FORD MOTOR CREDIT CO LLC - FORM 10-Q - July 31, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
(Mark One)
R
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended June 30, 2014
 

or
£
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the transition period from ____________________ to ____________________
 
 
Commission file number 1-6368
 



Ford Motor Credit Company LLC
(Exact name of registrant as specified in its charter)
Delaware
38-1612444
(State of organization)
(I.R.S. employer identification no.)
One American Road, Dearborn, Michigan
48126
(Address of principal executive offices)
(Zip code)

(313) 322-3000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes  þ No

All of the limited liability company interests in the registrant (“Shares”) are held by an affiliate of the registrant. None of the Shares are publicly traded.

REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.

 
Exhibit Index begins on page 50 




FORD MOTOR CREDIT COMPANY LLC
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2014
 
 
 
 
 
Table of Contents
 
Page
 
 
 
 
 
Part I. Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II. Other Information
 
 
 
 
 
 
 
 


i

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.


FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
For the Periods Ended June 30, 2014 and 2013
(in millions)

 
Second Quarter
 
First Half
 
2014
 
2013
 
2014
 
2013
 
(unaudited)
Financing revenue
 
 
 
 
 
 
 
Operating leases
$
1,001

 
$
818

 
$
1,967

 
$
1,572

Retail financing
691

 
680

 
1,387

 
1,377

Dealer financing
424

 
385

 
817

 
763

Other
21

 
24

 
42

 
49

Total financing revenue
2,137

 
1,907

 
4,213

 
3,761

Depreciation on vehicles subject to operating leases
(742
)
 
(553
)
 
(1,447
)
 
(1,034
)
Interest expense
(673
)
 
(682
)
 
(1,339
)
 
(1,365
)
Net financing margin
722

 
672

 
1,427

 
1,362

Other revenue
 

 
 

 
 
 
 
Insurance premiums earned
31

 
30

 
63

 
59

Other income, net (Note 11)
66

 
46

 
117

 
123

Total financing margin and other revenue
819

 
748

 
1,607

 
1,544

Expenses
 

 
 

 
 
 
 
Operating expenses
281

 
240

 
531

 
490

Provision for credit losses (Note 4)
27

 
20

 
58

 
49

Insurance expenses
77

 
34

 
85

 
44

Total expenses
385

 
294

 
674

 
583

Income before income taxes
434

 
454

 
933

 
961

Provision for income taxes
170

 
179

 
357

 
322

Net income
$
264

 
$
275

 
$
576

 
$
639



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Periods Ended June 30, 2014 and 2013
(in millions)

 
Second Quarter
 
First Half
 
2014
 
2013
 
2014
 
2013
 
(unaudited)
Net income
$
264

 
$
275

 
$
576

 
$
639

Other comprehensive income/(loss), net of tax (Note 10)
 
 
 
 
 
 
 
Foreign currency translation
85

 
(51
)
 
3

 
(238
)
Total other comprehensive income/(loss), net of tax
85

 
(51
)
 
3

 
(238
)
Comprehensive income
$
349

 
$
224

 
$
579

 
$
401


The accompanying notes are part of the financial statements.


1
Item 1. Financial Statements (Continued)


FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)

 
June 30,
2014
 
December 31,
2013
ASSETS
(unaudited)
Cash and cash equivalents
$
6,825

 
$
9,424

Marketable securities
3,020

 
1,943

Finance receivables, net (Note 2)
86,718

 
81,636

Net investment in operating leases (Note 3)
19,875

 
18,277

Notes and accounts receivable from affiliated companies
794

 
1,077

Derivative financial instruments (Note 7)
673

 
585

Other assets (Note 8)
2,536

 
2,666

Total assets
$
120,441

 
$
115,608

 
 
 
 
LIABILITIES
 
 
 
Accounts payable
 
 
 
Customer deposits, dealer reserves, and other
$
1,182

 
$
1,445

Affiliated companies
526

 
211

Total accounts payable
1,708

 
1,656

Debt (Note 9)
103,038

 
98,693

Deferred income taxes
1,864

 
1,627

Derivative financial instruments (Note 7)
320

 
506

Other liabilities and deferred income (Note 8)
2,356

 
2,522

Total liabilities
109,286

 
105,004

 
 
 
 
SHAREHOLDER’S INTEREST
 
 
 
Shareholder’s interest
5,217

 
5,217

Accumulated other comprehensive income (Note 10)
720

 
717

Retained earnings
5,218

 
4,670

Total shareholder’s interest
11,155

 
10,604

Total liabilities and shareholder’s interest
$
120,441

 
$
115,608



The following table includes assets to be used to settle the liabilities of the consolidated variable interest entities (“VIEs”).  These assets and liabilities are included in the consolidated balance sheet above.  See Notes 5 and 6 for additional information on our VIEs.
 
June 30,
2014
 
December 31,
2013
ASSETS
(unaudited)
Cash and cash equivalents
$
2,186

 
$
4,198

Finance receivables, net
43,085

 
45,796

Net investment in operating leases
9,012

 
8,116

Derivative financial instruments
3

 
5

 
 
 
 
LIABILITIES
 
 
 
Debt
$
38,322

 
$
40,728

Derivative financial instruments
40

 
88


The accompanying notes are part of the financial statements.

