Toyota Motor Credit 10Q 2023 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2022

☐ 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 1-9961

TOYOTA MOTOR CREDIT CORPORATION

(Exact name of registrant as specified in its charter)


California		95-3775816
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6565 Headquarters Drive Plano, Texas		75024
(Address of principal executive offices)		(Zip Code)

(469) 486-9300

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Medium-Term Notes, Series B Stated Maturity Date January 11, 2028

TM/28

New York Stock Exchange

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. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of January 31, 2023, the number of outstanding shares of capital stock, no par value per share, of the registrant was 91,500, all of which shares were held by Toyota Financial Services International Corporation.

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.

TOYOTA MOTOR CREDIT CORPORATION

FORM 10-Q

For the quarter ended December 31, 2022


INDEX
PART I. FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Consolidated Statements of Income	3
Consolidated Statements of Comprehensive Income	3
Consolidated Balance Sheets	4
Consolidated Statements of Shareholder’s Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7
Note 1. Interim Financial Data	7
Note 2. Investments in Marketable Securities	8
Note 3. Finance Receivables, Net	11
Note 4. Allowance for Credit Losses	17
Note 5. Investments in Operating Leases, Net	19
Note 6. Derivatives, Hedging Activities and Interest Expense	20
Note 7. Debt and Credit Facilities	23
Note 8. Variable Interest Entities	25
Note 9. Commitments and Contingencies	27
Note 10. Income Taxes	30
Note 11. Related Party Transactions	31
Note 12. Fair Value Measurements	33
Note 13. Segment Information	36
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3. Quantitative and Qualitative Disclosures About Market Risk	63
Item 4. Controls and Procedures	63
PART II. OTHER INFORMATION	64
Item 1. Legal Proceedings	64
Item 1A. Risk Factors	64
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3. Defaults Upon Senior Securities	64
Item 4. Mine Safety Disclosures	64
Item 5. Other Information	64
Item 6. Exhibits	65
Signatures	67

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in millions)

(Unaudited)


	Three months ended				Nine months ended
	December 31,				December 31,
	2022		2021		2022			2021
Financing revenues:
Operating lease	$	1,743	$	2,081	$	5,460		$	6,329
Retail		974		830		2,719			2,442
Dealer		139		80		332			251
Total financing revenues		2,856		2,991		8,511			9,022
Depreciation on operating leases		1,262		1,460		3,976			4,400
Interest expense		765		346		2,033			1,055
Net financing revenues		829		1,185		2,502			3,567

Voluntary protection contract revenues and insurance earned premiums		263		255		785			758
Investment and other income (loss), net		240		76		(204	)		239
Net financing revenues and other revenues		1,332		1,516		3,083			4,564

Expenses:
Provision for credit losses		278		45		569			110
Operating and administrative		463		394		1,313			1,163
Voluntary protection contract expenses and insurance losses		115		96		336			303
Total expenses		856		535		2,218			1,576

Income before income taxes		476		981		865			2,988
Provision for income taxes		112		233		212			697

Net income	$	364	$	748	$	653		$	2,291

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in millions)

(Unaudited)


	Three months ended					Nine months ended
	December 31,					December 31,
	2022		2021			2022			2021
Net income	$	364	$	748		$	653		$	2,291
Other comprehensive income, net of tax
Net unrealized gains (losses) on available-for-sale marketable securities [net of tax benefit (provision) of $0, $1, $14 and ($1), respectively]		3		(3	)		(48	)		4
Reclassification adjustment for net (gains) losses on available-for-sale marketable securities included in investment and other income, net [net of tax provision of $0, $0, $0 and $0, respectively]		-		(1	)		2			(1	)
Other comprehensive income (loss)		3		(4	)		(46	)		3
Comprehensive income	$	367	$	744		$	607		$	2,294

Refer to the accompanying Notes to Consolidated Financial Statements.

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in millions except share data)

(Unaudited)


	December 31,			March 31,
	2022			2022
ASSETS
Cash and cash equivalents	$	6,454		$	7,670
Restricted cash and cash equivalents		1,806			2,065
Investments in marketable securities		4,518			4,953
Finance receivables, net of allowance for credit losses of $1,484 and $1,246		89,294			82,432
Investments in operating leases, net		30,830			35,455
Other assets		4,728			2,466
Total assets	$	137,630		$	135,041

LIABILITIES AND SHAREHOLDER’S EQUITY
Debt	$	110,099		$	109,152
Deferred income taxes		3,148			1,564
Other liabilities		5,675			6,224
Total liabilities		118,922			116,940

Commitments and contingencies (Refer to Note 9)

Shareholder’s equity:
Capital stock, no par value (100,000 shares authorized; 91,500 issued and outstanding) at December 31, 2022 and March 31, 2022		915			915
Additional paid-in capital		2			2
Accumulated other comprehensive loss		(67	)		(21	)
Retained earnings		17,858			17,205
Total shareholder's equity		18,708			18,101
Total liabilities and shareholder's equity	$	137,630		$	135,041

The following table presents the assets and liabilities of our consolidated variable interest entities (Refer to Note 8).


	December 31,		March 31,
	2022		2022
ASSETS
Finance receivables, net	$	25,758	$	20,932
Investments in operating leases, net		12,565		11,886
Other assets		94		66
Total assets	$	38,417	$	32,884

LIABILITIES
Debt	$	31,510	$	26,864
Other liabilities		45		10
Total liabilities	$	31,555	$	26,874

Refer to the accompanying Notes to Consolidated Financial Statements.

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

(Dollars in millions)

(Unaudited)


	Three months ended December 31, 2022
					Accumulated
			Additional		other
	Capital		paid-in		comprehensive			Retained
	stock		capital		(loss) income			earnings		Total
Balance at September 30, 2022	$	915	$	2	$	(70	)	$	17,494	$	18,341

Net income		-		-		-			364		364
Other comprehensive income, net of tax		-		-		3			-		3
Balance at December 31, 2022	$	915	$	2	$	(67	)	$	17,858	$	18,708


	Nine months ended December 31, 2022
					Accumulated
			Additional		other
	Capital		paid-in		comprehensive			Retained
	stock		capital		loss			earnings		Total
Balance at March 31, 2022	$	915	$	2	$	(21	)	$	17,205	$	18,101

Net income		-		-		-			653		653
Other comprehensive loss, net of tax		-		-		(46	)		-		(46	)
Balance at December 31, 2022	$	915	$	2	$	(67	)	$	17,858	$	18,708


	Three months ended December 31, 2021
					Accumulated
			Additional		other
	Capital		paid-in		comprehensive			Retained
	stock		capital		income (loss)			earnings		Total
Balance at September 30, 2021	$	915	$	2	$	15		$	16,213	$	17,145

Net income		-		-		-			748		748
Other comprehensive loss, net of tax		-		-		(4	)		-		(4	)
Balance at December 31, 2021	$	915	$	2	$	11		$	16,961	$	17,889


	Nine months ended December 31, 2021
					Accumulated
			Additional		other
	Capital		paid-in		comprehensive			Retained
	stock		capital		income			earnings		Total
Balance at March 31, 2021	$	915	$	2	$	8		$	14,670	$	15,595

Net income		-		-		-			2,291		2,291
Other comprehensive income, net of tax		-		-		3			-		3
Balance at December 31, 2021	$	915	$	2	$	11		$	16,961	$	17,889

Refer to the accompanying Notes to Consolidated Financial Statements.

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)


	Nine months ended December 31,
	2022			2021
Cash flows from operating activities:
Net income	$	653		$	2,291
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,035			4,489
Recognition of deferred income		(1,436	)		(1,841	)
Provision for credit losses		569			110
Amortization of deferred costs		781			743
Foreign currency and other adjustments to the carrying value of financial instruments, net		(129	)		(164	)
Net losses (gains) from investments in marketable securities		508			(108	)
Net change in:
Derivative assets		7			(9	)
Other assets and accrued interest		(1,874	)		(421	)
Deferred income taxes		1,598			(462	)
Derivative liabilities		(24	)		(1	)
Other liabilities		(513	)		150
Net cash provided by operating activities		4,175			4,777

Cash flows from investing activities:
Purchase of investments in marketable securities		(1,637	)		(1,780	)
Proceeds from sales of investments in marketable securities		1,458			1,284
Proceeds from maturities of investments in marketable securities		44			296
Acquisition of finance receivables		(31,566	)		(30,681	)
Collection of finance receivables		25,533			25,604
Net change in wholesale and certain working capital receivables		(1,571	)		3,370
Acquisition of investments in operating leases		(6,981	)		(12,293	)
Disposals of investments in operating leases		8,396			9,435
Long term loans to affiliates		(670	)		(200	)
Payments on long term loans from affiliates		250			300
Net change in financing support provided to affiliates		26			-
Other, net		(62	)		(39	)
Net cash used in investing activities		(6,780	)		(4,704	)

Cash flows from financing activities:
Proceeds from issuance of debt		26,514			29,270
Payments on debt		(24,539	)		(29,246	)
Net change in commercial paper and other short-term financing		(892	)		537
Net change in financing support provided by affiliates		47			17
Net cash provided by financing activities		1,130			578
Net (decrease) increase in cash and cash equivalents and restricted cash and cash equivalents		(1,475	)		651
Cash and cash equivalents and restricted cash and cash equivalents at the beginning of the period		9,735			10,152
Cash and cash equivalents and restricted cash and cash equivalents at the end of the period	$	8,260		$	10,803
Supplemental disclosures:
Interest paid, net	$	1,465		$	1,310
Income taxes paid, net	$	1,000		$	1,296

Refer to the accompanying Notes to Consolidated Financial Statements.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 1 – Interim Financial Data

Basis of Presentation

The information furnished in these unaudited interim consolidated financial statements as of and for the three and nine months ended December 31, 2022 and 2021 has been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, the unaudited consolidated financial information reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The results of operations for the three and nine months ended December 31, 2022, do not necessarily indicate the results which may be expected for the full fiscal year ending March 31, 2023 (“fiscal 2023”).

These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Toyota Motor Credit Corporation’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2022 (“fiscal 2022”), which was filed with the Securities and Exchange Commission on June 3, 2022. References herein to “TMCC” denote Toyota Motor Credit Corporation, and references herein to “we”, “our”, and “us” denote Toyota Motor Credit Corporation and its consolidated subsidiaries.

Other Matters

In fiscal 2021, we announced the restructuring of our customer service operations to better serve our customers by relocating and streamlining the customer service operation and investing in new technology. The restructuring is in progress, and we plan to complete the process of moving our three regional CSCs to be co-located with the regional DSCs to become regional experience centers by the end of fiscal 2023. Costs associated with this restructure are not expected to be significant.

In fiscal 2022, TMCC announced, in furtherance of its private label financial services initiative for third party automotive and mobility companies, that we entered into a nonbinding letter of intent with Great American Outdoors Group LLC, the parent company of Bass Pro Shops, Cabela’s and the White River Marine Group (“Bass Pro Shops”) to provide private label financial services for Bass Pro Shop’s boats, all-terrain vehicle products, and other mobility products. The Company began to provide inventory financing for Bass Pro Shops, its affiliates, and authorized independent dealers in fiscal 2023, with additional private label services, including consumer financing and voluntary protection products and services, to be added over time. We are leveraging our existing processes and personnel to originate and service the new assets, and we expect to make certain technology investments to support the Bass Pro Shops program. We did not acquire any existing Bass Pro Shops assets or liabilities pursuant to the agreement, and we do not expect launch costs to be significant.

Recently Adopted Accounting Guidance

On April 1, 2022, we adopted ASU 2021-05, Lessors-Certain Leases with Variable Lease Payments (Topic 842), which requires a lessor to classify and account for a lease with variable lease payments that do not depend on a reference index or rate as an operating lease if certain criteria are met. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

Accounting Guidance Issued But Not Yet Adopted

In March 2022, the FASB issued ASU 2022-02, Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for Troubled Debt Restructurings by creditors that have adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, while enhancing disclosure requirements for certain loan refinancing and restructurings made to borrowers experiencing financial difficulty. Additionally, the ASU adds the requirement to disclose current period gross write-offs by year of origination for financing receivables. This ASU is effective for us on April 1, 2023, with early application permitted. The adoption of this guidance will not have a material impact on our consolidated financial statements and related disclosures.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 2 – Investments in Marketable Securities

Investments in marketable securities consist of debt securities and equity investments. We classify all of our debt securities as available-for-sale (“AFS”). Except when the fair value option is elected, AFS debt securities are recorded at fair value with unrealized gains or losses included in accumulated other comprehensive income (“AOCI”), net of applicable taxes. Realized gains and losses from sales of AFS debt securities are determined using the specific identification method or first in first out method and are included in Investment and other (loss) income, net in our Consolidated Statements of Income.

We elected the fair value option for certain debt securities held within one of our affiliate investment portfolios for operational ease given the size and composition of this portfolio. All debt securities within this specific portfolio are recorded at fair value with changes in fair value included in Investment and other (loss) income, net in our Consolidated Statements of Income. As of December 31, 2022 and March 31, 2022, we held AFS debt securities for which the fair value option was elected of $629 million and $674 million, respectively. The difference between the aggregate fair value and the aggregate unpaid principal balance of AFS debt securities for which the fair value option was elected was an unrealized loss of $81 million and $41 million as of December 31, 2022 and March 31, 2022, respectively.

All equity investments are recorded at fair value with changes in fair value included in Investment and other (loss) income, net in our Consolidated Statements of Income. Realized gains and losses from sales of equity investments are determined using the first in first out method and are included in Investment and other (loss) income, net in our Consolidated Statements of Income.

Investments in marketable securities consisted of the following:


	December 31, 2022
	Amortized		Unrealized		Unrealized			Fair
	cost		gains		losses			value
Available-for-sale debt securities:
U.S. government and agency obligations	$	714	$	1	$	(78	)	$	637
Foreign government and agency obligations		13		-		(2	)		11
Municipal debt securities		8		1		(1	)		8
Corporate debt securities		457		1		(69	)		389
Mortgage-backed securities:
U.S. government agency		54		-		(4	)		50
Non-agency residential		10		-		(2	)		8
Non-agency commercial		84		1		(8	)		77
Asset-backed securities		71		-		(8	)		63
Total available-for-sale debt securities	$	1,411	$	4	$	(172	)	$	1,243
Equity investments									3,275
Total investments in marketable securities								$	4,518

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 2 – Investments in Marketable Securities (Continued)


	March 31, 2022
	Amortized		Unrealized		Unrealized			Fair
	cost		gains		losses			value
Available-for-sale debt securities:
U.S. government and agency obligations	$	538	$	-	$	(29	)	$	509
Foreign government and agency obligations		26		-		(3	)		23
Municipal debt securities		9		1		-			10
Corporate debt securities		598		4		(34	)		568
Mortgage-backed securities:
U.S. government agency		20		-		-			20
Non-agency residential		11		-		(1	)		10
Non-agency commercial		88		1		(3	)		86
Asset-backed securities		82		-		(4	)		78
Total available-for-sale debt securities	$	1,372	$	6	$	(74	)	$	1,304
Equity investments									3,649
Total investments in marketable securities								$	4,953

A portion of our equity investments are investments in funds that are privately placed and managed by an open-end investment management company (the “Trust”). If we elect to redeem shares, the Trust will normally redeem all shares for cash, but may, in unusual circumstances, redeem amounts exceeding the lesser of $250 thousand or 1 percent of the Trust’s asset value by payment in kind of securities held by the respective fund during any 90-day period.

We also invest in actively traded open-end mutual funds. Redemptions are subject to normal terms and conditions as described in each fund’s prospectus.

For the three and nine months ended December 31, 2022, respectively, we had no non-cash investing activities related to in-kind redemptions. For the three months ended December 31, 2021, we had no non-cash investing activities related to in-kind redemptions. For the nine months ended December 31, 2021, non-cash investing activities related to in-kind redemptions and subsequent purchases amounted to $1.1 billion.

