Ford 2012 Annual Report Download - page 37

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Ford Motor Company | 2012 Annual Report 35
Management's Discussion and Analysis of Financial Condition and Results of Operations
Credit Losses. The charts below detail (i) annual trends of charge-offs (credit losses, net of recoveries), (ii) loss-to-
receivables ("LTR") ratios (charge-offs divided by the average amount of receivables outstanding for the period, excluding
the allowance for credit losses (also referred to as credit loss reserves) and unearned interest supplements related to
finance receivables), (iii) credit loss reserves, and (iv) Ford Credit's credit loss reserves as a percentage of end-of-period
("EOP") receivables:
Ford Credit's charge-offs are down from 2011, primarily reflecting lower repossessions in the United States and lower
losses in all international regions, offset partially by lower recoveries in the United States. The LTR ratio is about one-third
lower than in 2011, and is the lowest since Ford Credit started tracking LTRs more than thirty years ago.
Reserves and reserves as a percent of EOP receivables are both lower than a year ago reflecting the decrease in
charge-offs. The allowance for credit losses is estimated using a combination of models and management judgment, and
is based on such factors as portfolio quality, historical loss performance, and receivable levels.
In purchasing retail finance and lease contracts, Ford Credit uses a proprietary scoring system that classifies contracts
using several factors, such as credit bureau information, credit bureau scores (e.g., FICO score), and contract
characteristics. In addition to Ford Credit's proprietary scoring system, it considers other factors, such as employment
history, financial stability, and capacity to pay. At December 31, 2012 and 2011, Ford Credit classified between 5% - 6%
of the outstanding U.S. retail finance and lease contracts in its portfolio as high risk at contract inception. For additional
discussion, see "Critical Accounting Estimates - Allowance for Credit Losses" below.
Residual Risk. Ford Credit is exposed to residual risk on operating leases and similar balloon payment products where
the customer may return the financed vehicle to Ford Credit. Residual risk is the possibility that the amount Ford Credit
obtains from returned vehicles will be less than its estimate of the expected residual value for the vehicle. Ford Credit
estimates the expected residual value by evaluating recent auction values, return volumes for its leased vehicles,
industry-wide used vehicle prices, marketing incentive plans, and vehicle quality data. For additional discussion, see
"Critical Accounting Estimates - Accumulated Depreciation on Vehicles Subject to Operating Leases" below.
North America Retail Operating Lease Experience
Ford Credit uses various statistics to monitor its residual risk:
• Placement volume measures the number of leases Ford Credit purchases in a given period;
• Termination volume measures the number of vehicles for which the lease has ended in the given period; and
• Return volume reflects the number of vehicles returned to Ford Credit by customers at lease-end.
For more information visit www.annualreport.ford.com