Note 4 – Finance Receivables, Net

Finance receivables, net consist of retail receivables and dealer financing, which includes accrued interest and deferred fees and costs, net of the allowance for credit losses and deferred income. Finance receivables, net also includes securitized retail receivables, which represent retail 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 9 – Variable Interest Entities. Cash flows from these securitized retail 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,			March 31,
	2018			2018
Retail receivables	$	42,094		$	41,265
Securitized retail receivables		11,863			12,130
Dealer financing		16,538			17,420
		70,495			70,815

Deferred origination (fees) and costs, net		650			630
Deferred income		(1,370	)		(1,335	)
Allowance for credit losses
Retail and securitized retail receivables		(307	)		(312	)
Dealer financing		(140	)		(151	)
Total allowance for credit losses		(447	)		(463	)
Finance receivables, net	$	69,328		$	69,647

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.

Retail Loan Portfolio Segment

The retail loan portfolio segment consists of one class of finance receivables. While we use various credit quality metrics to develop our allowance for credit losses on the retail loan portfolio segment, 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 within the retail loan segment 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 receivables:

	Retail Loan
	September 30,		March 31,
	2018		2018
Aging of finance receivables:
Current	$	52,973	$	52,559
30-59 days past due		715		613
60-89 days past due		189		158
90 days or greater past due		80		65
Total	$	53,957	$	53,395

	Wholesale				Real Estate				Working Capital
	September 30,		March 31,		September 30,		March 31,		September 30,		March 31,
	2018		2018		2018		2018		2018		2018
Credit quality indicators:
Performing	$	8,441	$	9,451	$	3,993	$	4,070	$	2,195	$	2,118
Credit Watch		1,104		946		530		484		102		105
At Risk		91		75		29		29		51		33
Default		2		41		-		47		-		21
Total	$	9,638	$	10,513	$	4,552	$	4,630	$	2,348	$	2,277

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,
	2018		2018		2018		2018		2018		2018

Impaired account balances individually evaluated for impairment with an allowance:
Wholesale	$	95	$	107	$	95	$	107	$	7	$	14
Real estate		39		86		39		86		2		5
Working capital		50		55		50		55		48		51
Total	$	184	$	248	$	184	$	248	$	57	$	70

Impaired account balances individually evaluated for impairment without an allowance:
Wholesale	$	101	$	83	$	101	$	83
Real estate		140		142		140		142
Working capital		21		22		21		22
Total	$	262	$	247	$	262	$	247

Impaired account balances aggregated and evaluated for impairment:
Retail loan	$	216	$	222	$	214	$	220

Total impaired account balances:
Retail loan	$	216	$	222	$	214	$	220
Wholesale		196		190		196		190
Real estate		179		228		179		228
Working capital		71		77		71		77
Total	$	662	$	717	$	660	$	715

As of September 30, 2018 and March 31, 2018, the impaired finance receivables balance for accounts in the dealer products portfolio segment that were on nonaccrual status was $175 million and $249 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, 2018 and March 31, 2018, impaired finance receivables in the retail portfolio segment recorded at the fair value of the collateral less estimated selling costs were not significant and therefore excluded from the table above. Refer to Note 6 – Allowance for Credit Losses for details related to the retail loan portfolio segment’s impaired account balances which are aggregated and evaluated for impairment when determining the allowance for credit losses.

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:

	Three Months Ended September 30,				Six Months Ended September 30,
	2018		2017		2018		2017

Impaired account balances individually evaluated for impairment with an allowance:
Wholesale	$	103	$	101	$	104	$	98
Real estate		46		91		60		92
Working capital		51		44		52		40
Total	$	200	$	236	$	216	$	230

Impaired account balances individually evaluated for impairment without an allowance:
Wholesale	$	102	$	116	$	96	$	122
Real estate		141		97		141		100
Working capital		21		-		21		-
Total	$	264	$	213	$	258	$	222

Impaired account balances aggregated and evaluated for impairment:
Retail loan	$	220	$	222	$	221	$	221

Total impaired account balances:
Retail loan	$	220	$	222	$	221	$	221
Wholesale		205		217		200		220
Real estate		187		188		201		192
Working capital		72		44		73		40
Total	$	684	$	671	$	695	$	673

Interest income on impaired finance receivables and interest income recognized using a cash-basis method of accounting during the three and six months ended September 30, 2018 and 2017 were not significant. The primary source of interest income on impaired finance receivables is from performing troubled debt restructurings.

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, 2018 and 2017 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. 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, 2018 and 2017.

We consider finance receivables under bankruptcy protection within the retail loan class 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, 2018 and 2017, the financial impact of troubled debt restructurings related to finance receivables under bankruptcy protection was not significant to our Consolidated Statements of Income and Consolidated Balance Sheets.

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, 2018 and 2017, and for which the modification occurred within twelve months of the payment default, were not significant for all classes of such receivables.