2
Item 1. Financial Statements (Continued)


FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER’S INTEREST
For the Periods Ended June 30, 2014 and 2013
(in millions, unaudited)

 
 
Shareholder’s Interest
 
Accumulated Other Comprehensive Income (Note 10)
 
Retained Earnings
 
Total
Balance at December 31, 2013
 
$
5,217

 
$
717

 
$
4,670

 
$
10,604

Net income
 
—

 
—

 
576

 
576

Other comprehensive income/(loss), net of tax
 
—

 
3

 
—

 
3

Distributions
 
—

 
—

 
(28
)
 
(28
)
Balance at June 30, 2014
 
$
5,217

 
$
720

 
$
5,218

 
$
11,155

 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
5,274

 
$
743

 
$
3,636

 
$
9,653

Net income
 
—

 
—

 
639

 
639

Other comprehensive income/(loss), net of tax
 
—

 
(238
)
 
—

 
(238
)
Distributions
 
—

 
—

 
(28
)
 
(28
)
Balance at June 30, 2013
 
$
5,274

 
$
505

 
$
4,247

 
$
10,026




The accompanying notes are part of the financial statements.


3
Item 1. Financial Statements (Continued)


FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Periods Ended June 30, 2014 and 2013
(in millions)

 
First Half
 
2014
 
2013
 
(unaudited)
Cash flows from operating activities
 
 
 
Net income
$
576

 
$
639

Adjustments to reconcile net income to net cash provided by operations
 
 
 
Provision for credit losses
58

 
49

Depreciation and amortization
1,842

 
1,438

Amortization of upfront interest supplements
(498
)
 
(495
)
Net change in deferred income taxes
238

 
60

Net change in other assets
292

 
23

Net change in other liabilities
(36
)
 
692

All other operating activities
(17
)
 
(229
)
Net cash provided by/(used in) operating activities
2,455

 
2,177

Cash flows from investing activities
 
 
 
Purchases of finance receivables (excluding wholesale and other)
(16,684
)
 
(14,868
)
Collections of finance receivables (excluding wholesale and other)
15,029

 
14,303

Purchases of operating lease vehicles
(6,357
)
 
(5,737
)
Liquidations of operating lease vehicles
3,246

 
1,988

Net change in wholesale receivables and other
(3,129
)
 
(1,407
)
Net change in notes receivable from affiliated companies
30

 
3

Purchases of marketable securities
(7,003
)
 
(17,389
)
Proceeds from sales and maturities of marketable securities
5,898

 
16,386

Settlements of derivatives
(62
)
 
109

All other investing activities
44

 
(23
)
Net cash provided by/(used in) investing activities
(8,988
)
 
(6,635
)
Cash flows from financing activities
 
 
 
Proceeds from issuances of long-term debt
22,655

 
18,158

Principal payments on long-term debt
(15,228
)
 
(11,505
)
Change in short-term debt, net
(3,393
)
 
(3,822
)
Cash distributions to parent
(28
)
 
(28
)
All other financing activities
(66
)
 
22

Net cash provided by/(used in) financing activities
3,940

 
2,825

Effect of exchange rate changes on cash and cash equivalents
(6
)
 
(135
)
 
 
 
 
Net increase/(decrease) in cash and cash equivalents
$
(2,599
)
 
$
(1,768
)
 
 
 
 
Cash and cash equivalents at January 1
$
9,424

 
$
9,189

Net increase/(decrease) in cash and cash equivalents
(2,599
)
 
(1,768
)
Cash and cash equivalents at June 30
$
6,825

 
$
7,421

 
 
 
 

The accompanying notes are part of the financial statements.

4
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


Table of Contents

Footnote
 
Page
Accounting Policies
Finance Receivables
Net Investment in Operating Leases
Allowance for Credit Losses
Transfers of Receivables
Variable Interest Entities
Derivative Financial Instruments and Hedging Activities
Other Assets and Other Liabilities and Deferred Income
Debt
Accumulated Other Comprehensive Income
Other Income
Fair Value Measurements
Segment Information
Commitments and Contingencies




5
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 1. ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, and instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, these unaudited financial statements include all adjustments considered necessary for a fair statement of the results of operations and financial condition for interim periods for Ford Motor Credit Company LLC, its consolidated subsidiaries and consolidated VIEs in which Ford Motor Credit Company LLC is the primary beneficiary (collectively referred to herein as “Ford Credit,” “we,” “our,” or “us”). Results for interim periods should not be considered indicative of results for any other interim period or for the full year. Reference should be made to the financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K Report”). We are an indirect, wholly owned subsidiary of Ford Motor Company (“Ford”).

We reclassified certain prior period amounts in our consolidated financial statements to conform to the presentation in our 2013 Form 10-K Report.

Provision for Income Taxes

For interim tax reporting we estimate one single effective tax rate, which is applied to the year-to-date ordinary income/(loss). Tax effects of significant unusual or extraordinary items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.

Adoption of New Accounting Standards
Income Taxes - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. On January 1, 2014, we adopted the new accounting standard that requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists, and certain criteria are met. The new accounting standard is consistent with our prior practice, thus the adoption did not impact our consolidated financial statements.

Foreign Currency Matters - Parent’s Accounting for Cumulative Translation Adjustment. On January 1, 2014, we adopted the new accounting standard that clarifies the applicable guidance for a parent company’s accounting for the release of the cumulative translation adjustment into net income upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The new accounting standard is consistent with our prior practice, thus the adoption did not impact our consolidated financial statements.

Liabilities - Obligations Resulting from Joint and Several Liability Arrangements. On January 1, 2014, we adopted the new accounting standard that provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements. The adoption of this accounting standard did not impact our consolidated financial statements or financial statement disclosures.
 
