UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________

FORM 10-Q

(Mark One)

☑ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2020

or

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from ____________________ to ____________________

Commission file number 1-6368

Ford Motor Credit Company LLC

(Exact name of registrant as specified in its charter)

Delaware		38-1612444
(State of organization)		(I.R.S. employer identification no.)
One American Road
Dearborn,	Michigan	48126
(Address of principal executive offices)		(Zip Code)

(313) 322-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
0.623% Notes due June 28, 2023*	F/23E	New York Stock Exchange
1.355% Notes due February 7, 2025*	F/25I	New York Stock Exchange
4.125% Notes due on June 20, 2024*	F/24O	New York Stock Exchange
3.021% Notes due March 6, 2024*	F/24M	New York Stock Exchange
4.535% Notes due March 6, 2025*	F/25K	New York Stock Exchange
3.350% Notes due Nine Months or More from the Date of Issue due August 20, 2026	F/26N	New York Stock Exchange
1.514% Notes due February 17, 2023*	F/23G	New York Stock Exchange
2.386% Notes due February 17, 2026*	F/26AB	New York Stock Exchange
1.744% Notes due July 19, 2024*	F/24R	New York Stock Exchange
2.330% Notes due on November 25, 2025*	F/25L	New York Stock Exchange
3.683% Notes due on December 3, 2024*	F/24Q	New York Stock Exchange
Floating Rate Notes due May 14, 2021*	F/21C	New York Stock Exchange
Floating Rate Notes due December 1, 2021*	F/21AQ	New York Stock Exchange
Floating Rate Notes due December 7, 2022*	F/22T	New York Stock Exchange
Floating Rate Notes due November 15, 2023*	F/23D	New York Stock Exchange
Floating Rate Notes due December 1, 2024*	F/24L	New York Stock Exchange
*Issued under Euro Medium Term Notes due Nine Months or More from The Date of Issue Program

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes  o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o     Non-accelerated filer þ Smaller reporting company o

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐	Yes	☑	No

All of the limited liability company interests in the registrant (“Shares”) are held by an affiliate of the registrant. None of the Shares are publicly traded.

REDUCED DISCLOSURE FORMAT

The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.

Exhibit Index begins on page 49 

FORD MOTOR CREDIT COMPANY LLC

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2020

	Table of Contents	Page
	Part I. Financial Information
Item 1	Financial Statements	1
	Consolidated Income Statements	1
	Consolidated Statements of Comprehensive Income	1
	Consolidated Balance Sheets	2
	Consolidated Statements of Shareholder’s Interest	3
	Consolidated Statements of Cash Flows	4
	Notes to the Financial Statements	5
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Recent Developments	25
	Definitions and Information Regarding Causal Factors	26
	Results of Operations	28
	Financing Shares and Contract Placement Volume	31
	Financial Condition	32
	Credit Risk	34
	Residual Risk	36
	Credit Ratings	37
	Funding and Liquidity	38
	Leverage	42
	Outlook	42
	Cautionary Note on Forward-Looking Statements	43
	Critical Accounting Estimates	45
	Accounting Standards Issued But Not Yet Adopted	45
Item 3	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4	Controls and Procedures	46
	Part II. Other Information
Item 1A	Risk Factors	47
Item 5	Other Information	49
Item 6	Exhibits	49
	Signature	50

i

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements.

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(in millions)

	For the periods ended June 30,
	2019			2020			2019			2020
	Second Quarter						First Half
	(unaudited)
Financing revenue
Operating leases	$	1,472		$	1,401		$	2,949		$	2,860
Retail financing	987			941			1,971			1,917
Dealer financing	596			341			1,204			826
Other financing	26			27			50			49
Total financing revenue	3,081			2,710			6,174			5,652
Depreciation on vehicles subject to operating leases	(894		)	(990		)	(1,818		)	(2,042		)
Interest expense	(1,114		)	(839		)	(2,235		)	(1,823		)
Net financing margin	1,073			881			2,121			1,787
Other revenue
Insurance premiums earned	46			34			93			81
Fee based revenue and other	61			49			115			92
Total financing margin and other revenue	1,180			964			2,329			1,960
Expenses
Operating expenses	350			305			714			667
Provision for credit losses (Note 4)	63			93			96			679
Insurance expenses	60			60			70			66
Total expenses	473			458			880			1,412
Other income / (loss), net (Note 10)	124			37			183			25
Income before income taxes	831			543			1,632			573
Provision for / (Benefit from) income taxes	218			136			416			145
Net income	$	613		$	407		$	1,216		$	428

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

	For the periods ended June 30,
	2019		2020		2019		2020
	Second Quarter				First Half
	(unaudited)
Net income	$	613	$	407	$	1,216	$	428
Other comprehensive income / (loss), net of tax
Foreign currency translation	8		87		28		(261		)
Comprehensive income / (loss)	$	621	$	494	$	1,244	$	167

The accompanying notes are part of the financial statements.

1

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in millions)

	December 31, 2019			June 30, 2020
	(unaudited)
ASSETS
Cash and cash equivalents (Note 3)	$	9,067		$	12,838
Marketable securities (Note 3)	3,296			5,036
Finance receivables, net
Retail installment contracts, dealer financing, and other financing	106,131			96,418
Finance leases	8,186			7,500
Total finance receivables, net of allowance for credit losses of $513 and $1,285 (Note 4)	114,317			103,918
Net investment in operating leases (Note 5)	27,659			26,385
Notes and accounts receivable from affiliated companies	863			874
Derivative financial instruments (Note 7)	1,128			2,640
Assets held-for-sale (Note 1 and Note 4)	1,698			50
Other assets (Note 8)	3,398			3,535
Total assets	$	161,426		$	155,276
LIABILITIES
Accounts payable
Customer deposits, dealer reserves, and other	$	1,002		$	1,059
Affiliated companies	421			542
Total accounts payable	1,423			1,601
Debt (Note 9)	140,029			135,267
Deferred income taxes	2,593			1,804
Derivative financial instruments (Note 7)	356			668
Liabilities held-for-sale (Note 1)	45			—
Other liabilities and deferred revenue (Note 8)	2,633			2,174
Total liabilities	147,079			141,514
SHAREHOLDER’S INTEREST
Shareholder’s interest	5,227			5,227
Accumulated other comprehensive income / (loss)	(785		)	(1,046		)
Retained earnings	9,905			9,581
Total shareholder’s interest	14,347			13,762
Total liabilities and shareholder’s interest	$	161,426		$	155,276

The following table includes assets to be used to settle the liabilities of the consolidated variable interest entities (“VIEs”).  These assets and liabilities are included in the consolidated balance sheets above.  

	December 31, 2019		June 30,  2020
	(unaudited)
ASSETS
Cash and cash equivalents	$	3,202	$	3,204
Finance receivables, net	58,478		49,806
Net investment in operating leases	14,883		14,462
Derivative financial instruments	12		1
LIABILITIES
Debt	$	50,865	$	45,908
Derivative financial instruments	19		94

The accompanying notes are part of the financial statements.

2

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S INTEREST

(in millions, unaudited)

	Shareholder’s Interest		Accumulated Other Comprehensive Income / (Loss)			Retained Earnings			Total Shareholder’s Interest
Balance at December 31, 2018	$	5,227	$	(829	)	$	10,577		$	14,975
Net income	—		—			603			603
Other comprehensive income / (loss), net of tax	—		20			—			20
Distributions declared	—		—			(675		)	(675		)
Balance at March 31, 2019	$	5,227	$	(809	)	$	10,505		$	14,923
Net income	$	—	$	—		$	613		$	613
Other comprehensive income / (loss), net of tax	—		8			—			8
Distributions declared	—		—			(650		)	(650		)
Balance at June 30, 2019	$	5,227	$	(801	)	$	10,468		$	14,894
Balance at December 31, 2019	$	5,227	$	(785	)	$	9,905		$	14,347
Net income	—		—			21			21
Other comprehensive income / (loss), net of tax	—		(348		)	—			(348		)
Adoption of accounting standard (Note 2)	—		—			(202		)	(202		)
Distributions declared	—		—			(275		)	(275		)
Balance at March 31, 2020	$	5,227	$	(1,133	)	$	9,449		$	13,543
Net income	$	—	$	—		$	407		$	407
Other comprehensive income / (loss), net of tax	—		87			—			87
Distributions declared	—		—			(275		)	(275		)
Balance at June 30, 2020	$	5,227	$	(1,046	)	$	9,581		$	13,762

The accompanying notes are part of the financial statements.

3

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

	For the periods ended June 30,
	2019			2020
	First Half
	(unaudited)
Cash flows from operating activities
Net Income	$	1,216		$	428
Adjustments to reconcile net income to net cash provided in operations
Provision for credit losses	96			679
Depreciation and amortization	2,214			2,436
Amortization of upfront interest supplements	(1,062		)	(1,048		)
Net change in finance receivables held-for-sale	—			(74		)
Net change in deferred income taxes	82			(692		)
Net change in other assets	(211		)	(27		)
Net change in other liabilities	571			(243		)
All other operating activities	3			31
Net cash provided by / (used in) operating activities	$	2,909		$	1,490
Cash flows from investing activities
Purchases of finance receivables	(17,770		)	(20,424		)
Principal collections of finance receivables	20,888			19,377
Purchases of operating lease vehicles	(6,500		)	(5,063		)
Proceeds from termination of operating lease vehicles	4,734			4,022
Net change in wholesale receivables and other short-duration receivables	896			9,953
Proceeds from sale of business	—			1,340
Purchases of marketable securities	(2,099		)	(4,139		)
Proceeds from sales and maturities of marketable securities	1,183			2,425
Settlements of derivatives	23			37
All other investing activities	(24		)	(31		)
Net cash provided by / (used in) investing activities	1,331			7,497
Cash flows from financing activities
Proceeds from issuances of long-term debt	24,983			20,146
Principal payments on long-term debt	(24,298		)	(22,965		)
Change in short-term debt, net	(565		)	(1,668		)
Cash distributions to parent	(1,325		)	(550		)
All other financing activities	(64		)	(41		)
Net cash provided by / (used in) financing activities	(1,269		)	(5,078		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	24			(174		)
Net increase / (decrease) in cash, cash equivalents and restricted cash	$	2,995		$	3,735
Cash, cash equivalents and restricted cash at beginning of period (Note 3)	$	9,747		$	9,268
Net increase / (decrease) in cash, cash equivalents and restricted cash	2,995			3,735
Cash, cash equivalents and restricted cash at end of period (Note 3)	$	12,742		$	13,003

The accompanying notes are part of the financial statements.

4

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

Table of Contents

Footnote		Page
Note 1	Presentation	6
Note 2	Accounting Policies	7
Note 3	Cash, Cash Equivalents, and Marketable Securities	8
Note 4	Finance Receivables and Allowance for Credit Losses	9
Note 5	Net Investment in Operating Leases	15
Note 6	Transfers of Receivables and Variable Interest Entities	15
Note 7	Derivative Financial Instruments and Hedging Activities	18
Note 8	Other Assets and Other Liabilities and Deferred Revenue	19
Note 9	Debt	20
Note 10	Other Income / (Loss), Net	20
Note 11	Segment Information	21
Note 12	Commitments and Contingencies	23

5

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. PRESENTATION

Principles of Consolidation

The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, and instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, these unaudited financial statements include all adjustments considered necessary for a fair statement of the results of operations and financial condition for interim periods for Ford Motor Credit Company LLC, its consolidated subsidiaries and consolidated VIEs in which Ford Motor Credit Company LLC is the primary beneficiary (collectively referred to herein as “Ford Credit,” “we,” “our,” or “us”). Results for interim periods should not be considered indicative of results for any other interim period or for the full year. Reference should be made to the financial statements contained in our Current Report on Form 8-K filed April 29, 2020 (“April 29, 2020 Form 8-K Report). We are an indirect, wholly owned subsidiary of Ford Motor Company (“Ford”). We reclassify certain prior period amounts in our consolidated financial statements to conform to current year presentation.

Global Pandemic

On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures.  Since then, extraordinary actions were taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world. These actions include travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. Although restrictions have been eased in many locations, some areas that had previously eased restrictions have reverted to more stringent limitations on daily activities.

Consistent with the actions taken by governmental authorities, as of late March 2020, nearly all of our employees, other than in China, began working remotely in order to reduce the spread of COVID-19. As of June 2020, nearly all of our employees continue to work remotely. Our remote work arrangements have been designed to allow for continued operation of business functions, including originating and servicing customer contracts, financial reporting, and internal control.

