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Finance Receivables

9 Months Ended

Sep. 30, 2019

FINANCE RECEIVABLES

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

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



	December 31, 2018			September 30, 2019
Consumer
Retail installment contracts, gross	$	70,999		$	68,660
Finance leases, gross	8,748			8,833
Retail financing, gross	79,747			77,493
Unearned interest supplements from Ford and affiliated companies	(3,508		)	(3,595		)
Consumer finance receivables	76,239			73,898

Non-Consumer
Dealer financing	40,996			37,622
Other financing	2,168			1,764
Non-Consumer finance receivables	43,164			39,386
Total recorded investment	$	119,403		$	113,284

Recorded investment in finance receivables	$	119,403		$	113,284
Allowance for credit losses	(589		)	(513		)
Total finance receivables, net	$	118,814		$	112,771

Net finance receivables subject to fair value (a)	$	110,388		$	104,302
Fair value (b)	109,794			104,557

__________


(a)	Net finance receivables subject to fair value exclude finance leases. Previously, certain consumer financing products in Europe were classified as retail installment contracts. We now classify these products as finance leases. Comparative information has been revised to reflect this change.


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

At December 31, 2018 and September 30, 2019, accrued uncollected interest was $264 million and $241 million, respectively, which we report in Other assets on our balance sheet.

Included in recorded investment in finance receivables at December 31, 2018 and September 30, 2019 were consumer receivables of $40.7 billion and $37.8 billion, respectively, and non-consumer receivables of $25.7 billion and $24.0 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 (see Note 7 for additional information).

Finance Leases

Finance leases are composed of sales-type and direct financing leases. We offer finance leases to individuals, leasing companies, government entities, daily rental companies, and fleet customers. These financings include primarily lease plans for terms of 24 to 60 months. In limited cases, a customer may extend the lease term. Early terminations of leases may also occur at the customer’s request subject to our approval. We offer financing products in which the customer may be required to pay any shortfall, or may receive as payment any excess amount between the fair market value and the contractual vehicle value at the end of the term, which are classified as finance leases. In some markets, we finance a vehicle with a series of monthly payments followed by a single balloon payment or the option for the customer to return the vehicle to Ford Credit; these arrangements containing a purchase option are classified as finance leases.

NOTE 4. FINANCE RECEIVABLES (Continued)

The amounts contractually due on finance lease receivables were as follows (in millions):



	September 30, 2019
Within one year	$	2,032
After one year and within two years	1,980
After two years and within three years	1,534
After three years and within four years	709
After four years and within five years	114
After five years	2
Total future cash payments	6,371
Less: Present value discount	(316		)
Finance lease receivables	$	6,055

The reconciliation from finance lease receivables to finance leases, gross and finance leases, net is as follows (in millions):



	September 30, 2019
Finance lease receivables	$	6,055
Unguaranteed residual assets	2,653
Initial direct costs	125
Finance leases, gross	8,833
Unearned interest supplements from Ford and affiliated companies	(347		)
Allowance for credit losses	(17		)
Finance leases, net	$	8,469

Financing revenue from finance leases for the third quarter of 2018 and 2019 was $91 million and $90 million, respectively, and for the first nine months of 2018 and 2019 was $281 million and $279 million, respectively. Financing revenue from finance leases is included in Retail financing on the income statement. Revenue is recognized using the interest method and includes the accretion of certain direct origination costs that are deferred and interest supplements received from Ford and affiliated companies.

NOTE 4. FINANCE RECEIVABLES (Continued)

Aging

For all finance receivables, we define “past due” as any payment, including principal and interest, that is at least 31 days past the contractual due date. The recorded investment of consumer receivables greater than 90 days past due and still accruing interest was $20 million at December 31, 2018. At September 30, 2019, there were no balances greater than 90 days past due for which we are still accruing interest.

The aging analysis of our finance receivables balances was as follows (in millions):



	December 31, 2018		September 30, 2019
Consumer
31-60 days past due	$	859	$	741
61-90 days past due	123		110
91-120 days past due	39		39
Greater than 120 days past due	39		38
Total past due	1,060		928
Current	75,179		72,970
Consumer finance receivables	76,239		73,898

Non-Consumer
Total past due	76		70
Current	43,088		39,316
Non-Consumer finance receivables	43,164		39,386
Total recorded investment	$	119,403	$	113,284

Credit Quality

Consumer Portfolio. Credit quality ratings for consumer receivables are based on our 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.

Non-Consumer Portfolio. 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.

The credit quality analysis of dealer financing receivables was as follows (in millions):



	December 31, 2018		September 30, 2019
Dealer financing
Group I	$	33,656	$	30,786
Group II	5,635		4,733
Group III	1,576		2,012
Group IV	129		91
Total recorded investment	$	40,996	$	37,622

NOTE 4. FINANCE RECEIVABLES (Continued)

Impaired Receivables

Impaired consumer receivables include accounts that have been rewritten or modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code that are considered to be Troubled Debt Restructurings (“TDRs”), as well as all accounts greater than 120 days past due. Impaired non-consumer receivables represent accounts with dealers that have weak or poor financial metrics or dealer financing that has been modified in TDRs. The recorded investment of consumer receivables that were impaired at December 31, 2018 and September 30, 2019 was $370 million and $334 million, or 0.5% and 0.5% of consumer receivables, respectively. The recorded investment of non-consumer receivables that were impaired at December 31, 2018 and September 30, 2019 was $129 million and $91 million, or 0.3% and 0.2% of non-consumer receivables, respectively. Impaired finance receivables are evaluated both collectively and specifically.

The accrual of revenue is discontinued at the time a receivable is determined to be uncollectible. 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.

A restructuring of debt constitutes a TDR if we grant a concession to a debtor for economic or legal reasons related to the debtor’s financial difficulties that we 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. We do not grant concessions on the principal balance of our 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. Finance receivables involved in TDRs are specifically assessed for impairment.