Accounting Standards Issued But Not Yet Adopted

Revenue - Revenue from Contracts with Customers.  In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard that requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The new standard supersedes virtually all present U.S. GAAP guidance on revenue recognition and requires the use of more estimates and judgments than the present standards and requires additional disclosures. The new accounting standard is effective as of January 1, 2017 and we are assessing the potential impact to our consolidated financial statements and financial statement disclosures.
 





6
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 1. ACCOUNTING POLICIES (Continued)

Transfers and Servicing - Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures. In June 2014, the FASB issued a new accounting standard that changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. The new standard also requires additional disclosures for certain transfers of financial assets with agreements that both entitle and obligate the transferor to repurchase the transferred assets from the transferee. The new accounting standard is effective as of January 1, 2015 and we do not expect it to have an impact on our consolidated financial statements.

Stock Compensation - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June 2014, the FASB issued a new accounting standard that requires that a performance target that could be achieved after the requisite service period be treated as a performance condition that affects the vesting of the award. The new accounting standard is effective as of January 1, 2016 and we do not expect it to have an impact on our consolidated financial statements.


NOTE 2. FINANCE RECEIVABLES

We segment our North America and International portfolio of finance receivables into “consumer” and “non-consumer” receivables. The receivables are generally secured by the vehicles, inventory, or other property being financed.

Consumer Segment. Receivables in this portfolio segment include products offered to individuals and businesses that finance the acquisition of Ford and Lincoln vehicles from dealers for personal or commercial use. Retail financing includes retail installment contracts for new and used vehicles and direct financing leases with retail customers, government entities, daily rental companies, and fleet customers.

Non-Consumer Segment. Receivables in this portfolio segment include products offered to automotive dealers and receivables purchased from Ford and its affiliates. The products include:

•
Dealer financing – includes wholesale loans to dealers to finance the purchase of vehicle inventory, also known as floorplan financing, as well as loans to dealers to finance working capital and improvements to dealership facilities, finance the purchase of dealership real estate, and finance other dealer programs. Wholesale financing is approximately 95% of our dealer financing.

•
Other – purchased receivables from Ford and its affiliates, primarily related to the sale of parts and accessories to dealers, receivables from Ford related loans, and certain used vehicles from daily rental fleet companies. These receivables are excluded from our credit quality reporting since the performance of this group of receivables is generally guaranteed by Ford.

Notes and accounts receivable from affiliated companies are presented separately on the balance sheet. These receivables are based on intercompany relationships and the balances are settled regularly. We do not assess these receivables for potential credit losses, nor are they subjected to aging analysis, credit quality reviews, or other formal assessments. As a result, Notes and accounts receivable from affiliated companies are not subject to the following disclosures contained herein.

7
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 2. FINANCE RECEIVABLES (Continued)

Finance Receivables, Net

Finance receivables, net were as follows (in millions):
 
 
June 30, 2014
 
December 31, 2013
 
North America
 
International
 
Total Finance Receivables
 
North America
 
International
 
Total Finance Receivables
Consumer
 
 
 
 
 
 
 
 
 
 
 
Retail financing, gross (a)
$
41,674

 
$
11,857

 
$
53,531

 
$
40,902

 
$
10,797

 
$
51,699

Less:  Unearned interest supplements (b)
(1,355
)
 
(252
)
 
(1,607
)
 
(1,255
)
 
(247
)
 
(1,502
)
Consumer finance receivables
40,319

 
11,605

 
51,924

 
39,647

 
10,550

 
50,197

 
 
 
 
 
 
 
 
 
 
 
 
Non-Consumer
 
 
 
 
 
 
 
 
 
 
 
Dealer financing (a)(c)
23,437

 
10,366

 
33,803

 
22,139

 
8,232

 
30,371

Other
952

 
366

 
1,318

 
1,050

 
375

 
1,425

Non-Consumer finance receivables
24,389

 
10,732

 
35,121

 
23,189

 
8,607

 
31,796

 
 
 
 
 
 
 
 
 
 
 
 
Total recorded investment
$
64,708

 
$
22,337

 
$
87,045

 
$
62,836

 
$
19,157

 
$
81,993

 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in finance receivables (d)
$
64,708

 
$
22,337

 
$
87,045

 
$
62,836

 
$
19,157

 
$
81,993

Less:  Allowance for credit losses (e)
(252
)
 
(75
)
 
(327
)
 
(280
)
 
(77
)
 
(357
)
Finance receivables, net
$
64,456

 
$
22,262

 
$
86,718

 
$
62,556

 
$
19,080

 
$
81,636

 
 
 
 
 
 
 
 
 
 
 
 
Net finance receivables subject to fair value (f)
 
 
 
 
$
84,969

 
 
 
 
 
$
79,969

Fair Value
 
 
 
 
86,714

 
 
 
 
 
81,658

__________
(a)
At June 30, 2014 and December 31, 2013, includes North America consumer receivables of $20.8 billion and $21.8 billion and non-consumer receivables of $19.3 billion and $18.9 billion, respectively, and International consumer receivables of $5.9 billion and $5.9 billion and non-consumer receivables of $4.2 billion and $5.0 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. The receivables are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay our other obligations or the claims of our other creditors. We hold the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. See Note 5 for additional information.
(b)
Ford-sponsored special financing programs attributable to retail financing.
(c)
At June 30, 2014 and December 31, 2013, includes $65 million and $67 million, respectively, of North America dealer financing receivables with entities (primarily dealers) that are reported as consolidated subsidiaries of Ford. At June 30, 2014 and December 31, 2013, includes $540 million and $399 million, respectively, of International dealer financing receivables with entities (primarily dealers) that are reported as consolidated subsidiaries of Ford. The associated vehicles that are being financed by us are reported as inventory on Ford’s balance sheet.
(d)
At June 30, 2014 and December 31, 2013, excludes $182 million and $196 million, respectively, of accrued uncollected interest, which we report in Other assets on our balance sheet.
(e)
See Note 4 for additional information related to our allowance for credit losses.
(f)
At June 30, 2014 and December 31, 2013, excludes $1.7 billion and $1.7 billion, respectively, of certain receivables (primarily direct financing leases) that are not subject to fair value disclosure requirements.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 