Our results include adjustments due to the impact of COVID-19, the most significant of which were a charge to the provision for credit losses of $46 million and $532 million during the second quarter and first half of 2020, respectively, and a gain (decrease) of $40 million and a charge (increase) of $14 million to depreciation expense during the second quarter and first half of 2020, respectively, for lower of cost or market adjustments related to our operating lease vehicles awaiting sale at auction.  Our assessments of the effect of COVID-19 on our financial statements, including estimates, are based on a variety of factors and are subject to many uncertainties. See Notes 4 and 8 for additional information.

The impact of the COVID-19 pandemic on our full year financial results will depend on future developments, such as the ultimate duration and scope of the outbreak, its impact on our customers, dealers, and suppliers, and the rate at which economic conditions return to pre-COVID-19 levels.

Restructuring Actions

Beginning in the fourth quarter of 2019, we determined that it was not probable that we would hold certain assets and liabilities for more than the following twelve months, and these assets and liabilities were reported as held-for-sale.  The total value of our Assets held-for-sale presented at fair value at December 31, 2019 and June 30, 2020 were $1,698 million and $50 million, respectively, and Liabilities held-for-sale presented at fair value at December 31, 2019 and June 30, 2020 were $45 million and $0 million, respectively.

6

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 2. ACCOUNTING POLICIES

Provision for Income Taxes

For interim tax reporting we estimate one single effective tax rate, which is applied to the year-to-date ordinary income / (loss). Tax effects of significant unusual or infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.

Adoption of New Accounting Standards

Accounting Standards Update (“ASU”) 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments. On January 1, 2020, we adopted the new credit loss standard and all of the related amendments, which replaced the incurred loss impairment method with a method that reflects lifetime expected credit losses. We adopted the changes in accounting for credit losses by recognizing the cumulative effect of initially applying the new credit loss standard as an adjustment to the opening balance of Retained earnings. The comparative information has not been restated and continues to be reported under the accounting standard in effect for those periods.

The cumulative effect of the changes made to our consolidated balance sheet at January 1, 2020 for the adoption of ASU 2016-13 was as follows (in millions):

	Balance at December 31, 2019		Adjustments due to ASU 2016-13			Balance at January 1,  2020
Assets
Retail installment contracts, dealer financing, and other financing	$	106,131	$	(230	)	$	105,901
Finance leases	8,186		(22		)	8,164
Other assets	3,398		(8		)	3,390
Liabilities
Deferred income tax	2,593		(58		)	2,535
Equity
Retained earnings	9,905		(202		)	9,703

ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

On April 1, 2020, we adopted the new standard, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform (e.g., discontinuation of LIBOR), if certain criteria are met. As of June 30, 2020, we have not yet elected any optional expedients provided in the standard. We will apply the accounting relief as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period and do not expect the standard to have a material impact on our consolidated financial statements.

We also adopted the following ASUs during 2020, none of which had a material impact to our financial statements or financial statement disclosures:

ASU		Effective Date
2020-01	Clarifying the Interaction between Equity Securities, Equity Method and Joint Ventures, and Derivatives and Hedging	January 1, 2020
2018-18	Clarifying the Interaction between Collaborative Arrangements and Revenue from Contracts with Customers	January 1, 2020
2018-15	Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract	January 1, 2020

Accounting Standards Issued But Not Yet Adopted

The Company considers the applicability and impacts of all ASUs. ASUs were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements.

7

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 3. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES

The following table categorizes the fair values of cash, cash equivalents, and marketable securities measured at fair value on a recurring basis (in millions):

	Fair Value Level	December 31, 2019		June 30, 2020
Cash and cash equivalents
U.S. government	1	$	—	$	1,568
U.S. government and agencies	2	—		825
Non-U.S. government and agencies	2	350		1,352
Corporate debt	2	604		992
Total marketable securities classified as cash equivalents		954		4,737
Cash, time deposits and money market funds		8,113		8,101
Total cash and cash equivalents		$	9,067	$	12,838
Marketable securities
U.S. government	1	$	195	$	1,924
U.S. government and agencies	2	210		410
Non-U.S. government and agencies	2	2,408		2,215
Corporate debt	2	193		223
Other marketable securities	2	290		264
Total marketable securities		$	3,296	$	5,036

Cash, Cash Equivalents, and Restricted Cash 

Cash, cash equivalents, and restricted cash as reported in the statements of cash flows are presented separately on our consolidated balance sheets as follows (in millions):

	December 31, 2019		June 30, 2020
Cash and cash equivalents	$	9,067	$	12,838
Restricted cash included in other assets (a)	139		165
Cash, cash equivalents and restricted cash in assets held-for-sale	62		—
Total cash, cash equivalents, and restricted cash	$	9,268	$	13,003

__________

(a) Restricted cash primarily includes cash held to meet certain local governmental and regulatory reserve requirements and cash held under the terms of certain contractual agreements. Restricted cash does not include required minimum balances or cash securing debt issued through securitization transactions.

8

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 4. FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

We manage 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, we define “past due” as any payment, including principal and interest, that is at least 31 days past the contractual due date.

Total Finance Receivables, Net

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

	December 31, 2019			June 30, 2020
Consumer
Retail installment contracts, gross	$	68,998		$	70,857
Finance leases, gross	8,566			7,880
Retail financing, gross	77,564			78,737
Unearned interest supplements from Ford and affiliated companies	(3,589		)	(3,844		)
Consumer finance receivables	73,975			74,893
Non-Consumer
Dealer financing	38,910			28,460
Other financing	1,945			1,850
Non-Consumer finance receivables	40,855			30,310
Total recorded investment	$	114,830		$	105,203
Recorded investment in finance receivables	$	114,830		$	105,203
Allowance for credit losses	(513		)	(1,285		)
Total finance receivables, net	$	114,317		$	103,918
Net finance receivables subject to fair value (a)	$	106,131		$	96,418
Fair value (b)	106,260			97,509

__________

(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.

Finance leases are comprised of sales-type and direct financing leases. Financing revenue from finance leases for the second quarter of 2019 and 2020 was $97 million and $77 million, respectively, and for the first half of 2019 and 2020 was $189 million and $172 million, respectively, and is included in Retail financing on the consolidated income statements.

At December 31, 2019 and June 30, 2020, accrued interest was $253 million and $218 million, respectively, which we report in Other assets on the consolidated balance sheets.

Included in recorded investment in finance receivables were consumer and non-consumer receivables that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. See Note 6 for additional information.

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 related finance receivables. At June 30, 2020, there were $50 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 the consolidated balance sheets. See Note 1 for additional information.

9

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 4. 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):

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	72,935
Total	$	73,975

The credit quality analysis of consumer receivables at June 30, 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	$	45	$	60	$	98	$	135	$	124	$	31	$	493
61-120 days past due	9		17		33		44		40		10		153
Greater than 120 days past due	14		7		8		9		6		—		44
Total past due	68		84		139		188		170		41		690
Current	1,631		4,202		9,593		17,475		24,430		16,872		74,203
Total	$	1,699	$	4,286	$	9,732	$	17,663	$	24,600	$	16,913	$	74,893

10

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 4. FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Non-Consumer Portfolio

We use 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 we consider most significant in predicting a dealer’s ability to meet its financial obligations. We also consider numerous other financial and qualitative factors of the dealer’s operations, including capitalization and leverage, liquidity and cash flow, profitability, and credit history with ourselves and other creditors. The credit quality of dealer financing receivables is evaluated based on our 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.

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

Dealer financing
Group I	$	31,206
Group II	5,407
Group III	2,108
Group IV	189
Total (a)	$	38,910

__________

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

The credit quality analysis of dealer financing receivables at June 30, 2020 was as follows (in millions):

	Amortized Cost Basis by Origination Year
	Prior to 2016		2016		2017		2018		2019		2020		Total		Wholesale Loans		Total
Group I	$	608	$	132	$	159	$	221	$	98	$	237	$	1,455	$	19,378	$	20,833
Group II	38		32		17		18		7		72		184		5,317		5,501
Group III	9		—		4		17		6		28		64		1,908		1,972
Group IV	2		3		—		—		2		4		11		143		154
Total (a)	$	657	$	167	$	180	$	256	$	113	$	341	$	1,714	$	26,746	$	28,460

__________

(a) Total past due dealer financing receivables at June 30, 2020 were $143 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.

11

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 4. FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Troubled Debt Restructuring (“TDR”). 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.

We have offered various programs to provide relief to customers and dealers impacted by COVID-19.  These programs, which were broadly available to our customers and dealers, included payment extensions.  We concluded that these programs did not meet TDR criteria. As of June 30, 2020, in the United States we have received payments on 88% of the pandemic extensions offered to our customers, and no dealers are delinquent on their payments. 

Allowance for Credit Losses

The allowance for credit losses represents our 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 the Provision for credit losses 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 we repossess the collateral, the receivable is charged off and we record the collateral at its estimated fair value less costs to sell and report it in Other assets on the consolidated balance sheets.

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, we estimate 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.

12

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 4. FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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. We use 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. We update the forward-looking macroeconomic forecasts quarterly.

If management does not believe the 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, we review our models, including macroeconomic factors, the selection of macroeconomic scenarios, and their weighting to ensure they reflect the risk of the portfolio.

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, the purchase of dealership real estate, and 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, the financial status of the dealer, and any 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, we estimate an allowance for credit losses on a collective basis.

Wholesale Loans. We estimate 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. We use 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 our dealer loans portfolio. The expected credit loss is calculated under different economic scenarios that 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.

13

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 4. FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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 2019 (a)									First Half 2019 (a)
	Consumer			Non-Consumer			Total			Consumer			Non-Consumer			Total
Allowance for credit losses
Beginning balance	$	496		$	17		$	513		$	566		$	23		$	589
Charge-offs	(117		)	—			(117		)	(254		)	(17		)	(271		)
Recoveries	45			6			51			88			8			96
Provision for credit losses	70			(7		)	63			94			2			96
Other	2			1			3			2			1			3
Ending balance	$	496		$	17		$	513		$	496		$	17		$	513

__________

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

	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 (b)	(80		)	—			(80		)	(225		)	(1		)	(226		)
Recoveries (b)	33			1			34			76			3			79
Provision for credit losses	94			(1		)	93			628			51			679
Other (c)	7			—			7			(11		)	(1		)	(12		)
Ending balance	$	1,211		$	74		$	1,285		$	1,211		$	74		$	1,285

__________

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

(b) Charge-offs and recoveries were lower in the second quarter of 2020 reflecting program extensions and decision to temporarily suspend involuntary repossessions due to COVID-19.

(c) Primarily represents amounts related to translation adjustments.

During the second quarter and first half of 2020, the allowance for credit losses increased $54 million and $772 million, respectively. The change in the second quarter reflects an increase of $46 million, primarily attributable to COVID-19, and an increase for translation adjustments. The change in the first half reflects an increase to the reserve of $252 million related to the adoption of ASU 2016-13 and an increase of $532 million, primarily attributable to COVID-19, offset by a decrease for translation adjustments. The first half change to the reserve reflects economic uncertainty which, along with the expectation of continued higher unemployment, is expected to increase the probability of default and loss given default rates in our consumer portfolio, especially in the United States. These economic trends and conditions are also expected to negatively impact our dealers. The relatively moderate reserve increase in the second quarter reflects our view that future economic conditions are largely unchanged from our assumptions at March 31, 2020. Although net charge-offs during the second quarter and first half of 2020 remained low, reflecting government relief programs, our customer payment deferral programs, and our decision to temporarily suspend involuntary repossessions, the future impact of COVID-19 on credit losses is expected to be adverse.

14

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 5. NET INVESTMENT IN OPERATING LEASES

Net investment in operating leases consists primarily of lease contracts for vehicles with individuals, daily rental companies, and fleet customers with terms of 60 months or less. Included in Net investment in operating leases are net investments in operating leases sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. See Note 6 for additional information.

Net investment in operating leases was as follows (in millions):

	December 31, 2019			June 30, 2020
Vehicles, at cost (a)	$	33,431		$	32,660
Accumulated depreciation	(5,772		)	(6,275		)
Net investment in operating leases	$	27,659		$	26,385

__________

(a) Includes interest supplements and residual support payments we receive on certain leasing transactions under agreements with Ford and affiliated companies, and other vehicle acquisition costs.

