6. Finance Receivables

Finance receivables, net at December 31 for the past five years were as follows (in thousands):


	2011			2010			2009			2008			2007
Wholesale
United States	$	778,320		$	735,481		$	787,891		$	1,074,377		$	1,132,748
Europe		—			—			—			—			86,947
Canada		46,320			78,516			82,110			89,859			108,756

Total wholesale		824,640			813,997			870,001			1,164,236			1,328,451
Retail
United States		4,858,781			5,126,699			3,835,235			514,637			485,579
Canada		228,709			250,462			256,658			226,084			228,850

Total retail		5,087,490			5,377,161			4,091,893			740,721			714,429

		5,912,130			6,191,158			4,961,894			1,904,957			2,042,880
Allowance for credit losses		(125,449	)		(173,589	)		(150,082	)		(40,068	)		(30,295	)

		5,786,681			6,017,569			4,811,812			1,864,889			2,012,585
Investment in retained securitization interests		—			—			245,350			330,674			407,742

	$	5,786,681		$	6,017,569		$	5,057,162		$	2,195,563		$	2,420,327

Finance receivables held for sale at December 31 for the past five years were as follows (in thousands):


	2011		2010		2009		2008		2007
Retail
United States	$	—	$	—	$	—	$	2,443,965	$	781,280

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. Effective January 1, 2008, the finance receivables and related assets of the international wholesale operations located in Oxford, England were transferred at book value to Harley-Davidson Europe Ltd., a subsidiary of HDMC. Beginning in 2008, HDMC assumed responsibility for the collection of all wholesale receivables in Europe.

At December 31, 2011 and 2010, unused lines of credit extended to HDFS' wholesale finance customers totaled $909.9 million and $1.04 billion, respectively. Approved but unfunded retail finance loans totaled $139.3 million and $96.5 million at December 31, 2011 and 2010, respectively.

HDFS provides retail financial services to customers of the Company's independent dealers in the U.S. 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. As of December 31, 2011 and 2010, approximately 11% of gross outstanding finance receivables were originated in Texas.

During the second quarter of 2009, the Company reclassified $3.14 billion of finance receivables held for sale at the lower of cost or fair value to finance receivables held for investment due to the Company's intent to structure subsequent securitization transactions in a manner that did not qualify for accounting sale treatment under prior U.S. GAAP. As a result of the reclassification, the Company recorded a $72.7 million increase to the allowance for credit losses during the second quarter of 2009 in order to establish the initial reserve for the reclassified receivables. Included in finance receivables held for sale at December 31, 2008 is a lower of cost or market adjustment of $31.7 million. At December 31, 2011 and 2010, the Company's Consolidated Balance Sheet included finance receivables, net of $2.86 billion and $3.38 billion, respectively, which were restricted as collateral for the payment of debt held by VIEs and other related obligations as discussed in Note 8.

HDFS has cross-border outstandings in Canada which total $88.4 million, $88.7 million and $77.1 million as of December 31, 2011, 2010 and 2009, respectively.

Wholesale finance receivables are related primarily to motorcycles and related parts and accessories sales to independent Harley-Davidson dealers and are generally contractually due within one year. Retail finance receivables are primarily related to sales of motorcycles to the dealers' customers. On December 31, 2011, contractual maturities of finance receivables were as follows (in thousands):


	United States		Canada		Total
2012	$	1,701,602	$	89,131	$	1,790,733
2013		1,005,315		46,158		1,051,473
2014		1,136,485		51,471		1,187,956
2015		1,284,797		57,395		1,342,192
2015		395,711		30,874		426,585
Thereafter		113,191		—		113,191

Total	$	5,637,101	$	275,029	$	5,912,130

As of December 31, 2011, all finance receivables due after one year were at fixed interest rates.

The allowance for finance credit losses on finance receivables is comprised of individual components relating to wholesale and retail finance receivables. Changes in the allowance for credit losses on finance receivables by portfolio for the year ended December 31 were as follows (in thousands):


	2011
	Retail			Wholesale			Total
Balance, beginning of period	$	157,791		$	15,798		$	173,589
Provision for finance credit losses		23,054			(6,023	)		17,031
Charge-offs		(118,993	)		(503	)		(119,496	)
Recoveries		54,260			65			54,325

Balance, end of period⁽¹⁾	$	116,112		$	9,337		$	125,449

(1)	Included in the $116.1 million retail allowance for credit losses on finance receivables is $66.0 million related to finance receivables held by VIEs.