8
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 2. FINANCE RECEIVABLES (Continued)

Aging

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. The recorded investment of consumer receivables greater than 90 days past due and still accruing interest was $13 million and $14 million at June 30, 2014 and December 31, 2013, respectively. The recorded investment of non-consumer receivables greater than 90 days past due and still accruing interest was $6 million and $21 million at June 30, 2014 and December 31, 2013, respectively.
 
The aging analysis of finance receivables balances was as follows (in millions):

 
June 30, 2014
 
December 31, 2013
 
North America
 
International
 
Total
 
North America
 
International
 
Total
Consumer
 
 
 
 
 
 
 
 
 
 
 
31-60 days past due
$
588

 
$
41

 
$
629

 
$
715

 
$
39

 
$
754

61-90 days past due
75

 
19

 
94

 
88

 
17

 
105

91-120 days past due
17

 
8

 
25

 
18

 
9

 
27

Greater than 120 days past due
32

 
25

 
57

 
37

 
26

 
63

Total past due
712

 
93

 
805

 
858

 
91

 
949

Current
39,607

 
11,512

 
51,119

 
38,789

 
10,459

 
49,248

Consumer finance receivables
40,319

 
11,605

 
51,924

 
39,647

 
10,550

 
50,197

 
 
 
 
 
 
 
 
 
 
 
 
Non-Consumer
 
 
 
 
 
 
 
 
 
 
 
Total past due
8

 
102

 
110

 
49

 
40

 
89

Current
24,381

 
10,630

 
35,011

 
23,140

 
8,567

 
31,707

Non-Consumer finance receivables
24,389

 
10,732

 
35,121

 
23,189

 
8,607

 
31,796

 
 
 
 
 
 
 
 
 
 
 
 
  Total recorded investment
$
64,708

 
$
22,337

 
$
87,045

 
$
62,836

 
$
19,157

 
$
81,993


Credit Quality

Consumer Segment. When originating all classes of consumer receivables, we use a proprietary scoring system that measures the credit quality of the receivables using several factors, such as credit bureau information, consumer credit risk scores (e.g., FICO score), and contract characteristics. In addition to our proprietary scoring system, we consider other individual consumer factors, such as employment history, financial stability, and capacity to pay.

Subsequent to origination, we review the credit quality of retail financing based on customer payment activity. As each customer develops a payment history, we use an internally developed behavioral scoring model to assist in determining the best collection strategies which allows us to focus collection activity on higher-risk accounts. These models are used to refine our risk-based staffing model to ensure collection resources are aligned with portfolio risk. Based on data from this scoring model, contracts are categorized by collection risk. Our collection models evaluate several factors, including origination characteristics, updated credit bureau data, and payment patterns.

Credit quality ratings for consumer receivables are based on our aging analysis. Refer to the aging table above. 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
•
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




9
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 2. FINANCE RECEIVABLES (Continued)

Non-Consumer Segment. We extend credit to dealers primarily in the form of lines of credit to purchase new Ford and Lincoln vehicles as well as used vehicles. Payment is required when the dealer has sold the vehicle. Each non-consumer lending request is evaluated by taking into consideration the borrower’s financial condition and the underlying collateral securing the loan. 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. A dealer’s risk rating does not reflect any guarantees or a dealer owner’s net worth.

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
•
Group IV – poor financial metrics, including dealers classified as uncollectible

We suspend credit lines and extend no further funding to dealers classified in Group IV.

We regularly review our model to confirm the continued business significance and statistical predictability of the factors and update the model to incorporate new factors or other information that improves its statistical predictability. In addition, we regularly audit dealer inventory and dealer sales records to verify that the dealer is in possession of the financed vehicles and is promptly paying each receivable following the sale of the financed vehicle. The frequency of on-site vehicle inventory audits depends on factors such as the dealer’s risk rating and our security position. Under our policies, on-site vehicle inventory audits of low-risk dealers are conducted as circumstances warrant. Audits of higher risk dealers are conducted with increased frequency based on risk ratings and our security position. We perform a credit review of each dealer at least annually and adjust the dealer’s risk rating, if necessary.

The credit quality of dealer financing receivables is evaluated based on our internal dealer risk rating analysis. A dealer has the same risk rating for its entire dealer financing regardless of the type of financing.
 
The credit quality analysis of our dealer financing receivables was as follows (in millions):
 
June 30, 2014
 
December 31, 2013
 
North America
 
International
 
Total
 
North America
 
International
 
Total
Dealer financing
 
 
 
 
 
 
 
 
 
 
 
Group I
$
19,978

 
$
5,500

 
$
25,478

 
$
18,424

 
$
5,450

 
$
23,874

Group II
3,128

 
3,285

 
6,413

 
3,289

 
2,092

 
5,381

Group III
281

 
1,488

 
1,769

 
424

 
649

 
1,073

Group IV
50

 
93

 
143

 
2

 
41

 
43

Total recorded investment
$
23,437

 
$
10,366

 
$
33,803

 
$
22,139

 
$
8,232

 
$
30,371
















10
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 2. FINANCE RECEIVABLES (Continued)

Impaired Receivables

Impaired consumer receivables include accounts that have been rewritten or modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code that are considered to be Troubled Debt Restructurings (“TDRs”), as well as all accounts greater than 120 days past due. Impaired non-consumer receivables represent accounts with dealers that have weak or poor financial metrics or dealer financing that has been modified in TDRs. The recorded investment of consumer receivables that were impaired at June 30, 2014 and December 31, 2013 was $419 million, or 0.8% of consumer receivables, and $435 million, or 0.9% of consumer receivables, respectively. The recorded investment of non-consumer receivables that were impaired at June 30, 2014 and December 31, 2013 was $170 million, or 0.5% of non-consumer receivables, and $71 million, or 0.2% of non-consumer receivables, respectively. Impaired finance receivables are evaluated both collectively and specifically. See Note 4 for additional information related to the development of our allowance for credit losses.

