Finance Receivables

9 Months Ended

Sep. 30, 2023

Receivables [Abstract]

Financing Receivables

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, 2022		September 30, 2023
Consumer
Retail installment contracts, gross	$	67,043	$	71,240
Finance leases, gross	6,765		7,339
Retail financing, gross	73,808		78,579
Unearned interest supplements from Ford and affiliated companies	(2,305)		(2,967)
Consumer finance receivables	71,503		75,612
Non-Consumer
Dealer financing	28,408		29,366
Other financing	1,447		1,867
Non-Consumer finance receivables	29,855		31,233
Total recorded investment	$	101,358	$	106,845
Recorded investment in finance receivables	$	101,358	$	106,845
Allowance for credit losses	(845)		(876)
Total finance receivables, net	$	100,513	$	105,969
Net finance receivables subject to fair value (a)	$	94,090	$	99,041
Fair value (b)	91,410		96,775

__________

(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 2022 and 2023 was $73 million and $102 million, respectively, and for the first nine months of 2022 and 2023 was $223 million and $276 million, respectively, and is included in Retail financing on our consolidated income statements.

At December 31, 2022 and September 30, 2023, accrued interest was $187 million and $247 million, respectively, which we report in Other assets on our consolidated balance sheets.

Included in the 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.

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

Credit Quality

Consumer Portfolio. Credit quality ratings for consumer receivables are based on our aging analysis. Consumer receivables credit quality ratings are as follows:

•Pass – current to 60 days past due;

•Special Mention – 61 to 120 days past due and in intensified collection status; and

•Substandard – greater than 120 days past due and for which the uncollectible portion of the receivables has already been charged off, as measured using the fair value of collateral less costs to sell.

The credit quality analysis of consumer receivables at December 31, 2022 was as follows (in millions):

	Amortized Cost Basis by Origination Year
	Prior to 2018		2018		2019		2020		2021		2022		Total		Percent
Consumer
31-60 days past due	$	41	$	60	$	91	$	181	$	150	$	126	$	649	0.9	%
61-120 days past due	9		12		20		39		40		29		149		0.2
Greater than 120 days past due	9		4		5		7		7		6		38		0.1
Total past due	59		76		116		227		197		161		836		1.2
Current	883		2,564		6,149		13,864		18,382		28,825		70,667		98.8
Total	$	942	$	2,640	$	6,265	$	14,091	$	18,579	$	28,986	$	71,503	100.0	%

The credit quality analysis of consumer receivables at September 30, 2023 was as follows (in millions):

	Amortized Cost Basis by Origination Year
	Prior to 2019		2019		2020		2021		2022		2023		Total		Percent
Consumer
31-60 days past due	$	50	$	58	$	140	$	129	$	172	$	96	$	645	0.9	%
61-120 days past due	9		12		30		35		50		28		164		0.2
Greater than 120 days past due	8		4		6		10		10		3		41		—
Total past due	67		74		176		174		232		127		850		1.1
Current	1,296		3,093		8,800		12,892		22,287		26,394		74,762		98.9
Total	$	1,363	$	3,167	$	8,976	$	13,066	$	22,519	$	26,521	$	75,612	100.0	%
Gross charge-offs	$	38	$	30	$	55	$	61	$	81	$	14	$	279

Non-Consumer Portfolio. The credit quality of dealer financing receivables is evaluated based on our internal dealer risk rating analysis. 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.

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.

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

The credit quality analysis of dealer financing receivables at December 31, 2022 was as follows (in millions):

	Amortized Cost Basis by Origination Year
	Dealer Loans
	Prior to 2018		2018		2019		2020		2021		2022		Total		Wholesale Loans		Total		Percent
Group I	$	402	$	148	$	35	$	67	$	185	$	224	$	1,061	$	24,242	$	25,303	89.1	%
Group II	2		21		—		5		2		42		72		2,751		2,823		9.9
Group III	—		—		—		—		—		10		10		233		243		0.9
Group IV	—		—		1		—		—		3		4		35		39		0.1
Total (a)	$	404	$	169	$	36	$	72	$	187	$	279	$	1,147	$	27,261	$	28,408	100.0	%

__________

(a)Total past due dealer financing receivables at December 31, 2022 were $9 million. 

