Finance Receivables

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



	2012			2011			2010			2009			2008
Wholesale
United States	$	776,633		$	778,320		$	735,481		$	787,891		$	1,074,377
Canada	39,771			46,320			78,516			82,110			89,859
Total wholesale	816,404			824,640			813,997			870,001			1,164,236
Retail
United States	4,850,450			4,858,781			5,126,699			3,835,235			514,637
Canada	222,665			228,709			250,462			256,658			226,084
Total retail	5,073,115			5,087,490			5,377,161			4,091,893			740,721
	5,889,519			5,912,130			6,191,158			4,961,894			1,904,957
Allowance for credit losses	(107,667		)	(125,449		)	(173,589		)	(150,082		)	(40,068		)
	5,781,852			5,786,681			6,017,569			4,811,812			1,864,889
Investment in retained securitization interests	—			—			—			245,350			330,674
	$	5,781,852		$	5,786,681		$	6,017,569		$	5,057,162		$	2,195,563
Retail - finance receivables held for sale
United States	—			—			—			—			2,443,965
Total finance receivables, net	$	5,781,852		$	5,786,681		$	6,017,569		$	5,057,162		$	4,639,528

Prior to the second quarter of 2009, U.S. retail motorcycle finance receivables intended for securitization at origination were classified as finance receivables held for sale. These finance receivables held for sale were carried at the lower of cost or estimated fair value. Any amount by which cost exceeded fair value was accounted for as a valuation adjustment. Included in finance receivables held for sale at December 31, 2008 is a lower of cost or market adjustment of $31.7 million.

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.

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, 2012 and 2011, approximately 12% and 11%, respectively, of gross outstanding finance receivables were originated in Texas.

At December 31, 2012 and 2011, unused lines of credit extended to HDFS’ wholesale finance customers totaled $955.5 million and $909.9 million, respectively. Approved but unfunded retail finance loans totaled $137.7 million and $139.3 million at December 31, 2012 and 2011, 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, 2012, contractual maturities of finance receivables were as follows (in thousands):



	United States		Canada		Total
2013	$	1,685,921	$	81,268	$	1,767,189
2014	988,995		44,726		1,033,721
2015	1,117,929		50,035		1,167,964
2016	1,146,884		55,975		1,202,859
2017	601,981		30,432		632,413
Thereafter	85,373		—		85,373
Total	$	5,627,083	$	262,436	$	5,889,519

As of December 31, 2012, all finance receivables due after one year were at fixed interest rates.

The allowance for 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):



	2012
	Retail			Wholesale			Total
Balance, beginning of period	$	116,112		$	9,337		$	125,449
Provision for credit losses	25,252			(3,013		)	22,239
Charge-offs	(86,963		)	(99		)	(87,062		)
Recoveries	47,041			—			47,041
Balance, end of period	$	101,442		$	6,225		$	107,667



	2011
	Retail			Wholesale			Total
Balance, beginning of period	$	157,791		$	15,798		$	173,589
Provision for 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	$	116,112		$	9,337		$	125,449

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



	2010
Balance, beginning of period	$	150,082
Allowance related to newly consolidated finance receivables ⁽¹⁾	49,424
Provision for credit losses	93,118
Charge-offs, net of recoveries	(119,035		)
Balance, end of period	$	173,589

(1) As a part of the required consolidation of formerly unconsolidated VIEs done in connection with the adoption of the new requirements within ASC Topics 810 and 860 on January 1, 2010, 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):



	2012
	Retail		Wholesale		Total
Allowance for credit losses, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	101,442		6,225		107,667
Total allowance for credit losses	$	101,442	$	6,225	$	107,667
Finance receivables, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	5,073,115		816,404		5,889,519
Total finance receivables	$	5,073,115	$	816,404	$	5,889,519
	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

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 agreement. 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, 2012 and 2011, there were no wholesale finance receivables that were individually deemed to be impaired under ASC Topic 310, “Receivables”.

Retail finance receivables accrue interest until either collected or charged-off. Interest continues to accrue on past due wholesale finance receivables until the finance receivable becomes uncollectible, 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, 2012 and 2011, there were no wholesale finance receivables on non-accrual status.

An analysis of the aging of past due finance receivables at December 31 was as follows (in thousands):



	2012
	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Finance Receivables
Retail	$	4,894,675	$	113,604	$	37,239	$	27,597	$	178,440	$	5,073,115
Wholesale	814,706		984		278		436		1,698		816,404
Total	$	5,709,381	$	114,588	$	37,517	$	28,033	$	180,138	$	5,889,519



	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

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



	2012		2011		2010		2009		2008
United States	$	26,500	$	27,171	$	34,391	$	24,629	$	23,678
Canada	1,533		1,207		1,351		2,161		1,275
Total	$	28,033	$	28,378	$	35,742	$	26,790	$	24,953

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



	2012		2011
Prime	$	4,035,584	$	4,097,048
Sub-prime	1,037,531		990,442
Total	$	5,073,115	$	5,087,490

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



	2012		2011
Doubtful	$	8,107	$	13,048
Substandard	2,593		5,052
Special Mention	3,504		14,361
Medium Risk	8,451		3,032
Low Risk	793,749		789,147
Total	$	816,404	$	824,640