Changes in the allowance for finance credit losses on finance receivables for the years ended December 31 were as follows (in thousands):


	2010			2009
Balance, beginning of period	$	150,082		$	40,068
Allowance related to newly consolidated finance receivables⁽¹⁾		49,424			—
Provision for finance credit losses		93,118			169,206
Charge-offs, net of recoveries		(119,035	)		(59,192	)

Balance, end of period	$	173,589		$	150,082

(1)	As part of the required consolidation of formerly off balance-sheet securitization trusts, the Company consolidated a $49.4 million allowance for credit losses related to the newly consolidated finance receivables.

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, at December 31, were as follows (in thousands):


	2011
	Retail		Wholesale		Total
Allowance for credit losses, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment		116,112		9,337		125,449

Total allowance for credit losses	$	116,112	$	9,337	$	125,449

Finance receivables, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment		5,087,490		824,640		5,912,130

Total finance receivables	$	5,087,490	$	824,640	$	5,912,130

	2010
	Retail		Wholesale		Total
Allowance for credit losses, ending balance:
Individually evaluated for impairment	$	—	$	3,566	$	3,566
Collectively evaluated for impairment		157,791		12,232		170,023

Total allowance for credit losses	$	157,791	$	15,798	$	173,589

Finance receivables, ending balance:
Individually evaluated for impairment	$	—	$	5,423	$	5,423
Collectively evaluated for impairment		5,377,161		808,574		6,185,735

Total finance receivables	$	5,377,161	$	813,997	$	6,191,158

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 loan agreement. As retail finance receivables are collectively and not individually reviewed for impairment, this portfolio does not have specifically impaired finance receivables. A specific allowance is established for wholesale finance receivables determined to be individually impaired in accordance with the applicable accounting standards 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 agreements. The impairment is determined based on the cash that the Company expects to receive discounted at the loan's original interest rate and the fair value of the collateral, if the loan is collateral-dependent. In establishing the allowance, management considers a number of factors including the specific borrower's financial performance as well as ability to repay. At December 31, 2011, there are no wholesale finance receivables that are individually deemed to be impaired under ASC Topic 310, "Receivables". Additional information related to the wholesale finance receivables individually deemed to be impaired under ASC Topic 310 at December 31 includes (in thousands):


	2010
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Wholesale:
No related allowance recorded	$	—	$	—	$	—	$	—	$	—
Related allowance recorded		5,423		5,358		3,566		5,577		—

Total impaired wholesale finance receivables	$	5,423	$	5,358	$	3,566	$	5,577	$	—

Retail finance receivables accrue interest until either collected or charged-off. Interest continues to accrue on past due wholesale finance receivables until the date the collection of the finance receivables becomes doubtful, at which time the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these wholesale finance receivables when payments are current according to the terms of the loan agreements and future payments are reasonably assured. At December 31, 2011, there were no wholesale finance receivables on non-accrual status. The recorded investment of non-accrual status wholesale finance receivables at December 31, 2010 was $5.4 million.

An analysis of the aging of past due finance receivables, which includes non-accrual status finance receivables, at December 31 were as follows (in thousands):


	2011
	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Finance Receivables
Retail	$	4,915,711	$	107,373	$	36,937	$	27,469	$	171,779	$	5,087,490
Wholesale		822,610		777		344		909		2,030		824,640

Total	$	5,738,321	$	108,150	$	37,281	$	28,378	$	173,809	$	5,912,130


	2010
	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Finance Receivables
Retail	$	5,144,910	$	147,564	$	50,550	$	34,137	$	232,251	$	5,377,161
Wholesale		809,058		2,178		934		1,827		4,939		813,997

Total	$	5,953,968	$	149,742	$	51,484	$	35,964	$	237,190	$	6,191,158

The recorded investment of retail and wholesale finance receivables, which excludes non-accrual status finance receivables and are contractually past due 90 days or more at December 31 for the past five years were as follows (in thousands):


	2011		2010		2009		2008		2007
United States	$	27,171	$	34,391	$	24,629	$	23,678	$	6,205
Canada		1,207		1,351		2,161		1,275		1,759
Europe		—		—		—		—		386

Total	$	28,378	$	35,742	$	26,790	$	24,953	$	8,350

At December 31, 2011, all finance receivables contractually past due 90 days or more are accruing interest. Included in the $35.7 million of finance receivables which are accruing interest and are contractually past due 90 or more days at December 31, 2010 are $34.1 million of retail finance receivables and $1.6 million of wholesale finance receivables.

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 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, at December 31 were as follows (in thousands):


	2011		2010
Prime	$	4,097,048	$	4,303,050
Sub-prime		990,442		1,074,111

Total	$	5,087,490	$	5,377,161

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 capture 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, at December 31 were as follows (in thousands):


	2011		2010
Doubtful	$	13,048	$	23,570
Substandard		5,052		7,139
Special Mention		14,361		18,330
Medium risk		3,032		16,766
Low risk		789,147		748,192

Total	$	824,640	$	813,997