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Finance Receivables | 6 Months Ended
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Jun. 28, 2020
Receivables [Abstract] |
Finance Receivables | Finance Receivables The Company provides retail financial services to customers of its independent dealers in the U.S. and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts and are primarily related to independent dealer sales of motorcycles to retail customers. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts. The Company offers wholesale financing to its independent dealers in the U.S. and Canada. Wholesale finance receivables are related primarily to the Company's sale of motorcycles and related parts and accessories to dealers. Wholesale loans to dealers are generally secured by financed inventory or property. Finance receivables, net, consisted of the following (in thousands):
| June 28, 2020 |  | December 31, 2019 |  | June 30, 2019
Retail finance receivables | $ | 6,520,919 |  |  | $ | 6,416,428 |  |  | $ | 6,549,707 |
Wholesale finance receivables | 870,087 |  |  | 1,156,519 |  |  | 1,239,694 |
| 7,391,006 |  |  | 7,572,947 |  |  | 7,789,401 |
Allowance for credit losses | (411,015) |  |  | (198,581) |  |  | (194,996) |
| $ | 6,979,991 |  |  | $ | 7,374,366 |  |  | $ | 7,594,405 |
On January 1, 2020, the Company adopted ASU 2016-13, which requires an entity to recognize expected lifetime losses on finance receivables upon origination. The allowance for credit losses as of June 28, 2020 represents the Company’s estimate of lifetime losses for its finance receivables. Prior to the adoption of ASU 2016-13, the Company maintained an allowance for credit losses based on the Company’s estimate of probable losses inherent in the finance receivable portfolio as of the balance sheet date. Under ASU 2016-13, the Company’s finance receivables are reported at amortized cost, net of the allowance for credit losses. Amortized cost includes the principal outstanding, accrued interest, and deferred loan fees and costs. Based on differences in the nature of the finance receivables and the underlying methodology for calculating the allowance for loan losses, the Company segments its finance receivables into the retail and wholesale portfolios. The Company further disaggregates each portfolio by credit quality indicators. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit quality indicators for each portfolio. Prior to the adoption of ASU 2016-13, the Company’s investment in finance receivables included the same components as the amortized cost under the new accounting guidance. The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a collective evaluation of the adequacy of the retail allowance for credit losses. For periods after January 1, 2020, the Company utilizes a vintage-based loss forecast methodology that includes decompositions for probability of default, exposure at default, attrition rate, and recovery balance rate. Reasonable and supportable economic forecasts for a two-year period are incorporated into the methodology to reflect the estimated impact of changes in future economic conditions, such as unemployment rates, household obligations or other relevant factors, over the expected life of the retail portfolio. For periods beyond the Company’s reasonable and supportable forecasts, the Company reverts to its average historical loss experience for a three-year period using a mean-reversion process. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, or term as well as other relevant factors. For periods prior to January 1, 2020, the Company performed a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilized loss forecast models which considered a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates and current economic conditions. The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s evaluation for the wholesale allowance for credit losses is first based on a loan-by-loan review to determine whether the loans share similar risk characteristics. The Company classifies loans that do not share risk characteristics as Non-Performing and evaluates these loans individually. A specific allowance for credit losses is established for these finance receivables when foreclosure is probable. The specific allowance is determined based on amortized