XML 21 R10.htm IDEA: XBRL DOCUMENT

Finance Receivables

9 Months Ended

Sep. 30, 2020

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		September 30, 2020
Consumer
Retail installment contracts, gross	$	68,998	$	73,336
Finance leases, gross	8,566		8,244
Retail financing, gross	77,564		81,580
Unearned interest supplements from Ford and affiliated companies	(3,589)		(4,091)
Consumer finance receivables	73,975		77,489

Non-Consumer
Dealer financing	38,910		26,992
Other financing	1,945		1,697
Non-Consumer finance receivables	40,855		28,689
Total recorded investment	$	114,830	$	106,178

Recorded investment in finance receivables	$	114,830	$	106,178
Allowance for credit losses	(513)		(1,314)
Total finance receivables, net	$	114,317	$	104,864

Net finance receivables subject to fair value (a)	$	106,131	$	97,021
Fair value (b)	106,260		98,426

__________

(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 third quarter of 2019 and 2020 was $90 million and $96 million, respectively, and for the first nine months of 2019 and 2020 was $279 million and $268 million, respectively, and is included in Retail financing on the consolidated income statements.

At December 31, 2019 and September 30, 2020, accrued interest was $253 million and $185 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 September 30, 2020, there were $38 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.

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 September 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	$	58	$	99	$	141	$	141	$	76	$	560
61-120 days past due	7		14		28		45		48		22		164
Greater than 120 days past due	13		7		7		8		7		1		43
Total past due	65		79		134		194		196		99		767
Current	1,141		3,292		8,011		15,466		22,526		26,286		76,722
Total	$	1,206	$	3,371	$	8,145	$	15,660	$	22,722	$	26,385	$	77,489

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 September 30, 2020 was as follows (in millions):


	Amortized Cost Basis by Origination Year
	Dealer Loans
	Prior to 2016		2016		2017		2018		2019		2020		Total		Wholesale Loans		Total
Group I	$	528	$	130	$	142	$	132	$	72	$	301	$	1,305	$	19,394	$	20,699
Group II	46		21		15		35		4		89		210		4,520		4,730
Group III	9		—		3		17		3		41		73		1,356		1,429
Group IV	2		3		—		—		2		5		12		122		134
Total (a)	$	585	$	154	$	160	$	184	$	81	$	436	$	1,600	$	25,392	$	26,992

__________

(a)Total past due dealer financing receivables at September 30, 2020 were $126 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.

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 during the first half of 2020, included payment extensions. We concluded that these programs did not meet TDR criteria. As of September 30, 2020, in the United States, we have received payments on nearly all the pandemic extensions offered to our customers, and no dealers were delinquent on their payments. The volume of payment extensions has returned to pre-COVID-19 levels and we continue to grant payment extensions to customers and dealers under our normal business practices.

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.

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.

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 September 30 was as follows (in millions):


	Third Quarter 2019 (a)						First Nine Months 2019 (a)
	Consumer		Non-Consumer		Total		Consumer		Non-Consumer		Total
Allowance for credit losses
Beginning balance	$	496	$	17	$	513	$	566	$	23	$	589
Charge-offs	(129)		(1)		(130)		(383)		(18)		(401)
Recoveries	41		—		41		129		8		137
Provision for credit losses	93		—		93		187		2		189
Other (b)	(3)		(1)		(4)		(1)		—		(1)
Ending balance	$	498	$	15	$	513	$	498	$	15	$	513


	Third Quarter 2020						First Nine Months 2020
	Consumer		Non-Consumer		Total		Consumer		Non-Consumer		Total
Allowance for credit losses
Beginning balance	$	1,211	$	74	$	1,285	$	496	$	17	$	513
Adoption of ASU 2016-13 (c)	—		—		—		247		5		252
Charge-offs	(104)		(5)		(109)		(329)		(6)		(335)
Recoveries	41		2		43		117		5		122
Provision for credit losses	95		(9)		86		723		42		765
Other (b)	8		1		9		(3)		—		(3)
Ending balance	$	1,251	$	63	$	1,314	$	1,251	$	63	$	1,314

__________

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

(b)Primarily represents amounts related to translation adjustments.

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

During the third quarter and first nine months of 2020, the allowance for credit losses increased $29 million and $801 million, respectively. The change in the third quarter of 2020 reflects an increase to the reserve of $20 million associated with higher balances in our finance receivables portfolio, as well as an increase for translation adjustments. The relatively moderate reserve increase in the third quarter also reflects our view that future economic conditions are largely unchanged from our assumptions at June 30, 2020. The change in the first nine months of 2020 reflects an increase to the reserve of $252 million related to the adoption of ASU 2016-13, with the remainder primarily related to economic conditions attributable to the COVID-19 pandemic.

The change to the reserve due to the impact of COVID-19 reflects economic uncertainty which, along with the expectation of continued higher unemployment, has increased the probability of default and loss given default rates used in our estimate of the lifetime expected credit losses for our consumer portfolio, especially in the United States. These economic trends and conditions are also expected to negatively impact our dealers. Although net charge-offs during the third quarter and first nine months of 2020 remained low, reflecting government relief programs and our customer payment deferral programs, the future impact of COVID-19 on credit losses is expected to be adverse.