Note 4 – Finance Receivables, Net

Finance receivables, net consist of retail and dealer accounts including accrued interest and deferred fees and costs, net of the allowance for credit losses and deferred income. Securitized receivables represent retail loan receivables that have been sold for legal purposes to securitization trusts but continue to be included in our consolidated financial statements, as discussed further in Note 10 – Variable Interest Entities. Cash flows from these securitized receivables are available only for the repayment of debt issued by these trusts and other obligations arising from the securitization transactions. They are not available for payment of our other obligations or to satisfy claims of our other creditors.

Finance receivables, net consisted of the following:

	September 30, 2015			March 31, 2015
Retail receivables	$	36,612		$	39,141
Securitized retail receivables		14,871			11,682
Dealer financing		14,170			15,744
		65,653			66,567

Deferred origination (fees) and costs, net		667			646
Deferred income		(921	)		(911	)
Allowance for credit losses
Retail and securitized retail receivables		(263	)		(301	)
Dealer financing		(114	)		(108	)
Total allowance for credit losses		(377	)		(409	)
Finance receivables, net	$	65,022		$	65,893

As of August 31, 2015, certain finance receivables, net related to our commercial finance business were reclassified as held-for-sale. See Note 8 – Other Assets and Other Liabilities of the Notes to Consolidated Financial Statements for additional detail. Finance receivables, net and retail receivables presented in the previous table includes direct finance lease receivables, net of $25 million and $308 million at September 30, 2015 and March 31, 2015, respectively.

Credit Quality Indicators

We are exposed to credit risk on our finance receivables. Credit risk is the risk of loss arising from the failure of customers or dealers to meet the terms of their contracts with us or otherwise fail to perform as agreed.

As of August 31, 2015, certain assets within the commercial and dealer products portfolio segments related to our commercial finance business were reclassified as held-for-sale. See Note 8 – Other Assets and Other Liabilities of the Notes to Consolidated Financial Statements for additional detail.

Retail Loan and Commercial Portfolio Segments

Retail loan and commercial portfolio segments each consist of one class of finance receivables. While we use various credit quality metrics to develop our allowance for credit losses on the retail loan and commercial portfolio segments, we primarily utilize the aging of the individual accounts to monitor the credit quality of these finance receivables. Based on our experience, the payment status of borrowers is the strongest indicator of the credit quality of the underlying receivables. Payment status also impacts charge-offs.

Individual borrower accounts for each class of finance receivables within the retail loan and commercial portfolio segments are segregated into aging categories based on the number of days outstanding. The aging for each class of finance receivables is updated monthly.

Note 4 – Finance Receivables, Net (Continued)

Dealer Products Portfolio Segment

For the three classes of finance receivables within the dealer products portfolio segment (wholesale, real estate and working capital), all loans outstanding for an individual dealer or dealer group, which includes affiliated entities, are aggregated and evaluated collectively by dealer or dealer group. This reflects the interconnected nature of financing provided to our individual dealer and dealer group customers, and their affiliated entities.

When assessing the credit quality of the finance receivables within the dealer products portfolio segment, we segregate the finance receivables account balances into four categories representing distinct credit quality indicators based on internal risk assessments. The internal risk assessments for all finance receivables within the dealer products portfolio segment are updated on a monthly basis.

The four credit quality indicators are:

Performing – Account not classified as either Credit Watch, At Risk or Default

Credit Watch – Account designated for elevated attention

At Risk – Account where there is an increased likelihood that default may exist based on qualitative and quantitative factors

Default – Account is not currently meeting contractual obligations or we have temporarily waived certain contractual requirements

The tables below present each credit quality indicator by class of finance receivable:

	Retail Loan				Commercial
	September 30, 2015		March 31, 2015		September 30, 2015		March 31, 2015
Aging of finance receivables:
Current	$	50,621	$	49,684	$	-	$	511
30-59 days past due		631		467		-		8
60-89 days past due		154		100		-		2
90 days or greater past due		77		51		-		-
Total	$	51,483	$	50,302	$	-	$	521

	Wholesale				Real Estate				Working Capital
	September 30, 2015		March 31, 2015		September 30, 2015		March 31, 2015		September 30, 2015		March 31, 2015
Credit quality indicators:
Performing	$	6,913	$	7,993	$	3,861	$	3,782	$	1,564	$	1,643
Credit Watch		794		1,137		676		842		166		176
At Risk		67		60		31		37		30		32
Default		18		36		45		4		5		2
Total	$	7,792	$	9,226	$	4,613	$	4,665	$	1,765	$	1,853

Note 4 – Finance Receivables, Net (Continued)

Impaired Finance Receivables

The following table summarizes the information related to our impaired loans by class of finance receivables:

	Impaired								Individually Evaluated
	Finance Receivables				Unpaid Principal Balance				Allowance
	September 30,		March 31,		September 30,		March 31,		September 30,		March 31,
	2015		2015		2015		2015		2015		2015
Impaired account balances individually evaluated for impairment with an allowance:
Wholesale	$	76	$	76	$	76	$	76	$	11	$	14
Real estate		86		52		86		52		13		10
Working capital		33		34		33		34		30		31
Total	$	195	$	162	$	195	$	162	$	54	$	55

