total (a)	$	404	$	169	$	36	$	72	$	187	$	279	$	1,147	$	16,907	$	18,054	100.0	%

__________

(a)Total past due dealer financing receivables at December 31, 2022 were $9 million.

The credit quality analysis of dealer financing receivables at September 30, 2023 was as follows (in millions):


	Amortized Cost Basis by Origination Year														Wholesale Loans
	Dealer Loans
	Prior to 2019		2019		2020		2021		2022		2023		Total				Total		Percent
Group I	$	491	$	31	$	66	$	159	$	62	$	285	$	1,094	$	17,393	$	18,487	86.5	%
Group II	2		—		2		4		2		50		60		2,384		2,444		11.4
Group III	—		—		—		—		1		6		7		386		393		1.8
Group IV	—		1		—		—		—		2		3		49		52		0.3
Total (a)	$	493	$	32	$	68	$	163	$	65	$	343	$	1,164	$	20,212	$	21,376	100.0	%

Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

__________

(a)Total past due dealer financing receivables at September 30, 2023 were $4 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.

Loan Modifications. Consumer and non-consumer receivables that have a modified interest rate and/or a term extension (including receivables that were modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code) are typically considered to be loan modifications. Ford Credit does not grant modifications to 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.

The use of interest rate modifications and term extensions helps Ford Credit mitigate financial loss. Term extensions may assist in cases where Ford Credit believes the customer will recover from short-term financial difficulty and resume regularly scheduled payments. The effect of most loan modifications made to borrowers experiencing financial difficulty is included in the historical trends used to measure the allowance for credit losses. A loan modification that improves the delinquency status of a borrower reduces the probability of default, which results in a lower allowance for credit losses. At September 30, 2023, an insignificant portion of Ford Credit's total finance receivables portfolio had been granted a loan modification, and these modifications are generally treated as a continuation of the existing loan.

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. 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.

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 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


	Third Quarter 2023						First Nine Months 2023
	Consumer		Non-Consumer		Total		Consumer		Non-Consumer		Total
Allowance for credit losses
Beginning balance	$	866	$	7	$	873	$	838	$	7	$	845
Charge-offs	(105)		—		(105)		(279)		—		(279)
Recoveries	37		—		37		113		1		114
Provision for/(Benefit from) credit losses	75		(1)		74		193		(2)		191
Other (a)	(3)		—		(3)		5		—		5
Ending balance	$	870	$	6	$	876	$	870	$	6	$	876

__________

(a) Primarily represents amounts related to translation adjustments.

During the third quarter and first nine months of 2023, the allowance for credit losses increased $3 million and $31 million, respectively, driven by an increase in Ford Credit finance receivables. Net charge-offs increased from a year ago reflecting normalization from extraordinarily low levels. The impact of higher inflation 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.