Non-Accrual Receivables

The accrual of revenue is discontinued at the earlier of the time a receivable is determined to be uncollectible, at bankruptcy status notification, or greater than 120 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.

The recorded investment of consumer receivables in non-accrual status was $216 million, or 0.4% of consumer receivables, at June 30, 2014, and $238 million, or 0.5% of consumer receivables, at December 31, 2013. The recorded investment of non-consumer receivables in non-accrual status was $102 million, or 0.3% of non-consumer receivables, at June 30, 2014, and $41 million, or 0.1% of non-consumer receivables, at December 31, 2013.

Troubled Debt Restructurings

A restructuring of debt constitutes a TDR if we grant a concession to a debtor for economic or legal reasons related to the debtor’s financial difficulties that we otherwise would not consider. Consumer and non-consumer receivables that have a modified interest rate below market rate or that were modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code, except non-consumer receivables that are current with minimal risk of loss, are considered to be TDRs. We do not grant concessions on 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. The outstanding recorded investment at time of modification for consumer receivables that are considered to be TDRs was $96 million, or 0.2%, and $109 million, or 0.2%, of consumer receivables, during the periods ended June 30, 2014 and 2013, respectively. The annualized subsequent default rate of TDRs that were previously modified in TDRs within the last twelve months and resulted in repossession for consumer receivables was 6.0% and 6.0% of TDRs at June 30, 2014 and 2013, respectively. There were no non-consumer receivables involved in TDRs during the periods ended June 30, 2014 and 2013.

Finance receivables involved in TDRs are specifically assessed for impairment. An impairment charge is recorded as part of the provision to the allowance for credit losses for the amount that the recorded investment of the receivable exceeds its estimated fair value. Estimated fair value is based on either the present value of the expected future cash flows of the receivable discounted at the contract’s original effective interest rate, or for receivables where foreclosure is probable, the fair value of the collateral adjusted for estimated costs to sell. The allowance for credit losses related to all active consumer TDRs was $22 million and $22 million at June 30, 2014 and 2013, respectively. The allowance for credit losses related to all active non-consumer TDRs was de minimis during the periods ended June 30, 2014 and 2013.

11
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 3. NET INVESTMENT IN OPERATING LEASES

Net investment in operating leases consist primarily of lease contracts for vehicles with retail customers, daily rental companies, government entities, and fleet customers with terms of 60 months or less.

Net investment in operating leases were as follows (in millions):
 
June 30,
2014
 
December 31,
2013
Vehicles, at cost, including acquisition costs
$
23,011

 
$
21,092

Less: Accumulated depreciation
(3,110
)
 
(2,792
)
Net investment in operating leases before allowance for credit losses (a)
19,901

 
18,300

Less: Allowance for credit losses
(26
)
 
(23
)
Net investment in operating leases
$
19,875

 
$
18,277

__________
(a)
At June 30, 2014 and December 31, 2013, includes net investment in operating leases of $9.0 billion and $8.1 billion, respectively, that have been included in securitization transactions but continue to be reported in our consolidated financial statements. These net investment in operating leases are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay our other obligations or the claims of our other creditors. We hold the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. See Note 5 for additional information.


 
 
 
 
 
 
 
 
 
 


12
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 4. ALLOWANCE FOR CREDIT LOSSES

Following is an analysis of the allowance for credit losses related to finance receivables and net investment in operating leases for the periods ended June 30 (in millions):
 
Second Quarter 2014
 
Finance Receivables
 
Net Investment in Operating Leases
 
Total Allowance
 
Consumer
 
Non-Consumer
 
Total
 
 
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
307

 
$
27

 
$
334

 
$
24

 
$
358

Charge-offs
(57
)
 
(3
)
 
(60
)
 
(26
)
 
(86
)
Recoveries
34

 
1

 
35

 
18

 
53

Provision for credit losses
17

 
—

 
17

 
10

 
27

Other (a)
2

 
(1
)
 
1

 
—

 
1

Ending balance
$
303

 
$
24

 
$
327

 
$
26

 
$
353


 
First Half 2014
 
Finance Receivables
 
Net Investment in Operating Leases
 
Total Allowance
 
Consumer
 
Non-Consumer
 
Total
 
 
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
327

 
$
30

 
$
357

 
$
23

 
$
380

Charge-offs
(132
)
 
(5
)
 
(137
)
 
(54
)
 
(191
)
Recoveries
68

 
6

 
74

 
32

 
106

Provision for credit losses
40

 
(7
)
 
33

 
25

 
58

Other (a)
—

 
—

 
—

 
—

 
—

Ending balance
$
303

 
$
24

 
$
327

 
$
26

 
$
353

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of allowance for credit losses
 
 
 
 
 
 
 
 
 