Unrealized Losses on Securities

The following table presents the aggregate fair value and unrealized losses on AFS debt securities in a continuous unrealized loss position:


	December 31, 2022
	Less than 12 months					12 months or longer					Total
Available-for-sale debt securities:	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
U.S. government and agency obligations	$	328	$	(23	)	$	230	$	(55	)	$	558	$	(78	)
Foreign government and agency obligations		3		-			8		(2	)		11		(2	)
Municipal debt securities		1		(1	)		1		-			2		(1	)
Corporate debt securities		122		(17	)		254		(52	)		376		(69	)
Mortgage-backed securities
U.S. Government agency		24		(2	)		22		(2	)		46		(4	)
Non-agency residential		-		-			8		(2	)		8		(2	)
Non-agency commercial		25		(2	)		45		(6	)		70		(8	)
Asset-backed securities		25		(2	)		37		(6	)		62		(8	)
Total available-for-sale debt securities	$	528	$	(47	)	$	605	$	(125	)	$	1,133	$	(172	)

The aggregate unrealized losses on AFS debt securities in a continuous unrealized loss position for twelve months or longer were not significant as of March 31, 2022.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 2 – Investments in Marketable Securities (Continued)

An allowance for credit losses is established when it is determined that a credit loss has occurred. As of December 31, 2022 and March 31, 2022, management determined that credit losses did not exist for securities in an unrealized loss position. This analysis considered a variety of factors including, but not limited to, performance indicators of the issuer, default rates, industry analyst reports, credit ratings, and other relevant information, which indicated that contractual cash flows are expected to occur.

Gains and Losses on Securities

The following table represents gains and losses on our investments in marketable securities presented in our Consolidated Statements of Income:


	Three months ended						Nine months ended
	December 31,						December 31,
	2022			2021			2022			2021
Available-for-sale debt securities:
Unrealized gains (losses) on securities for which the fair value option was elected	$	16		$	(4	)	$	(41	)	$	3
Realized losses on sales	$	(8	)	$	(1	)	$	(33	)	$	(1	)

Equity investments:
Unrealized gains (losses)	$	80		$	26		$	(415	)	$	84
Realized (losses) gains on sales	$	(4	)	$	-		$	(19	)	$	22

Contractual Maturities

The amortized cost and fair value by contractual maturities of available-for-sale debt securities are summarized in the following table. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations.


	December 31, 2022
	Amortized cost		Fair value
Available-for-sale debt securities:
Due within 1 year	$	58	$	57
Due after 1 year through 5 years		286		267
Due after 5 years through 10 years		458		418
Due after 10 years		390		303
Mortgage-backed and asset-backed securities 1		219		198
Total	$	1,411	$	1,243

1 Mortgage-backed and asset-backed securities are shown separately from other maturity groupings as these securities have multiple maturity dates.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 3 – Finance Receivables, Net

Finance receivables, net consists of the retail loan and dealer products portfolio segments, and includes deferred origination costs, deferred income, and allowance for credit losses. 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 8 – 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:


	December 31,			March 31,
	2022			2022
Retail receivables 1	$	78,794		$	73,152
Dealer financing		11,801			10,298
		90,595			83,450

Deferred origination costs		1,332			1,330
Deferred income		(1,149	)		(1,102	)
Allowance for credit losses
Retail receivables		(1,426	)		(1,195	)
Dealer financing		(58	)		(51	)
Total allowance for credit losses		(1,484	)		(1,246	)
Finance receivables, net	$	89,294		$	82,432

1 Includes securitized retail receivables of $26.0 billion and $21.2 billion as of December 31, 2022 and March 31, 2022, respectively.

Accrued interest related to finance receivables is presented in Other assets on the Consolidated Balance Sheets and was $284 million and $214 million at December 31, 2022 and March 31, 2022, respectively.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 3 – Finance Receivables, Net (Continued)

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 portfolio segment are segregated into aging categories based on the number of days past due. The aging of finance receivables is updated monthly.

The following tables present the amortized cost basis of our retail loan portfolio by origination fiscal year by credit quality indicator based on number of days past due:


	Amortized Cost Basis by Origination Fiscal Year at December 31, 2022
	2023		2022		2021		2020		2019		2018 and Prior		Total
Aging of finance receivables:
Current	$	26,023	$	24,645	$	15,847	$	6,395	$	2,713	$	1,266	$	76,889
30-59 days past due		245		518		360		158		92		66		1,439
60-89 days past due		69		155		111		46		29		22		432
90 days or greater past due		33		82		52		22		13		15		217
Total	$	26,370	$	25,400	$	16,370	$	6,621	$	2,847	$	1,369	$	78,977


	Amortized Cost Basis by Origination Fiscal Year at March 31, 2022
	2022		2021		2020		2019		2018		2017 and Prior		Total
Aging of finance receivables:
Current	$	32,382	$	21,917	$	9,624	$	4,774	$	2,674	$	718	$	72,089
30-59 days past due		275		304		153		101		63		36		932
60-89 days past due		68		82		40		25		16		11		242
90 days or greater past due		33		39		17		13		8		7		117
Total	$	32,758	$	22,342	$	9,834	$	4,913	$	2,761	$	772	$	73,380

The amortized cost of retail loan portfolio excludes accrued interest of $240 million and $192 million at December 31, 2022 and March 31, 2022, respectively. The previous tables include contracts greater than 120 days past due, which are recorded at the fair value of collateral less estimated costs to sell, and contracts in bankruptcy.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 3 – Finance Receivables, Net (Continued)

Dealer Products Portfolio Segment

The dealer products portfolio segment consists of three classes of finance receivables: 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; and

•

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

The following tables present the amortized cost basis of our dealer products portfolio by credit quality indicator based on internal risk assessments by origination fiscal year:


	Amortized Cost Basis by Origination Fiscal Year at December 31, 2022
	2023		2022		2021		2020		2019		2018 and Prior		Revolving loans		Total
Wholesale
Performing	$	-	$	-	$	-	$	-	$	-	$	-	$	3,858	$	3,858
Credit Watch		-		-		-		-		-		-		30		30
At Risk		-		-		-		-		-		-		2		2
Default		-		-		-		-		-		-		-		-
Wholesale total	$	-	$	-	$	-	$	-	$	-	$	-	$	3,890	$	3,890
Real estate
Performing	$	987	$	1,213	$	1,083	$	148	$	331	$	1,021	$	109	$	4,892
Credit Watch		5		-		-		-		-		-		-		5
At Risk		-		-		-		-		-		-		-		-
Default		-		-		-		-		-		-		-		-
Real estate total	$	992	$	1,213	$	1,083	$	148	$	331	$	1,021	$	109	$	4,897
Working Capital
Performing	$	530	$	383	$	201	$	146	$	127	$	120	$	1,507	$	3,014
Credit Watch		-		-		-		-		-		-		-		-
At Risk		-		-		-		-		-		-		-		-
Default		-		-		-		-		-		-		-		-
Working capital total	$	530	$	383	$	201	$	146	$	127	$	120	$	1,507	$	3,014
Total	$	1,522	$	1,596	$	1,284	$	294	$	458	$	1,141	$	5,506	$	11,801

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 3 – Finance Receivables, Net (Continued)


	Amortized Cost Basis by Origination Fiscal Year at March 31, 2022
	2022		2021		2020		2019		2018		2017 and Prior		Revolving loans		Total
Wholesale
Performing	$	-	$	-	$	-	$	-	$	-	$	-	$	2,927	$	2,927
Credit Watch		-		-		-		-		-		-		16		16
At Risk		-		-		-		-		-		-		-		-
Default		-		-		-		-		-		-		-		-
Wholesale total	$	-	$	-	$	-	$	-	$	-	$	-	$	2,943	$	2,943
Real estate
Performing	$	1,614	$	1,245	$	264	$	384	$	260	$	1,245	$	-	$	5,012
Credit Watch		2		-		-		-		-		5		-		7
At Risk		-		-		-		-		-		-		-		-
Default		-		-		-		-		-		-		-		-
Real estate total	$	1,616	$	1,245	$	264	$	384	$	260	$	1,250	$	-	$	5,019
Working Capital
Performing	$	662	$	321	$	209	$	158	$	37	$	173	$	774	$	2,334
Credit Watch		1		1		-		-		-		-		-		2
At Risk		-		-		-		-		-		-		-		-
Default		-		-		-		-		-		-		-		-
Working capital total	$	663	$	322	$	209	$	158	$	37	$	173	$	774	$	2,336
Total	$	2,279	$	1,567	$	473	$	542	$	297	$	1,423	$	3,717	$	10,298

The amortized cost of the dealer products portfolio excludes accrued interest of $44 million and $22 million at December 31, 2022 and March 31, 2022, respectively. As of December 31, 2022 and March 31, 2022, the amount of line-of-credit arrangements that are converted to term loans in each reporting period was insignificant, respectively.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 3 – Finance Receivables, Net (Continued)

Past Due Finance Receivables by Class

Substantially all finance receivables do not involve recourse to the dealer in the event of customer default. Finance receivables include contracts greater than 120 days past due, which are recorded at the fair value of collateral less estimated costs to sell, and contracts in bankruptcy. Contracts for which vehicles have been repossessed are excluded. For all finance receivables, we define “past due” as any payment, including principal and interest, that is at least 30 days past the contractual due date. For any customer who is granted a payment extension under an extension program, the aging of the receivable is adjusted for the number of days of the extension granted.

The following tables summarize the aging of the amortized cost basis of our finance receivables by class:


	December 31, 2022
	30 - 59 Days past due		60 - 89 Days past due		90 Days or greater past due		Total Past due		Current		Total Finance receivables		90 Days or greater past due and accruing
Retail loan	$	1,439	$	432	$	217	$	2,088	$	76,889	$	78,977	$	152
Wholesale		-		-		-		-		3,890		3,890		-
Real estate		-		-		-		-		4,897		4,897		-
Working capital		-		-		-		-		3,014		3,014		-
Total	$	1,439	$	432	$	217	$	2,088	$	88,690	$	90,778	$	152


	March 31, 2022
	30 - 59 Days past due		60 - 89 Days past due		90 Days or greater past due		Total Past due		Current		Total Finance receivables		90 Days or greater past due and accruing
Retail loan	$	932	$	242	$	117	$	1,291	$	72,089	$	73,380	$	65
Wholesale		-		-		-		-		2,943		2,943		-
Real estate		-		-		-		-		5,019		5,019		-
Working capital		-		-		-		-		2,336		2,336		-
Total	$	932	$	242	$	117	$	1,291	$	82,387	$	83,678	$	65

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 3 – 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 nine months ended December 31, 2022 and 2021 was not significant for each class of finance receivables. Troubled debt restructurings for accounts not under bankruptcy protection 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 nine months ended December 31, 2022 and 2021.

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 nine months ended December 31, 2022 and 2021, 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.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 4 – Allowance for Credit Losses

The following tables provide information related to our allowance for credit losses for finance receivables and certain off-balance sheet lending commitments by portfolio segment:


	Three months ended December 31, 2022
	Retail loan			Dealer products		Total

Beginning balance, October 1, 2022	$	1,321		$	74	$	1,395
Charge-offs		(173	)		-		(173	)
Recoveries		13			-		13
Provision for credit losses		265			13		278
Ending balance, December 31, 2022 ¹	$	1,426		$	87	$	1,513

	Nine months ended December 31, 2022
	Retail loan			Dealer products		Total
Beginning balance, April 1, 2022	$	1,195		$	77	$	1,272
Charge-offs		(370	)		-		(370	)
Recoveries		42			-		42
Provision for credit losses		559			10		569
Ending balance, December 31, 2022 ¹	$	1,426		$	87	$	1,513

1 Ending balance includes $29 million of allowance for credit losses related to off-balance sheet commitments in the dealer products portfolio which is included in Other liabilities on the Consolidated Balance Sheet.


	Three months ended December 31, 2021
	Retail loan			Dealer products			Total

Beginning balance, October 1, 2021	$	1,135		$	89		$	1,224
Charge-offs		(64	)		-			(64	)
Recoveries		14			-			14
Provision for credit losses		55			(10	)		45
Ending balance, December 31, 2021 ¹	$	1,140		$	79		$	1,219


	Nine months ended December 31, 2021
	Retail loan			Dealer products			Total
Beginning balance, April 1, 2021	$	1,075		$	140		$	1,215
Charge-offs		(152	)		-			(152	)
Recoveries		46			-			46
Provision for credit losses		171			(61	)		110
Ending balance, December 31, 2021 ¹	$	1,140		$	79		$	1,219

1 Ending balance includes $34 million of allowance for credit losses related to off-balance sheet commitments in the dealer products portfolio which is included in Other liabilities on the Consolidated Balance Sheet.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 4 – Allowance for Credit Losses (Continued)

We have elected to exclude accrued interest from the measurement of expected credit losses as we apply policies and procedures that result in the timely write-offs of accrued interest. Accrued interest is written off within allowance for credit losses at the earlier of when an account is deemed to be uncollectible or when an account is greater than 120 days past due.

Finance receivables for the dealer products portfolio segment as of December 31, 2022, includes $983 million in finance receivables that are guaranteed by Toyota Motor North America, Inc. (“TMNA”), and $203 million in finance receivables that are guaranteed by third-party private Toyota distributors. Finance receivables for the dealer products portfolio segment as of December 31, 2021, includes $922 million in finance receivables that are guaranteed by TMNA, and $183 million in finance receivables that are guaranteed by third-party private Toyota distributors. These finance receivables are related to certain Toyota and Lexus dealers and other third parties to whom we provided financing at the request of TMNA and third-party private Toyota distributors.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 5 – Investments in Operating Leases, Net

Investments in operating leases, net consists of vehicle lease contracts acquired from dealers, and includes deferred origination fees and costs, deferred income, and accumulated depreciation. Securitized investments in operating leases represent beneficial interests in a pool of certain vehicle leases 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 8 - Variable Interest Entities. Cash flows from these securitized investments in operating leases 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.

Investments in operating leases, net consisted of the following:


	December 31,			March 31,
	2022			2022
Investments in operating leases 1	$	40,215		$	45,728
Deferred origination (fees) and costs, net		(68	)		(46	)
Deferred income		(784	)		(1,272	)
Accumulated depreciation		(8,533	)		(8,955	)
Investments in operating leases, net	$	30,830		$	35,455

1 Includes securitized investments in operating leases of $17.1 billion and $16.2 billion as of December 31, 2022 and March 31, 2022, respectively.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 6 – Derivatives, Hedging Activities and Interest Expense

Derivative Instruments

Our liabilities consist mainly of fixed and variable rate debt, denominated in U.S. dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps, and foreign currency swaps to economically hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. Our use of derivative transactions is intended to reduce long-term fluctuations in the fair value of assets and liabilities caused by market movements. All of our derivative activities are authorized and monitored by our management and our Asset-Liability Committee which provides a framework for financial controls and governance to manage market risk.

All derivative instruments are recorded on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow us to net settle asset and liability positions and offset cash collateral with the same counterparty on a net basis. Changes in the fair value of our derivative instruments are recorded in Interest expense in our Consolidated Statements of Income. The derivative instruments are included as a component of Other assets or Other liabilities on our Consolidated Balance Sheets.

Offsetting of Derivatives

Accounting guidance permits the net presentation on our Consolidated Balance Sheets of derivative receivables and derivative payables with the same counterparty and the related cash collateral when a legally enforceable master netting agreement exists, or when the derivative receivables and derivative payables meet all the conditions for the right of setoff to exist. When we meet this condition, we elect to present such balances on a net basis.

Over-the-Counter (“OTC”) Derivatives

Our International Swaps and Derivatives Association (“ISDA”) Master Agreements are our master netting agreements which permit multiple transactions to be cancelled and settled with a single net balance paid to either party for our OTC derivatives. The master netting agreements also contain reciprocal collateral agreements which require the transfer of cash collateral to the party in a net asset position across all transactions. Our collateral agreements with substantially all our counterparties include a zero threshold, full collateralization arrangement. Although we have daily valuation and collateral exchange arrangements with all of our counterparties, due to the time required to move collateral, there may be a delay of up to one day between the exchange of collateral and the valuation of our derivatives. We would not be required to post additional collateral to the counterparties with whom we were in a net liability position at December 31, 2022, if our credit ratings were to decline, since we fully collateralize without regard to credit ratings with these counterparties. In addition, as our collateral agreements include legal right of offset provisions, collateral amounts are netted against derivative assets or derivative liabilities, and the net amount is included in Other assets or Other liabilities on our Consolidated Balance Sheets.