We evaluate the carrying value of held-and-used long-lived asset groups (such as vehicles subject to operating leases) for potential impairment when we determine a triggering event has occurred. When a triggering event occurs, a test for recoverability is performed by comparing projected undiscounted future cash flows to the carrying value of the asset group. If the test for recoverability identifies a possible impairment, the asset group’s fair value is measured in accordance with the fair value measurement framework. An impairment charge is recognized for the amount by which the carrying value of the asset group exceeds its estimated fair value. For the second quarter of 2020, we considered the economic slowdown resulting from COVID-19 and determined a triggering event has not occurred. For the periods presented, we have not recorded any impairment charges.

NOTE 6. TRANSFERS OF RECEIVABLES AND VARIABLE INTEREST ENTITIES

We securitize finance receivables and net investment in operating leases through a variety of programs using amortizing, variable funding, and revolving structures. We also sell finance receivables in structured financing transactions. Due to the similarities between securitization and structured financing, we refer to structured financings as securitization transactions. Our securitization programs are targeted to institutional investors in both public and private transactions in capital markets primarily in the United States, Canada, the United Kingdom, Germany, and China.

We engage in securitization transactions to fund operations and to maintain liquidity. Our securitization transactions are recorded as asset-backed debt, and the associated assets are not derecognized and continue to be included in our financial statements.

The finance receivables sold for legal purposes and net investment in operating leases included in securitization transactions 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 our other obligations or the claims of our other creditors. The debt is the obligation of our consolidated securitization entities and not the obligation of Ford Credit or our other subsidiaries.

We use special purpose entities to issue asset-backed securities in our securitization transactions. We have deemed most of these special purpose entities to be VIEs of which we are the primary beneficiary. The asset-backed securities are backed by finance receivables and interests in net investments in operating leases. The assets continue to be consolidated by us. We retain interests in our securitization VIEs, including subordinated securities issued by the VIEs, rights to cash held for the benefit of the securitization investors, and rights 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.

15

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 6. TRANSFERS OF RECEIVABLES AND VARIABLE INTEREST ENTITIES (Continued)

We have no obligation to repurchase or replace any securitized asset that subsequently becomes delinquent in payment or otherwise is in default, except when representations and warranties about the eligibility of the securitized assets are breached, or when certain changes are made to the underlying asset contracts. Securitization investors have no recourse to us or our other assets and have no right to require us to repurchase the investments. We generally have no obligation to provide liquidity or contribute cash or additional assets to the VIEs and do not guarantee any asset-backed securities. We may be required to support the performance of certain securitization transactions, however, by increasing cash reserves.

Securitization transactions that are exposed to interest rate or currency risk may reduce their risks by entering into derivative transactions. In certain instances, we have entered into derivative transactions with the counterparty to protect the counterparty from risks absorbed through its derivative transactions with the securitization entities. See Note 7 for additional information regarding derivatives.

Most of these securitization transactions utilize VIEs. The following tables show the assets and debt related to our securitization transactions that were included in our financial statements (in billions):

	December 31, 2019
	Cash and Cash Equivalents		Finance Receivables and Net Investment in Operating Leases (a)						Related Debt (c)
			Before Allowance for Credit Losses		Allowance for Credit Losses		After Allowance for Credit Losses
VIE (b)
Retail financing	$	1.8	$	32.6	$	0.2	$	32.4	$	28.0
Wholesale financing	0.9		26.1		—		26.1		13.4
Finance receivables	2.7		58.7		0.2		58.5		41.4
Net investment in operating leases	0.5		14.9		—		14.9		9.5
Total VIE	$	3.2	$	73.6	$	0.2	$	73.4	$	50.9
Non-VIE
Retail financing	$	0.3	$	5.7	$	—	$	5.7	$	5.1
Wholesale financing	—		0.7		—		0.7		0.6
Finance receivables	0.3		6.4		—		6.4		5.7
Net investment in operating leases	—		—		—		—		—
Total Non-VIE	$	0.3	$	6.4	$	—	$	6.4	$	5.7
Total securitization transactions
Retail financing	$	2.1	$	38.3	$	0.2	$	38.1	$	33.1
Wholesale financing	0.9		26.8		—		26.8		14.0
Finance receivables	3.0		65.1		0.2		64.9		47.1
Net investment in operating leases	0.5		14.9		—		14.9		9.5
Total securitization transactions	$	3.5	$	80.0	$	0.2	$	79.8	$	56.6

__________

(a) Unearned interest supplements and residual support are excluded from securitization transactions.

(b) Includes assets to be used to settle the liabilities of the consolidated VIEs.

(c) Includes unamortized discount and debt issuance costs.

16

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 6. TRANSFERS OF RECEIVABLES AND VARIABLE INTEREST ENTITIES (Continued)

	June 30, 2020
	Cash and Cash Equivalents		Finance Receivables and Net Investment in Operating Leases (a)						Related Debt (c)
			Before Allowance for Credit Losses		Allowance for Credit Losses		After Allowance for Credit Losses
VIE (b)
Retail financing	$	1.8	$	33.0	$	0.4	$	32.6	$	26.2
Wholesale financing	0.7		17.2		—		17.2		10.4
Finance receivables	2.5		50.2		0.4		49.8		36.6
Net investment in operating leases	0.7		14.5		—		14.5		9.3
Total VIE	$	3.2	$	64.7	$	0.4	$	64.3	$	45.9
Non-VIE
Retail financing	$	0.4	$	9.1	$	0.1	$	9.0	$	8.3
Wholesale financing	—		0.6		—		0.6		0.3
Finance receivables	0.4		9.7		0.1		9.6		8.6
Net investment in operating leases	—		—		—		—		—
Total Non-VIE	$	0.4	$	9.7	$	0.1	$	9.6	$	8.6
Total securitization transactions
Retail financing	$	2.2	$	42.1	$	0.5	$	41.6	$	34.5
Wholesale financing	0.7		17.8		—		17.8		10.7
Finance receivables	2.9		59.9		0.5		59.4		45.2
Net investment in operating leases	0.7		14.5		—		14.5		9.3
Total securitization transactions	$	3.6	$	74.4	$	0.5	$	73.9	$	54.5

__________

(a) Unearned interest supplements and residual support are excluded from securitization transactions.

(b) Includes assets to be used to settle the liabilities of the consolidated VIEs.

(c) Includes unamortized discount and debt issuance cost.

17

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, our operations are exposed to global market risks, including the effect of changes in interest rates and foreign currency exchange rates. To manage these risks, we enter into highly effective derivative contracts. We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.

Income Effect of Derivative Financial Instruments

The gains / (losses), by hedge designation, reported in income for the periods ended June 30 were as follows (in millions):

	Second Quarter						First Half
	2019			2020			2019			2020
Fair value hedges
Interest rate contracts
Net interest settlements and accruals on hedging instruments	$	(12	)	$	68		$	(32	)	$	96
Fair value changes on hedging instruments	474			112			724			1,222
Fair value changes on hedged debt	(463		)	(98		)	(716		)	(1,191		)
Derivatives not designated as hedging instruments
Interest rate contracts	(3		)	(12		)	(30		)	(86		)
Foreign currency exchange contracts (a)	40			(41		)	34			166
Cross-currency interest rate swap contracts	141			154			(4		)	3
Total	$	177		$	183		$	(24	)	$	210

__________

(a) Reflects forward contracts between Ford Credit and an affiliated company.

Balance Sheet Effect of Derivative Financial Instruments

Derivative assets and liabilities are reported on the balance sheets at fair value and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the parties and are not a direct measure of our financial exposure. We also enter into master agreements with counterparties that may allow for netting of exposures in the event of default or breach of the counterparty agreement. Collateral represents cash received or paid under reciprocal arrangements that we have entered into with our derivative counterparties which we do not use to offset our derivative assets and liabilities.

The fair value of our derivative instruments and the associated notional amounts were as follows (in millions):

	December 31, 2019						June 30, 2020
	Notional		Fair Value of Assets		Fair Value of Liabilities		Notional		Fair Value of Assets		Fair Value of Liabilities
Fair value hedges
Interest rate contracts	$	26,577	$	702	$	19	$	24,434	$	1,682	$	—
Derivatives not designated as hedging instruments
Interest rate contracts	68,914		275		191		71,075		752		573
Foreign currency exchange contracts	5,540		17		79		3,524		43		42
Cross-currency interest rate swap contracts	5,849		134		67		5,611		163		53
Total derivative financial instruments, gross (a) (b)	$	106,880	$	1,128	$	356	$	104,644	$	2,640	$	668

__________

(a) At December 31, 2019 and June 30, 2020, we held collateral of $18 million and $20 million, respectively, and we posted collateral of $78 million and $91 million, respectively.

(b) At December 31, 2019 and June 30, 2020, the fair value of assets and liabilities available for counterparty netting was $169 million and $337 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.

18

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 8. OTHER ASSETS AND OTHER LIABILITIES AND DEFERRED REVENUE

Other assets and other liabilities and deferred revenue consist of various balance sheet items that are combined for financial statement presentation due to their respective materiality compared with other individual asset and liability items.

Other assets were as follows (in millions):

	December 31, 2019		June 30, 2020
Collateral held for resale, at net realizable value	$	843	$	994
Accrued interest and other non-finance receivables	898		875
Prepaid reinsurance premiums and other reinsurance recoverables	687		695
Property and equipment, net of accumulated depreciation (a)	212		212
Deferred charges - income taxes	171		153
Investment in non-consolidated affiliates (b)	132		122
Operating lease assets	108		107
Other	347		377
Total other assets	$	3,398	$	3,535

__________

(a) Accumulated depreciation was $393 million and $404 million at December 31, 2019 and June 30, 2020, respectively.

(b) Adoption of ASU 2016-13 reduced investment in non-consolidated affiliates $8 million. See Note 2 for additional information.

Returned operating lease vehicles and repossessed vehicles are classified as collateral held for resale and recorded at net realizable value. Based on sales during the second quarter of 2020, we released the unused portion of our valuation adjustment related to COVID-19 that was recorded in the first quarter.

Other liabilities and deferred revenue were as follows (in millions):

	December 31, 2019		June 30, 2020
Unearned insurance premiums and fees	$	806	$	811
Interest payable	888		739
Income tax and related interest (a)	433		173
Operating lease liabilities	110		109
Deferred revenue	110		95
Other	286		247
Total other liabilities and deferred revenue	$	2,633	$	2,174

__________

(a) Includes tax and interest payable to affiliated companies of $294 million and $38 million at December 31, 2019 and June 30, 2020, respectively.

19

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 9. DEBT

Debt outstanding and interest rates were as follows (in millions):

							Interest Rates
	Debt						Average Contractual				Average Effective
	December 31, 2019			June 30, 2020			2019		2020		2019		2020
Short-term debt
Unsecured debt
Floating rate demand notes	$	6,545		$	5,910
Commercial paper	3,560			1,793
Other short-term debt	2,731			3,186
Asset-backed debt (a)	881			792
Total short-term debt	13,717			11,681			2.8	%	2.0	%	2.8	%	2.0	%
Long-term debt
Unsecured debt
Notes payable within one year	15,062			18,567
Notes payable after one year	55,148			49,711
Asset-backed debt (a)
Notes payable within one year	23,609			22,997
Notes payable after one year	32,162			30,794
Unamortized (discount) / premium	7			5
Unamortized issuance costs	(214		)	(205		)
Fair value adjustments (b)	538			1,717
Total long-term debt	126,312			123,586			3.0	%	2.7	%	3.0	%	2.7	%
Total debt	$	140,029		$	135,267		2.9	%	2.7	%	3.0	%	2.7	%
Fair value of debt (c)	$	141,678		$	132,836

__________

(a) Asset-backed debt issued in securitizations is the obligation of the consolidated securitization entity that issued the debt and is payable only out of collections on the underlying securitized assets and related enhancements. This asset-backed debt is not the obligation of Ford Credit or our other subsidiaries.

(b) These adjustments relate to fair value hedges. The carrying value of hedged debt was $39.4 billion and $42.5 billion at December 31, 2019 and June 30, 2020, respectively.

(c) The fair value of debt includes $12.8 billion and $10.9 billion of short-term debt at December 31, 2019 and June 30, 2020, respectively, carried at cost, which approximates fair value. All other debt is categorized within Level 2 of the fair value hierarchy.

NOTE 10. OTHER INCOME / (LOSS), NET

Other income / (loss) consists of various line items that are combined on the income statements due to their respective materiality compared with other individual income and expense items.