Collective impairment allowance
$
281

 
$
23

 
$
304

 
$
26

 
$
330

Specific impairment allowance
22

 
1

 
23

 
—

 
23

Ending balance
303

 
24

 
327

 
26

 
$
353

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of finance receivables and net investment in operating leases
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
51,505

 
34,951

 
86,456

 
19,901

 
 
Specifically evaluated for impairment
419

 
170

 
589

 
—

 
 
Recorded investment
51,924

 
35,121

 
87,045

 
19,901

 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, net of allowance for credit losses
$
51,621

 
$
35,097

 
$
86,718

 
$
19,875

 
 
__________
(a)
Represents amounts related to translation adjustments.



13
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 4. ALLOWANCE FOR CREDIT LOSSES (Continued)
 
Second Quarter 2013
 
Finance Receivables
 
Net Investment in Operating Leases
 
Total Allowance
 
Consumer
 
Non-Consumer
 
Total
 
 
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
340

 
$
27

 
$
367

 
$
22

 
$
389

Charge-offs
(61
)
 
(9
)
 
(70
)
 
(15
)
 
(85
)
Recoveries
38

 
2

 
40

 
13

 
53

Provision for credit losses
5

 
11

 
16

 
4

 
20

Other (a)
—

 
—

 
—

 
(1
)
 
(1
)
Ending balance
$
322

 
$
31

 
$
353

 
$
23

 
$
376


 
First Half 2013
 
Finance Receivables
 
Net Investment in Operating Leases
 
Total Allowance
 
Consumer
 
Non-Consumer
 
Total
 
 
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
356

 
$
29

 
$
385

 
$
23

 
$
408

Charge-offs
(140
)
 
(10
)
 
(150
)
 
(30
)
 
(180
)
Recoveries
76

 
3

 
79

 
24

 
103

Provision for credit losses
33

 
9

 
42

 
7

 
49

Other (a)
(3
)
 
—

 
(3
)
 
(1
)
 
(4
)
Ending balance
$
322

 
$
31

 
$
353

 
$
23

 
$
376

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of allowance for credit losses
 
 
 
 
 
 
 
 
 
Collective impairment allowance
$
300

 
$
27

 
$
327

 
$
23

 
$
350

Specific impairment allowance
22

 
4

 
26

 
—

 
26

Ending balance
322

 
31

 
353

 
23

 
$
376

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of finance receivables and net investment in operating leases
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
46,759

 
29,541

 
76,300

 
16,222

 
 
Specifically evaluated for impairment
420

 
67

 
487

 
—

 
 
Recorded investment
47,179

 
29,608

 
76,787

 
16,222

 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, net of allowance for credit losses
$
46,857

 
$
29,577

 
$
76,434

 
$
16,199

 
 
__________
(a)
Represents amounts related to translation adjustments.





14
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 5. TRANSFERS OF RECEIVABLES

We securitize finance receivables and net investment in operating leases through a variety of programs using amortizing, variable funding, and revolving structures. We also sell finance receivables in structured financing transactions. Due to the similarities between securitization and structured financing, we refer to structured financings as securitization transactions. Our securitization programs are targeted to institutional investors in both public and private transactions in capital markets primarily in North America and Europe.

We engage in securitization transactions to fund operations and to maintain liquidity. Our securitization transactions are recorded as asset-backed debt and the associated assets are not derecognized and continue to be included in our financial statements.

The finance receivables sold for legal purposes and net investment in operating leases included in securitization transactions are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. They are not available to pay our other obligations or the claims of our other creditors. We hold the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. The debt is the obligation of our consolidated securitization entities and not the obligation of Ford Credit or our other subsidiaries.

Most of these securitization transactions utilize VIEs. See Note 6 for more information concerning VIEs. The following tables show the assets and debt related to our securitization transactions that were included in our financial statements (in billions):

 
June 30, 2014
 
Cash and Cash Equivalents
 
Finance Receivables and Net Investment in Operating Leases (a)
 
Related Debt
 
Before Allowance
for Credit Losses
 
Allowance for
Credit Losses
 
After Allowance
for Credit Losses
 
VIE (b)
 
 
 
 
 
 
 
 
 
Retail financing
$
1.5

 
$
20.9

 
$
0.1

 
$
20.8

 
$
19.0

Wholesale financing
0.3

 
22.3

 
—

 
22.3

 
13.0

Finance receivables
1.8

 
43.2

 
0.1

 
43.1

 
32.0

Net investment in operating leases
0.4

 
9.0

 
—

 
9.0

 
6.3

Total VIE
$
2.2

 
$
52.2

 
$
0.1

 
$
52.1

 
$
38.3

 
 
 
 
 
 
 
 
 
 
Non-VIE
 
 
 
 
 
 
 
 
 
Retail financing
$
0.3

 
$
5.8

 
$
—

 
$
5.8

 
$
5.4

Wholesale financing
—

 
1.2

 
—

 
1.2

 
1.0

Finance receivables
0.3

 
7.0

 
—

 
7.0

 
6.4

Net investment in operating leases
—

 
—

 
—

 
—

 
—

Total Non-VIE
$
0.3

 
$
7.0

 
$
—

 
$
7.0

 
$
6.4

 
 
 
 
 
 
 
 
 
 
Total securitization transactions
 
 
 
 
 
 
 
 
 
Retail financing
$
1.8

 
$
26.7

 
$
0.1

 
$
26.6

 
$
24.4

Wholesale financing
0.3

 
23.5

 
—

 
23.5

 
14.0

Finance receivables
2.1

 
50.2

 
0.1

 
50.1

 
38.4

Net investment in operating leases
0.4

 
9.0

 
—

 
9.0

 
6.3

Total securitization transactions
$
2.5

 
$
59.2

 
$
0.1

 
$
59.1

 
$
44.7

__________
(a)
Unearned interest supplements and residual support are excluded from securitization transactions.
(b)
Includes assets to be used to settle the liabilities of the consolidated VIEs.