Centrally Cleared Derivatives

For our centrally cleared derivatives, variation margin payments are legally characterized as settlement payments and accounted for with corresponding derivative positions as one unit of account as opposed to collateral. Initial margin payments are separately recorded in Other assets on our Consolidated Balance Sheets. We perform valuation and margin exchange on a daily basis. Similar to the OTC swaps, there may be a delay of up to one day between the exchange of margin payments and the valuation of our derivatives.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 6 – Derivatives, Hedging Activities and Interest Expense (Continued)

Derivative Activity Impact on Consolidated Financial Statements

The following tables show the financial statement line item and amount of our derivative assets and liabilities that are reported on our Consolidated Balance Sheets:


	December 31, 2022					March 31, 2022
			Fair					Fair
	Notional		value			Notional		value
Other assets:
Interest rate swaps	$	66,902	$	2,093		$	64,327	$	1,425
Foreign currency swaps		129		13			1,594		55
Total	$	67,031	$	2,106		$	65,921	$	1,480

Counterparty netting				(809	)				(761	)
Collateral held				(1,243	)				(658	)
Carrying value of derivative contracts – Other assets			$	54				$	61

Other liabilities:
Interest rate swaps	$	33,198	$	779		$	19,903	$	822
Foreign currency swaps		7,603		1,317			8,102		717
Total	$	40,801	$	2,096		$	28,005	$	1,539

Counterparty netting				(809	)				(761	)
Collateral posted				(1,286	)				(753	)
Carrying value of derivative contracts – Other liabilities			$	1				$	25

As of December 31, 2022 and March 31, 2022, excess collateral and variation margin held, which we did not use to offset derivative assets and was recorded in Other liabilities on our Consolidated Balance Sheets, was not significant. As of December 31, 2022 and March 31, 2022, we posted initial margin and excess collateral of $183 million and $132 million, respectively, which we did not use to offset derivative liabilities and was recorded in Other assets on our Consolidated Balance Sheets.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 6 – Derivatives, Hedging Activities and Interest Expense (Continued)

The following table summarizes the components of interest expense, including the location and amount of gains and losses on derivative instruments and related hedged items, as reported in our Consolidated Statements of Income:


	Three months ended						Nine months ended
	December 31,						December 31,
	2022			2021			2022			2021
Interest expense on debt	$	845		$	362		$	1,914		$	1,134
Interest (income) expense on derivatives		(186	)		23			(368	)		137
Interest expense on debt and derivatives		659			385			1,546			1,271

Losses (gains) on debt denominated in foreign currencies		532			(60	)		(649	)		(338	)
(Gains) losses on foreign currency swaps		(509	)		151			947			509
Losses (gains) on U.S. dollar interest rate swaps		83			(130	)		189			(387	)
Total interest expense	$	765		$	346		$	2,033		$	1,055

Interest expense on debt and derivatives represents net interest settlements and changes in accruals. Gains and losses on derivatives and debt denominated in foreign currencies exclude net interest settlements and changes in accruals. Cash flows associated with derivatives are reported in Net cash provided by operating activities in our Consolidated Statements of Cash Flows.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 7 – Debt and Credit Facilities

Debt and the related weighted average contractual interest rates are summarized as follows:


	December 31, 2022					March 31, 2022
	Face value		Carrying value		Weighted average contractual interest rates	Face value		Carrying value		Weighted average contractual interest rates
Unsecured notes and loans payable	$	78,958	$	78,589	3.06%	$	82,542	$	82,288	1.30%
Secured notes and loans payable		31,557		31,510	3.23%		26,907		26,864	1.01%
Total debt	$	110,515	$	110,099	3.10%	$	109,449	$	109,152	1.23%

The carrying value of our debt includes unamortized premiums, discounts, debt issuance costs and the effects of foreign currency translation adjustments.

Weighted average contractual interest rates are calculated based on original notional or par value before consideration of premium or discount and approximate the effective interest rates. Debt is callable at par value.

Unsecured Notes and Loans Payable

Our unsecured notes and loans payable consist of commercial paper and fixed and variable rate debt. Short-term funding needs are met through the issuance of commercial paper in the U.S. Amounts outstanding under our commercial paper programs were $16.8 billion and $16.9 billion as of December 31, 2022 and March 31, 2022, respectively.

Upon issuance of fixed rate debt, we generally elect to enter into pay-float swaps to convert fixed rate payments on debt to floating rate payments. Certain unsecured notes and loans payable are denominated in various foreign currencies. The debt is translated into U.S. dollars using the applicable exchange rate at the transaction date and retranslated at each balance sheet date using the exchange rate in effect at that date. Concurrent with the issuance of these foreign currency unsecured notes and loans payable, we enter into currency swaps in the same notional amount to convert non-U.S. currency payments to U.S. dollar denominated payments. Gains and losses related to foreign currency transactions are included in Interest expense in our Consolidated Statements of Income.

Certain of our unsecured notes and loans payable contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. We are currently in compliance with these covenants and conditions.

Secured Notes and Loans Payable

Our secured notes and loans payable are denominated in U.S. dollars and consist of both fixed and variable rate debt. Secured notes and loans payable are issued using on-balance sheet securitization trusts, as further discussed in Note 8 – Variable Interest Entities. These notes are repayable only from collections on the underlying securitized retail finance receivables and the beneficial interests in investments in operating leases and from related credit enhancements. Some of our secured notes are backed by a revolving pool of finance receivables and cash collateral, with the ability to repay the notes in full after the revolving period ends, after which an amortization period begins.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 7 – Debt and Credit Facilities (Continued)

Credit Facilities and Letters of Credit

For additional liquidity purposes, we maintain credit facilities, which may be used for general corporate purposes, as described below:

364-Day Credit Agreement, Three-Year Credit Agreement and Five-Year Credit Agreement

TMCC, Toyota Credit de Puerto Rico Corp. (“TCPR”), and other Toyota affiliates are party to a $5.0 billion 364-day syndicated bank credit facility, a $5.0 billion three-year syndicated bank credit facility, and a $5.0 billion five-year syndicated bank credit facility, expiring in fiscal 2024, 2026, and 2028, respectively.

The ability to make draws is subject to covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. These agreements were not drawn upon and had no outstanding balances as of December 31, 2022 and March 31, 2022. We are currently in compliance with the covenants and conditions of the credit agreements described above.

Committed Revolving Asset-backed Facility

We are party to a 364-day revolving securitization facility with certain bank-sponsored asset-backed conduits and other financial institutions expiring in fiscal 2024. Under the terms and subject to the conditions of this facility, the committed lenders under the facility have committed to make advances up to a facility limit of $8.0 billion backed by eligible retail finance receivables transferred by us to a special-purpose entity acting as borrower. We utilized $3.9 billion and $3.2 billion of this facility as of December 31, 2022 and March 31, 2022, respectively.

Other Unsecured Credit Agreements

TMCC is party to additional unsecured credit facilities with various banks. As of December 31, 2022, TMCC had committed bank credit facilities totaling $4.6 billion, of which $350 million, $2.0 billion, $455 million, and $1.8 billion mature in fiscal 2023, 2024, 2025, and 2026 respectively.

These credit agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. These credit facilities were not drawn upon and had no outstanding balances as of December 31, 2022 and March 31, 2022. We are currently in compliance with the covenants and conditions of the credit agreements described above.

TMCC is party to a $5.0 billion three-year revolving credit facility with Toyota Motor Sales U.S.A., Inc. expiring in fiscal 2025. This credit facility was not drawn upon and had no outstanding balance as of December 31, 2022 and March 31, 2022.

From time to time, we may borrow from affiliates based upon a number of business factors such as funds availability, cash flow timing, relative cost of funds, and market access capabilities. Amounts borrowed from affiliates are recorded in Other liabilities on our Consolidated Balance Sheets.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 8 – Variable Interest Entities

Consolidated Variable Interest Entities

We use one or more special purpose entities that are considered Variable Interest Entities (“VIEs”) to issue asset-backed securities to third-party bank-sponsored asset-backed securitization vehicles and to investors in securitization transactions. The securities issued by these VIEs are backed by the cash flows related to retail finance receivables and beneficial interests in investments in operating leases (“Securitized Assets”). We hold variable interests in the VIEs that could potentially be significant to the VIEs. We determined that we are the primary beneficiary of the securitization trusts because (i) our servicing responsibilities for the Securitized Assets give us the power to direct the activities that most significantly impact the performance of the VIEs, and (ii) our variable interests in the VIEs give us the obligation to absorb losses and the right to receive residual returns that could potentially be significant.

The following tables show the assets and liabilities related to our VIE securitization transactions that were included on our Consolidated Balance Sheets:


	December 31, 2022
			VIE Assets				VIE Liabilities
			Net
	Restricted cash		securitized assets		Other assets		Debt		Other liabilities
Retail finance receivables	$	1,211	$	25,758	$	74	$	22,644	$	31
Investments in operating leases		595		12,565		20		8,866		14
Total	$	1,806	$	38,323	$	94	$	31,510	$	45


	March 31, 2022
			VIE Assets				VIE Liabilities
			Net
	Restricted cash		securitized assets		Other assets		Debt		Other liabilities
Retail finance receivables	$	1,284	$	20,932	$	51	$	18,562	$	8
Investments in operating leases		645		11,886		15		8,302		2
Total	$	1,929	$	32,818	$	66	$	26,864	$	10

Restricted Cash, including cash equivalents, shown in the previous tables represent collections from the underlying Net securitized assets and certain reserve deposits held by TMCC for the VIEs and is included as part of Restricted cash and cash equivalents on our Consolidated Balance Sheets. Net securitized assets shown in the previous tables are presented net of deferred fees and costs, deferred income, accumulated depreciation and allowance for credit losses. Other assets represent accrued interests related to securitized retail finance receivables and used vehicles held-for-sale that were repossessed by or returned to TMCC for the benefit of the VIEs. The related debt of these consolidated VIEs is presented net of $1.6 billion and $1.7 billion of securities retained by TMCC at December 31, 2022 and March 31, 2022, respectively. Other liabilities represent accrued interest on the debt of the consolidated VIEs.

The assets of the VIEs and the restricted cash and cash equivalents held by TMCC serve as the sole source of repayment for the asset-backed securities issued by these entities. Investors in the notes issued by the VIEs do not have recourse to us or our other assets, with the exception of customary representation and warranty repurchase provisions and indemnities.

As the primary beneficiary of these entities, we are exposed to credit, residual value, interest rate, and prepayment risk from the Securitized Assets in the VIEs. However, our exposure to these risks did not change as a result of the transfer of the assets to the VIEs. We may also be exposed to interest rate risk arising from the secured notes issued by the VIEs.

In addition, we entered into interest rate swaps with certain special purpose entities that issue variable rate debt. Under the terms of these swaps, the special purpose entities are obligated to pay TMCC a fixed rate of interest on certain payment dates in exchange for receiving a floating rate of interest on notional amounts equal to the outstanding balance of the secured debt. This arrangement enables the special purpose entities to mitigate the interest rate risk inherent in issuing variable rate debt that is secured by fixed rate Securitized Assets.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 8 – Variable Interest Entities (Continued)

The transfers of the Securitized Assets to the special purpose entities in our securitizations are considered to be sales for legal purposes. However, the Securitized Assets and the related debt remain on our Consolidated Balance Sheets. We recognize financing revenue on the Securitized Assets and interest expense on the secured debt issued by the special purpose entities. We also maintain an allowance for credit losses on the securitized retail finance receivables using a methodology consistent with that used for our non-securitized asset portfolio. The interest rate swaps between TMCC and the special purpose entities are considered intercompany transactions and therefore are eliminated in our consolidated financial statements.

Non-consolidated Variable Interest Entities

We provide lending to Toyota and Lexus dealers through the Toyota Dealer Investment Group’s Dealer Capital Program (“TDIG Program”) operated by our affiliate TMNA, which has an equity interest in these dealerships. Dealers participating in this program have been determined to be VIEs. We do not consolidate the dealerships in this program as we are not the primary beneficiary and any exposure to loss is limited to the amount of the credit facility. Amounts due from these dealers under the TDIG Program that are classified as Finance receivables, net in our Consolidated Balance Sheets at December 31, 2022 and March 31, 2022 and revenues earned from these dealers for the three and nine months ended December 31, 2022 and 2021 were not significant.

We also have other lending relationships which have been determined to be VIEs, but these relationships are not consolidated as we are not the primary beneficiary. Amounts due from these lending relationships at December 31, 2022 and March 31, 2022 and revenues earned under these relationships for the three and nine months ended December 31, 2022 and 2021 were not significant.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 9 – Commitments and Contingencies

Commitments and Guarantees

We have entered into certain commitments and guarantees for which the maximum unfunded amounts are summarized in the table below:


	December 31,		March 31,
	2022		2022
Commitments:
Credit facilities commitments with dealers	$	3,193	$	3,289
Commitments under operating lease agreements		110		119
Total commitments		3,303		3,408
Guarantees of affiliate pollution control and solid waste disposal bonds		100		100
Total commitments and guarantees	$	3,403	$	3,508

Wholesale financing is not considered to be a contractual commitment as the arrangements are not binding arrangements under which TMCC is required to perform.

Commitments

We provide fixed and variable rate working capital loans, revolving lines of credit, and real estate financing to dealers and various multi-franchise organizations referred to as dealer groups for facilities construction and refurbishment, working capital requirements, real estate purchases, business acquisitions and other general business purposes. These loans are typically secured with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate, and may be guaranteed by individual or corporate guarantees of affiliated dealers, dealer groups, or dealer principals. Although the loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover our exposure under such agreements. Our pricing reflects market conditions, the competitive environment, the level of support dealers provide our retail, lease and voluntary protection business and the credit worthiness of each dealer. Amounts drawn under these facilities are reviewed for collectability on a quarterly basis, in conjunction with our evaluation of the allowance for credit losses. In addition to the total commitments and guarantees in the previous table, we also have extended credit facilities to affiliates as described in Note 12 – Related Party Transactions in our fiscal 2022 Form 10-K.

Lease Commitments

Our operating lease portfolio consists of real estate leases. Total operating lease expense, including payments to affiliates, was $25 million and $10 million for the first nine months and third quarter of fiscal 2023, as compared to $25 million and $8 million for the same periods in fiscal 2022. We have a lease agreement through August 2032 with TMNA for our headquarters facility in Plano, Texas. Commitments under operating lease agreements in the previous table include $78 million and $84 million for facilities leases with affiliates at December 31, 2022 and March 31, 2022, respectively.

Lease terms may contain renewal and extension options or early termination features. Generally, these options do not impact the lease term because TMCC is not reasonably certain that it will exercise the options. These lease agreements do not impose restrictions on our ability to pay dividends, engage in debt or equity financing transactions or enter into further lease agreements, nor do they have residual value guarantees. We exclude from our Consolidated Balance Sheets leases with a term equal to one year or less and do not separate non-lease components from our real estate leases.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 9 – Commitments and Contingencies (Continued)

Our commitments under operating lease agreements are summarized below:


	December 31,
Years ending March 31,	2022
2023	$	5
2024		18
2025		15
2026		14
2027		13
Thereafter		45
Total	$	110
Present value discount		(12	)
Total operating lease liability	$	98

Operating lease liabilities and right-of-use (“ROU”) assets are recognized at the lease commencement date based on the present value of the future minimum lease payments over the lease term. As the interest rate implicit in the lease contract is typically not readily determinable, we utilize our incremental borrowing rate at the lease commencement date for the duration of the lease term.