cost of the related finance receivable and the estimated fair value of the collateral, less selling costs and the cash that the Company expects to receive. Finance receivables in the wholesale portfolio not individually assessed are aggregated, based on similar risk characteristics, according to the Company’s internal risk rating system and measured collectively. For periods after January 1, 2020, the related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, reasonable and supportable economic forecasts, and the value of the underlying collateral and expected recoveries. For periods prior to January 1, 2020, the related allowance for credit losses was based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral. Changes in the Company’s outlook on economic conditions impacted the retail and wholesale estimates for expected credit losses at June 28, 2020. As part of the January 1, 2020 adoption of ASU 2016-13, the Company expected to be operating in a negative economic environment throughout 2020, the Company’s economic forecast worsened during the first quarter of 2020 as a result of the impact of the COVID-19 pandemic. During the second quarter of 2020, the Company’s outlook on economic conditions further deteriorated driven by the impact of the COVID-19 pandemic with recessionary conditions continuing to restrain the U.S. economy, including continued high unemployment rates and a slow U.S. Gross Domestic Product (GDP) recovery. The historical experience incorporated into the portfolio-specific models does not fully reflect the Company's comprehensive expectations regarding the future. As such, the Company incorporated qualitative factors to produce reasonable and supportable allowance balances. These factors include motorcycle recovery value considerations, delinquency adjustments associated with COVID-19 payment extensions and specific problem loan trends. Due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company in either portfolio could differ from the amounts estimated. Further, the Company’s allowance for credit losses incorporates management’s expectations surrounding the economic forecasts and known conditions at the balance sheet date. The Company’s expectations surrounding its economic forecasts may change in future periods as additional information becomes available. Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):
| Three months ended June 28, 2020 |  |  |  |
| Retail |  | Wholesale |  | Total
Balance, beginning of period | $ | 311,368 |  |  | $ | 24,128 |  |  | $ | 335,496 |
Provision for credit losses | 94,050 |  |  | (2,871) |  |  | 91,179 |
Charge-offs | (29,859) |  |  | — |  |  | (29,859) |
Recoveries | 14,199 |  |  | — |  |  | 14,199 |
Balance, end of period | $ | 389,758 |  |  | $ | 21,257 |  |  | $ | 411,015 |
| Three months ended June 30, 2019 |  |  |  |
| Retail |  | Wholesale |  | Total
Balance, beginning of period | $ | 181,426 |  |  | $ | 9,446 |  |  | $ | 190,872 |
Provision for credit losses | 27,555 |  |  | (1,172) |  |  | 26,383 |
Charge-offs | (35,741) |  |  | — |  |  | (35,741) |
Recoveries | 13,482 |  |  | — |  |  | 13,482 |
Balance, end of period | $ | 186,722 |  |  | $ | 8,274 |  |  | $ | 194,996 |
| Six months ended June 28, 2020 |  |  |  |
| Retail |  | Wholesale |  | Total
Balance, beginning of period | $ | 188,501 |  |  | $ | 10,080 |  |  | $ | 198,581 |
Cumulative effect of change in accounting(a) | 95,558 |  |  | 5,046 |  |  | 100,604 |
Provision for credit losses | 164,467 |  |  | 6,131 |  |  | 170,598 |
Charge-offs | (85,074) |  |  | — |  |  | (85,074) |
Recoveries | 26,306 |  |  | — |  |  | 26,306 |
Balance, end of period | $ | 389,758 |  |  | $ | 21,257 |  |  | $ | 411,015 |
| Six months ended June 30, 2019 |  |  |  |
| Retail |  | Wholesale |  | Total
Balance, beginning of period | $ | 182,098 |  |  | $ | 7,787 |  |  | $ | 189,885 |
Provision for credit losses | 60,387 |  |  | 487 |  |  | 60,874 |
Charge-offs | (80,462) |  |  | — |  |  | (80,462) |
Recoveries | 24,699 |  |  | — |  |  | 24,699 |
Balance, end of period | $ | 186,722 |  |  | $ | 8,274 |  |  | $ | 194,996 |