The amounts included in Other income / (loss), net for the periods ended June 30 were as follows (in millions):

	Second Quarter						First Half
	2019			2020			2019			2020
Gains / (Losses) on derivatives	$	178		$	101		$	—		$	83
Currency revaluation gains / (losses)	(147		)	(108		)	(16		)	(169		)
Interest and investment income	83			27			162			90
Other	10			17			37			21
Total other income / (loss), net	$	124		$	37		$	183		$	25

20

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 11. SEGMENT INFORMATION

We conduct our financing operations directly and indirectly through our subsidiaries and affiliates. We offer substantially similar products and services throughout many different regions, subject to local legal restrictions and market conditions. As of January 1, 2020, we updated our reportable segments in our consolidated financial statements to align with our new management reporting structure and reflect the manner in which our Chief Operating Decision Maker manages our business, including resource allocation and performance assessment. These segments are: the United States and Canada, Europe, and All Other. Our All Other segment includes China, India, Mexico, Brazil, Argentina, and our joint venture in South Africa. Items excluded in assessing segment performance because they are managed at the corporate level, including market valuation adjustments to derivatives and exchange-rate fluctuations on foreign currency-denominated transactions, are reflected in Unallocated Other.

21

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 11. SEGMENT INFORMATION (Continued)

Key financial information for our business segments for the periods ended or at June 30 was as follows (in millions):

	United States and Canada		Europe		All Other			Total Segments		Unallocated Other (a)			Total
Second Quarter 2019 (b)
Total revenue	$	2,716	$	307	$	165		$	3,188	$	—		$	3,188
Income before income taxes	589		113		37			739		92			831
Other disclosures:
Depreciation on vehicles subject to operating leases	885		9		—			894		—			894
Interest expense	939		86		91			1,116		(2		)	1,114
Provision for credit losses	48		7		8			63		—			63
Second Quarter 2020
Total revenue	$	2,448	$	244	$	101		$	2,793	$	—		$	2,793
Income before income taxes	445		65		17			527		16			543
Other disclosures:
Depreciation on vehicles subject to operating leases	990		—		—			990		—			990
Interest expense	726		82		55			863		(24		)	839
Provision for credit losses	76		14		3			93		—			93
First Half 2019 (b)
Total revenue	$	5,427	$	610	$	345		$	6,382	$	—		$	6,382
Income before income taxes	1,211		227		95			1,533		99			1,632
Other disclosures:
Depreciation on vehicles subject to operating leases	1,797		21		—			1,818		—			1,818
Interest expense	1,870		166		193			2,229		6			2,235
Provision for credit losses	88		12		(4		)	96		—			96
Net finance receivables and net investment in operating leases	118,990		27,224		5,708			151,922		(8,443		)	143,479
Total assets	127,482		30,094		6,442			164,018		—			164,018
First Half 2020
Total revenue	$	5,079	$	525	$	221		$	5,825	$	—		$	5,825
Income before income taxes	467		82		24			573		—			573
Other disclosures:
Depreciation on vehicles subject to operating leases	2,029		13		—			2,042		—			2,042
Interest expense	1,571		172		120			1,863		(40		)	1,823
Provision for credit losses	596		67		16			679		—			679
Net finance receivables and net investment in operating leases (c)	111,775		23,659		3,949			139,383		(9,080		)	130,303
Total assets	124,375		26,091		4,810			155,276		—			155,276

__________

(a) Finance receivables, net and Net investment in operating lease includes unearned interest supplements and residual support, allowance for credit losses, and other (primarily accumulated supplemental depreciation).

(b) Comparative information has been updated to reflect the reportable segments as of January 1, 2020.

(c) Excludes held-for-sale finance receivables.

22

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. COMMITMENTS AND CONTINGENCIES

Commitments and contingencies primarily consist of lease commitments, guarantees and indemnifications, and litigation and claims.

Lease Commitments

We lease various land, buildings, and equipment under agreements that expire over various contractual periods ranging from less than one year to 31 years. Many of our leases contain one or more options to extend. We include options that we are reasonably certain to exercise in our evaluation of the lease term after considering all relevant economic and financial factors. The leased assets and liabilities are reported in Other assets and Other liabilities and deferred revenue, respectively, on our consolidated balance sheets.

Guarantees and Indemnifications

Guarantees and indemnifications are recorded at fair value at their inception. For financial guarantees, subsequent to initial recognition, the guarantee liability is adjusted at each reporting period to reflect the current estimate of expected payments resulting from possible default events over the remaining life of the guarantee. The probability of default is applied to the expected exposure at the time of default less recoveries to determine the expected payments. Factors to consider when estimating the probability of default include the obligor’s financial position, forecasted economic environment, historical loss rates, and other communications. For non-financial guarantees, we regularly review our performance risk under these arrangements, and in the event it becomes probable we will be required to perform under a guarantee or indemnity, the amount of probable payment is recorded.

The maximum potential payments under these guarantees and limited indemnities totaled $53 million and $126 million at December 31, 2019 and June 30, 2020, respectively. Of these values, $48 million and $49 million at December 31, 2019 and June 30, 2020, respectively, were counter-guaranteed by Ford to us. There were no recorded liabilities related to guarantees and limited indemnities at December 31, 2019 or June 30, 2020.

In some cases, we have guaranteed debt and other financial obligations of outside third parties and unconsolidated affiliates, including Ford. Expiration dates vary, and guarantees will terminate on payment and / or cancellation of the underlying obligation. A payment by us would be triggered by failure of the guaranteed party to fulfill its obligation covered by the guarantee. In some circumstances, we are entitled to recover from a third party amounts paid by us under the guarantee. However, our ability to enforce these rights is sometimes stayed until the guaranteed party is paid in full and may be limited in the event of insolvency of the third party or other circumstances.

In the ordinary course of business, we execute contracts involving indemnifications standard in the industry and indemnifications specific to a transaction. These indemnifications might include and are not limited to claims relating to any of the following: environmental, tax, and shareholder matters; intellectual property rights; governmental regulations and employment-related matters; dealer and other commercial contractual relationships; and financial matters, such as securitizations. Performance under these indemnities generally would be triggered by a breach of terms of the contract or a third-party claim. While some of these indemnifications are limited in nature, many of them do not limit potential payment. Therefore, we are unable to estimate a maximum amount of future payments that could result from claims made under these unlimited indemnities.

23

Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued)

Litigation and Claims

Various legal actions, proceedings, and claims (generally, “matters”) are pending or may be instituted or asserted against us. These include, but are not limited to, matters arising out of governmental regulations; tax matters; alleged illegal acts resulting in fines or penalties; financial services; employment-related matters; dealer and other contractual relationships; personal injury matters; investor matters; and financial reporting matters. Certain of the pending legal actions are, or purport to be, class actions. Some of the matters involve or may involve claims for compensatory, punitive, or antitrust or other treble damages in very large amounts, sanctions, assessments, or other relief, which, if granted, would require very large expenditures.

The extent of our financial exposure to these matters is difficult to estimate. Many matters do not specify a dollar amount for damages, and many others specify only a jurisdictional minimum. To the extent an amount is asserted, our historical experience suggests that in most instances the amount asserted is not a reliable indicator of the ultimate outcome.

We accrue for matters when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood that we will prevail, and the severity of any potential loss. We reevaluate and update our accruals as matters progress over time.

For nearly all matters where our historical experience with similar matters is of limited value (i.e., “non-pattern matters”), we evaluate the matters primarily based on the individual facts and circumstances. For non-pattern matters, we evaluate whether there is a reasonable possibility of a material loss in excess of any accrual that can be estimated. It is reasonably possible that some of the matters for which accruals have not been established could be decided unfavorably and could require us to pay damages or make other expenditures. On January 9, 2019, FCE Bank plc (“FCE”) received a decision from the Italian Competition Authority, which included an assessment of a fine against FCE in the amount of €42 million (equivalent to $46.5 million at June 30, 2020).  On March 8, 2019, FCE appealed the decision and the fine, and a hearing has been scheduled for October 21, 2020. The ultimate resolution of the matter potentially taking several years.  While we have determined that an adverse outcome is not probable, the reasonably possible loss could be up to the fine amount.

As noted, the litigation process is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. Our assessments are based on our knowledge and experience, but the ultimate outcome of any matter could require payment substantially in excess of the amount that we have accrued and / or disclosed.

24

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Recent Developments

The impact of the COVID-19 has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. Although restrictions have been eased in many locations, some areas that had previously eased restrictions have reverted to more stringent limitations on daily activities.

Remote Work Arrangements and Business Operations

We have taken significant action to safeguard our employees, customers, and dealers. The remote work arrangements that we implemented in the first quarter remain in place. Our remote work arrangements have been designed to allow for continued operation of business-critical functions, including originating and servicing customer contracts, financial reporting, and internal control. Our controls and procedures have incorporated remote work arrangements using appropriate digital tools. To help our existing customers, we implemented various programs including payment deferrals, due date changes, and lease-end extensions. From mid-March through May 31, 2020, for customers who requested assistance, we have granted payment extensions on about 10% of our global retail financing and operating lease contracts. In the United States through July 28, 2020, 96% of customers with extensions have made payments post extension and our daily extension processing during the month of June approached normal pre-COVID-19 levels. We have also taken action to provide cash flow support to our dealers during this critical time.

The predominant share of our business consists of financing Ford and Lincoln vehicles. At the time we released our first quarter 2020 results on April 28, 2020, Ford had suspended manufacturing operations in North America, Europe, and other regions. A phased restart of Ford’s manufacturing plants, supply network, and other dependent functions occurred in the second quarter of 2020. In significant regions, Ford has returned to pre-COVID-19 production levels.

As a result of the restrictions described above and consumer reaction to COVID-19 in general, showroom traffic at dealers initially dropped significantly and many dealers temporarily ceased normal operations. A move to online selling formats, the re-opening of the majority of our dealers, and attractive financing programs for new vehicle buyers has substantially mitigated the impact on U.S. retail installment sales, while regions outside of the U.S. have experienced a decline in retail financing. In addition, Ford’s suspension of manufacturing had a significant negative impact on our business. Wholesale financing in the second quarter of 2020 is significantly lower, reflecting the temporary suspension of production.

The impact of stay-at-home orders has resulted in many businesses temporarily ceasing operations and unemployment rates have increased sharply. We expect the economic uncertainty and higher unemployment to result in higher defaults in our consumer portfolio. Additionally, prolonged unemployment could have a negative impact on both new and used vehicle demand. A sustained decline in sales could have a significant adverse effect on dealer profitability and creditworthiness.

The majority of U.S. auction houses, at which we sell our off-lease and repossessed vehicles, and which temporarily ceased physical operations have now re-opened. Sales of used vehicles slowed to minimal volume in April and rebounded in mid-May to pre-COVID-19 levels with sustained strong demand and pricing through June. We anticipate ongoing volatility in used vehicles pricing in response to economic environment.

Liquidity

At the end of the second quarter, our liquidity was $32.4 billion and we expect to maintain strong liquidity throughout 2020. While COVID-19 has created significant volatility in the global economy and credit markets, lower originations as a result of COVID-19 are projected to decrease the size of the balance sheet and our funding requirements in 2020. For additional information refer to the Funding and Liquidity section.

25

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Enhanced Safety Standards

We established new protocols to help protect the health and safety of our workforce.  The actions include a daily, online health self-certification, a no-touch temperature scan upon entering our premises, a policy requiring the use of face masks in our facilities, and measures to provide additional personal protective equipment, such as gloves and face shields or goggles, in instances where employees’ jobs do not allow them to follow social distancing guidelines.  We have also scheduled additional cleaning of our facilities.

Forward Looking Information

The full impact of COVID-19 on our full year financial results will depend on future developments, such as the ultimate duration and scope of the outbreak, its impact on our customers, dealers, and suppliers, Ford’s operations, customer demand for Ford’s products, the rate at which the financing of new and used vehicles and economic conditions return to pre-COVID-19 levels, and the risk of recessionary conditions in key markets due to the effects of the pandemic. Accordingly, the ultimate impact on us cannot be determined at this time; however, despite the uncertainty related to COVID-19, we expect our full year 2020 results of operations to be adversely affected. For additional information on the impact and potential impact of COVID-19 on us, see Item 1A. Risk Factors.

Definitions and Information Regarding Causal Factors

In general, we measure year-over-year changes in EBT using the causal factors listed below:

• Volume and Mix – Volume and Mix are primarily reflected within Net financing margin on the income statements.