The following table provides additional information related to operating lease agreements for which we are the lessee:


	December 31,
	2022
ROU assets	$	86
Weighted average remaining lease term (in years)		7.7
Weighted average discount rate		2.86	%

Guarantees and Other Contingencies

TMCC has guaranteed bond obligations totaling $100 million in principal that were issued by Putnam County, West Virginia and Gibson County, Indiana to finance the construction of pollution control facilities at manufacturing plants of certain TMCC affiliates. The bonds mature in the following fiscal years ending March 31: 2028 - $20 million; 2029 - $50 million; 2030 - $10 million; 2031 - $10 million; and 2032 - $10 million. TMCC would be required to perform under the guarantees in the event of non-payment on the bonds and other related obligations. TMCC is entitled to reimbursement by the applicable affiliates for any amounts paid. TMCC receives a nominal annual fee for guaranteeing such payments. TMCC has not been required to perform under any of these affiliate bond guarantees as of December 31, 2022 and March 31, 2022.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 9 – Commitments and Contingencies (Continued)

Indemnification

In the ordinary course of business, we enter into agreements containing indemnification provisions standard in the industry related to several types of transactions, including, but not limited to, debt funding, derivatives, securitization transactions, and our vendor, supplier and service agreements. Performance under these indemnities would generally occur upon a breach of the representations, warranties, covenants or other commitments made or given in the agreement, or as a result of a third-party claim. In addition, we have agreed in certain debt and derivative issuances, and subject to certain exceptions, to gross-up payments due to third parties in the event that withholding tax is imposed on such payments. In addition, certain of our funding arrangements may require us to pay lenders for increased costs due to certain changes in laws or regulations. Due to the difficulty in predicting events which could cause a breach of the indemnification provisions or trigger a gross-up or other payment obligation, we are not able to estimate our maximum exposure to future payments that could result from claims made under such provisions. We have not made any material payments in the past as a result of these provisions, and as of December 31, 2022, we determined that it is not probable that we will be required to make any material payments in the future. As of December 31, 2022 and March 31, 2022, no amounts have been recorded under these indemnification provisions.

Litigation and Governmental Proceedings

Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against us with respect to matters arising in the ordinary course of business. Certain of these actions are or purport to be class action suits, seeking sizeable damages and/or changes in our business operations, policies and practices. Certain of these actions are similar to suits that have been filed against other financial institutions and captive finance companies. In addition, we are subject to governmental and regulatory examinations, information-gathering requests, and investigations from time to time at the state and federal levels. It is inherently difficult to predict the course of such legal actions and governmental inquiries.

We perform periodic reviews of pending claims and actions to determine the probability of adverse verdicts and resulting amounts of liability. We establish accruals for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. When we are able, we also determine estimates of reasonable possibility of loss or range of loss, whether in excess of any related accrued liability or where there is no accrued liability. Given the inherent uncertainty associated with legal matters, the actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts for which accruals have been established. Based on available information and established accruals, we do not believe it is reasonably probable that the results of these proceedings, either individually or in the aggregate, will have a material adverse effect on our consolidated financial condition or results of operations.

On November 24, 2020, the Consumer Financial Protection Bureau (“CFPB”) issued a civil investigative demand to the Company seeking, among other things, certain information relating to the Company’s vehicle and payment protection products and credit reporting policies and procedures and reporting records. We are cooperating with the inquiry and cannot predict the eventual scope, duration or outcome at this time. As a result, we are unable to estimate the amount or range of any potential loss arising from this investigation.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 10 – Income Taxes

Our provision for income taxes was $112 million and $212 million for the three and nine months ended December 31, 2022, respectively, compared to $233 million and $697 million for the same periods in fiscal 2022. Our effective tax rate was 24 percent and 25 percent for the three and nine months ended December 31, 2022, respectively, compared to 24 percent and 23 percent for the same periods in fiscal 2022. The decrease in the provision for income taxes for the three and nine months ended December 31, 2022, compared to the same periods in fiscal 2022, was primarily due to the decrease in income before income taxes. The higher effective tax rate for the first nine months of fiscal 2023, compared to the same period in fiscal 2022, was primarily attributable to the decrease in federal plug-in vehicle credits and the increase in unrecognized state tax benefits in the current period.

In August 2022, the Inflation Reduction Act ("the Act") was signed into law. The Act modifies climate and clean energy corporate tax provisions, including amendments to the federal tax credit for plug-in vehicles available under current tax law. The Act also includes a 15 percent corporate alternative minimum tax based on modified financial statement net income, applying to tax years beginning after December 31, 2022, which we expect to be applicable in fiscal 2024. As additional guidance related to the Act is issued, we will evaluate any impact to our consolidated financial statements. We do not expect the Act to have a material impact on our results of operations for fiscal 2023.

Tax-related Contingencies

As of December 31, 2022, we remain under IRS examination for fiscal 2018 through fiscal 2023.

We periodically review our uncertain tax positions. Our assessment is based on many factors including any ongoing IRS audits. For the three months ended December 31, 2022, our assessment did not result in a material change in unrecognized tax benefits.

Our deferred tax assets include the deferred deduction of allowance for credit losses and residual value loss estimates, mark-to-market adjustment of investment in marketable securities, and other deferred costs. The total deferred tax liability, net of these deferred tax assets, was $3.1 billion and $1.6 billion at December 31, 2022 and March 31, 2022, respectively. The increase in our net deferred tax liability was primarily due to the temporary difference between depreciation expense reported for financial statement and that reported for income tax purposes. Although realization of the deferred tax assets is not assured, management believes it is more likely than not that the deferred tax assets will be realized. The amount of the deferred tax assets considered realizable could be reduced if management’s estimates change.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 11 – Related Party Transactions

As of December 31, 2022, there were no material changes to our related party agreements or relationships as described in our fiscal 2022 Form 10-K. The tables below show the financial statement line items and amounts included in our Consolidated Statements of Income and in our Consolidated Balance Sheets under various related party agreements or relationships:


	Three months ended					Nine months ended
	December 31,					December 31,
	2022		2021			2022		2021
Net financing revenues:
Manufacturer's subvention and other revenues	$	300	$	425		$	955	$	1,361
Depreciation on operating leases	$	23	$	(14	)	$	79	$	(67	)

Interest expense:
Credit support fees, interest and other expenses	$	25	$	25		$	72	$	76

Voluntary protection contract revenues and insurance earned premiums:
Voluntary protection contract revenues and insurance earned premiums	$	39	$	42		$	118	$	127

Investment and other income, net:
Interest and other income	$	21	$	1		$	18	$	6

Expenses:
Operating and administrative	$	42	$	19		$	79	$	62

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 11 – Related Party Transactions (Continued)


	December 31,			March 31,
	2022			2022
Assets:
Cash and cash equivalents
Commercial paper	$	4		$	100

Finance receivables, net
Accounts receivable	$	57		$	90
Deferred retail subvention income	$	(914	)	$	(875	)

Investments in operating leases, net
Investments in operating leases, net	$	(258	)	$	(212	)
Deferred lease subvention income	$	(504	)	$	(923	)

Other assets
Notes receivable	$	1,176		$	789
Other receivables, net	$	96		$	80

Liabilities:
Other liabilities
Unearned voluntary protection contract revenues and insurance earned premiums	$	395		$	374
Other payables, net	$	452		$	394
Notes payable	$	55		$	8

TMCC receives subvention payments from TMNA which results in a gross monthly subvention receivable. As of December 31, 2022 and March 31, 2022, the subvention receivable from TMNA was $94 million and $66 million, respectively. We have a master netting agreement with TMNA which allows us to net settle payments for shared services and subvention transactions. Under this agreement, as of December 31, 2022 and March 31, 2022, respectively, we had a net amount payable to TMNA which is recorded in Other payables, net in Other liabilities.

In February 2023, the TMCC Board of Directors declared a cash dividend of approximately $2.5 billion payable to Toyota Financial Services International Corporation on or before March 31, 2023.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 12 – Fair Value Measurements

Recurring Fair Value Measurements

Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following tables summarize our financial assets and financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy except for certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient and are excluded from the leveling information provided in the tables below. Fair value amounts presented below are intended to permit reconciliation of the fair value hierarchy to the amounts presented in our Consolidated Balance Sheets.


	December 31, 2022
								Counterparty
								netting &			Fair
	Level 1		Level 2			Level 3		collateral			value
Investments in marketable securities:
Available-for-sale debt securities:
U.S. government and agency obligations	$	633	$	4		$	-	$	-		$	637
Foreign government and agency obligations		-		11			-		-			11
Municipal debt securities		-		8			-		-			8
Corporate debt securities		-		389			-		-			389
Mortgage-backed securities:
U.S. government agency		-		50			-		-			50
Non-agency residential		-		5			3		-			8
Non-agency commercial		-		55			22		-			77
Asset-backed securities		-		53			10		-			63
Available-for-sale debt securities total		633		575			35		-			1,243
Equity investments:
Fixed income mutual funds:
Fixed income mutual funds measured at net asset value												1,021
Total return bond funds		1,441		-			-		-			1,441
Equity mutual funds		813		-			-		-			813
Equity investments total		2,254		-			-		-			3,275
Investments in marketable securities total		2,887		575			35		-			4,518
Derivative assets:
Interest rate swaps		-		2,093			-		-			2,093
Foreign currency swaps		-		13			-		-			13
Counterparty netting and collateral		-		-			-		(2,052	)		(2,052	)
Derivative assets total		-		2,106			-		(2,052	)		54
Assets at fair value		2,887		2,681			35		(2,052	)		4,572
Derivative liabilities:
Interest rate swaps		-		(779	)		-		-			(779	)
Foreign currency swaps		-		(1,317	)		-		-			(1,317	)
Counterparty netting and collateral		-		-			-		2,095			2,095
Liabilities at fair value		-		(2,096	)		-		2,095			(1	)
Net assets at fair value	$	2,887	$	585		$	35	$	43		$	4,571

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 12 – Fair Value Measurements (Continued)


	March 31, 2022
									Counterparty
									netting &			Fair
	Level 1			Level 2			Level 3		collateral			value
Investments in marketable securities:
Available-for-sale debt securities:
U.S. government and agency obligations	$	504		$	5		$	-	$	-		$	509
Foreign government and agency obligations		-			23			-		-			23
Municipal debt securities		-			10			-		-			10
Corporate debt securities		-			568			-		-			568
Mortgage-backed securities:
U.S. government agency		-			20			-		-			20
Non-agency residential		-			7			3		-			10
Non-agency commercial		-			78			8		-			86
Asset-backed securities		-			75			3		-			78
Available-for-sale debt securities total		504			786			14		-			1,304
Equity investments:
Fixed income mutual funds:
Fixed income mutual funds measured at net asset value													1,137
Total return bond funds		1,576			-			-		-			1,576
Equity mutual funds		936			-			-		-			936
Equity investments total		2,512			-			-		-			3,649
Investments in marketable securities total		3,016			786			14		-			4,953
Derivative assets:
Interest rate swaps		-			1,425			-		-			1,425
Foreign currency swaps		-			55			-		-			55
Counterparty netting and collateral		-			-			-		(1,419	)		(1,419	)
Derivative assets total		-			1,480			-		(1,419	)		61
Assets at fair value		3,016			2,266			14		(1,419	)		5,014
Derivative liabilities:			��
Interest rate swaps		-			(822	)		-		-			(822	)
Foreign currency swaps		-			(717	)		-		-			(717	)
Counterparty netting and collateral		-			-			-		1,514			1,514
Liabilities at fair value		-			(1,539	)		-		1,514			(25	)
Net assets at fair value	$	3,016		$	727		$	14	$	95		$	4,989

Level 3 Fair Value Measurements

The Level 3 financial assets and liabilities recorded at fair value which are subject to recurring and nonrecurring fair value measurement, and the corresponding activity and change in the fair value measurements of these assets and liabilities, were not significant to our Consolidated Balance Sheets as of December 31, 2022 and March 31, 2022, or Consolidated Statements of Income for the three and nine months ended December 31, 2022 and 2021.

Nonrecurring Fair Value Measurements

Nonrecurring fair value measurements include Level 3 net finance receivables that are not measured at fair value on a recurring basis but are subject to fair value adjustments utilizing the fair value of the underlying collateral when there is evidence of impairment. We did not have any significant nonrecurring fair value items as of December 31, 2022 and March 31, 2022.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 12 – Fair Value Measurements (Continued)

Financial Instruments

The following tables provide information about assets and liabilities not carried at fair value on a recurring basis on our Consolidated Balance Sheets:


	December 31, 2022
	Carrying								Total Fair
	value		Level 1		Level 2		Level 3		value
Financial assets
Finance receivables
Retail loan	$	77,786	$	-	$	-	$	76,370	$	76,370
Wholesale		3,900		-		-		3,881		3,881
Real estate		4,889		-		-		4,827		4,827
Working capital		2,940		-		-		2,854		2,854

Financial liabilities
Unsecured notes and loans payable	$	78,589	$	-	$	75,405	$	-	$	75,405
Secured notes and loans payable		31,510		-		-		30,766		30,766


	March 31, 2022
	Carrying								Total Fair
	value		Level 1		Level 2		Level 3		value
Financial assets
Finance receivables
Retail loan	$	72,369	$	-	$	-	$	73,385	$	73,385
Wholesale		2,940		-		-		2,931		2,931
Real estate		4,985		-		-		4,961		4,961
Working capital		2,256		-		-		2,171		2,171

Financial liabilities
Unsecured notes and loans payable	$	82,288	$	-	$	80,980	$	-	$	80,980
Secured notes and loans payable	$	26,864	$	-	$	-	$	26,500	$	26,500

Accrued interest related to finance receivables is in Other assets in the Consolidated Balance Sheets; however, TMCC measures the fair value of each class of finance receivables using scheduled principal and interest payments. Therefore, accrued interest has been included in the carrying value of each class of finance receivables in the previous tables, along with the finance receivables, deferred origination costs, deferred income, and allowance for credit losses. Finance receivables in the previous tables excludes related party transactions, for which the fair value approximates the carrying value, of $57 million and $90 million at December 31, 2022 and March 31, 2022, respectively. Fair values of related party finance receivables, net are classified as Level 3 within the fair value hierarchy.

For Cash and cash equivalents and Restricted cash and cash equivalents on our Consolidated Balance Sheets, the fair value approximates the carrying value and these instruments are classified as Level 1 within the fair value hierarchy.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 13 – Segment Information

Financial information for our reportable operating segments, which includes allocated corporate expenses, is summarized as follows:


	Three months ended December 31, 2022
	Finance		Voluntary protection			Intercompany
	operations		operations			eliminations			Total

Total financing revenues	$	2,856	$	-		$	-		$	2,856
Depreciation on operating leases		1,262		-			-			1,262
Interest expense		765		-			-			765
Net financing revenues		829		-			-			829

Voluntary protection contract revenues and insurance earned premiums		-		263			-			263
Investment and other income, net		97		143			-			240
Net financing and other revenues		926		406			-			1,332

Expenses:
Provision for credit losses		278		-			-			278
Operating and administrative expenses		345		118			-			463
Voluntary protection contract expenses and insurance losses		-		115			-			115
Total expenses		623		233			-			856

Income before income taxes		303		173			-			476
Provision for income taxes		70		42			-			112

Net income	$	233	$	131		$	-		$	364

	Nine months ended December 31, 2022
	Finance		Voluntary protection			Intercompany
	operations		operations			eliminations			Total

Total financing revenues	$	8,511	$	-		$	-		$	8,511
Depreciation on operating leases		3,976		-			-			3,976
Interest expense		2,033		-			-			2,033
Net financing revenues		2,502		-			-			2,502

Voluntary protection contract revenues and insurance earned premiums		-		785			-			785
Investment and other income (loss), net		185		(389	)		-			(204	)
Net financing and other revenues		2,687		396			-			3,083

Expenses:
Provision for credit losses		569		-			-			569
Operating and administrative		983		330			-			1,313
Voluntary protection contract expenses and insurance losses		-		336			-			336
Total expenses		1,552		666			-			2,218

Income (loss) before income taxes		1,135		(270	)		-			865
Provision (benefit) for income taxes		281		(69	)		-			212

Net income (loss)	$	854	$	(201	)	$	-		$	653

Total assets at December 31, 2022	$	131,402	$	6,352		$	(124	)	$	137,630

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 13 – Segment Information (Continued)


	Three months ended December 31, 2021
	Finance		Voluntary protection		Intercompany
	operations		operations		eliminations			Total

Total financing revenues	$	2,991	$	-	$	-		$	2,991
Depreciation on operating leases		1,460		-		-			1,460
Interest expense		346		-		-			346
Net financing revenues		1,185		-		-			1,185

Voluntary protection contract revenues and insurance earned premiums		-		255		-			255
Investment and other income, net		12		64		-			76
Net financing and other revenues		1,197		319		-			1,516

Expenses:
Provision for credit losses		45		-		-			45
Operating and administrative expenses		293		101		-			394
Voluntary protection contract expenses and insurance losses		-		96		-			96
Total expenses		338		197		-			535

Income before income taxes		859		122		-			981
Provision for income taxes		204		29		-			233

Net income	$	655	$	93	$	-		$	748

	Nine months ended December 31, 2021
	Finance		Voluntary protection		Intercompany
	operations		operations		eliminations			Total

Total financing revenues	$	9,022	$	-	$	-		$	9,022
Depreciation on operating leases		4,400		-		-			4,400
Interest expense		1,055		-		-			1,055
Net financing revenues		3,567		-		-			3,567

Voluntary protection contract revenues and insurance earned premiums		-		758		-			758
Investment and other income, net		40		199		-			239
Net financing and other revenues		3,607		957		-			4,564

Expenses:
Provision for credit losses		110		-		-			110
Operating and administrative		872		291		-			1,163
Voluntary protection contract expenses and insurance losses		-		303		-			303
Total expenses		982		594		-			1,576

Income before income taxes		2,625		363		-			2,988
Provision for income taxes		610		87		-			697

Net income	$	2,015	$	276	$	-		$	2,291

Total assets at December 31, 2021	$	129,511	$	6,745	$	(121	)	$	136,135

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

Note 13 – Segment Information (Continued)

Voluntary protection operations – Contract revenues

For the three and nine months ended December 31, 2022 and 2021, approximately 83 percent and 82 percent, respectively, of voluntary protection contract revenues in the Voluntary protection operations segment were accounted for under the guidance for revenue from contracts with customers.