15
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 5. TRANSFERS OF RECEIVABLES (Continued)

 
December 31, 2013
 
Cash and Cash Equivalents
 
Finance Receivables and Net Investment in Operating Leases (a)
 
Related Debt
 
Before Allowance
for Credit Losses
 
Allowance for
Credit Losses
 
After Allowance
for Credit Losses
 
VIE (b)
 
 
 
 
 
 
 
 
 
Retail financing
$
1.9

 
$
23.1

 
$
0.2

 
$
22.9

 
$
20.3

Wholesale financing
1.9

 
22.9

 
—

 
22.9

 
14.8

Finance receivables
3.8

 
46.0

 
0.2

 
45.8

 
35.1

Net investment in operating leases
0.4

 
8.1

 
—

 
8.1

 
5.6

Total VIE
$
4.2

 
$
54.1

 
$
0.2

 
$
53.9

 
$
40.7

 
 
 
 
 
 
 
 
 
 
Non-VIE
 
 
 
 
 
 
 
 
 
Retail financing
$
0.2

 
$
4.6

 
$
—

 
$
4.6

 
$
4.4

Wholesale financing
—

 
1.0

 
—

 
1.0

 
0.8

Finance receivables
0.2

 
5.6

 
—

 
5.6

 
5.2

Net investment in operating leases
—

 
—

 
—

 
—

 
—

Total Non-VIE
$
0.2

 
$
5.6

 
$
—

 
$
5.6

 
$
5.2

 
 
 
 
 
 
 
 
 
 
Total securitization transactions
 
 
 
 
 
 
 
 
 
Retail financing
$
2.1

 
$
27.7

 
$
0.2

 
$
27.5

 
$
24.7

Wholesale financing
1.9

 
23.9

 
—

 
23.9

 
15.6

Finance receivables
4.0

 
51.6

 
0.2

 
51.4

 
40.3

Net investment in operating leases
0.4

 
8.1

 
—

 
8.1

 
5.6

Total securitization transactions
$
4.4

 
$
59.7

 
$
0.2

 
$
59.5

 
$
45.9

__________
(a)
Unearned interest supplements and residual support are excluded from securitization transactions.
(b)
Includes assets to be used to settle the liabilities of the consolidated VIEs.

Interest expense related to securitization debt for the periods ended June 30 was as follows (in millions):
 
Second Quarter
 
First Half
 
2014
 
2013
 
2014
 
2013
VIE
$
126

 
$
145

 
$
252

 
$
296

Non-VIE
22

 
18

 
43

 
35

Total securitization transactions
$
148

 
$
163

 
$
295

 
$
331


Certain of our securitization entities enter into derivative transactions to mitigate interest rate exposure, primarily resulting from fixed-rate assets securing floating-rate debt and, in certain instances, currency exposure resulting from assets in one currency and debt in another currency. In many instances, the counterparty enters into offsetting derivative transactions with us to mitigate its interest rate risk resulting from derivatives with our securitization entities. See Note 7 for additional information regarding the accounting for derivatives. Our exposures based on the fair value of derivative instruments with external counterparties related to securitization programs were as follows (in millions):
 
June 30, 2014
 
December 31, 2013
 
Derivative
Asset
 
Derivative
Liability
 
Derivative
Asset
 
Derivative
Liability
Derivatives of the VIEs
$
3

 
$
40

 
$
5

 
$
88

Derivatives related to the VIEs
11

 
15

 
23

 
30

Other securitization related derivatives
2

 
8

 
5

 
7

Total exposures related to securitization
$
16

 
$
63

 
$
33

 
$
125


16
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 5. TRANSFERS OF RECEIVABLES (Continued)

Derivative expense/(income) related to our securitization transactions for the periods ended June 30 was as follows (in millions):
 
Second Quarter
 
First Half
 
2014
 
2013
 
2014
 
2013
VIEs
$
(2
)
 
$
(1
)
 
$
18

 
$
(93
)
Related to the VIEs
6

 
7

 
—

 
10

Other securitization related derivatives
11

 
(2
)
 
15

 
(1
)
Total derivative expense/(income) related to securitization
$
15

 
$
4

 
$
33

 
$
(84
)


NOTE 6. VARIABLE INTEREST ENTITIES

A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. Nearly all of our VIEs are special purpose entities used for our securitizations.

We have the power to direct the activities of our special purpose entities when we have the ability to exercise discretion in the servicing of financial assets, issue additional debt, exercise a unilateral call option, add assets to revolving structures, or control investment decisions.

Assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against our general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs.

VIEs of Which We Are the Primary Beneficiary

We use special purpose entities to issue asset-backed securities in transactions to public and private investors, bank conduits, and government-sponsored entities or others who obtain funding from government programs. We have deemed most of these special purpose entities to be VIEs. The asset-backed securities are backed by finance receivables and interests in net investments in operating leases. The assets continue to be consolidated by us. We retain interests in our securitization VIEs, including subordinated securities issued by the VIEs, rights to cash held for the benefit of the securitization investors, and rights to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions.