The credit quality analysis of dealer financing receivables at September 30, 2023 was as follows (in millions):

	Amortized Cost Basis by Origination Year
	Dealer Loans
	Prior to 2019		2019		2020		2021		2022		2023		Total		Wholesale Loans		Total		Percent
Group I	$	491	$	31	$	66	$	159	$	62	$	304	$	1,113	$	25,364	$	26,477	90.2	%
Group II	2		—		2		4		2		50		60		2,384		2,444		8.3
Group III	—		—		—		—		1		6		7		386		393		1.3
Group IV	—		1		—		—		—		2		3		49		52		0.2
Total (a)	$	493	$	32	$	68	$	163	$	65	$	362	$	1,183	$	28,183	$	29,366	100.0	%
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

__________

(a)Total past due dealer financing receivables at September 30, 2023 were $4 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.

Loan Modifications. Consumer and non-consumer receivables that have a modified interest rate and/or a term extension (including receivables that were modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code) are typically considered to be loan modifications. We do not grant modifications to 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.

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

During the collection process, we may offer a term extension to a customer experiencing financial difficulty. During the extension period, finance charges continue to accrue. If the customer's financial difficulty is not temporary, but we believe the customer is willing and able to repay their loan at a lower payment amount, we may offer to modify the interest rate and/or extend the term in order to lower the scheduled monthly payment. In those cases, the outstanding balance generally remains unchanged. The use of interest rate modifications and term extensions helps us mitigate financial loss. Term extensions may assist in cases where we believe the customer will recover from short-term financial difficulty and resume regularly scheduled payments. Before offering an interest rate modification or term extension, we evaluate and take into account the capacity of the customer to meet the revised payment terms. Although the granting of an extension could delay the eventual charge-off of a receivable, we are typically able to repossess and sell the related collateral, thereby mitigating the loss. The effect of most loan modifications made to borrowers experiencing financial difficulty is included in the historical trends used to measure the allowance for credit losses. A loan modification that improves the delinquency status of a borrower reduces the probability of default, which results in a lower allowance for credit losses. At September 30, 2023, an insignificant portion of our total finance receivables portfolio had been granted a loan modification and these modifications are generally treated as a continuation of the existing loan.

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. The adequacy of the allowance for credit losses is assessed quarterly.

Adjustments to the allowance for credit losses are made by recording charges to the Provision for/(Benefit from) 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 the collateral is recorded at its estimated fair value less costs to sell and reported in Other assets on our consolidated balance sheets.

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 2022						Third Quarter 2023
	Consumer		Non-Consumer		Total		Consumer		Non-Consumer		Total
Allowance for credit losses
Beginning balance	$	754	$	9	$	763	$	866	$	7	$	873
Charge-offs	(73)		—		(73)		(105)		—		(105)
Recoveries	39		1		40		37		—		37
Provision for/(Benefit from) credit losses	40		(1)		39		75		(1)		74
Other (a)	(9)		—		(9)		(3)		—		(3)
Ending balance	$	751	$	9	$	760	$	870	$	6	$	876
	First Nine Months 2022						First Nine Months 2023
	Consumer		Non-Consumer		Total		Consumer		Non-Consumer		Total
Allowance for credit losses
Beginning balance	$	903	$	22	$	925	$	838	$	7	$	845
Charge-offs	(196)		(1)		(197)		(279)		—		(279)
Recoveries	126		3		129		113		1		114
Provision for/(Benefit from) credit losses	(67)		(14)		(81)		193		(2)		191
Other (a)	(15)		(1)		(16)		5		—		5
Ending balance	$	751	$	9	$	760	$	870	$	6	$	876

__________

(a)Primarily represents amounts related to translation adjustments.

During the third quarter and first nine months of 2023, the allowance for credit losses increased $3 million and $31 million, respectively, driven by an increase in finance receivables. Net charge-offs increased from a year ago, reflecting normalization from extraordinarily low levels. The impact of higher inflation and higher interest rates on future credit losses remains uncertain. We will continue to monitor economic trends and conditions and portfolio performance and will adjust the reserve accordingly.