(a)On January 1, 2020, the Company adopted ASU 2016-13 and increased the allowance for loan loss through Retained earnings, net of income taxes, to establish an allowance that represents expected lifetime credit losses on the finance receivable portfolios at date of adoption. The Company manages retail credit risk through its credit approval process and ongoing collection efforts. The Company 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. For the Company’s U.S. and Canadian retail finance receivables, the Company determines the credit quality indicator for each loan at origination and does not update the credit quality indicator subsequent to the loan origination date. As loan performance by credit quality indicator differs between the U.S. and Canadian retail loans, the Company’s credit quality indicators vary for the two portfolios. For U.S. retail finance receivables, those with a FICO score of 740 or above at origination are generally considered super prime, loans with a FICO score between 640 and 740 are generally categorized as prime, and loans with FICO score below 640 are generally considered sub-prime. For Canadian retail finance receivables, those with a FICO score of 700 or above at origination are generally considered super prime, loans with a FICO score between 620 and 700 are generally categorized as prime, and loans with FICO score below 620 are generally considered sub-prime. The amortized cost of the Company's U.S. and Canadian retail finance receivables by credit quality indicator and vintage, as of June 28, 2020, was as follows (in thousands):
| 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | 2015 & Prior |  | Total
U.S. Retail: |  |  |  |  |  |  |  |  |  |  |  |  |
Super prime | $ | 486,327 |  |  | $ | 737,419 |  |  | $ | 474,280 |  |  | $ | 234,239 |  |  | $ | 114,496 |  |  | $ | 54,661 |  |  | $ | 2,101,422 |
Prime | 670,363 |  |  | 973,046 |  |  | 644,846 |  |  | 388,039 |  |  | 223,960 |  |  | 131,367 |  |  | 3,031,621 |
Sub-prime | 271,843 |  |  | 360,812 |  |  | 217,720 |  |  | 138,998 |  |  | 95,630 |  |  | 79,754 |  |  | 1,164,757 |
| 1,428,533 |  |  | 2,071,277 |  |  | 1,336,846 |  |  | 761,276 |  |  | 434,086 |  |  | 265,782 |  |  | 6,297,800 |
Canadian Retail: |  |  |  |  |  |  |  |  |  |  |  |  |
Super prime | 34,715 |  |  | 57,818 |  |  | 35,786 |  |  | 19,265 |  |  | 8,508 |  |  | 3,687 |  |  | 159,779 |
Prime | 11,548 |  |  | 15,741 |  |  | 11,598 |  |  | 7,932 |  |  | 4,093 |  |  | 3,187 |  |  | 54,099 |
Sub-prime | 1,970 |  |  | 2,720 |  |  | 1,881 |  |  | 1,289 |  |  | 782 |  |  | 599 |  |  | 9,241 |
| 48,233 |  |  | 76,279 |  |  | 49,265 |  |  | 28,486 |  |  | 13,383 |  |  | 7,473 |  |  | 223,119 |
| $ | 1,476,766 |  |  | $ | 2,147,556 |  |  | $ | 1,386,111 |  |  | $ | 789,762 |  |  | $ | 447,469 |  |  | $ | 273,255 |  |  | $ | 6,520,919 |
Prior to the adoption of ASU 2016-13, retail loans with a FICO score of 640 or above at origination were generally considered prime, and loans with a FICO score below 640 were generally considered sub-prime. These credit quality indicators were determined at the time of loan origination and were not updated subsequent to the loan origination date. The recorded investment in retail finance receivables, by credit quality indicator, was as follows (in thousands):
|  | December 31, 2019 |  | June 30, 2019
Prime |  | $ | 5,278,093 |  |  | $ | 5,372,712 |
Sub-prime |  | 1,138,335 |  |  | 1,176,995 |
|  | $ | 6,416,428 |  |  | $ | 6,549,707 |
The Company's 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. The Company 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. The Company uses the following internal credit quality indicators, based on an 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 the Company’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 Company classifies dealers identified as those in which foreclosure is probable as Non-Performing. The internal rating system considers factors such as the specific borrower's ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis. The amortized cost of wholesale financial receivables, by credit quality indicator and vintage, was as follows as of June 28, 2020 (in thousands):
| 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | 2015 & Prior |  | Total
Non-Performing | $ | — |  |  | $ | 2,376 |  |  | $ | 1,774 |  |  | $ | 107 |  |  | $ | 25 |  |  | $ | 43 |  |  | $ | 4,325 |
Doubtful | 579 |  |  | 1,009 |  |  | 188 |  |  | — |  |  | — |  |  | — |  |  | 1,776 |
Substandard | 944 |  |  | 966 |  |  | 53 |  |  | — |  |  | — |  |  | — |  |  | 1,963 |
