TOYOTA MOTOR CREDIT CORPORATION

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended March 31, 2020

 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)

Registrant’s telephone number, including area code: (469) 486-9300

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

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

(Title of class)

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No 

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, 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 April 30, 2020, 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.

Documents incorporated by reference: None

Reduced Disclosure Format

The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with

the reduced disclosure format.

TOYOTA MOTOR CREDIT CORPORATION

FORM 10-K

For the fiscal year ended March 31, 2020

INDEX

PART I.................................................................................................................................................................................................

Item 1.

Business..........................................................................................................................................................................

Item 1A.

Risk Factors....................................................................................................................................................................

Item 1B.

Unresolved Staff Comments...........................................................................................................................................

Item 2.

Properties........................................................................................................................................................................

Item 3.

Legal Proceedings...........................................................................................................................................................

Item 4.

Mine Safety Disclosures.................................................................................................................................................

PART II ...............................................................................................................................................................................................

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ..........................

Item 6.

Selected Financial Data....................................................................................................................................................

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations..........................................

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.........................................................................................

Item 8.

Financial Statements and Supplementary Data................................................................................................................

Report of Independent Registered Public Accounting Firm............................................................................................

Consolidated Statements of Income.................................................................................................................................

Consolidated Statements of Comprehensive Income.......................................................................................................

Consolidated Balance Sheets ...........................................................................................................................................

Consolidated Statements of Shareholder’s Equity...........................................................................................................

Consolidated Statements of Cash Flows..........................................................................................................................

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ........................................

121

Item 9A.

Controls and Procedures ..................................................................................................................................................

121

Item 9B.

Other Information.............................................................................................................................................................

121

PART III..............................................................................................................................................................................................

122

Item 10.

Directors, Executive Officers and Corporate Governance.............................................................................................

122

Item 11.

Executive Compensation................................................................................................................................................

125

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......................

125

Item 13.

Certain Relationships and Related Transactions, and Director Independence...............................................................

125

Item 14.

Principal Accounting Fees and Services........................................................................................................................

125

PART IV ..............................................................................................................................................................................................

126

Item 15.

Exhibits, Financial Statement Schedules .......................................................................................................................

126

Item 16.

Form 10-K Summary .....................................................................................................................................................

130

Signatures.......................................................................................................................................................................

131

PART I

ITEM 1. BUSINESS

GENERAL

Toyota Motor Credit Corporation was incorporated in California in 1982 and commenced operations in 1983.

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. We are wholly-owned by Toyota

Financial Services International Corporation (“TFSIC”), a California corporation, which is a wholly-owned subsidiary

of Toyota Financial Services Corporation (“TFSC”), a Japanese corporation. TFSC, in turn, is a wholly-owned

subsidiary of Toyota Motor Corporation (“TMC”), a Japanese corporation. TFSC manages TMC’s worldwide

financial services operations. TMCC is marketed under the brands of Toyota Financial Services and Lexus Financial

Services.

We provide a variety of finance and insurance products to authorized Toyota and Lexus dealers or dealer groups and,

to a lesser extent, other domestic and import franchise dealers (collectively referred to as “dealers”) and their

customers in the United States of America (excluding Hawaii) (the “U.S.”) and Puerto Rico. Our products fall

primarily into the following categories:

• Finance - We acquire retail installment sales contracts from dealers in the U.S. and Puerto Rico (“retail

contracts”) and leasing contracts accounted for as operating leases (“lease contracts”) from dealers in the

U.S. We collectively refer to our retail and lease contracts as the “consumer portfolio.” We also provide

dealer financing, including wholesale financing, working capital loans, revolving lines of credit and real

estate financing to dealers in the U.S. and Puerto Rico. We collectively refer to our dealer financing

portfolio as the “dealer portfolio.”