The transactions create and pass along risks to the variable interest holders, depending on the assets securing the debt and the specific terms of the transactions. We aggregate and analyze the asset-backed securitization transactions based on the risk profile of the product and the type of funding structure, including:

•
Retail financing – consumer credit risk and pre-payment risk
•
Wholesale financing – dealer credit risk and Ford risk, as the receivables owned by the VIEs primarily arise from the financing provided by us to Ford-franchised dealers; therefore, the collections depend upon the sale of Ford vehicles
•
Net investment in operating leases – vehicle residual value risk, consumer credit risk, and pre-payment risk

As residual interest holder, we are exposed to the underlying residual and credit risk of the collateral and are exposed to interest rate risk in some transactions. The amount of risk absorbed by our residual interests generally is represented by and limited to the amount of overcollateralization of the assets securing the debt and any cash reserves.

17
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 6. VARIABLE INTEREST ENTITIES (Continued)

We have no obligation to repurchase or replace any securitized asset that subsequently becomes delinquent in payment or otherwise is in default, except when representations and warranties about the eligibility of the securitized assets are breached, or when certain changes are made to the underlying asset contracts. Securitization investors have no recourse to us or our other assets and have no right to require us to repurchase the investments. We generally have no obligation to provide liquidity or contribute cash or additional assets to the VIEs and do not guarantee any asset-backed securities. We may be required to support the performance of certain securitization transactions, however, by increasing cash reserves.

VIEs that are exposed to interest rate or currency risk have reduced their risks by entering into derivative transactions. In certain instances, we have entered into offsetting derivative transactions with the VIE to protect the VIE from the risks that are not mitigated through the derivative transactions between the VIE and its external counterparty. In other instances, we have entered into derivative transactions with the counterparty to protect the counterparty from risks absorbed through its derivative transactions with the VIEs.

Although not contractually required, we regularly support our wholesale securitization programs by repurchasing receivables of a dealer from a VIE when the dealer’s performance is at risk, which transfers the corresponding risk of loss from the VIE to us. In order to continue to fund the wholesale receivables, we also may contribute additional cash or wholesale receivables if the collateral falls below the required levels. The balances of cash related to these contributions were $0 at June 30, 2014 and December 31, 2013, and ranged from $0 to $242 million during the first half of 2014.

See Note 5 for information on the financial position and financial performance of our VIEs and Notes 7 and 12 for additional information regarding derivatives.

VIEs of Which We Are Not the Primary Beneficiary

We have an investment in Forso Nordic AB, a joint venture determined to be a VIE of which we are not the primary beneficiary. The joint venture provides retail and dealer financing in its local markets and is financed by external debt and additional subordinated debt provided by the joint venture partner. The operating agreement indicates that the power to direct economically significant activities is shared with the joint venture partner, and the obligation to absorb losses or right to receive benefits resides primarily with the joint venture partner. Our investment in the joint venture is accounted for as an equity method investment and is included in Other assets. Our maximum exposure to any potential losses associated with this VIE is limited to our equity investment and amounted to $72 million and $72 million at June 30, 2014 and December 31, 2013, respectively.



18
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, our operations are exposed to global market risks, including the effect of changes in interest rates and foreign currency exchange rates. To manage these risks, we enter into various derivative contracts:

•
Interest rate contracts including swaps, caps, and floors that are used to manage the effects of interest rate fluctuations;
•
Foreign currency exchange contracts that are used to manage foreign exchange exposure; and
•
Cross-currency interest rate swap contracts that are used to manage foreign currency and interest rate exposures on foreign-denominated debt.

Our derivatives are over-the-counter customized derivative transactions and are not exchange traded. We review our hedging program, derivative positions, and overall risk management strategy on a regular basis.

Derivative assets and derivative liabilities are recorded in Derivative financial instruments on our balance sheet at fair value and presented on a gross basis.

We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Cash flows and the profit impact associated with designated hedges are reported in the same category as the underlying hedged item.

Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting. Regardless, we only enter into transactions that we believe will be highly effective at offsetting the underlying economic risk. We report net interest settlements and accruals and changes in the fair value of derivatives not designated as hedging instruments in Other income, net. Cash flows associated with non-designated or de-designated derivatives are reported in Net cash provided by/(used in) investing activities in our statement of cash flows.
 
Fair Value Hedges. We use derivatives to reduce the risk of changes in the fair value of debt. We have designated certain receive-fixed, pay-float interest rate swaps as fair value hedges of fixed-rate debt. The risk being hedged is the risk of changes in the fair value of the hedged debt attributable to changes in the benchmark interest rate. If the hedge relationship is deemed to be highly effective, we record the changes in the fair value of the hedged debt related to the risk being hedged in Debt with the offset in Other income, net. The change in fair value of the related derivative (excluding accrued interest) also is recorded in Other income, net.

Net interest settlements and accruals on fair value hedges are excluded from the assessment of hedge effectiveness. We report net interest settlements and accruals in Interest expense. We report foreign currency revaluation on accrued interest in Other income, net. The cash flows associated with fair value hedges are reported in Net cash provided by/(used in) operating activities in our statement of cash flows.

Hedge ineffectiveness is the difference between the change in fair value of the derivative instrument and the change in fair value of the hedged item attributable to changes in the benchmark interest rate. Ineffectiveness is recorded directly to income.

When a fair value hedge is de-designated, or when the derivative is terminated before maturity, the fair value adjustment to the hedged debt continues to be reported as part of the carrying value of the debt and is amortized over its remaining life.

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Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Income Effect of Derivative Financial Instruments

The following table summarizes by hedge designation the pre-tax gains/(losses) recognized in income for the periods ended June 30 (in millions):
 
Second Quarter
 
First Half
 
2014
 
2013
 
2014
 
2013
Fair value hedges
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
Net interest settlements and accruals excluded from the assessment of hedge effectiveness
$
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