Special Mention | 5,345 |  |  | 5,281 |  |  | 564 |  |  | — |  |  | — |  |  | 1,805 |  |  | 12,995 |
Medium Risk | 6,690 |  |  | 3,587 |  |  | 301 |  |  | 63 |  |  | — |  |  | — |  |  | 10,641 |
Low Risk | 517,708 |  |  | 273,408 |  |  | 29,301 |  |  | 8,965 |  |  | 6,006 |  |  | 2,999 |  |  | 838,387 |
| $ | 531,266 |  |  | $ | 286,627 |  |  | $ | 32,181 |  |  | $ | 9,135 |  |  | $ | 6,031 |  |  | $ | 4,847 |  |  | $ | 870,087 |
Dealer risk rating categories prior to the adoption of ASU 2016-13 were consistent with the current risk rating categories with the exception of the Non-Performing category for dealers identified as those in which foreclosure is probable, which was established in connection with the January 1, 2020 adoption of the new accounting guidance. The recorded investment in wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):
|  | December 31, 2019 |  | June 30, 2019
Doubtful |  | $ | 11,664 |  |  | $ | 6,850 |
Substandard |  | 6,122 |  |  | 7,643 |
Special Mention |  | 16,125 |  |  | 12,642 |
Medium Risk |  | 16,800 |  |  | 6,170 |
Low Risk |  | 1,105,808 |  |  | 1,206,389 |
|  | $ | 1,156,519 |  |  | $ | 1,239,694 |
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed, or the receivable is otherwise deemed uncollectible. The Company reverses accrued interest related to charged-off accounts against interest income when the account is charged-off. The Company reversed $5.0 million and $11.4 million of accrued interest against interest income during the three and six months ended June 28, 2020, respectively. All retail finance receivables accrue interest until either collected or charged-off. Due to the timely write-off of accrued interest, the Company made the election provided under ASU 2016-13 to exclude accrued interest from its allowance for credit losses. Accordingly, as of June 28, 2020, December 31, 2019 and June 30, 2019, all retail finance receivables were accounted for as interest-earning receivables, of which $16.0 million, $48.0 million and $30.4 million, re spectively, were 90 days or more past due. Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Wholesale finance receivables are written down once the Company determines that the specific borrower does not have the ability to repay the loan in full. Interest continues to accrue on past due finance receivables until the date the Company determines that foreclosure is probable, and the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. Once an account is charged-off, the Company will reverse the associated accrued interest against interest income. As the Company follows a non-accrual policy for interest, the allowance for credit losses excludes accrued interest for the wholesale portfolio. There were no charged-off accounts during the three and six months ended June 28, 2020. As such, the Company did not reverse any accrued interest in that period. At June 28, 2020, December 31, 2019 and June 30, 2019, $3.5 million, $2.6 million, and $2.1 million, respectively, of wholesale finance receivables were 90 days or more past due and accruing interest. Additional information related to the wholesale finance receivables on non-accrual status was as follows (in thousands):
| Amortized Cost |  |  |  | Amortized Cost |  | Interest Income
| January 1, 2020 |  |  |  | June 28, 2020 |  | Recognized
Wholesale: |  |  |  |  |  |  |
No related allowance recorded | $ | — |  |  |  |  | $ | — |  |  | $ | — |
Related allowance recorded | 4,994 |  |  |  |  | 4,325 |  |  | — |
| $ | 4,994 |  |  |  |  | $ | 4,325 |  |  | $ | — |
The aging analysis of finance receivables was as follows (in thousands):
| June 28, 2020 |  |  |  |  |  |  |  |  |  |
| Current |  | 31-60 Days Past Due |  | 61-90 Days Past Due |  | Greater than 90 Days Past Due |  | Total Past Due |  | Total
Retail finance receivables | $ | 6,425,078 |  |  | $ | 63,190 |  |  | $ | 16,631 |  |  | $ | 16,020 |  |  | $ | 95,841 |  |  | $ | 6,520,919 |
Wholesale finance receivables | 864,911 |  |  | 1,261 |  |  | 413 |  |  | 3,502 |  |  | 5,176 |  |  | 870,087 |
| $ | 7,289,989 |  |  | $ | 64,451 |  |  | $ | 17,044 |  |  | $ | 19,522 |  |  | $ | 101,017 |  |  | $ | 7,391,006 |
| December 31, 2019 |  |  |  |  |  |  |  |  |  |
| Current |  | 31-60 Days Past Due |  | 61-90 Days Past Due |  | Greater than 90 Days Past Due |  | Total Past Due |  | Total
