Finance Receivables

HDFS provides retail financial services to customers of the Company’s independent dealers in the United States and Canada. The origination of retail loans is a separate and distinct transaction between HDFS and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and installment loans. HDFS holds either titles or liens on titles to vehicles financed by promissory notes and installment loans.

HDFS offers wholesale financing to the Company’s independent dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada.

Finance receivables, net, consisted of the following (in thousands):



	March 30, 2014			December 31, 2013			March 31, 2013
Retail	$	5,254,133		$	5,265,044		$	4,981,488
Wholesale	1,298,091			845,212			1,159,243
	6,552,224			6,110,256			6,140,731
Allowance for credit losses	(114,529		)	(110,693		)	(106,792		)
	$	6,437,695		$	5,999,563		$	6,033,939

A provision for credit losses on finance receivables is charged or credited to earnings in amounts that the Company believes are sufficient to maintain the allowance for credit losses at a level that is adequate to cover losses of principal inherent in the existing portfolio. The allowance for credit losses represents management’s estimate of probable losses inherent in the finance receivable portfolio as of the balance sheet date. However, due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company could differ from the amounts estimated.

Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):



	Three months ended March 30, 2014
	Retail			Wholesale		Total
Balance, beginning of period	$	106,063		$	4,630	$	110,693
Provision for credit losses	17,208			3,123		20,331
Charge-offs	(27,343		)	—		(27,343		)
Recoveries	10,848			—		10,848
Balance, end of period	$	106,776		$	7,753	$	114,529
	Three months ended March 31, 2013
	Retail			Wholesale		Total
Balance, beginning of period	$	101,442		$	6,225	$	107,667
Provision for credit losses	11,085			2,025		13,110
Charge-offs	(25,243		)	—		(25,243		)
Recoveries	11,258			—		11,258
Balance, end of period	$	98,542		$	8,250	$	106,792

Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement. Portions of the allowance for credit losses are established to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses covers estimated losses on finance receivables which are collectively reviewed for impairment.

The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. HDFS performs a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. HDFS utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates, and current economic conditions including items such as unemployment rates. Retail finance receivables are not evaluated individually for impairment prior to charge-off and therefore are not reported as impaired loans.

The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s evaluation for the wholesale allowance for credit losses is first based on a loan-by-loan review. A specific allowance for credit losses is established for wholesale finance receivables determined to be individually impaired when management concludes that the borrower will not be able to make full payment of the contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan’s original interest rate or the fair value of the collateral, if the loan is collateral-dependent. Finance receivables in the wholesale portfolio that are not considered impaired on an individual basis are segregated, based on similar risk characteristics, according to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.

Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.

The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in thousands):



	March 30, 2014
	Retail		Wholesale		Total
Allowance for credit losses, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	106,776		7,753		114,529
Total allowance for credit losses	$	106,776	$	7,753	$	114,529
Finance receivables, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	5,254,133		1,298,091		6,552,224
Total finance receivables	$	5,254,133	$	1,298,091	$	6,552,224
	December 31, 2013
	Retail		Wholesale		Total
Allowance for credit losses, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	106,063		4,630		110,693
Total allowance for credit losses	$	106,063	$	4,630	$	110,693
Finance receivables, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	5,265,044		845,212		6,110,256
Total finance receivables	$	5,265,044	$	845,212	$	6,110,256
	March 31, 2013
	Retail		Wholesale		Total
Allowance for credit losses, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	98,542		8,250		106,792
Total allowance for credit losses	$	98,542	$	8,250	$	106,792
Finance receivables, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	4,981,488		1,159,243		6,140,731
Total finance receivables	$	4,981,488	$	1,159,243	$	6,140,731

There were no wholesale finance receivables at March 30, 2014, December 31, 2013, or March 31, 2013 that were individually deemed to be impaired under ASC Topic 310, “Receivables.”

Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either collected or charged-off. Accordingly, as of March 30, 2014, December 31, 2013 and March 31, 2013, all retail finance receivables were accounted for as interest-earning receivables, of which $17.0 million, $24.6 million and $20.3 million, respectively, were 90 days or more past due.

Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Interest continues to accrue on past due finance receivables until the date the finance receivable becomes uncollectible and the finance receivable is placed on non-accrual status. HDFS will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. There were no wholesale receivables on non-accrual status at March 30, 2014, December 31, 2013 or March 31, 2013. At March 30, 2014, December 31, 2013 and March 31, 2013, $0.1 million, $0.2 million, and $0.8 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.

An analysis of the aging of past due finance receivables was as follows (in thousands):



	March 30, 2014
	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Finance Receivables
Retail	$	5,134,053	$	80,344	$	22,767	$	16,969	$	120,080	$	5,254,133
Wholesale	1,297,761		144		96		90		330		1,298,091
Total	$	6,431,814	$	80,488	$	22,863	$	17,059	$	120,410	$	6,552,224
	December 31, 2013
	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Finance Receivables
Retail	$	5,094,615	$	109,806	$	36,029	$	24,594	$	170,429	$	5,265,044
Wholesale	844,033		791		181		207		1,179		845,212
Total	$	5,938,648	$	110,597	$	36,210	$	24,801	$	171,608	$	6,110,256
	March 31, 2013
	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Finance Receivables
Retail	$	4,855,128	$	83,265	$	22,837	$	20,258	$	126,360	$	4,981,488
Wholesale	1,157,596		535		310		802		1,647		1,159,243
Total	$	6,012,724	$	83,800	$	23,147	$	21,060	$	128,007	$	6,140,731

A significant part of managing HDFS’ finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, HDFS utilizes different credit risk indicators for each portfolio.

HDFS manages retail credit risk through its credit approval policy and ongoing collection efforts. HDFS uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail loans with a FICO score of 640 or above at origination are considered prime, and loans with a FICO score below 640 are considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.

The recorded investment of retail finance receivables, by credit quality indicator, was as follows (in thousands):



	March 30, 2014		December 31, 2013		March 31, 2013
Prime	$	4,128,996	$	4,141,559	$	3,942,294
Sub-prime	1,125,137		1,123,485		1,039,194
Total	$	5,254,133	$	5,265,044	$	4,981,488

HDFS’ credit risk on the wholesale portfolio is different from that of the retail portfolio. Whereas the retail portfolio represents a relatively homogeneous pool of retail finance receivables that exhibit more consistent loss patterns, the wholesale portfolio exposures are less consistent. HDFS utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and individually evaluates credit risk factors for each borrower.

HDFS uses the following internal credit quality indicators, based on the Company’s internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon management’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged off, while the dealers classified as Low Risk are least likely to be charged off. The internal rating system considers factors such as the specific borrowers’ ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.

The recorded investment of wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):



	March 30, 2014		December 31, 2013		March 31, 2013
Doubtful	$	5,508	$	—	$	4,843
Substandard	3,888		8,383		10,441
Special Mention	10,950		2,076		11,125
Medium Risk	11,103		5,205		7,804
Low Risk	1,266,642		829,548		1,125,030
Total	$	1,298,091	$	845,212	$	1,159,243