◦ Volume primarily measures changes in net financing margin driven by changes in average managed receivables at prior period financing margin yield (defined below in financing margin) at prior period exchange rates. Volume changes are primarily driven by the volume of new and used vehicles sold and leased, the extent to which we purchase retail financing and operating lease contracts, the extent to which we provide wholesale financing, the sales price of the vehicles financed, the level of dealer inventories, Ford-sponsored special financing programs available exclusively through us, and the availability of cost-effective funding.

◦ Mix primarily measures changes in net financing margin driven by period-over-period changes in the composition of our average managed receivables by product within each region.

• Financing Margin – Financing Margin is reflected within Net financing margin on the income statements.

◦ Financing margin variance is the period-to-period change in financing margin yield multiplied by the present period average managed receivables at prior period exchange rates. This calculation is performed at the product and country level and then aggregated. Financing margin yield equals revenue, less interest expense and scheduled depreciation for the period, divided by average managed receivables for the same period.

◦ Financing margin changes are driven by changes in revenue and interest expense. Changes in revenue are primarily driven by the level of market interest rates, cost assumptions in pricing, mix of business, and competitive environment. Changes in interest expense are primarily driven by the level of market interest rates, borrowing spreads, and asset-liability management.

• Credit Loss – Credit Loss is reflected within Provision for credit losses on the income statements.

◦ Credit loss is the change in the provision for credit losses at prior period exchange rates. For analysis purposes, management splits the provision for credit losses into net charge-offs and the change in the allowance for credit losses.

◦ Net charge-off changes are primarily driven by the number of repossessions, severity per repossession, and recoveries. Changes in the allowance for credit losses are primarily driven by changes in historical trends in credit losses and recoveries, changes in the composition and size of our present portfolio, changes in trends in historical used vehicle values, and changes in forward looking macroeconomic conditions. For additional information, refer to the Critical Accounting Estimates section.

• Lease Residual – Lease Residual is reflected within Depreciation on vehicles subject to operating leases on the income statements.

◦ Lease residual measures changes to residual performance at prior period exchange rates. For analysis purposes, management splits residual performance primarily into residual gains and losses, and the change in accumulated supplemental depreciation.

26

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

◦ Residual gain and loss changes are primarily driven by the number of vehicles returned to us and sold, and the difference between the auction value and the depreciated value (which includes both base and accumulated supplemental depreciation) of the vehicles sold. Changes in accumulated supplemental depreciation are primarily driven by changes in our estimate of the expected auction value at the end of the lease term and changes in our estimate of the number of vehicles that will be returned to us and sold. Depreciation on vehicles subject to operating leases reflects early termination losses on operating leases due to customer default events for all periods presented. For additional information, refer to the “Critical Accounting Estimates” section of Item 7 of Exhibit 99 of our Current Report on Form 8-K filed April 29, 2020 (“April 29, 2020 Form 8-K Report”).

• Exchange – Reflects changes in EBT driven by the effects of converting functional currency income to U.S. dollars.

• Other – Primarily includes Operating expenses, Other revenue, Insurance expenses, and Other income / (Loss), net on the income statements at prior period exchange rates.

◦ Changes in operating expenses are primarily driven by salaried personnel costs, facilities costs, and costs associated with the origination and servicing of customer contracts.

◦ In general, other income / (loss) changes are primarily driven by changes in earnings related to market valuation adjustments to derivatives (primarily related to movements in interest rates), which are included in unallocated risk management, and other miscellaneous items.

In addition, the following definitions and calculations apply to the tables contained in Item 2 of this report:

• Cash (as shown in the Funding Structure, Liquidity, and Leverage tables) – Cash and cash equivalents and Marketable securities reported on Ford Credit’s balance sheets, excluding amounts related to insurance activities.

• Debt (as shown in the Key Metrics and Leverage tables) – Debt on Ford Credit’s balance sheets. Includes debt issued in securitizations and payable only out of collections on the underlying securitized assets and related enhancements. 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.

• Earnings Before Taxes (“EBT”) – Reflects Income before income taxes as reported on Ford Credit’s income statements.

• Return on Equity (“ROE”) (as shown in the Key Metrics table) – Reflects return on equity calculated by annualizing net income for the period and dividing by monthly average equity for the period.

• Securitization Cash (as shown in the Liquidity table) – Cash held for the benefit of the securitization investors (for example, a reserve fund).

• Securitizations (as shown in the Public Term Funding Plan table) – Public securitization transactions, Rule 144A offerings sponsored by Ford Credit, and widely distributed offerings by Ford Credit Canada.

• Term Asset-Backed Securities (as shown in the Funding Structure table) – Obligations issued in securitization transactions that are payable only out of collections on the underlying securitized assets and related enhancements.

• Total Net Receivables (as shown in the Key Metrics and Financial Condition tables) – Includes finance receivables (retail financing and wholesale) sold for legal purposes and net investment in operating leases included in securitization transactions that do not satisfy the requirements for accounting sale treatment. These receivables and operating leases are reported on Ford Credit’s balance sheets and 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 of Ford Credit or the claims of Ford Credit’s other creditors.

• Unallocated Other (as shown in the Segment Results table) – Items excluded in assessing segment performance because they are managed at the corporate level, including market valuation adjustments to derivatives and exchange-rate fluctuations on foreign currency-denominated transactions.

27

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations

Key Metrics

	Second Quarter									First Half
GAAP Financial Measures	2019			2020			H / (L)			2019			2020			H / (L)
Total Net Receivables (billions)	$	143		$	130		(9		)%	$	143		$	130		(9		)%
Loss-to-Receivables (bps) (a)	39			15			(24		)	48			37			(11		)
Auction Values (b)	$	20,115		$	19,755		(2		)%	$	19,525		$	19,435		(1		)%
EBT (millions)	$	831		$	543		$	(288	)	$	1,632		$	573		$	(1,059	)
ROE	16		%	12		%	(4) ppts			16		%	6		%	(10) ppts
Other Balance Sheet Metrics
Debt (billions)										$	141		$	135		(4		)%
Net Liquidity (billions)										$	34		$	32		(6		)%
Financial Statement Leverage (to 1)										9.5			9.8			0.3

__________

(a) U.S. Retail financing.

(b) U.S. 36-month off-lease second quarter auction values at 2Q 2020 mix.

Non-GAAP Financial Measures	June 30,  2019		June 30, 2020		H / (L)
Managed Receivables (billions) (a)	$	152	$	139	(9	)%
Managed Leverage (to 1) (b)	8.6		8.5		(0.1	)

__________

(a) See “Financial Condition” section for reconciliation to GAAP.

(b) See “Leverage” section for reconciliation to GAAP.

In the second quarter of 2020, EBT was $543 million, $288 million lower than a year ago. ROE was 12%, 4 percentage points lower compared with a year ago as a result of lower EBT. Total Net receivables were $13 billion lower than a year ago, a 9% decline. The loss-to-receivables ratio remained at a low level in the second quarter; at 0.15%, 24 basis points lower compared with a year ago. Second quarter 2020 U.S. auction values were 2% lower than a year ago.

We remain an important source of support for customers and dealers during this crisis. Our balance sheet is strong and inherently liquid reflecting cumulative debt maturities having a longer tenor than asset maturities. This means we generate liquidity as our balance sheet size declines because of lower Ford volume. Managed receivables of $139 billion at quarter end were $13 billion lower year-over-year and $12 billion lower than December 31, 2019. At the end of the second quarter, we had $32.4 billion in liquidity and we expect to maintain strong liquidity throughout 2020.

28

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Second Quarter 2020 Compared with Second Quarter 2019

The following table shows the factors that contributed to the second quarter EBT (in millions):

Change in EBT by Causal Factor
Second Quarter 2019 EBT	$	831
Volume / Mix	(46		)
Financing Margin	(13		)
Credit Loss	(33		)
Lease Residual	(127		)
Exchange	(6		)
Other	(63		)
Second Quarter 2020 EBT	$	543

Our second quarter 2020 EBT was $543 million, $288 million lower than a year ago, primarily reflecting higher supplemental depreciation on operating leases and lower derivative market valuation gains (reflected in Other), unfavorable volume and mix driven by lower average receivables, and an increase in the credit loss reserve during the quarter. Favorable year-over-year off-lease auction performance and credit losses were partial offsets.

29

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Segment Results

As of January 1, 2020, we updated our reportable segments in our consolidated financial statements to align with our new management reporting structure and reflect the manner in which our Chief Operating Decision Maker manages our business, including resource allocation and performance assessment. These segments are: United States and Canada, Europe, and All Other. Items excluded in assessing segment performance, because they are managed at the corporate level, are reflected in Unallocated Other. Results of operations by segment and Unallocated Other for the periods ended June 30 are shown below (in millions):

	Second Quarter									First Half
	2019			2020			H / (L)			2019			2020			H / (L)
Results
U.S. and Canada segment	$	589		$	445		$	(144	)	$	1,211		$	467		$	(744	)
Europe segment	113			65			(48		)	227			82			(145		)
All Other segment	37			17			(20		)	95			24			(71		)
Total segments earnings before taxes	$	739		$	527		$	(212	)	$	1,533		$	573		$	(960	)
Unallocated other	92			16			(76		)	99			—			(99		)
Earnings before taxes	$	831		$	543		$	(288	)	$	1,632		$	573		$	(1,059	)
Taxes	(218		)	(136		)	82			(416		)	(145		)	271
Net Income	$	613		$	407		$	(206	)	$	1,216		$	428		$	(788	)

For additional information, see Note 11 of our Notes to the Financial Statements.

U.S. and Canada segment

The U.S. and Canada segment second quarter 2020 EBT of $445 million was $144 million lower compared with second quarter 2019, explained primarily by higher accumulated supplemental depreciation on operating leases and an increase in the credit loss reserve during the quarter, partially offset by favorable auction performance on off-lease vehicles and lower year-over-year credit losses. U.S. and Canada segment first half EBT of $467 million was $744 million lower compared with a year ago, primarily explained by an increase to the credit loss reserve due to COVID-19 and higher supplemental depreciation on operating leases, partially offset by favorable auction performance on off-lease vehicles and lower year-over-year credit losses.

Europe segment

The Europe segment second quarter 2020 EBT of $65 million was $48 million lower compared with second quarter 2019, explained primarily by lower receivables, unfavorable financing margin, and higher credit losses. Europe segment first half EBT of $82 million was $145 million lower compared with a year ago, explained primarily by credit loss reserve increases reflecting estimates of the impact of COVID-19 in future periods, and lower volumes.

All Other segment

The All Other segment second quarter 2020 EBT of $17 million was $20 million lower compared with second quarter 2019, explained primarily by weakening currency exchange in Argentina and Brazil and lower volume. All Other segment first half EBT of $24 million was $71 million lower compared with a year ago, explained primarily by lower volume, weakening currency exchange primarily in Argentina and Brazil, and credit loss increases.

Unallocated Other

Unallocated Other was a $16 million gain for second quarter 2020, a $76 million deterioration compared with second quarter 2019, reflecting a smaller gain in market valuation adjustments to derivatives. For the first half, Unallocated Other was $99 million lower when compared with a year ago, reflecting unfavorable performance in market valuation adjustments to derivatives.

30

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Financing Shares and Contract Placement Volume

Our focus is on supporting Ford and Lincoln dealers and customers. This includes going to market with Ford and our dealers to support vehicle sales with financing products and marketing programs. Ford’s marketing programs may encourage or require Ford Credit financing and influence the financing choices customers make. As a result, our financing share, volume, and contract characteristics vary from period to period as Ford’s marketing programs change.

The following table shows our retail financing and operating lease share of new Ford and Lincoln brand sales, wholesale financing share of new Ford and Lincoln brand vehicles acquired by dealers (in percent), and contract placement volume for new and used vehicles (in thousands) in several key markets:

	Second Quarter				First Half
	2019		2020		2019		2020
Share of Ford and Lincoln Sales (a)
United States	49	%	77	%	49	%	67	%
Canada	65		63		66		63
U.K.	36		44		38		44
Germany	49		34		49		39
China	32		37		34		36
Wholesale Share
United States	75	%	73	%	76	%	74	%
Canada	57		42		57		45
U.K.	100		100		100		100
Germany	93		93		93		93
China	64		61		62		58
Contract Placement Volume - New and Used (000)
United States	220		297		420		502
Canada	40		25		70		48
U.K	34		13		75		43
Germany	45		19		87		48
China	28		28		54		44

__________

(a) United States and Canada exclude Fleet sales, other markets include Fleet.

In the second quarter and first half of 2020, U.S. contract placement volumes were up compared with a year ago, reflecting increased share, as the result of Ford marketing programs. Outside the United States, first half contract placement volumes were lower than the prior year due to a combination of lower share as well as lower Ford sales.