Retail finance receivables | $ | 6,171,930 |  |  | $ | 142,479 |  |  | $ | 53,995 |  |  | $ | 48,024 |  |  | $ | 244,498 |  |  | $ | 6,416,428 |
Wholesale finance receivables | 1,152,416 |  |  | 1,145 |  |  | 384 |  |  | 2,574 |  |  | 4,103 |  |  | 1,156,519 |
| $ | 7,324,346 |  |  | $ | 143,624 |  |  | $ | 54,379 |  |  | $ | 50,598 |  |  | $ | 248,601 |  |  | $ | 7,572,947 |
| June 30, 2019 |  |  |  |  |  |  |  |  |  |
| Current |  | 31-60 Days Past Due |  | 61-90 Days Past Due |  | Greater than 90 Days Past Due |  | Total Past Due |  | Total
Retail finance receivables | $ | 6,359,499 |  |  | $ | 119,770 |  |  | $ | 40,015 |  |  | $ | 30,423 |  |  | $ | 190,208 |  |  | $ | 6,549,707 |
Wholesale finance receivables | 1,236,747 |  |  | 577 |  |  | 320 |  |  | 2,050 |  |  | 2,947 |  |  | 1,239,694 |
| $ | 7,596,246 |  |  | $ | 120,347 |  |  | $ | 40,335 |  |  | $ | 32,473 |  |  | $ | 193,155 |  |  | $ | 7,789,401 |
Prior to the Company's January 1, 2020 adoption of ASU 2016-13, finance receivables were considered impaired when management determined it was probable that the Company would not be able to collect all amounts due according to the terms of the loan agreement. Portions of the allowance for credit losses were established to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses covered estimated losses on finance receivables which were collectively reviewed for impairment. The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that were individually evaluated for impairment and those that were collectively evaluated for impairment, were as follows (in thousands):
| December 31, 2019 |  |  |  |
| Retail |  | Wholesale |  | Total
Allowance for credit losses, ending balance: |  |  |  |  |
Individually evaluated for impairment | $ | — |  |  | $ | 2,100 |  |  | $ | 2,100 |
Collectively evaluated for impairment | 188,501 |  |  | 7,980 |  |  | 196,481 |
| $ | 188,501 |  |  | $ | 10,080 |  |  | $ | 198,581 |
Finance receivables, ending balance: |  |  |  |  |
Individually evaluated for impairment | $ | — |  |  | $ | 4,601 |  |  | $ | 4,601 |
Collectively evaluated for impairment | 6,416,428 |  |  | 1,151,918 |  |  | 7,568,346 |
| $ | 6,416,428 |  |  | $ | 1,156,519 |  |  | $ | 7,572,947 |
| June 30, 2019 |  |  |  |
| Retail |  | Wholesale |  | Total
Allowance for credit losses, ending balance: |  |  |  |  |
Individually evaluated for impairment | $ | — |  |  | $ | — |  |  | $ | — |
Collectively evaluated for impairment | 186,722 |  |  | 8,274 |  |  | 194,996 |
| $ | 186,722 |  |  | $ | 8,274 |  |  | $ | 194,996 |
Finance receivables, ending balance: |  |  |  |  |
Individually evaluated for impairment | $ | — |  |  | $ | — |  |  | $ | — |
Collectively evaluated for impairment | 6,549,707 |  |  | 1,239,694 |  |  | 7,789,401 |
| $ | 6,549,707 |  |  | $ | 1,239,694 |  |  | $ | 7,789,401 |
At June 30, 2019, there were no wholesale receivables that were individually deemed to be impaired under ASC Topic 310, Receivables. Additional information related to the wholesale finance receivables that were individually deemed to be impaired at December 31, 2019 included the following (in thousands):
| Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance |  | Average Recorded Investment |  | Interest Income Recognized
Wholesale: |  |  |  |  |  |  |  |  |
No related allowance recorded | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Related allowance recorded | 4,994 |  |  | 4,601 |  |  | 2,100 |  |  | 4,976 |  |  | — |
| $ | 4,994 |  |  | $ | 4,601 |  |  | $ | 2,100 |  |  | $ | 4,976 |  |  | $ | — |
Retail finance receivables were not evaluated individually for impairment prior to charge-off at December 31, 2019 or June 30, 2019. Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total troubled restructured finance receivables are not significant as of June 28, 2020, December 31, 2019 and June 30, 2019. Additionally, in certain situations, the Company may offer short-term adjustments to customer payment due dates without affecting the associated interest rate or loan term. During the second quarter of 2020, the Company offered an increased amount of payment due date extensions on eligible retail loans to help retail customers get through short-term financial difficulties associated with the COVID-19 pandemic.

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