The Voluntary protection operations segment defers contractually determined incentives paid to dealers as contract costs for selling voluntary protection products. These costs are recorded in Other assets on our Consolidated Balance Sheets and are amortized to Operating and administrative expenses in the Consolidated Statements of Income using a methodology consistent with the recognition of revenue. The amount of capitalized dealer incentives and the related amortization was not significant to our consolidated financial statements as of and for the three and nine months ended December 31, 2022 and 2021.

We had $2.5 billion and $2.7 billion of unearned voluntary protection contract revenues from contracts with customers included in Other liabilities on our Consolidated Balance Sheets as of March 31, 2021 and March 31, 2022, respectively. We recognized $198 million and $598 million of these balances in voluntary protection contract revenues in our Consolidated Statements of Income during the three and nine months ended December 31, 2022, respectively, compared to $170 million and $545 million recognized during the same periods in fiscal 2022. As of December 31, 2022, we had unearned voluntary protection contract revenues of $2.9 billion included in Other liabilities on our Consolidated Balance Sheets, and with respect to this balance we expect to recognize revenue of $218 million during fiscal 2023, and $2.6 billion thereafter. At December 31, 2021, we had unearned voluntary protection contract revenues of $2.6 billion associated with outstanding contracts.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Information

Certain statements contained in this Form 10-Q are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and currently available information. However, since these statements are based on factors that involve risks and uncertainties, our performance and results may differ materially from those described or implied by such forward-looking statements. Words such as “believe,” “anticipate,” “expect,” “estimate,” “project,” “should,” “intend,” “will,” “may” or words or phrases of similar meaning are intended to identify forward-looking statements. We caution that the forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause actual results to differ materially from those in the forward-looking statements, including, without limitation, the risk factors set forth in “Part II. Other Information – Item 1A. Risk Factors” and “Item 1A. Risk Factors” of our Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2022 (“fiscal 2022”), including the following:

 Risks related to health epidemics and other outbreaks; 

 Changes in general business, economic, and geopolitical conditions, including trade policy, as well as in consumer demand and the competitive environment in the automotive markets in the United States;

 A decline in Toyota Motor North America, Inc. (“TMNA”) or any private label sales volume and the level of TMNA or any private label sponsored subvention, cash, and contractual residual value support incentive programs;

 Extreme weather conditions, natural disasters, changes in fuel prices, manufacturing disruptions and production suspensions of Toyota, Lexus, and private label vehicles and related parts supply;

 Increased competition from other financial institutions seeking to increase their share of financing Toyota, Lexus, and private label vehicles;

 Changes in consumer behavior;

 Recalls announced by TMNA or private label companies and the perceived quality of Toyota, Lexus, and any private label vehicles;

 Availability and cost of financing;

 Failure or interruption in our operations, including our communications and information systems, or as a result of our failure to retain existing or to attract new key personnel;

 Increased cost, credit and operating risk exposure, or our failure to realize the anticipated benefits, from our private label financial services to third-party automotive and mobility companies, including Mazda and Bass Pro Shops;

 Changes in our credit ratings and those of our ultimate parent, Toyota Motor Corporation (“TMC”) and changes in our credit support arrangements;

 Changes in our financial position and liquidity, or changes or disruptions in our funding sources or access to the global capital markets;

 Revisions to the estimates and assumptions for our allowance for credit losses;

 Flaws in the design, implementation and use of quantitative models and revisions to the estimates and assumptions that are used to determine the value of certain assets;

 Fluctuations in the value or market prices of our investment securities;

 Changes in prices of used vehicles and their effect on residual values of our off-lease vehicles and return rates;

 Failure of our customers or dealers to meet the terms of any contract with us, or otherwise perform as agreed;

 Fluctuations in interest rates and foreign currency exchange rates;

 Failure or changes in commercial soundness of our counterparties and other financial institutions;

 Insufficient establishment of reserves, or the failure of a reinsurer to meet its obligations, in our voluntary protection operations;

 Changes to existing, or adoption of new, accounting standards;

 A security breach or a cyber-attack;

 Failure to maintain compliant enterprise data practices, including the collection, use, sharing, and security of personally identifiable and financial information of our customers and employees;

 Compliance with current laws and regulations or becoming subject to more stringent laws, regulatory requirements and regulatory scrutiny; and

 Changes in the economies and applicable laws in the states where we have concentration risk.

Forward-looking statements speak only as of the date they are made. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements.

OVERVIEW

Key Performance Indicators and Factors Affecting Our Business

In our finance operations, we generate revenue, income, and cash flows by providing retail, lease, and dealer financing to dealers and their customers. We measure the performance of our finance operations using the following metrics: financing volume, market share, Net financing revenues, Operating and administrative expense, residual value and credit loss metrics.

In our voluntary protection operations, we generate revenue primarily through marketing, underwriting, and providing claims administration for products that cover certain risks of customers. We measure the performance of our voluntary protection operations using the following metrics: issued contract volume, average number of contracts in force, loss metrics and investment income.

Our financial results are affected by a variety of economic and industry factors including, but not limited to, new and used vehicle markets, Toyota, Lexus, and private label new vehicle production volume, vehicle inventory levels, vehicle sales and incentive programs, consumer behavior, employment levels, our ability to respond to changes in interest rates with respect to both contract pricing and funding, the actual or perceived quality, safety or reliability of Toyota, Lexus, and private label vehicles, the financial health of the dealers we finance, and competitive pressure. Our financial results may also be affected by the regulatory environment in which we operate, including as a result of new legislation or changes in regulation and any compliance costs or changes we may be required to make to our business practices. All of these factors can influence consumer contract and dealer financing volume, the number of consumer contracts and dealers that default and the loss per occurrence, our inability to realize originally estimated contractual residual values on leased vehicles, the volume and performance of our voluntary protection operations, and our Net financing revenues on consumer and dealer financing volume. Changes in the volume of vehicle sales, sales of our voluntary protection products, or the level of voluntary protection expenses and insurance losses could materially and adversely impact our voluntary protection operations. Additionally, our funding programs and related costs are influenced by changes in the global capital markets, prevailing interest rates, and our credit ratings and those of our parent companies, which may affect our ability to obtain cost effective funding to support earning asset growth.

Fiscal 2023 First Nine Months Operating Environment

During the first nine months of the fiscal year ending March 31, 2023 (“fiscal 2023”), the United States (“U.S.”) economy continued to be impacted by uncertainties related to inflationary pressures, higher interest rates, the ongoing effects of the global coronavirus and related variants (“COVID-19”) pandemic, and the conflict in Ukraine. The economic conditions, including consumer price increases and higher interest rates, have negatively impacted some consumers ability to make scheduled payments which has resulted in an increase in consumer delinquencies and charge-offs. The ongoing challenging economic conditions caused by the COVID-19 pandemic and geopolitical conflicts, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in a decrease in the availability of new vehicles from pre-pandemic levels. The new vehicle inventory constraints have resulted in decreases in industry-wide vehicle sales and sales incentives in the U.S. for the first nine months of fiscal 2023, compared to the same period in fiscal 2022. For more information regarding the potential impact of current market conditions, refer to Part I. Item 1A. Risk Factors in our Form 10-K for the fiscal year ended March 31, 2022.

While average used vehicle values in the first nine months of fiscal 2023 remained elevated compared to pre-pandemic levels, primarily due to the new vehicle inventory constraints, there has been a decline in values in the current fiscal year. Future declines in used vehicle values resulting from increases in the supply of new and used vehicles and increases in new vehicle sales incentives could unfavorably impact return rates, residual values, depreciation expense and credit losses.

During the first nine months of fiscal 2023, the global capital markets experienced periods of heightened volatility in response to the ongoing conflict in Ukraine, increases in the inflation rate, and uncertainty regarding the path of U.S. monetary policy. U.S. benchmark interest rates and credit spreads both increased during the first nine months of the fiscal year. While we continue to maintain broad global access to both domestic and international markets, these events could lead to further disruptions in the capital markets and increases in our funding costs. Future changes in interest rates in the U.S. and foreign markets could result in volatility in our interest expense, which could affect our results of operations.

RESULTS OF OPERATIONS

The following table summarizes total net income by our reportable operating segments:


	Three months ended				Nine months ended
	December 31,				December 31,
(Dollars in millions)	2022		2021		2022			2021
Net income:
Finance operations 1	$	233	$	655	$	854		$	2,015
Voluntary protection operations 1		131		93		(201	)		276
Total net income	$	364	$	748	$	653		$	2,291

1 Refer to Note 13 - Segment Information of the Notes to Consolidated Financial Statements for the total asset balances of our finance and voluntary protection operations.

Our consolidated net income was $653 million and $364 million for the first nine months and third quarter of fiscal 2023, respectively, compared to $2.3 billion and $748 million for the same periods in fiscal 2022. The decrease in net income for the first nine months of fiscal 2023, compared to the same period in fiscal 2022, was primarily due to a $978 million increase in interest expense, a $511 million decrease in total financing revenues, a $459 million increase in provision for credit losses, a $443 million decrease in investment and other income, net, and a $150 million increase in operating and administrative expense, partially offset by a $485 million decrease in provision for income taxes, and a $424 million decrease in depreciation on operating leases. The decrease in net income for the third quarter of fiscal 2023, compared to the same period in fiscal 2022, was primarily due to a $419 million increase in interest expense, a $233 million increase in provision for credit losses, a $135 million decrease in total financing revenues, and a $69 million increase in operating and administrative expense, partially offset by a $198 million decrease in depreciation on operating leases, a $164 million increase in investment and other income, net, and a $121 million decrease in provision for income taxes.

Our overall capital position increased $0.6 billion, bringing total shareholder’s equity to $18.7 billion at December 31, 2022 as compared to $18.1 billion at March 31, 2022. Our debt increased to $110.1 billion at December 31, 2022 from $109.2 billion at March 31, 2022. Our debt-to-equity ratio decreased to 5.9 at December 31, 2022 from 6.0 at March 31, 2022.

Finance Operations

The following table summarizes key results of our finance operations:


	Three months ended					Nine months ended
	December 31,				Percentage	December 31,				Percentage
(Dollars in millions)	2022		2021		Change	2022		2021		change
Financing revenues:
Operating lease	$	1,743	$	2,081	(16)%	$	5,460	$	6,329	(14)%
Retail		974		830	17%		2,719		2,442	11%
Dealer		139		80	74%		332		251	32%
Total financing revenues		2,856		2,991	(5)%		8,511		9,022	(6)%
Depreciation on operating leases		1,262		1,460	(14)%		3,976		4,400	(10)%
Interest expense		765		346	121%		2,033		1,055	93%
Net financing revenues		829		1,185	(30)%		2,502		3,567	(30)%

Investment and other income, net		97		12	708%		185		40	363%
Net financing and other revenues		926		1,197	(23)%		2,687		3,607	(26)%

Expenses:
Provision for credit losses		278		45	518%		569		110	417%
Operating and administrative		345		293	18%		983		872	13%
Total expenses		623		338	84%		1,552		982	58%

Income before income taxes		303		859	(65)%		1,135		2,625	(57)%
Provision for income taxes		70		204	(66)%		281		610	(54)%

Net income from finance operations	$	233	$	655	(64)%	$	854	$	2,015	(58)%

Our finance operations reported net income of $854 million and $233 million for the first nine months and third quarter of fiscal 2023, respectively, compared to $2.0 billion and $655 million for the same periods in fiscal 2022. The decrease in net income from finance operations for the first nine months of fiscal 2023, compared to the same period in fiscal 2022 was due to a $978 million increase in interest expense, a $511 million decrease in total financing revenues, a $459 million increase in provision for credit losses, and a $111 million increase in operating and administrative expenses, partially offset by a $424 million decrease in depreciation on operating leases, a $329 million decrease in provision for income taxes, and a $145 million increase in investment and other income, net. The decrease in net income from finance operations for the third quarter of fiscal 2023, compared to the same period in fiscal 2022 was due to a $419 million increase in interest expense, a $233 million increase in provision for credit losses, a $135 million decrease in total financing revenues, and a $52 million increase in operating and administrative expenses, partially offset by a $198 million decrease in depreciation on operating leases, a $134 million decrease in provision for income taxes, and an $85 million increase in investment and other income, net.

Financing Revenues

Total financing revenues decreased 6 percent and 5 percent during the first nine months and third quarter of fiscal 2023, as compared to the same periods in fiscal 2022 due to the following:

•

Operating lease revenues decreased 14 percent and 16 percent for the first nine months and third quarter of fiscal 2023, respectively, compared to the same periods in fiscal 2022, due to lower average outstanding earning asset balances and lower yields.

•

Retail financing revenues increased 11 percent and 17 percent for the first nine months and third quarter of fiscal 2023, respectively, as compared to the same periods in fiscal 2022, due to higher average outstanding earning asset balances and higher yields.

•

Dealer financing revenues increased 32 percent and 74 percent for the first nine months and third quarter of fiscal 2023, respectively, as compared to the same periods in fiscal 2022, primarily due to higher yields.

As a result of the above, our total portfolio yield, which includes operating lease, retail and dealer financing revenues, was 5.0 percent and 5.2 percent for the first nine months and third quarter of fiscal 2023, respectively, compared to 5.1 percent, respectively, for the same periods in fiscal 2022.

Depreciation on Operating Leases

We recorded depreciation on operating leases of $4.0 billion and $1.3 billion for the first nine months and third quarter of fiscal 2023, compared to $4.4 billion and $1.5 billion for the same periods in fiscal 2022, primarily due to lower average operating lease units outstanding.

The ongoing challenging economic conditions have resulted in a decrease in the availability of new vehicles from pre-pandemic levels. The new vehicle inventory constraints and higher off-lease vehicle purchases by consumers and dealers have led to historically high levels of average used vehicle values. Declines in used vehicle values resulting from increases in the supply of new vehicles and increases in new vehicle sales incentives could unfavorably impact return rates, residual values, and depreciation expense in the future.