31

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Financial Condition

Our receivables, including finance receivables and operating leases, were as follows (in billions):

	June 30, 2019			December 31, 2019			June 30, 2020
Net Receivables
U.S. and Canada Segment
Consumer financing	$	54.1		$	55.4		$	57.0
Non-Consumer financing	30.2			29.4			20.3
Net investment in operating leases	27.1			27.3			26.2
Total U.S. and Canada Segment	$	111.4		$	112.1		$	103.5
Europe Segment
Consumer financing	$	15.8		$	14.8		$	13.9
Non-Consumer financing	10.1			9.8			8.9
Net investment in operating leases	0.6			0.4			0.2
Total Europe Segment	$	26.5		$	25.0		$	23.0
All Other Segment
Consumer financing	$	3.9		$	3.3		$	2.8
Non-Consumer financing	1.6			1.6			1.0
Net investment in operating leases	—			—			—
Total Other Segment	$	5.5		$	4.9		$	3.8
Total net receivables	$	143.4		$	142.0		$	130.3
Managed Receivables
Total net receivables (GAAP)	$	143.4		$	142.0		$	130.3
Held-for-sale receivables (GAAP)	—			1.5			0.0
Unearned interest supplements and residual support	6.9			6.7			6.5
Allowance for credit losses	0.5			0.5			1.3
Other, primarily accumulated supplemental depreciation	1.1			1.0			1.3
Total managed receivables (Non-GAAP)	$	151.9		$	151.7		$	139.4
U.S. and Canada Segment Lease Mix
SUV / CUV	57		%	56		%	58		%
Truck	29			27			31
Car	14			17			11

32

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Financial Condition (Continued)

At June 30, 2019, December 31, 2019, and June 30, 2020, total net receivables includes consumer receivables before allowance for credit losses of $39.3 billion, $38.3 billion, and $42.1 billion, respectively, and non-consumer receivables before allowance for credit losses of $25.1 billion, $26.8 billion, and $17.8 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. In addition, at June 30, 2019, December 31, 2019, and June 30, 2020, total net receivables includes net investment in operating leases of $14.0 billion, $14.9 billion, and $14.5 billion, respectively, that have been included in securitization transactions but continue to be reported in our consolidated financial statements. The receivables and net investment in operating leases 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. For additional information on our securitization transactions, refer to the “Securitization Transactions” and “On-Balance Sheet Arrangements” sections of Item 7 of Exhibit 99 of our April 29, 2020 Form 8-K Report and Note 6 of our Notes to the Financial Statements for the period ended June 30, 2020.

Total net receivables at June 30, 2020 were $13.1 billion lower compared with June 30, 2019 and $11.7 billion lower compared with December 31, 2019, primarily reflecting lower Ford vehicle production because of COVID-19.

Our operating lease portfolio was 20% of total net receivables at June 30, 2020. Leasing is an important product, and our leasing strategy balances sales, share, residuals, and long-term profitability. Operating leases in the United States and Canada represent 99% of our total operating lease portfolio.

33

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Credit Risk

Credit risk is the possibility of loss from a customer’s or dealer’s failure to make payments according to contract terms. Credit losses are a normal part of a lending business, and credit risk has a significant impact on our business. We manage the credit risk of our consumer (retail financing) and non-consumer (dealer financing) receivables to balance our level of risk and return using our consistent underwriting standards, effective proprietary scoring system (discussed below), and world-class servicing. The allowance for credit losses (also referred to as the credit loss reserve) represents our estimate of the expected credit losses inherent in our finance receivables for the lifetime of those receivables as of the balance sheet date. The allowance for credit losses is estimated using a combination of models and management judgment and is based on such factors as historical loss performance, portfolio quality, and receivable levels. The adequacy of our allowance for credit losses is assessed quarterly and the assumptions and models used in establishing the allowance are evaluated regularly.

Most of our charge-offs are related to retail financing. Charge-offs are affected by the number of vehicle repossessions, the unpaid balance outstanding at the time of repossession, the auction price of repossessed vehicles, and other charge-offs. We also incur credit losses on our dealer financing, but default rates for these receivables historically have been substantially lower than those for retail financing.

In purchasing retail financing contracts, we use a proprietary scoring system that measures credit quality using information in the credit application, proposed contract terms, credit bureau data, and other information. After a proprietary risk score is generated, we decide whether to purchase a contract using a decision process based on a judgmental evaluation of the applicant, the credit application, the proposed contract terms, credit bureau information (e.g., FICO score), proprietary risk score, and other information. Our evaluation emphasizes the applicant’s ability to pay and creditworthiness focusing on payment, affordability, applicant credit history, and stability as key considerations. While FICO is a part of our scoring system, our models enable us to more effectively determine the probability that a customer will pay than using credit scores alone. When we originate business, our models project expected losses and we price accordingly. We ensure the business fits our risk appetite.

For additional information on our allowance for credit losses, the quality of our receivables, and COVID-19 impacts, see Note 4 of our Notes to the Financial Statements.

U.S. Origination Metrics

The following table shows U.S. retail financing and operating lease average placement FICO and higher risk portfolio mix metrics. Also shown are extended term mix and U.S. retail financing average placement terms.

	Second Quarter				First Half
	2019		2020		2019		2020
Origination Metrics
Average placement FICO	747		743		744		741
Higher risk portfolio mix	6	%	6	%	6	%	6	%
Greater than or equal to 84 months placement mix	3	%	15	%	4	%	12	%
Average placement term (months)	65		71		65		70

Our second quarter 2020 average placement FICO score was similar compared with the same period a year ago. We support customers across the credit spectrum. Our higher risk business, as classified at contract inception, consistently represents 6% of our portfolio and has been stable for over 10 years.

As a result of our “Built to Lend a Hand” campaign that offered 0% financing for 84 months, our second quarter 2020 average retail financing placement term increased by six months when compared with a year ago, while retail financing contract placement mix of 84 months and longer increased by 12 percentage points when compared with a year ago. Ford Credit remains focused on managing the trade cycle—building customer relationships and loyalty while offering financing products and terms customers want. Ford Credit origination and risk management processes deliver robust portfolio performance.

34

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

U.S. Retail Financing Credit Losses

The following table shows the primary drivers of credit losses in the U.S. retail financing business, which comprised 65% of our worldwide consumer finance receivables at June 30, 2020.

	Second Quarter						First Half
	2019			2020			2019			2020
Credit Loss Drivers
Over-60-Day delinquencies (excl. bankruptcies)	0.11		%	0.15		%	0.12		%	0.16		%
Repossessions (000)	6			3			13			10
Repossession ratio	1.13		%	0.52		%	1.18		%	0.88		%
Loss severity (000) (a)	$	10.4		$	10.9		$	10.6		$	11.1
Charge-offs (millions)	$	45		$	19		$	110		$	92
LTR ratio (b)	0.39		%	0.15		%	0.48		%	0.37		%

__________

(a) The expected difference between the amount a customer owes when the finance contract is charged off and the amount received, net of expenses, from selling the repossessed vehicle.

(b) Loss-to-Receivables (“LTR”) ratios are charge-offs divided by average finance receivables.

Delinquencies and charge-offs remained at low levels in the quarter. The second quarter 2020 repossession ratio and LTR rate were lower compared with a year ago, reflecting loan and lease extension programs offered and decisions to temporarily suspend involuntary repossessions due to COVID-19.

To help our existing customers, we implemented various retail financing and lease extension programs including payment deferrals, due date changes, and lease-end extensions. From mid-March through May 31, 2020, for customers who requested assistance, we granted payment extensions on about 10% of our global retail financing and operating lease contracts. This represents approximately 361,000 contracts in the United States. Through July 28, 2020, 96% of those customers in the United States receiving extensions have made payments.

Worldwide Credit Losses

The following table shows key metrics related to worldwide credit losses:

	Second Quarter						First Half
	2019			2020			2019			2020
Charge-offs (millions)	$	66		$	45		$	175		$	146
LTR ratio	0.22		%	0.17		%	0.29		%	0.27		%
Credit loss reserve (millions)	$	513		$	1,285		$	513		$	1,285
Reserve as percent of EOP Managed Receivables	0.43		%	1.18		%	0.43		%	1.18		%

Our worldwide charge-offs and LTR ratio were both lower than a year ago. The improvement primarily reflects loan and lease extension programs offered and the decision to temporarily suspend involuntary repossessions due to COVID-19. Our credit loss reserve is based on such factors as historical loss performance, portfolio quality, receivables level, and forward-looking economic scenarios. The credit loss reserve and the reserve as a percent of managed receivables were both higher than a year ago, primarily reflecting a $252 million increase to account for the Current Expected Credit Losses (“CECL”) adoption, and a $532 million reserve increase driven by a higher probability of default reflecting an increase in unemployment outlook as a result of COVID-19, offset by a decrease for translation adjustments. Our credit loss reserve reflects lifetime losses at about the same level as the first quarter. See Note 4 of our Notes to the Financial Statements for more information.

35

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Residual Risk

Leasing is an important product that many customers want and value, and operating lease customers also are more likely to buy or lease another Ford or Lincoln vehicle. We manage our lease share with an enterprise view to support sales, protect residual values, and manage the trade cycle. Ford Credit and Ford work together under a leasing strategy that considers share, term, model mix, geography, and other factors.

We are exposed to residual risk on operating leases and similar balloon payment products where the customer may return the financed vehicle to us. Residual risk is the possibility that the amount we obtain from returned vehicles will be less than our estimate of the expected residual value for the vehicle. We estimate the expected residual value by evaluating recent auction values, return volumes for our leased vehicles, industry wide used vehicle prices, marketing incentive plans, and vehicle quality data. For operating leases, changes in expected residual values impact depreciation expense, which is recognized on a straight-line basis over the life of the lease.

For additional information on our residual risk on operating leases, refer to the “Critical Accounting Estimates – Accumulated Depreciation on Vehicles Subject to Operating Leases” section of Item 7 of Exhibit 99 of our April 29, 2020 Form 8-K Report.

U.S. Ford and Lincoln Brand Operating Leases

The following table shows share of Ford and Lincoln brand retail financing and operating lease sales, placement volume, and residual performance metrics for our U.S. operating lease portfolio, which represents 88% of our total net investment in operating leases at June 30, 2020.

	Second Quarter						First Half
	2019			2020			2019			2020
Lease Share of Retail Sales
Ford Credit	20		%	15		%	21		%	18		%
Industry (a)	30		%	25		%	30		%	28		%
Placement Volume (000)
24-Month	9			9			18			20
36-Month	56			36			104			74
39-Month / Other	16			7			42			28
Total	81			52			164			122
Residual Performance
Return rates	78		%	76		%	79		%	76		%
Return volume (000)	75			58			149			125
Off-lease auction values (b)	$	20,115		$	19,755		$	19,525		$	19,435

__________

(a) Source: J.D. Power PIN.

(b) 36-month off-lease auction values; quarterly amounts at 2Q 2020 mix and YTD amounts at 2020 YTD mix.

Ford Credit’s U.S. operating lease share of retail sales in the second quarter of 2020 was lower compared with a year ago and remains well below the industry average, reflecting the Ford sales mix. Our second quarter 2020 lease placement volume was down compared with a year ago, reflecting a higher mix retail contracts over lease.

Lease return volume and return rate in the second quarter of 2020 were down from a year ago. Our second quarter 2020 36-month off-lease auction values were down 2% year-over-year, and up 3% compared with first quarter 2020, performing better than expected. Presently, most auctions have re-opened their physical operations and continue to conduct digital sales through online auctions.  We expect used vehicle markets to normalize over time.  We are forecasting full-year 2020 off-lease 36-month auction values to be down about 5%, consistent with third party estimates.

36

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Credit Ratings

Our short-term and long-term debt is rated by four credit rating agencies designated as nationally recognized statistical rating organizations (“NRSROs”) by the U.S. Securities and Exchange Commission: DBRS, Fitch, Moody’s, and S&P.

In several markets, locally recognized rating agencies also rate us. A credit rating reflects an assessment by the rating agency of the credit risk associated with a corporate entity or particular securities issued by that entity. Rating agencies’ ratings of us are based on information provided by us and other sources. Credit ratings assigned to us from all of the NRSROs are closely associated with their opinions on Ford. Credit ratings are not recommendations to buy, sell, or hold securities and are subject to revision or withdrawal at any time by the assigning rating agency. Each rating agency may have different criteria for evaluating company risk and, therefore, ratings should be evaluated independently for each rating agency.