Impaired account balances individually evaluated for impairment without an allowance:
Wholesale	$	108	$	105	$	108	$	105
Real estate		90		91		90		91
Working capital		4		2		4		2
Total	$	202	$	198	$	202	$	198

Impaired account balances aggregated and evaluated for impairment:
Retail loan	$	245	$	264	$	241	$	261
Commercial		-		-		-		-
Total	$	245	$	264	$	241	$	261

Total impaired account balances:
Retail loan	$	245	$	264	$	241	$	261
Commercial		-		-		-		-
Wholesale		184		181		184		181
Real estate		176		143		176		143
Working capital		37		36		37		36
Total	$	642	$	624	$	638	$	621

As of September 30, 2015 and March 31, 2015, the impaired finance receivables balance for accounts in the dealer products portfolio segment that were on nonaccrual status was $195 million and $172 million, respectively, and there were no charge-offs against the allowance for credit losses for these finance receivables. Therefore, the impaired finance receivables balance is equal to the unpaid principal balance. As of September 30, 2015 and March 31, 2015, impaired finance receivables in the retail portfolio segment recorded at the fair value of the collateral less estimated selling costs were insignificant and therefore excluded from the table above.

Note 4 – Finance Receivables, Net (Continued)

The following table summarizes the average impaired loans by class of finance receivables as of the balance sheet date and the interest income recognized on these loans:

	Average Impaired Finance Receivables								Interest Income Recognized
	Three Months Ended September 30,				Six Months Ended September 30,				Three Months Ended September 30,				Six Months Ended September 30,
	2015		2014		2015		2014		2015		2014		2015		2014
Impaired account balances individually evaluated for impairment with an allowance:
Wholesale	$	88	$	20	$	84	$	17	$	1	$	-	$	1	$	-
Real estate		88		20		76		23		-		-		1		-
Working capital		35		23		35		23		1		1		1		1
Total	$	211	$	63	$	195	$	63	$	2	$	1	$	3	$	1

Impaired account balances individually evaluated for impairment without an allowance:
Wholesale	$	104	$	51	$	105	$	51	$	1	$	-	$	1	$	-
Real estate		85		96		87		94		1		1		2		2
Working capital		4		3		3		3		-		-		-		-
Total	$	193	$	150	$	195	$	148	$	2	$	1	$	3	$	2

Impaired account balances aggregated and evaluated for impairment:
Retail loan	$	252	$	302	$	256	$	309	$	4	$	6	$	9	$	12
Commercial		-		1		-		1		-		-		-		-
Total	$	252	$	303	$	256	$	310	$	4	$	6	$	9	$	12

Total impaired account balances:
Retail loan	$	252	$	302	$	256	$	309	$	4	$	6	$	9	$	12
Commercial		-		1		-		1		-		-		-		-
Wholesale		192		71		189		68		2		-		2		-
Real estate		173		116		163		117		1		1		3		2
Working capital		39		26		38		26		1		1		1		1
Total	$	656	$	516	$	646	$	521	$	8	$	8	$	15	$	15

The primary source of interest income recognized on the loans in the table above is from performing troubled debt restructurings. In addition, interest income recognized using a cash-basis method of accounting during the three and six months ended September 30, 2015 and 2014 was not significant.

Note 4 – Finance Receivables, Net (Continued)

Troubled Debt Restructuring

For accounts not under bankruptcy protection, the amount of finance receivables modified as a troubled debt restructuring during the three and six months ended September 30, 2015 and 2014 was not significant for each class of finance receivables. Troubled debt restructurings for non-bankrupt accounts within the retail loan class of finance receivables are comprised exclusively of contract term extensions that reduce the monthly payment due from the customer. Troubled debt restructurings for accounts within the commercial portfolio class of finance receivables consist of contract term extensions, interest rate adjustments, or a combination of the two. For the three classes of finance receivables within the dealer products portfolio segment, troubled debt restructurings include contract term extensions, interest rate adjustments, waivers of loan covenants, or any combination of the three. Troubled debt restructurings of accounts not under bankruptcy protection did not include forgiveness of principal or interest rate adjustments during the three and six months ended September 30, 2015 and 2014. As of August 31, 2015, troubled debt restructurings related to our commercial finance business were reclassified as held-for-sale.

We consider finance receivables under bankruptcy protection within the retail loan and commercial classes to be troubled debt restructurings as of the date we receive notice of a customer filing for bankruptcy protection, regardless of the ultimate outcome of the bankruptcy proceedings. The bankruptcy court may impose modifications as part of the proceedings, including interest rate adjustments and forgiveness of principal. For the three and six months ended September 30, 2015 and 2014, the financial impact of troubled debt restructurings related to accounts under bankruptcy protection was not significant to our Consolidated Statement of Income and Consolidated Balance Sheet.

Payment Defaults

Finance receivables modified as troubled debt restructurings for which there was a subsequent payment default during the three and six months ended September 30, 2015 and 2014, and for which the modification occurred within twelve months of the payment default, were not significant for all classes of such receivables.