Interest Expense


	Three months ended						Nine months ended
	December 31,						December 31,
(Dollars in millions)	2022			2021			2022			2021
Interest expense on debt	$	845		$	362		$	1,914		$	1,134
Interest (income) expense on derivatives		(186	)		23			(368	)		137
Interest expense on debt and derivatives		659			385			1,546			1,271

Losses (gains) on debt denominated in foreign currencies		532			(60	)		(649	)		(338	)
(Gains) losses on foreign currency swaps		(509	)		151			947			509
Losses (gains) on U.S. dollar interest rate swaps		83			(130	)		189			(387	)
Total interest expense	$	765		$	346		$	2,033		$	1,055

During the first nine months and third quarter of fiscal 2023, total interest expense increased to $2.0 billion and $765 million, respectively, from $1.1 billion and $346 million for the same periods in fiscal 2022. The increase in total interest expense for the first nine months of fiscal 2023, compared to the same period in fiscal 2022 is primarily attributable to an increase in interest expense on debt, losses on U.S. dollar interest rate swaps, and losses on foreign currency swaps net of gains from debt denominated in foreign currencies. The increase in total interest expense for the third quarter of fiscal 2023, compared to the same period in fiscal 2022 is primarily attributable to an increase on interest expense on debt and losses on U.S. dollar interest rate swaps, partially offset by interest income on derivatives.

Interest expense on debt and derivatives primarily represents contractual net interest settlements and changes in accruals on secured and unsecured notes and loans payable and derivatives, and includes amortization of discounts, premiums, and debt issuance costs. During the first nine months and third quarter of fiscal 2023, interest expense on debt and derivatives combined increased to$1.5 billion and $659 million, respectively, from $1.3 billion and $385 million for the same periods in fiscal 2022. The increase in interest expense on debt is due to an increase in weighted average interest rates. The decrease in interest expense on derivatives is primarily due to a decrease in interest expense on pay-fixed swaps, partially offset by increase in interest expense on pay-float swaps.

Gains or losses on debt denominated in foreign currencies represent the impact of translation adjustments. We use foreign currency swaps to economically hedge the debt denominated in foreign currencies. During the first nine months and third quarter of fiscal 2023, we recorded net losses of $298 million and $23 million, respectively, compared to $171 million and $91 million, for the same periods in fiscal 2022, primarily due to increases in foreign currency swap rates across various currencies in which our debt is denominated.

Gains or losses on U.S. dollar interest rate swaps represent the change in the valuation of interest rate swaps. During the first nine months and third quarter of fiscal 2023, we recorded losses of $189 million and $83 million, respectively, as the impact from net interest income outweighed the impact attributable to the shifting of U.S. dollar swap rates. During the first nine months and third quarter of fiscal 2022, we recorded gains of $387 million and $130 million, respectively, primarily due to the upward shift of U.S. dollar swap rates and net interest income on our pay-fixed swaps exceeding losses on our pay-float swaps.

Future changes in interest and foreign currency exchange rates could continue to result in significant volatility in our interest expense, thereby affecting our results of operations.

Investment and Other Income, Net

We recorded investment and other income, net of $185 million and $97 million for the first nine months and third quarter of fiscal 2023, respectively, compared to $40 million and $12 million for the same periods in fiscal 2022. The increase in investment and other income, net for the first nine months and third quarter of fiscal 2023, compared to the same periods in fiscal 2022, was primarily due to higher yields on our investment in marketable securities portfolio.

Provision for Credit Losses

We recorded a provision for credit losses of $569 million and $278 million for the first nine months and third quarter of fiscal 2023, respectively, compared to a provision for credit losses of $110 million and $45 million for the same periods in fiscal 2022. The economic conditions have resulted in an increase in consumer delinquencies and charge-offs as well as higher expectations of credit losses in the retail loan portfolio. These factors combined with the increase in size of our retail loan portfolio have led to an increase in the provision for credit losses for the first nine months and third quarter of fiscal 2023, compared to the same periods in fiscal 2022.

Operating and Administrative Expenses

We recorded operating and administrative expenses of $983 million and $345 million for the first nine months and third quarter of fiscal 2023, respectively, compared to $872 million and $293 million for the same periods in fiscal 2022. The increase in operating and administrative expenses for the first nine months and third quarter of fiscal 2023, compared to the same periods in fiscal 2022, was primarily due to higher technology expenses and employee expenses.

Voluntary Protection Operations

The following table summarizes key results of our voluntary protection operations:


	Three months ended					Nine months ended
	December 31,				Percentage	December 31,					Percentage
	2022		2021		Change	2022			2021		change
Contracts (units in thousands)
Issued		715		677	6%		2,241			2,296	(2)%
Average in force		10,420		10,063	4%		10,241			9,866	4%

(Dollars in millions)
Voluntary protection contract revenues and insurance earned premiums	$	263	$	255	3%	$	785		$	758	4%
Investment and other income (loss), net		143		64	123%		(389	)		199	(295)%
Revenues from voluntary protection operations		406		319	27%		396			957	(59)%

Expenses:
Voluntary protection contract expenses and insurance losses		115		96	20%		336			303	11%
Operating and administrative		118		101	17%		330			291	13%
Total expenses		233		197	18%		666			594	12%

Income (loss) before income taxes		173		122	42%		(270	)		363	(174)%
Provision (benefit) for income taxes		42		29	45%		(69	)		87	(179)%

Net income (loss) from voluntary protection operation	$	131	$	93	41%	$	(201	)	$	276	(173)%

Our voluntary protection operations reported net loss of $201 million and net income of $131 million for the first nine months and third quarter of fiscal 2023, respectively, compared to net income of $276 million and $93 million for the same periods in fiscal 2022. The decrease in net income from voluntary protection operations for the first nine months of fiscal 2023, compared to the same period in fiscal 2022, was primarily due to a $588 million decrease in investment and other income, net, and a $39 million increase in operating and administrative expenses, partially offset by a $156 million decrease in provision for income taxes. The increase in net income from voluntary protection operations for the third quarter of fiscal 2023, compared to the same period in fiscal 2022, was primarily due to a $79 million increase in investment and other income, net, partially offset by a $19 million increase in voluntary protection contract expenses and insurance losses, and a $17 million increase in operating and administrative expenses.

Contracts issued decreased 2 percent for the first nine months of fiscal 2023, compared to the same period in fiscal 2022, primarily due to a decrease in financing contract volumes as a result of lower new vehicles inventory levels. Contracts issued increased 6 percent for the third quarter of fiscal 2023, compared to the same period in fiscal 2022, primarily due to an increase in issuances of prepaid maintenance contracts. The average number of contracts in force increased 4 percent for the first nine months and third quarter of fiscal 2023, respectively, compared to the same periods in fiscal 2022, due to net growth in the voluntary protection portfolio compared to prior years, primarily in prepaid maintenance, vehicle services contracts, and tire and wheel contracts.

Revenue from Voluntary Protection Operations

Our voluntary protection operations reported voluntary protection contract revenues and insurance earned premiums of $785 million and $263 million for the first nine months and third quarter of fiscal 2023, respectively, compared to $758 million and $255 million for the same periods in fiscal 2022. Voluntary protection contract revenues and insurance earned premiums represent revenues from in force contracts and are affected by issuances as well as the level of coverage, age, and mix of in force contracts. Voluntary protection contract revenues and insurance earned premiums are recognized over the term of the contracts in relation to the timing and level of anticipated claims. The increase in voluntary protection contract revenues and insurance earned premiums for the first nine months and third quarter of fiscal 2023, compared to the same periods in fiscal 2022, was primarily due to an increase in our average in force contracts resulting from net growth in the voluntary protection portfolio from prior years.

Investment and Other (Loss) Income, Net

Our voluntary protection operations reported investment and other loss, net of $389 million and net income of $143 million for the first nine months and third quarter of fiscal 2023, respectively, compared to investment and other income, net of $199 million and $64 million for the same periods in fiscal 2022. Investment and other (loss) income, net, consists primarily of dividend and interest income, realized gains and losses on investments in marketable securities, changes in fair value from equity and available-for-sale debt securities for which the fair value option was elected, and credit loss expense on available-for-sale debt securities, if any. The decrease in investment and other (loss) income, net for the first nine months of fiscal 2023, compared to the same period in fiscal 2022, was primarily due to losses from changes in fair value on our equity investments and available-for-sale debt securities for which the fair value option was elected and losses from sales of marketable securities as a result of market volatility. The increase in investment and other income, net for the third quarter of fiscal 2023, compared to the same period in fiscal 2022, was primarily due to gains from changes in fair value on our equity investments and available-for-sale debt securities for which the fair value option was elected, partially offset by losses from sales of marketable securities as a result of market volatility. In spite of recent increases, should market volatility persist or become more severe, it could continue to negatively impact results from voluntary protection operations.

Voluntary Protection Contract Expenses and Insurance Losses

Our voluntary protection operations reported voluntary protection contract expenses and insurance losses of $336 million and $115 million for the first nine months and third quarter of fiscal 2023, respectively, compared to $303 million and $96 million for the same periods in fiscal 2022. Voluntary protection contract expenses and insurance losses incurred are a function of the amount of covered risks, the frequency and severity of claims associated with in force contracts and the level of risk retained by our voluntary protection operations. Voluntary protection contract expenses and insurance losses include amounts paid and accrued for reported losses, estimates of losses incurred but not reported, and any related claim adjustment expenses. The increase in voluntary protection contract expenses and insurance losses for the first nine months and third quarter of fiscal 2023, compared to the same periods in fiscal 2022, was primarily due to an increase in frequency and severity of claims in our vehicle service and prepaid maintenance contracts. These increases were partially offset by a decrease in frequency and severity of claims in guaranteed auto protection contracts.

Operating and Administrative Expenses

Our voluntary protection operations reported operating and administrative expenses of $330 million and $118 million for the first nine months and third quarter of fiscal 2023, respectively, compared to $291 million and $101 million for the same periods in fiscal 2022. The increase in operating and administrative expenses for the first nine months and third quarter of fiscal 2023, compared to the same periods in fiscal 2022, was primarily attributable to higher product expenses driven by the continued growth of our voluntary protection product business.

Provision for Income Taxes

We recorded a provision for income taxes of $212 million and $112 million for the first nine months and third quarter of fiscal 2023, respectively, compared to $697 million and $233 million for the same periods in fiscal 2022. Our effective tax rate was 25 percent and 24 percent for the first nine months and third quarter of fiscal 2023, compared to 23 percent and 24 percent for the same periods in fiscal 2022. The decrease in the provision for income taxes for the first nine months and third quarter of fiscal 2023, compared to the same periods in fiscal 2022, was primarily due to the decrease in income before income taxes. The higher effective tax rate for the first nine months of fiscal 2023, compared to the same period in fiscal 2022, was primarily attributable to the decrease in federal plug-in vehicle credits and the increase in unrecognized state tax benefits in the current period.

FINANCIAL CONDITION

Vehicle Financing Volume and Net Earning Assets

The composition of our vehicle contract volume and market share is summarized below:


	Three months ended							Nine months ended
	December 31,						Percentage	December 31,						Percentage
(units in thousands):	2022			2021			change	2022			2021			Change
Vehicle financing volume 1:
New retail contracts		191			158		21%		551			523		5%
Used retail contracts		85			106		(20)%		310			355		(13)%
Lease contracts		59			72		(18)%		183			349		(48)%
Total		335			336		-%		1,044			1,227		(15)%

TMNA subvened vehicle financing volume 2:
New retail contracts		128			63		103%		346			174		99%
Used retail contracts		14			8		75%		30			21		43%
Lease contracts		29			42		(31)%		99			207		(52)%
Total		171			113		51%		475			402		18%

Market share of TMNA sales 3:		52.4	%		54.3	%			53.5	%		55.1	%

Total financing volume was comprised of approximately 69 percent Toyota, 13 percent Lexus, 11 percent Mazda, and 7 percent non-Toyota/Lexus/Mazda for the first nine months of fiscal 2023. Total financing volume was comprised of approximately 70 percent Toyota, 13 percent Mazda, 12 percent Lexus, and 5 percent non-Toyota/Lexus/Mazda for the third quarter of fiscal 2023. Total financing volume was comprised of approximately 64 percent Toyota, 15 percent Lexus, 14 percent Mazda, and 7 percent non-Toyota/Lexus/Mazda for the first nine months of fiscal 2022. Total financing volume was comprised of approximately 67 percent Toyota, 15 percent Lexus, 10 percent Mazda, and 8 percent non-Toyota/Lexus/Mazda for the third quarter of fiscal 2022.

TMNA subvened volume units are included in the total vehicle financing. Units exclude third-party subvened units.

Represents the percentage of total domestic TMNA sales of new Toyota and Lexus vehicles financed by us, excluding sales under dealer rental car and commercial fleet programs, sales of a private Toyota distributor and private label vehicles financed.

Vehicle Financing Volume

The volume of our retail and lease contracts, which are acquired primarily from Toyota, Lexus, and private label dealers, is dependent upon TMNA and private label sales volume, the level of TMNA, private label, and third-party sponsored subvention and other incentive programs, as well as TMCC competitive rate and other incentive programs.

Our financing volume decreased 15 percent for the first nine months of fiscal 2023, compared to the same period in fiscal 2022, primarily due to new vehicle inventory constraints and increased competition from other financial institutions, partially offset by higher levels incentives and subvention on new and used retail contracts. Our financing volume remained relatively unchanged for the third quarter of fiscal 2023, compared to the same period in fiscal 2022. The ongoing challenging economic conditions, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in a decrease in the availability of new vehicles from pre-pandemic levels.

Our market share of TMNA sales decreased approximately 2 percentage points for the first nine months and third quarter of fiscal 2023, respectively, compared to the same periods in fiscal 2022, due to increased competition from other financial institutions.

The composition of our net earning assets is summarized below:


	December 31,		March 31,		Percentage
(Dollars in millions)	2022		2022		change
Net Earning Assets
Finance receivables, net
Retail finance receivables, net	$	77,551	$	72,185	7%
Dealer financing, net 1		11,743		10,247	15%
Total finance receivables, net		89,294		82,432	8%
Investments in operating leases, net		30,830		35,455	(13)%
Net earning assets	$	120,124	$	117,887	2%

Dealer Financing
(Number of dealers serviced)
Toyota, Lexus, and private label dealers1		1,261		966	31%
Dealers outside of the Toyota/Lexus/private label dealer network		393		399	(2)%
Total number of dealers receiving wholesale financing		1,654		1,365	21%

1 Includes wholesale and other credit arrangements in which we participate as part of a syndicate of lenders.

Retail Contract Volume and Earning Assets

Our new retail contract volume increased 5 percent and 21 percent for the first nine months and third quarter of fiscal 2023, compared to the same periods in fiscal 2022, primarily due to higher levels of incentives and subvention. Our used retail contracts decreased 13 percent and 20 percent for the first nine months and third quarter of fiscal 2023, respectively, compared to the same periods in fiscal 2022, due to increased competition in the used vehicle marketplace caused by the reduction in new vehicle inventory levels.

Our retail finance receivables, net increased 7 percent at December 31, 2022 as compared to March 31, 2022 due to higher retail contracts outstanding and higher average amount financed.

Lease Contract Volume and Earning Assets

Our lease contract volume decreased 48 percent and 18 percent for the first nine months and third quarter of fiscal 2023, respectively, compared to the same periods in fiscal 2022, primarily due to new vehicles inventory constraints and lower levels of incentive and subvention programs. Our investments in operating leases, net, decreased 13 percent at December 31, 2022, as compared to March 31, 2022 due to lower average operating lease units outstanding, partially offset by higher vehicle values.

Dealer Financing and Earning Assets

Dealer financing, net increased 15 percent at December 31, 2022, as compared to March 31, 2022, primarily due to an increase in wholesale and revolving credit financing as well as the new inventory financing volume we gained from the launch of our private label financial services to Bass Pro Shops in fiscal 2023.

The ongoing challenging economic conditions, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in lower dealer new vehicle inventory levels from pre-pandemic levels.

Residual Value Risk

The primary factors affecting our exposure to residual value risk are the levels at which residual values are established at lease inception, current economic conditions and outlook, projected end-of-term market values, and the resulting impact on depreciation expense and lease return rates. Higher average operating lease units outstanding and the resulting increase in maturities, a higher supply of used vehicles, as well as deterioration in actual and expected used vehicle values for Toyota, Lexus, and private label vehicles could unfavorably impact return rates, residual values, and depreciation expense.