The following rating actions were taken by these NRSROs since the filing of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020:

• On May 7, 2020, Fitch downgraded the credit ratings for Ford Credit (to BB+ from BBB-) and maintained a negative outlook.

• On May 21, 2020, DBRS downgraded the credit ratings for Ford Credit (to BB (high) from BBB), and maintained a negative outlook.

• On May 27, 2020, Moody’s concluded its review of Ford Credit for possible downgrade, confirmed its rating at Ba2, and revised the outlook to negative from under review for downgrade.

The following table summarizes certain of the credit ratings and outlook presently assigned by these four NRSROs:

		NRSRO RATINGS
		Ford Credit						NRSROs
	Long-Term Senior Unsecured		Short -Term Unsecured		Outlook/Trend		Minimum Long-Term Investment Grade Rating
DBRS		BB (high)		R-4		Negative		BBB (low)
Fitch		BB+		B		Negative		BBB-
Moody’s		Ba2		NP		Negative		Baa3
S&P		BB+		B		CreditWatch with negative implications		BBB-

37

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Funding and Liquidity

We ended the second quarter of 2020 with $32.4 billion in liquidity. During the quarter, we completed $5 billion of public term funding. Lower expected originations as a result of COVID-19 are projected to decrease the size of the balance sheet and reduce our funding requirements in 2020. We expect to increase ABS mix, prudently issue unsecured debt, and maintain strong liquidity throughout 2020.

Key elements of our funding strategy include:

•Maintain strong liquidity; continue to renew and expand committed ABS capacity

•Prudently access public markets

•Flexibility to increase ABS mix as needed; preserving assets and committed capacity

•Target managed leverage of 8:1 to 9:1

•Maintain self-liquidating balance sheet

Our liquidity profile continues to be diverse, robust, and focused on maintaining liquidity levels that meet our business and funding requirements. We regularly stress test our balance sheet and liquidity to ensure that we continue to meet our financial obligations through economic cycles.

The following table shows funding for our managed receivables (in billions):

Funding Structure	June 30, 2019			December 31, 2019			June 30, 2020
Term Debt (incl. Bank Borrowings)	$	74		$	73		$	73
Term Asset-Backed Securities	57			57			55
Commercial Paper	4			4			2
Ford Interest Advantage / Deposits	6			7			6
Other	10			9			6
Equity	15			14			14
Adjustments for Cash	(14		)	(12		)	(17		)
Total Managed Receivables (a)	$	152		$	152		$	139
Securitized Funding as a percent of Managed Receivables	38		%	38		%	39		%

__________

(a) Reconciliation to GAAP provided in the Financial Condition section.

Managed receivables of $139 billion as of June 30, 2020, were funded primarily with term debt and term asset-backed securities. Securitized funding as a percent of managed receivables was 39% at the end of the second quarter. We expect this to increase modestly by the end of the year. The calendarization of the funding plan will result in quarterly fluctuations of the securitized funding percentage.

38

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Public Term Funding Plan

The following table shows our issuances for full year 2018 and 2019, planned issuances for full year 2020, and our global public term funding issuances through July 29, 2020, excluding short-term funding programs (in billions):

	2018 Actual		2019 Actual		2020 Forecast	Through July 29
Unsecured	$	13	$	17	7 - 10	$	5
Securitizations	14		14		11 - 14	7
Total public	$	27	$	31	18 - 24	$	12

For 2020, we now project full year public term funding in the range of $18 billion to $24 billion. Through July 29, 2020, we have completed $12 billion of public term issuances.

Liquidity

We define gross liquidity as cash, cash equivalents, and marketable securities (excluding amounts related to insurance activities) and committed capacity (which includes our credit and asset-backed facilities and bank lines), less utilization of liquidity. Utilization of liquidity is the amount funded under our liquidity sources and also includes the cash and cash equivalents required to support securitization transactions. Net liquidity available for use is defined as gross liquidity less certain adjustments as described below. While not included in available liquidity, these adjustments represent additional funding sources for future originations.

The following table shows our liquidity sources and utilization (in billions):

	June 30, 2019			December 31, 2019			June 30, 2020
Liquidity Sources
Cash	$	14.1		$	11.7		$	17.1
Committed asset-backed facilities	35.7			36.6			37.1
Other unsecured credit facilities	2.9			3.0			2.5
Ford corporate credit facility allocation	3.0			3.0			—
Total liquidity sources	$	55.7		$	54.3		$	56.7
Utilization of Liquidity
Securitization cash	$	(4.0	)	$	(3.5	)	$	(3.6	)
Committed asset-backed facilities	(17.5		)	(17.3		)	(17.7		)
Other unsecured credit facilities	(0.9		)	(0.8		)	(0.6		)
Ford corporate credit facility allocation	—			—			—
Total utilization of liquidity	$	(22.4	)	$	(21.6	)	$	(21.9	)
Gross liquidity	$	33.3		$	32.7		$	34.8
Adjustments (a)	0.3			0.4			(2.4		)
Net liquidity available for use	$	33.6		$	33.1		$	32.4

__________

(a) Includes asset-backed capacity in excess of eligible receivables and cash related to the Ford Credit Revolving Extended Variable-utilization program (“FordREV”), which can be accessed through future sales of receivables.

39

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Liquidity (Continued)

Our net liquidity available for use will fluctuate quarterly based on factors including near-term debt maturities, receivable growth, and timing of funding transactions. At June 30, 2020, our net liquidity available for use was $32.4 billion, $0.7 billion lower than year-end 2019. Our sources of liquidity include cash, committed asset-backed facilities, and unsecured credit facilities. At June 30, 2020, our liquidity sources including cash totaled $56.7 billion, up $2.4 billion from year-end 2019.

Cash, Cash Equivalents, and Marketable Securities.  At June 30, 2020, our cash, cash equivalents, and marketable securities (excluding amounts related to insurance activities) totaled $17.1 billion, compared with $11.7 billion at year-end 2019.  In the normal course of our funding activities, we may generate more proceeds than are required for our immediate funding needs.  These excess amounts are held primarily in highly liquid investments, which provide liquidity for our anticipated and unanticipated cash needs and give us flexibility in the use of our other funding programs. Our cash, cash equivalents, and marketable securities (excluding amounts related to insurance activities) primarily include U.S. Department of Treasury obligations, federal agency securities, bank time deposits with investment-grade institutions, investment-grade commercial paper, debt obligations of a select group of non-U.S. governments, non-U.S. governmental agencies, supranational institutions, non-U.S. central banks, and money market funds that carry the highest possible ratings. 

The average maturity of these investments ranges from approximately three to six months and is adjusted based on market conditions and liquidity needs.  We monitor our cash levels and average maturity on a daily basis.  Cash, cash equivalents, and marketable securities included amounts to be used only to support our securitization transactions of $3.5 billion and $3.6 billion at December 31, 2019 and June 30, 2020, respectively.

Committed Capacity. At June 30, 2020, our committed capacity totaled $39.6 billion, compared with $42.6 billion at December 31, 2019. Our committed capacity is primarily comprised of committed ABS facilities from bank-sponsored commercial paper conduits and other financial institutions and unsecured credit facilities with financial institutions.

Committed Asset-Backed Facilities. We and our subsidiaries have entered into agreements with a number of bank-sponsored asset-backed commercial paper conduits and other financial institutions. Such counterparties are contractually committed, at our option, to purchase from us eligible retail financing receivables or to purchase or make advances under asset-backed securities backed by retail financing or wholesale finance receivables or operating leases for proceeds of up to $37.1 billion ($20.7 billion of retail financing, $4.7 billion of wholesale financing, and $11.7 billion of operating leases) at June 30, 2020. In the United States, we are able to obtain funding within two days of our unutilized capacity in some of our committed asset-backed facilities. These committed facilities have varying maturity dates, with $22.2 billion having maturities within the next twelve months and the remaining balance having maturities through first quarter 2022. We plan capacity renewals to protect our global funding needs, to optimize capacity utilization, and to maintain funding needs.

Our ability to obtain funding under these facilities is subject to having a sufficient amount of eligible assets as well as our ability to obtain interest rate hedging arrangements for certain facilities. At June 30, 2020, $17.7 billion of these commitments were in use. These programs are free of material adverse change clauses, restrictive financial covenants (for example, debt-to-equity limitations and minimum net worth requirements), and generally, credit rating triggers that could limit our ability to obtain funding. However, the unused portion of these commitments may be terminated if the performance of the underlying assets deteriorates beyond specified levels. Based on our experience and knowledge as servicer of the related assets, we do not expect any of these programs to be terminated due to such events.

Unsecured Credit Facilities. At June 30, 2020, we and our majority-owned subsidiaries had $2.5 billion of contractually committed unsecured credit facilities with financial institutions, including the FCE Credit Agreement and the Ford Bank Agreement. At June 30, 2020, $1.9 billion was available for use.

FCE’s £745 million (equivalent to $914.5 million at June 30, 2020) syndicated credit facility (the “FCE Credit Agreement”) and Ford Bank GmbH’s €240 million (equivalent to $268.7 million at June 30, 2020) syndicated credit facility (the “Ford Bank Credit Agreement”) both mature in 2022.  At June 30, 2020, all £745 million under the FCE Credit Agreement and all €240 million under the Ford Bank Credit Agreement were available for use.

40

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Liquidity (Continued)

Both the FCE Credit Agreement and Ford Bank Credit Agreement contain certain covenants, including an obligation for FCE and Ford Bank to maintain their ratio of regulatory capital to risk-weighted assets at no less than the applicable regulatory minimum. The FCE Credit Agreement requires the support agreement between FCE and Ford Credit to remain in effect (and enforced by FCE to ensure that its net worth is maintained at no less than $500 million). The Ford Bank Credit Agreement requires a guarantee of Ford Bank’s obligations under the agreement, provided by Ford Credit, to remain in effect.

Balance Sheet Liquidity Profile

We define our balance sheet liquidity profile as the cumulative maturities, including the impact of expected prepayments and allowance for credit losses, of our finance receivables, investment in operating leases, and cash, less the cumulative debt maturities over upcoming annual periods. Our balance sheet is inherently liquid because of the short-term nature of our finance receivables, investment in operating leases, and cash. We ensure our cumulative debt maturities have a longer tenor than our cumulative asset maturities. This positive maturity profile is intended to provide additional liquidity after all of our assets have been funded and is in addition to our liquidity stress test.

The following table shows our cumulative maturities for assets and total debt for the periods presented and Unsecured Long-Term Debt Maturities in the individual periods presented (in billions):

	July - December 2020		2021		2022		2023 & Beyond
Balance Sheet Liquidity Profile
Assets (a)	$	64	$	95	$	121	$	154
Total debt (b)	35		75		97		134
Memo: Unsecured Long-Term Debt Maturities	8		17		13		30

__________

(a) Includes gross finance receivables less the allowance for credit losses, investment in operating leases net of accumulated depreciation, cash and cash equivalents, and marketable securities (excluding amounts related to insurance activities). Amounts shown include the impact of expected prepayments.

(b) Excludes unamortized debt (discount) / premium, unamortized issuance costs, and fair value adjustments.

Maturities of investment in operating leases consist primarily of the portion of rental payments attributable to depreciation over the remaining life of the lease and the expected residual value at lease termination. Maturities of finance receivables and investment in operating leases in the table above include expected prepayments for our retail installment sale contracts and investment in operating leases. The table above also reflects adjustments to debt maturities to match the asset-backed debt maturities with the underlying asset maturities. All wholesale securitization transactions and wholesale receivables are shown maturing in the next 12 months, even if the maturities extend beyond second quarter 2021. The retail securitization transactions under certain committed asset-backed facilities are assumed to amortize immediately rather than amortizing after the expiration of the commitment period. As of June 30, 2020, out of the $154 billion of assets, $76 billion are unencumbered. For additional information on finance receivables, investment in operating leases, and debt, see Notes 4, 5 and 9 of our Notes to the Financial Statements for additional information.

Funding and Liquidity Risks

Our funding plan is subject to risks and uncertainties, many of which are beyond our control, including disruption in the capital markets (such as from the impact of COVID-19), and the effects of regulatory changes on the financial markets. Refer to the “Funding and Liquidity Risks” section of Item 7 of Exhibit 99 of our April 29, 2020 Form 8-K Report for more information.

41

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Leverage

We use leverage, or the debt-to-equity ratio, to make various business decisions, including evaluating and establishing pricing for finance receivable and operating lease financing, and assessing our capital structure. We refer to our shareholder’s interest as equity.

