Ford 2010 Annual Report Download - page 41

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2010 Annual Report 39
The decrease from a year ago in charge-offs and loss-to-receivables ratios primarily reflects lower losses in the
United States and Europe. Charge-offs in the United States decreased due to lower repossessions, lower severity and
lower wholesale and dealer loan net losses. The decrease in charge-offs in Europe primarily reflected lower losses in
Germany and Spain.
Shown below is Ford Credit's allowance for credit losses and its allowance for credit losses as a percentage of end-
of-period receivables (finance receivables, excluding unearned interest supplements, and net investment in operating
leases, excluding the allowance for credit losses) for its on-balance sheet portfolio for the years ended December 31 (in
millions, except for ratios):
2010
20102010
2010
2009
20092009
2009
2010
2010 2010
2010
Over/(Under)
Over/(Under) Over/(Under)
Over/(Under)
2009
20092009
2009
Allowance for Credit Los
Allowance for Credit LosAllowance for Credit Los
Allowance for Credit Losses
sesses
ses
Retail installment and lease ................................................................
................................
$ 788 $ 1,479 $ (691)
Wholesale................................................................................................
................................
48 43 5
Dealer loan and other ................................................................
................................
18 27 (9)
Total allowance for credit losses................................................................
................................
$ 854 $ 1,549 $ (695)
As a Percentage of End
As a Percentage of EndAs a Percentage of End
As a Percentage of End-
---of ofof
of-
---Period Receivables Period ReceivablesPeriod Receivables
Period Receivables
Retail installment and lease ................................................................
................................
1.32% 2.08% (0.76) pts.
Wholesale................................................................................................
................................
0.22 0.19 (0.03)
Total including dealer loan and other 1.02% 1.61% (0.59) pts.
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. The decrease in the allowance for
credit losses is consistent with the decrease in charge-offs and the decline in receivables. At December 31, 2010, Ford
Credit's allowance for credit losses included about $9 million for management's judgment regarding higher retail loss
assumptions in Spain compared with historical trends used in its models. At December 31, 2009, Ford Credit's
allowance for credit losses included about $215 million for management's judgment regarding higher retail installment
and lease repossession assumptions and higher wholesale and dealer loan default assumptions compared with historical
trends used in its models. See Note 7 of the Notes to the Financial Statements for additional information on the quality of
Ford Credit's receivables.
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), customer
characteristics, 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. Based on all the factors Ford Credit
considers, as of December 31, 2010, about 5% of the outstanding U.S. retail finance and lease contracts in Ford Credit's
serviced portfolio were classified as high risk at contract inception, about the same as year-end 2009. See Note 7 of the
Notes to the Financial Statements for additional information on the quality of Ford Credit's receivables.
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.