• Insurance - Through Toyota Motor Insurance Services, Inc., a wholly-owned subsidiary, and its insurance

company subsidiaries (collectively referred to as “TMIS”), we provide marketing, underwriting, and

claims administration for vehicle and payment protection products sold by dealers in the U.S. Our vehicle

and payment protection products include vehicle service agreements, guaranteed auto protection

agreements, prepaid maintenance contracts, excess wear and use agreements, tire and wheel protection

agreements, key replacement protection and used vehicle limited warranty agreements. TMIS also

provides coverage and related administrative services to certain of our affiliates in the U.S. Although the

vehicle and payment protection products are generally not regulated as insurance products, for ease of

reference we collectively refer to the group of products provided by TMIS herein as “insurance products.”

We support growth in earning assets through funding obtained primarily in the global capital markets as well as funds

provided by investing and operating activities. Refer to Item 7. Management’s Discussion and Analysis of Financial

Condition and Results of Operations, “Liquidity and Capital Resources” for a discussion of our funding activities.

On April 16, 2019, we announced that we will restructure our field operations to better serve our dealer partners by

streamlining our field office structure and investing in new technology. We are currently in the process of

consolidating our field operations locations, which consist of dealer sales and service offices (“DSSOs”) and regional

management offices located in cities throughout the U.S., into three new regional dealer service centers (“DSCs”)

located in Chandler, Arizona (serving the West region), Plano, Texas (serving the Central region) and Alpharetta,

Georgia (serving the East region). The consolidation of field operations is expected to be complete by the end of fiscal

year 2021. The regional DSCs acquire retail and lease contracts from dealers, and market TMIS insurance products to

dealers.

The dealer lending function, previously located at the various DSSO’s, is now centralized at the DSC located in Plano,

Texas. The dealer lending function supports the dealers by providing wholesale financing and other dealer financing

activities such as business acquisitions, facilities refurbishment, real estate purchases, and working capital

requirements.

We service contracts through three regional customer service centers (“CSCs”) located throughout the U.S. The CSCs

support customer account servicing functions such as collections, lease terminations, and administration of both retail

and lease contract customer accounts. The Central region CSC also supports insurance product operations by

providing agreement and claims administrative services.

As of April 1, 2020, we began providing private label financial services to third-party automotive and mobility

companies commencing with the provision of services to Mazda Motor of America, Inc. (“Mazda”). Pursuant to our

previously disclosed agreement with Mazda, we currently offer exclusive private label automotive retail, lease, and

dealer financing products and services, and later in fiscal year 2021 intend to offer exclusive vehicle protection

products and services, marketed under the brand Mazda Financial Services to Mazda customers and dealers in the

United States. Our agreement with Mazda is for an initial term of approximately five years.

Available Information

Our filings with the Securities and Exchange Commission (“SEC”) may be found by accessing the SEC website

(http://www.sec.gov). A link to the SEC website and certain of our SEC filings are contained on our website located

at: www.toyotafinancial.com under “Investor Relations, SEC Filings”.

Investors and others should note that we announce material financial information using the investor relations section

of our website. We use our website, press releases, as well as social media to communicate with our investors,

customers and the general public about our company, our services and other issues. While not all of the information

that we post on our website or on social media is of a material nature, some information could be material. Therefore,

we encourage investors, the media, and others interested in our company to review the information we post on the

investor relations section of our website and our Twitter feed (http://www.twitter.com/toyotafinancial). We are not

incorporating any of the information set forth on our website or on social media channels into this filing on Form 10-

Seasonality

Revenues generated by our retail and lease contracts are generally not subject to seasonal variations. Financing

volume is subject to a certain degree of seasonality. This seasonality does not have a significant impact on revenues as

collections, generally in the form of fixed payments, occur over the course of several years. We are subject to

seasonal variations in credit losses, which are historically higher in the first and fourth calendar quarters of the year.

FINANCE OPERATIONS

The table below summarizes our financing revenues, net of depreciation by product.