The following table shows the calculation of our financial statement leverage and managed leverage (in billions):

	June 30,  2019			December 31, 2019			June 30,  2020
Leverage Calculation
Debt	$	141.5		$	140.0		$	135.3
Adjustments for cash	(14.1		)	(11.7		)	(17.1		)
Adjustments for derivative accounting	(0.6		)	(0.5		)	(1.8		)
Total adjusted debt	$	126.8		$	127.8		$	116.4
Equity	$	14.9		$	14.3		$	13.8
Adjustments for derivative accounting	(0.1		)	—			—
Total adjusted equity	$	14.8		$	14.3		$	13.8
Financial statement leverage (to 1) (GAAP)	9.5			9.8			9.8
Managed leverage (to 1) (Non-GAAP)	8.6			8.9			8.5

We plan our managed leverage by considering market conditions and the risk characteristics of our business. At June 30, 2020, our financial statement leverage was 9.8:1, and managed leverage was 8.5:1. We target managed leverage in the range of 8:1 to 9:1.

Outlook

We expect lower year-over-year EBT in both third and fourth quarter 2020.

42

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Cautionary Note on Forward-Looking Statements

Statements included or incorporated by reference herein may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on expectations, forecasts, and assumptions by our management and involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those stated, including without limitation:

• Ford and Ford Credit’s financial condition and results of operations have been and may continue to be adversely affected by public health issues, including epidemics or pandemics such as COVID-19;

• Ford’s long-term competitiveness depends on the successful execution of global redesign and fitness actions;

• Ford’s vehicles could be affected by defects that result in delays in new model launches, recall campaigns, or increased warranty costs;

• Ford may not realize the anticipated benefits of existing or pending strategic alliances, joint ventures, acquisitions, divestitures, or new business strategies;

• Operational systems, security systems, and vehicles could be affected by cyber incidents;

• Ford’s production, as well as Ford’s suppliers’ production, could be disrupted by labor issues, natural or man-made disasters, financial distress, production difficulties, or other factors;

• Ford’s ability to maintain a competitive cost structure could be affected by labor or other constraints;

• Ford’s ability to attract and retain talented, diverse, and highly skilled employees is critical to its success and competitiveness;

• Ford’s new and existing products and mobility services are subject to market acceptance;

• Ford’s results are dependent on sales of larger, more profitable vehicles, particularly in the United States;

• With a global footprint, Ford’s results could be adversely affected by economic, geopolitical, protectionist trade policies, or other events, including tariffs and Brexit;

• Industry sales volume in any of our key markets can be volatile and could decline if there is a financial crisis, recession, or significant geopolitical event;

• Ford may face increased price competition or a reduction in demand for its products resulting from industry excess capacity, currency fluctuations, competitive actions, or other factors;

• Fluctuations in commodity prices, foreign currency exchange rates, interest rates, and market value of our investments can have a significant effect on results;

• Ford and Ford Credit’s access to debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts could be affected by credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors;

• Ford’s receipt of government incentives could be subject to reduction, termination, or clawback;

• Ford Credit could experience higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles;

• Economic and demographic experience for pension and other postretirement benefit plans (e.g., discount rates or investment returns) could be worse than Ford has assumed;

• Pension and other postretirement liabilities could adversely affect Ford’s liquidity and financial condition;

• Ford could experience unusual or significant litigation, governmental investigations, or adverse publicity arising out of alleged defects in products, perceived environmental impacts, or otherwise;

• Ford may need to substantially modify its product plans to comply with safety, emissions, fuel economy, autonomous vehicle, and other regulations that may change in the future;

• Ford and Ford Credit could be affected by the continued development of more stringent privacy, data use, and data protection laws and regulations as well as consumer expectations for the safeguarding of personal information; and

• Ford Credit could be subject to new or increased credit regulations, consumer protection regulations, or other regulations.

43

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

We cannot be certain that any expectation, forecast, or assumption made in preparing forward-looking statements will prove accurate, or that any projection will be realized.  It is to be expected that there may be differences between projected and actual results.  Our forward-looking statements speak only as of the date of their initial issuance, and we do not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events, or otherwise. For additional discussion, see “Item 1A. Risk Factors” in our 2019 Form 10-K Report, as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

44

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Critical Accounting Estimates

As a result of the January 1, 2020 adoption of the CECL standard (ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments), we updated our Critical Accounting Estimates disclosure. For additional information on our Allowance for Credit Losses Critical Accounting Estimates, see “Critical Accounting Estimates” in Item 2 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Accounting Standards Issued But Not Yet Adopted

The Financial Accounting Standards Board (“FASB”) has issued the following Accounting Standards Updates (“ASU”), which are not expected to have a material impact to our financial statements or financial statement disclosures. For additional information, see Note 2 of our Notes to the Financial Statements.

ASU		Effective Date (a)
2019-12	Simplifying the Accounting for Income Taxes	January 1, 2021

__________

(a) Early adoption is permitted.

45

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

In our Annual Report on Form 10-K for the year ended December 31, 2019, we discuss in greater detail our market risk, counterparty risk, credit risk, residual risk, liquidity risk, and operating risk.

To provide a quantitative measure of the sensitivity of our pre-tax cash flow to changes in interest rates, we use interest rate scenarios that assume a hypothetical, instantaneous increase or decrease of one percentage point in all interest rates across all maturities (a “parallel shift”), as well as a base case that assumes that all interest rates remain constant at existing levels. The differences in pre-tax cash flow between these scenarios and the base case over a twelve-month period represent an estimate of the sensitivity of our pre-tax cash flow. Under this model, we estimate that at June 30, 2020, all else constant, such an increase in interest rates would decrease our pre-tax cash flow by $11 million over the next 12 months, compared with a decrease of $26 million at December 31, 2019. In reality, interest rate changes are rarely instantaneous or parallel and rates could move more or less than the one percentage point assumed in our analysis. As a result, the actual impact to pre-tax cash flow could be higher or lower than the results detailed above.

ITEM 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. Marion B. Harris, our President and Chief Executive Officer (“CEO”), and Brian E. Schaaf, our Chief Financial Officer (“CFO”) and Treasurer, have performed an evaluation of the Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of June 30, 2020, and each has concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by SEC rules and forms, and that such information is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting. There were no changes in internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

46

PART II. OTHER INFORMATION

ITEM 1A. Risk Factors.

The following risk factor supplements the risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and should be read in conjunction with the risk factors described in our 2019 Form 10-K Report, as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K:

Ford and Ford Credit’s financial condition and results of operations have been and may continue to be adversely affected by public health issues, including epidemics or pandemics such as COVID-19.  Ford and Ford Credit face various risks related to public health issues, including epidemics, pandemics, and other outbreaks, including the deadly global outbreak of COVID-19. The impact of COVID-19, including changes in consumer behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. Although restrictions have been partially eased in many locations, some areas that had previously eased restrictions have reverted to more stringent limitations on daily activities.

Consistent with the actions taken by governmental authorities, in late March 2020, Ford idled its manufacturing operations in regions around the world other than China, where manufacturing operations were suspended in January and February before beginning to resume operations in March. Beginning in May 2020, taking a phased approach and after introducing new safety protocols at its plants, Ford resumed manufacturing operations around the world, and by July 2020, Ford returned to pre-COVID-19 production levels in North America, Europe, and China.

The economic slowdown attributable to COVID-19 led to a global decrease in vehicle sales in markets around the world. As described in more detail under “Industry sales volume in any of our key markets can be volatile and could decline if there is a financial crisis, recession, or significant geopolitical event” in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, a sustained decline in vehicle sales would have a substantial adverse effect on Ford’s financial condition, results of operations, and cash flow. Moreover, as a result of the restrictions described above and consumers’ reaction to COVID-19 in general, showroom traffic at dealers dropped significantly and many dealers temporarily ceased normal operations, thereby reducing the demand for Ford’s products and leading dealers to purchase fewer vehicles from Ford, as well as a reduction in parts and accessories sales. To the extent dealer operations are impacted by restrictions on daily activities, it could have a substantial adverse effect on Ford’s financial condition, liquidity, and results of operations.

The predominant share of Ford Credit’s business consists of financing Ford and Lincoln vehicles, and the duration or reemergence of COVID-19 or similar public health issues may negatively impact the level of originations at Ford Credit. For example, Ford’s suspension of manufacturing operations, a significant decline in dealer showroom traffic, and / or a reduction of operations at dealers may lead to a significant decline in Ford Credit’s consumer and non-consumer originations. Moreover, a sustained decline in sales could have a significant adverse effect on dealer profitability and creditworthiness. Further, COVID-19 has had a significant negative impact on many businesses and unemployment rates have increased sharply from pre-COVID-19 levels. Ford Credit expects the economic uncertainty and higher unemployment to result in higher defaults in its consumer portfolio, and prolonged unemployment is expected to have a negative impact on both new and used vehicle demand.

The global economic slowdown and stay-at-home orders enacted across the United States disrupted auction activity in many locations, which adversely impacted and caused delays in realizing the resale value for off-lease and repossessed vehicles. Although auction performance has improved, future or additional restrictions could have a similar adverse impact on Ford Credit. For more information about the impact of higher credit losses and lower residual values on Ford Credit’s business, see “Ford Credit could experience higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles” in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019.

47

ITEM 1A. Risk Factors. (Continued)

As described in more detail under “Ford and Ford Credit’s access to debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts could be affected by credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors” in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, the volatility created by COVID-19 has adversely affected Ford Credit’s access to the debt and securitization markets and its cost of funding.

The full impact of COVID-19 on Ford and Ford Credit’s financial condition and results of operations will depend on future developments, such as the ultimate duration and scope of the outbreak (including any potential second wave or future waves), its impact on customers, dealers, and suppliers, how quickly normal economic conditions, operations, and the demand for Ford’s products can resume, the duration and severity of the current recession, and any permanent behavioral changes that the pandemic may cause. For example, in the event manufacturing operations are again suspended, fully ramping up Ford’s production schedule to prior levels may take longer than the prior resumption and will depend, in part, on whether Ford’s suppliers and dealers have resumed normal operations. Ford’s automotive operations generally do not realize revenue while its manufacturing operations are suspended, but Ford continues to incur operating and non-operating expenses, resulting in a deterioration of its cash flow. Accordingly, any significant future disruption to Ford’s production schedule, whether as a result of Ford’s or a supplier’s suspension of operations, could have a substantial adverse effect on its financial condition, liquidity, and results of operations. Further, government-sponsored liquidity or stimulus programs in response to COVID-19 may not be available to Ford or Ford Credit or their customers, suppliers, or dealers, and if available, may nevertheless be insufficient to address the impacts of COVID-19. Moreover, Ford’s supply and distribution chains may be disrupted by supplier or dealer bankruptcies or their permanent discontinuation of operations. While the ultimate impact on Ford and Ford Credit’s financial condition and results of operations cannot be determined at this time, Ford and Ford Credit continue to expect their full year 2020 results of operations to be adversely affected by COVID-19.

The COVID-19 pandemic may also exacerbate other risks disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, including, but not limited to, Ford’s competitiveness, demand or market acceptance for its products, and shifting consumer preferences.

48

ITEM 5. Other Information.

None.

ITEM 6. Exhibits.

Designation	Description	Method of Filing
Exhibit 31.1	Rule 15d-14(a) Certification of CEO.	Filed with this Report.
Exhibit 31.2	Rule 15d-14(a) Certification of CFO.	Filed with this Report.
Exhibit 32.1	Section 1350 Certification of CEO.	Furnished with this Report.
Exhibit 32.2	Section 1350 Certification of CFO.	Furnished with this Report.
Exhibit 101.INS	Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (“Inline XBRL”).	*
Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document.	*
Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.	*
Exhibit 101.LAB	XBRL Taxonomy Extension Label Linkbase Document.	*
Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.	*
Exhibit 101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.	*
Exhibit 104	Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).	*

__________

* Submitted electronically with this Report in accordance with the provisions of Regulation S-T.

Instruments defining the rights of holders of certain issues of long-term debt of Ford Credit have not been filed as exhibits to this Report because the authorized principal amount of any one of such issues does not exceed 10% of the total assets of Ford Credit. Ford Credit will furnish a copy of each such instrument to the SEC upon request.

49

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, Ford Motor Credit Company LLC has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

FORD MOTOR CREDIT COMPANY LLC

 

By:	/s/ Brian E. Schaaf
	Brian E. Schaaf
	Chief Financial Officer and Treasurer
Date:	July 30, 2020

50