On a quarterly basis, we review the estimated end-of-term market values of leased vehicles to assess the appropriateness of our carrying values. To the extent the estimated end-of-term market value of a leased vehicle is lower than the residual value established at lease inception, the residual value of the leased vehicle is adjusted downward so that the carrying value at lease end will approximate the estimated end-of-term market value. For investments in operating leases, adjustments are made on a straight-line basis over the remaining terms of the lease contracts and are included in Depreciation on operating leases in our Consolidated Statements of Income as a change in accounting estimate.

Depreciation on Operating Leases

Depreciation on operating leases and average operating lease units outstanding are as follows:


	Three months ended					Nine months ended
	December 31,				Percentage	December 31,				Percentage
	2022		2021		change	2022		2021		change
Depreciation on operating leases (dollars in millions)	$	1,262	$	1,460	(14)%	$	3,976	$	4,400	(10)%
Average operating lease units outstanding (in thousands)		1,109		1,308	(15)%		1,164		1,330	(12)%

Depreciation expense on operating leases decreased 10 percent and 14 percent for the first nine months and third quarter of fiscal 2023, respectively, compared to the same periods in fiscal 2022, primarily due to lower average operating lease units outstanding.

Origination, Credit Loss, and Delinquency Experience

Our credit loss experience may be affected by a number of factors including the economic environment, our purchasing, servicing and collections practices, used vehicle market conditions and subvention. Changes in the economy that impact the consumer such as increasing interest rates, and a rise in the unemployment rate as well as higher debt balances, coupled with deterioration in actual and expected used vehicle values, could increase our credit losses. In addition, a decline in the effectiveness of our collection practices could also increase our credit losses. We continuously evaluate and refine our purchasing practices and collection efforts to minimize risk. In addition, subvention contributes to our overall portfolio quality, as subvened contracts typically have higher credit scores than non-subvened contracts.

The following table provides information related to our origination experience:


	December 31,		March 31,		December 31,
	2022		2022		2021
Average consumer portfolio origination FICO score		744		742		742
Average consumer retail loan origination term (months) 1		69		69		69

1 Retail loan origination greater than or equal to 78 months was 10% as of December 31, 2022, 10% as of March 31, 2022, and 9% as of December 31, 2021.

While we have included the average origination FICO score to illustrate origination trends, we also use a proprietary credit scoring system to evaluate an applicant’s risk profile. Refer to Part I. Item 1. Business “Finance Operations” in our fiscal 2022 Form 10-K for further discussion of the proprietary manner in which we evaluate risk.

The following table provides information related to our finance receivables and investment in operating leases:



	December 31,		March 31,		December 31,
	2022		2022		2021
Net charge-offs as a percentage of average finance receivables 1, 5	0.46%		0.22%		0.18%
Default frequency as a percentage of outstanding finance receivables contracts 1	0.80%		0.72%		0.71%
Average finance receivables loss severity per unit 2	$	11,746	$	9,012	$	8,598
Aggregate balances for accounts 60 or more days past due as a percentage of earning assets 3, 4, 5
Finance receivables	0.72%		0.43%		0.51%
Operating leases	0.47%		0.26%		0.28%

1 The ratio for net charge-offs and the ratio for default frequency have been annualized using nine month results for the periods ended December 31, 2022 and 2021. Net charge-off includes the write-offs of accounts deemed to be uncollectable and accounts greater than 120 days past due.

2 Average loss per unit upon disposition of repossessed vehicles or charge-off prior to repossession.

3 Substantially all retail receivables do not involve recourse to the dealer in the event of customer default.

4 Includes accounts in bankruptcy and excludes accounts for which vehicles have been repossessed.

5 Excludes accrued interest from average finance receivables.

Management considers historical credit loss information when assessing the allowance for credit losses. Historical credit losses are primarily driven by two factors: default frequency and loss severity. Our net charge-offs as a percentage of average finance receivables for the first nine months of fiscal 2023 increased to 0.46 percent from 0.18 percent for the same period in fiscal 2022. Our default frequency as a percentage of outstanding finance receivable contracts increased to 0.80 percent for the first nine months of fiscal 2023, compared to 0.71 percent in the same period in fiscal 2022. Our average finance receivables loss severity per unit for the first nine months of fiscal 2023 increased to $11,746 from $8,598 in the first nine months of fiscal 2022. The increase in net charge-offs, default frequency, and loss severity per unit were due to higher average amounts financed, a higher percentage of used vehicles financed, and higher delinquencies.

Our aggregate balances for accounts 60 or more days past due as a percentage of finance receivables was 0.72 percent at December 31, 2022, compared to 0.51 percent at December 31, 2021, and 0.43 percent at March 31, 2022. Our aggregate balances for accounts 60 or more days past due as a percentage of operating leases was 0.47 percent at December 31, 2022, compared to 0.28 percent at December 31, 2021, and 0.26 percent at March 31, 2022. Our delinquencies increased at December 31, 2022, compared to December 31, 2021 and March 31, 2022 primarily due to the ongoing challenging economic conditions.

Allowance for Credit Losses

We maintain an allowance for credit losses which is measured by an impairment model that reflects lifetime expected losses.

The allowance for credit losses for our retail consumer portfolio is measured on a collective basis when loans have similar risk characteristics such as loan-to-value ratio, book payment-to-income ratio, FICO score at origination, collateral type, contract term, and other relevant factors. We use statistical models to estimate lifetime expected credit losses of our retail loan portfolio segment by applying probability of default and loss given default to the exposure at default on a loan level basis. Probability of default models are developed from internal risk scoring models which consider variables such as delinquency status, historical default frequency, and other credit quality indicators. Other credit quality indicators include loan-to-value ratio, book payment-to-income ratio, FICO score at origination, collateral type (new or used, Lexus, Toyota, or private label), and contract term. Loss given default models forecast the extent of losses given that a default has occurred and consider variables such as collateral, trends in recoveries, historical loss severity, and other contract structure variables. Exposure at default represents the expected outstanding principal balance, including the effects of expected prepayment when applicable. The lifetime expected credit losses incorporate the probability-weighted forward-looking macroeconomic forecasts for baseline, favorable, and adverse scenarios. The loan lifetime is regarded by management as the reasonable and supportable period. We use macroeconomic forecasts from a third party and update such forecasts quarterly. On an ongoing basis, we review our models, including macroeconomic factors, the selection of macroeconomic scenarios and their weighting to ensure they reflect the risk of the portfolio.

For the allowance for credit losses for our dealer portfolio, an allowance for credit losses is established for both outstanding dealer finance receivables and certain unfunded off-balance sheet lending commitments. The allowance for credit losses is measured on a collective basis when loans have similar risk characteristics such as dealer group internal risk rating and loan-to-value ratios. We measure lifetime expected credit losses of our dealer products portfolio segment by applying probability of default and loss given default to the exposure at default on a loan level basis. Probability of default is primarily established based on internal risk assessments. The probability of default model also considers qualitative factors related to macroeconomic outlooks. Loss given default is established based on the nature and market value of the collateral, loan-to-value ratios and other credit quality indicators. Exposure at default represents the expected outstanding principal balance. The lifetime of the loan or lending commitment is regarded by management as the reasonable and supportable period. On an ongoing basis, we review our models, including macroeconomic outlooks, to ensure they reflect the risk of the portfolio.

If management does not believe the models reflect lifetime expected credit losses, a qualitative adjustment is made to reflect management judgment regarding observable changes in recent or expected economic trends and conditions, portfolio composition, and other relevant factors.

The following table provides information related to our allowance for credit losses for finance receivables and certain off-balance sheet lending commitments:


	Three months ended						Nine months ended
	December 31,						December 31,
(Dollars in millions)	2022			2021			2022			2021
Allowance for credit losses at beginning of period	$	1,395		$	1,224		$	1,272		$	1,215
Charge-offs		(173	)		(64	)		(370	)		(152	)
Recoveries		13			14			42			46
Provision for credit losses		278			45			569			110
Allowance for credit losses at end of period 1	$	1,513		$	1,219		$	1,513		$	1,219

1 Ending balance as of December 31, 2022 and 2021 includes allowance for credit losses related to off-balance-sheet commitments of $29 million and $34 million, respectively, which is included in Other liabilities on the Consolidated Balance Sheet.

Our allowance for credit losses increased by $294 million from $1.2 billion at December 31, 2021 to $1.5 billion at December 31, 2022. The economic conditions have resulted in an increase in consumer delinquencies and charge-offs as well as higher expectations of credit losses in the retail loan portfolio. These factors combined with the increase in the size of our retail loan portfolio have led to an increase in the allowance for credit losses.

Future changes in the economy that impact the consumer and consumer confidence such as increasing interest rates and a rise in the unemployment rate as well as higher debt balances, coupled with deterioration in actual and expected used vehicle values, could result in further increases to our allowance for credit losses. In addition, a decline in the effectiveness of our collection practices could also increase our allowance for credit losses.

LIQUIDITY AND CAPITAL RESOURCES

Cash Requirements

Our primary material cash requirements include the acquisition of finance receivables and investment in operating leases from dealers, providing various financing to dealers, payments related to debt and swaps, operating expenses, voluntary protection contract expenses, income taxes, and dividend payments.

Guarantees

TMCC has guaranteed the payments of principal and interest with respect to the bond obligations that were issued by Putnam County, West Virginia and Gibson County, Indiana to finance the construction of pollution control facilities at manufacturing plants of certain TMCC affiliates. Refer to Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for further discussion.

Commitments

A description of our lending commitments is included under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources” and Note 12 - Related Party Transactions of the Notes to Consolidated Financial Statements in our fiscal 2022 Form 10-K, as well as in Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements.

Indemnification

Refer to Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for a description of agreements containing indemnification provisions.

Liquidity

Liquidity risk is the risk relating to our ability to meet our financial obligations when they come due. Our liquidity strategy is to ensure that we maintain the ability to fund assets and repay liabilities in a timely and cost-effective manner, even in adverse market conditions. Our strategy includes raising funds via the global capital markets and through loans, credit facilities, and other transactions as well as generating liquidity from our earning assets. This strategy has led us to develop a diversified borrowing base that is distributed across a variety of markets, geographies, investors and financing structures.

Liquidity management involves forecasting and maintaining sufficient capacity to meet our cash needs, including unanticipated events. To ensure adequate liquidity through a full range of potential operating environments and market conditions, we conduct our liquidity management and business activities in a manner that will preserve and enhance funding stability, flexibility and diversity. Key components of this operating strategy include a strong focus on developing and maintaining direct relationships with commercial paper investors and wholesale market funding providers and maintaining the ability to sell certain assets when and if conditions warrant.

We develop and maintain contingency funding plans and regularly evaluate our liquidity position under various operating circumstances, allowing us to assess how we will be able to operate through a period of stress when access to normal sources of capital is constrained. The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, and outline actions and procedures for effectively managing through the problem period. In addition, we monitor the ratings and credit exposure of the lenders that participate in our credit facilities to ascertain any issues that may arise with potential draws on these facilities if that contingency becomes warranted.

We maintain broad access to a variety of domestic and global markets and may choose to realign our funding activities depending upon market conditions, relative costs, and other factors. We believe that our funding sources, combined with operating and investing activities, provide sufficient liquidity to meet future funding requirements and business growth. For liquidity purposes, we hold cash in excess of our immediate funding needs. These excess funds are invested in short-term, highly liquid and investment grade money market instruments as well as certain available-for-sale debt securities, which provide liquidity for our short-term funding needs and flexibility in the use of our other funding sources. We maintained excess funds ranging from $5.0 billion to $11.5 billion with an average balance of $8.0 billion during the quarter ended December 31, 2022. The amount of excess funds we hold may fluctuate, depending on market conditions and other factors. We also have access to liquidity under the $5.0 billion credit facility with Toyota Motor Sales U.S.A., Inc. (“TMS”), which as of December 31, 2022, was not drawn upon and had no outstanding balance as further described in Note 7 – Debt and Credit Facilities of the Notes to the Consolidated Financial Statements. We believe we have sufficient capacity to meet our short-term funding requirements and manage our liquidity, including payment of dividends.

Credit support is provided to us by our indirect parent Toyota Financial Services Corporation (“TFSC”), and, in turn to TFSC by TMC. Taken together, these credit support agreements provide an additional source of liquidity to us, although we do not rely upon such credit support in our liquidity planning and capital and risk management. The credit support agreements are not a guarantee by TMC or TFSC of any securities or obligations of TFSC or TMCC, respectively. The fees paid pursuant to these agreements are disclosed in Note 11 – Related Party Transactions of the Notes to Consolidated Financial Statements.

TMC’s obligations under its credit support agreement with TFSC rank pari passu with TMC’s senior unsecured debt obligations. Refer to Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations “Liquidity and Capital Resources” in our fiscal 2022 Form 10-K for further discussion.

We routinely monitor global financial conditions and our financial exposure to our global counterparties, particularly in those countries experiencing significant economic, fiscal or political strain, and the corresponding likelihood of default. As of December 31, 2022, our exposure to foreign sovereign and non-sovereign counterparties was not significant. Refer to the “Liquidity and Capital Resources - Credit Facilities and Letters of Credit” section and Part I, Item 1A. Risk Factors – “The failure or commercial soundness of our counterparties and other financial institutions may have an effect on our liquidity, results of operations or financial condition” in our fiscal 2022 Form 10-K for further discussion.

Funding

The following table summarizes the components of our outstanding debt which includes unamortized premiums, discounts, debt issuance costs and the effects of foreign currency translation adjustments:


	December 31, 2022					March 31, 2022
(Dollars in millions)	Face value		Carrying value		Weighted average contractual interest rates	Face value		Carrying value		Weighted average contractual interest rates
Unsecured notes and loans payable
Commercial paper	$	16,948	$	16,800	4.39%	$	16,896	$	16,876	0.43%
U.S. medium term note ("MTN") program		45,502		45,352	2.70%		46,387		46,235	1.55%
Euro medium term note ("EMTN") program		11,801		11,732	1.83%		13,891		13,813	1.54%
Other debt		4,707		4,705	4.79%		5,368		5,364	1.28%
Total Unsecured notes and loans payable		78,958		78,589	3.06%		82,542		82,288	1.30%
Secured notes and loans payable		31,557		31,510	3.23%		26,907		26,864	1.01%
Total debt	$	110,515	$	110,099	3.10%	$	109,449	$	109,152	1.23%

Unsecured notes and loans payable

The following table summarizes the significant activities by program of our Unsecured notes and loans payable:


(Dollars in millions)	Commercial paper 1		MTNs			EMTNs			Other			Total Unsecured notes and loans payable
Balance at March 31, 2022	$	16,896	$	46,387		$	13,891		$	5,368		$	82,542
Issuances		52		10,350			1,089			150			11,641
Maturities and terminations		-		(11,235	)		(2,853	)		(811	)		(14,899	)
Non-cash changes in foreign currency rates		-		-			(326	)		-			(326	)
Balance at December 31, 2022	$	16,948	$	45,502		$	11,801		$	4,707		$	78,958

1 Changes in Commercial paper are shown net due to its short duration.

Commercial paper

Short-term funding needs are met through the issuance of commercial paper in the U.S. Commercial paper outstanding under our commercial paper programs ranged from approximately $16.9 billion to $18.1 billion during the quarter ended December 31, 2022, with an average outstanding balance of $17.6 billion. Our commercial paper programs are supported by the credit facilities discussed under the heading “Credit Facilities and Letters of Credit.” We believe we have sufficient capacity to meet our short-term funding requirements and manage our liquidity.

MTN program

We maintain a shelf registration statement with the Securities and Exchange Commission (“SEC”) to provide for the issuance of debt securities in the U.S. capital markets to retail and institutional investors. We currently qualify as a well-known seasoned issuer under SEC rules, which allows us to issue under our registration statement an unlimited amount of debt securities during the three-year period ending January 2024. Debt securities issued under the U.S. shelf registration statement are issued pursuant to the terms of an indenture which requires TMCC to comply with certain covenants, including negative pledge and cross-default provisions. We are currently in compliance with these covenants.

