Ford 2013 Annual Report Download - page 37

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Ford Motor Company | 2013 Annual Report 35
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Credit Losses. The charts below detail annual trends of charge-offs (credit losses, net of recoveries), loss-to-
receivables (“LTR”) ratios (charge-offs divided by average managed receivables), credit loss reserve, and Ford Credit’s
credit loss reserve as a percentage of end-of-period (“EOP”) managed receivables:
Ford Credit’s charge-offs were up from its record-low in 2012, primarily reflecting higher severity and lower recoveries
in North America, and higher losses in International. The LTR ratio was up 2 basis points from 2012 and is Ford Credit’s
second lowest on record.
The credit loss reserve and the reserve as a percentage of EOP receivables were both lower than a year ago,
reflecting the continuation of low charge-offs.
In purchasing retail finance and operating lease contracts, Ford Credit uses a proprietary scoring system that classifies
contracts using several factors, such as credit bureau information, consumer credit risk 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, 2013 and 2012, Ford Credit classified
between 5% and 6% of the outstanding U.S. retail finance and operating 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. Changes in expected residual
values impact the depreciation expense, which is recognized on a straight-line basis over the life of the lease. 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 a 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