EMTN program

Our EMTN program, shared with our affiliates Toyota Motor Finance (Netherlands) B.V., Toyota Credit Canada Inc. and Toyota Finance Australia Limited (TMCC and such affiliates, the “EMTN Issuers”), provides for the issuance of debt securities in the international capital markets. In September 2022, the EMTN Issuers renewed the EMTN program for a one-year period. The maximum aggregate principal amount authorized under the EMTN Program to be outstanding at any time is €60.0 billion or the equivalent in other currencies, of which €30.1 billion was available for issuance at December 31, 2022. The authorized amount is shared among all EMTN Issuers. The authorized aggregate principal amount under the EMTN program may be increased from time to time. Debt securities issued under the EMTN program are issued pursuant to the terms of an agency agreement. Certain debt securities issued under the EMTN program are subject to negative pledge provisions. We are currently in compliance with these covenants.

Other debt

TMCC has entered into term loan agreements with various banks. These term loan agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. We are currently in compliance with these covenants and conditions.

We may borrow from affiliates on terms based upon a number of business factors such as funds availability, cash flow timing, relative cost of funds, and market access capabilities. Amounts borrowed from affiliates are recorded in Other liabilities on our Consolidated Balance Sheets and are therefore excluded from Debt amounts.

Secured Notes and Loans Payable

Asset-backed securitization of our earning asset portfolio provides us with an alternative source of funding. We regularly execute public or private securitization transactions.

The following table summarizes the significant activities of our Secured notes and loans payable:


(Dollars in millions)	Secured notes and loans payable
Balance at March 31, 2022	$	26,907
Issuances		15,001
Maturities and terminations		(10,351	)
Balance at December 31, 2022	$	31,557

We securitize finance receivables and beneficial interests in investments in operating leases (“Securitized Assets”) using a variety of structures. Our securitization transactions involve the transfer of Securitized Assets to bankruptcy-remote special purpose entities. These bankruptcy-remote entities are used to ensure that the Securitized Assets are isolated from the claims of creditors of TMCC and that the cash flows from these assets are available solely for the benefit of the investors in these asset-backed securities. Investors in asset-backed securities do not have recourse to our other assets, and neither TMCC nor our affiliates guarantee these obligations. We are not required to repurchase or make reallocation payments with respect to the Securitized Assets that become delinquent or default after securitization. As seller and servicer of the Securitized Assets, we are required to repurchase or make a reallocation payment with respect to the underlying assets that are subsequently discovered not to have met specified eligibility requirements. This repurchase obligation is customary in securitization transactions. With the exception of our revolving asset-backed securitization program, funding obtained from our securitization transactions is repaid as the underlying Securitized Assets amortize.

We service the Securitized Assets in accordance with our customary servicing practices and procedures. Our servicing duties include collecting payments on Securitized Assets and submitting them to a trustee for distribution to security holders and other interest holders. We prepare monthly servicer certificates on the performance of the Securitized Assets, including collections, investor distributions, delinquencies, and credit losses. We also perform administrative services for the special purpose entities.

Our use of special purpose entities in securitizations is consistent with conventional practice in the securitization market. None of our officers, directors, or employees hold any equity interests or receive any direct or indirect compensation from our special purpose entities. These entities do not own our stock or the stock of any of our affiliates. Each special purpose entity has a limited purpose and generally is permitted only to purchase assets, issue asset-backed securities, and make payments to the security holders, other interest holders and certain service providers as required under the terms of the transactions.

Our securitizations are structured to provide credit enhancement to reduce the risk of loss to security holders and other interest holders in the asset-backed securities. Credit enhancement may include some or all of the following:

•

Overcollateralization: The principal of the Securitized Assets that exceeds the principal amount of the related secured debt.

•

Excess spread: The expected interest collections on the Securitized Assets that exceed the expected fees and expenses of the special purpose entity, including the interest payable on the debt, net of swap settlements, if any.

•

Cash reserve funds: A portion of the proceeds from the issuance of asset-backed securities may be held by the securitization trust in a segregated reserve fund and may be used to pay principal and interest to security holders and other interest holders if collections on the underlying receivables are insufficient.

•

Yield supplement arrangements: Additional overcollateralization may be provided to supplement the future contractual interest payments from securitized receivables with relatively low contractual interest rates.

•

Subordinated notes: The subordination of principal and interest payments on subordinated notes may provide additional credit enhancement to holders of senior notes.

In addition to the credit enhancement described above, we may enter into interest rate swaps with our special purpose entities that issue variable rate debt. Under the terms of these swaps, the special purpose entities are obligated to pay TMCC a fixed rate of interest on payment dates in exchange for receiving a floating rate of interest on notional amounts equal to the outstanding balance of the secured notes and loans payable. This arrangement enables the special purpose entities to mitigate the interest rate risk inherent in issuing variable rate debt that is secured by fixed rate Securitized Assets.

Securitized Assets and the related debt remain on our Consolidated Balance Sheets. We recognize financing revenue on the Securitized Assets. We also recognize interest expense on the secured notes and loans payable issued by the special purpose entities and maintain an allowance for credit losses on the Securitized Assets to cover estimated lifetime expected credit losses using a methodology consistent with that used for our non-securitized asset portfolio. The interest rate swaps between TMCC and the special purpose entities are considered intercompany transactions and therefore are eliminated in our consolidated financial statements.

Our secured notes also include a revolving asset-backed securitization program backed by a revolving pool of finance receivables and cash collateral. Cash flows from these receivables during the revolving period in excess of what is needed to pay certain expenses of the securitization trust and contractual interest payments on the related secured notes may be used to purchase additional receivables, provided that certain conditions are met following the purchase. The secured notes feature a scheduled revolving period, with the ability to repay the secured notes in full, after which an amortization period begins. The revolving period may also end with the amortization period beginning upon the occurrence of certain events that include certain segregated account balances falling below their required levels, credit losses or delinquencies on the pool of assets supporting the secured notes exceeding specified levels, the adjusted pool balance falling to less than 50% of the initial principal amount of the secured notes, or interest not being paid on the secured notes.

Public Securitization

We maintain a shelf registration statement with the SEC to provide for the issuance of securities backed by Securitized Assets in the U.S. capital markets during the three-year period ending December 2024. We regularly sponsor public securitization trusts that issue securities backed by retail finance receivables, including registered securities that we retain. None of these securities have defaulted, experienced any events of default or failed to pay principal in full at maturity. As of December 31, 2022 and March 31, 2022, we did not have any outstanding lease securitization transactions registered with the SEC.

Credit Facilities and Letters of Credit

For additional liquidity purposes, we maintain credit facilities, which may be used for general corporate purposes, as described below:

364-Day Credit Agreement, Three-Year Credit Agreement and Five-Year Credit Agreement

Committed Revolving Asset-backed Facility

Other Unsecured Credit Agreements

TMCC is party to additional unsecured credit facilities with various banks. As of December 31, 2022, TMCC had committed bank credit facilities totaling $4.6 billion of which $350 million, $2.0 billion, $455 million, and $1.8 billion mature in fiscal 2023, 2024, 2025, and 2026, respectively.

TMCC is party to a $5.0 billion three-year revolving credit facility with TMS expiring in fiscal 2025. This credit facility was not drawn upon and had no outstanding balance as of December 31, 2022 and March 31, 2022.

From time to time, we may borrow from affiliates based upon a number of business factors such as funds availability, cash flow timing, relative cost of funds, and market access capabilities.

Credit Ratings

The cost and availability of unsecured financing is influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation. Lower ratings generally result in higher borrowing costs as well as reduced access to capital markets. Credit ratings are not recommendations to buy, sell, or hold securities, and are subject to revision or withdrawal at any time by the assigning credit rating organization. Each credit rating organization may have different criteria for evaluating risk, and therefore ratings should be evaluated independently for each organization. Our credit ratings depend in part on the existence of the credit support agreements of TFSC and TMC. Refer to “Part I, Item 1A. Risk Factors - Our borrowing costs and access to the unsecured debt capital markets depend significantly on the credit ratings of TMCC and its parent companies and our credit support arrangements” in our fiscal 2022 Form 10-K.

Derivative Instruments

Our liabilities consist mainly of fixed and variable rate debt, denominated in U.S. dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps and foreign currency swaps to economically hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. Our use of derivative transactions is intended to reduce long-term fluctuations in the fair value of assets and liabilities caused by market movements. All of our derivative activities are authorized and monitored by our management and our Asset-Liability Committee which provides a framework for financial controls and governance to manage market risk.

Refer to Note 6 – Derivatives, Hedging Activities and Interest Expense of the Notes to Consolidated Financial Statements for further discussion and disclosure on derivative instruments.

LIBOR TRANSITION

The publication of non-U.S. dollar LIBOR rates on a representative basis, as well as the publication of the lesser used 1-week and 2-month U.S. dollar LIBOR tenors, ceased as of the end of December 2021. While the most commonly used U.S. dollar LIBOR tenors are expected to continue to be published until June 30, 2023, U.S. banking agencies issued guidance that financial institutions should cease using U.S. dollar LIBOR as a reference rate in new contracts after December 31, 2021. We are exposed to LIBOR-based financial instruments, including through our dealer financing activities, derivative contracts, secured and unsecured debt, and investment securities. To facilitate an orderly transition from LIBOR to alternative reference rates (“ARRs”), we have established an initiative led by senior management, with Board and committee oversight, to assess, monitor and mitigate risks associated with the expected discontinuation of LIBOR, to achieve operational readiness and engage impacted borrowers and counterparties in connection with the transition to ARRs. Our efforts under this initiative include monitoring developments and the usage of ARRs, monitoring the regulatory and financial reporting guidance, as well as reviewing and updating current legal contracts, internal systems and processes to accommodate the use of ARRs. For example, we have committed to using Secured Overnight Financing Rate (“SOFR”) linked rates in connection with various borrowing arrangements and Prime in connection with various lending arrangements and we continue to evaluate other alternatives as potential ARRs to LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions.

We are also continuously assessing how the expected discontinuation of LIBOR will impact accounting and financial reporting. Refer to Part I, Item 1A. Risk Factors – “Uncertainty about the transition away from the London Interbank Offered Rate (“LIBOR”) and the adoption of alternative reference rates could adversely impact our business and results of operations” in our fiscal 2022 Form 10-K for further discussion.

NEW ACCOUNTING STANDARDS

Refer to Note 1 – Interim Financial Data of the Notes to Consolidated Financial Statements.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make certain estimates which affect reported financial results. The evaluation of the factors used in determining each of our critical accounting estimates involves significant assumptions, complex analyses, and management judgment. Changes in the evaluation of these factors may have a significant impact on the consolidated financial statements. Additionally, due to inherent uncertainties in making estimates, actual results could differ from those estimates, and those differences could be material. The critical accounting estimates that affect the consolidated financial statements and the judgment and assumptions used are consistent with those described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Estimates” in our fiscal 2022 Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have omitted this section pursuant to General Instruction H(2) of Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the principal executive officer) and Chief Financial Officer (the principal financial officer), of the effectiveness of our “disclosure controls and procedures” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) concluded that the disclosure controls and procedures were effective as of December 31, 2022, to ensure that information required to be disclosed in reports filed under the Exchange Act was recorded, processed, summarized and reported within the time periods specified by the SEC’s rules, regulations, and forms and that such information is accumulated and communicated to our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.

There have been no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Litigation

For a discussion of legal proceedings, see “Part I. Financial Information – Item 1. Financial Statements - Note 9 – Commitments and Contingencies of the Notes to Consolidated Financial Statements – Litigation and Governmental Proceedings.”

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors set forth under “Item 1A. Risk Factors” in our fiscal 2022 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We have omitted this section pursuant to General Instruction H(2) of Form 10-Q.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

We have omitted this section pursuant to General Instruction H(2) of Form 10-Q.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibit Number	Description	Method of Filing

3.1	Restated Articles of Incorporation of Toyota Motor Credit Corporation filed with the California Secretary of State on April 1, 2010	(1)

3.2	Bylaws of Toyota Motor Credit Corporation as amended through December 8, 2000	(2)

10.1	364 Day Credit Agreement, dated as of November 18, 2022, among Toyota Motor Credit Corporation, Toyota Motor Finance (Netherlands) B.V., Toyota Financial Services (UK) PLC, Toyota Credit De Puerto Rico Corp., Toyota Credit Canada Inc., Toyota Kreditbank GmbH, and Toyota Finance Australia Limited, as Borrowers, the lenders party thereto, and BNP Paribas, as Administrative Agent, Swing Line Agent and Swing Line Lender, BNP Paribas Securities Corp., BofA Securities, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., and MUFG Bank, Ltd., as Joint Lead Arrangers and Joint Book Managers, Citibank, N.A., Bank of America, N.A. and JPMorgan Chase Bank, N.A., as Syndication Agents and Swing Line Lenders, and MUFG Bank, Ltd., as a Syndication Agent.	(3)

10.2	Three Year Credit Agreement, dated as of November 18, 2022, among Toyota Motor Credit Corporation, Toyota Motor Finance (Netherlands) B.V., Toyota Financial Services (UK) PLC, Toyota Credit De Puerto Rico Corp., Toyota Credit Canada Inc., Toyota Kreditbank GmbH, and Toyota Finance Australia Limited, as Borrowers, the lenders party thereto, and BNP Paribas, as Administrative Agent, Swing Line Agent and Swing Line Lender, BNP Paribas Securities Corp., BofA Securities, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., and MUFG Bank, Ltd., as Joint Lead Arrangers and Joint Book Managers, Citibank, N.A., Bank of America, N.A. and JPMorgan Chase Bank, N.A., as Syndication Agents and Swing Line Lenders, and MUFG Bank, Ltd., as a Syndication Agent.	(4)

10.3	Five Year Credit Agreement, dated as of November 18, 2022, among Toyota Motor Credit Corporation, Toyota Motor Finance (Netherlands) B.V., Toyota Financial Services (UK) PLC, Toyota Credit De Puerto Rico Corp., Toyota Credit Canada Inc., Toyota Kreditbank GmbH, and Toyota Finance Australia Limited, as Borrowers, the lenders party thereto, and BNP Paribas, as Administrative Agent, Swing Line Agent and Swing Line Lender, BNP Paribas Securities Corp., BofA Securities, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., and MUFG Bank, Ltd., as Joint Lead Arrangers and Joint Book Managers, Citibank, N.A., Bank of America, N.A. and JPMorgan Chase Bank, N.A., as Syndication Agents and Swing Line Lenders, and MUFG Bank, Ltd., as a Syndication Agent.	(5)

31.1	Certification of Chief Executive Officer	Filed Herewith

31.2	Certification of Chief Financial Officer	Filed Herewith

32.1	Certification pursuant to 18 U.S.C. Section 1350	Furnished Herewith

32.2	Certification pursuant to 18 U.S.C. Section 1350	Furnished Herewith

(1) Incorporated herein by reference to Exhibit 3.1, filed with our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, Commission File Number 1-9961.

(2) Incorporated herein by reference to Exhibit 3.2, filed with our Quarterly Report on Form 10-Q for the three months ended December 31, 2000, Commission File Number 1-9961.

(3) Incorporated herein by reference to Exhibit 10.1, filed with our Current Report on Form 8-K filed November 21, 2022, Commission File Number 1-9961.

(4) Incorporated herein by reference to Exhibit 10.2, filed with our Current Report on Form 8-K filed November 21, 2022, Commission File Number 1-9961.

(5) Incorporated herein by reference to Exhibit 10.3, filed with our Current Report on Form 8-K filed November 21, 2022, Commission File Number 1-9961.


Exhibit Number	Description	Method of Filing

101.INS	Inline XBRL instance document	Filed Herewith

101.CAL	Inline XBRL taxonomy extension calculation linkbase document	Filed Herewith

101.DEF	Inline XBRL taxonomy extension definition linkbase document	Filed Herewith

101.LAB	Inline XBRL taxonomy extension labels linkbase document	Filed Herewith

101.PRE	Inline XBRL taxonomy extension presentation linkbase document	Filed Herewith

101.SCH	Inline XBRL taxonomy extension schema document	Filed Herewith

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)	Filed Herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	TOYOTA MOTOR CREDIT CORPORATION
	(Registrant)



Date: February 9, 2023	By	/s/ Mark S. Templin
		Mark S. Templin
		President and Chief Executive Officer
		(Principal Executive Officer)



Date: February 9, 2023	By	/s/ Scott Cooke
		Scott Cooke
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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Toyota Motor Credit (TM/28) 10-Q2023 Q3 Quarterly report

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