Years ended March 31,

2020

2019

2018

Percentage of financing revenues, net of depreciation:

Operating leases, net of depreciation

Retail

Dealer

Financing revenues, net of depreciation

100

Retail and Lease Financing

Pricing

We utilize a tiered pricing program, which matches interest rates with customer risk as defined by credit bureau scores

and other factors for a range of price and risk combinations. Each application is assigned a credit tier. Rates vary

based on credit tier, term, loan-to-value and collateral, including whether a new or used vehicle is financed. In

addition, special rates may apply as a result of promotional activities. We review and adjust interest rates based on

competitive and economic factors and distribute the rates, by tier, to dealers.

Underwriting

Dealers transmit customer credit applications electronically through our online system for contract acquisition. The

customer may submit a credit application directly to our website, in which case, the credit application is sent to the

dealer of the customer’s choice and is considered by us for preapproval. Upon receipt of the credit application, our

loan origination system automatically requests a credit bureau report from one of the major credit bureaus. We use a

proprietary credit scoring system to evaluate an applicant’s risk profile. Factors used by the credit scoring system

(based on the applicant’s credit history) include the term of the contract, ability to pay, debt ratios, amount financed

relative to the value of the vehicle to be financed, and credit bureau attributes such as number of trade lines, utilization

ratio and number of credit inquiries.

Credit applications are subject to systematic evaluation. Our loan origination system evaluates each application to

determine if it qualifies for automatic approval or decline without manual intervention (“auto-decisioning”) using

specific requirements, including internal credit score and other application characteristics. Typically, the highest

quality credit applications are approved automatically, and the lowest quality credit applications are automatically

declined.

Credit analysts (working in our field operations) approve or decline all credit applications that are not auto-decisioned

and may also approve an application that has been the subject of an automated decline. Failure to be automatically

approved through auto-decisioning does not mean that an application does not meet our underwriting guidelines. A

credit analyst decisions applications based on an evaluation that considers an applicant’s creditworthiness and

projected ability to meet the monthly payment obligation, which is derived from, among other things, the amount

financed and the term. A credit analyst will verify information contained in the credit application if the application

presents an elevated level of credit risk. Our proprietary scoring system assists the credit analyst in the credit review

process. The credit analyst’s final credit decision is made based upon the degree of credit risk perceived by the credit

analyst after assessing the strengths and weaknesses of the application.

Completion of the financing process is dependent upon whether the transaction is a retail or lease contract. For a retail

contract, we acquire the retail contract from the dealer and obtain a security interest in the vehicle. We perfect our

security interests in the financed retail vehicles through the applicable state department of motor vehicles (or

equivalent) with certificate of title filings or with Uniform Commercial Code (“UCC”) filings, as appropriate. For a

lease contract, except as described below under “Servicing”, we acquire the lease contract and concurrently assume

ownership of the leased vehicle. We have the right to pursue collection actions against a delinquent customer, as well

as repossess a vehicle if a customer fails to meet contractual obligations.

We regularly review and analyze our consumer portfolio to evaluate the effectiveness of our underwriting guidelines

and purchasing criteria. If external economic factors, credit losses, delinquency experience, market conditions or other

factors change, we may adjust our underwriting guidelines and purchasing criteria in order to change the asset quality

of our portfolio or to achieve other goals and objectives.

Subvention and Incentive Programs

Toyota Motor Sales, U.S.A., Inc. (“TMS”), a subsidiary of Toyota Motor North America, Inc. (“TMNA”), is the

primary distributor of Toyota and Lexus vehicles in the United States. In partnership with TMNA and certain non-

affiliated third party distributors, we may offer special promotional rates, which we refer to as subvention programs.

TMNA pays us the majority of the difference between our standard rate and the promotional rate. Amounts received

in connection with these programs allow us to maintain yields at levels consistent with standard program levels. The

level of subvention program activity varies based on the marketing strategies of TMNA, economic conditions, and

volume of new and used vehicle sales. The amount of subvention received varies based on the mix of Toyota and

Lexus vehicles included in the promotional rate programs and the timing of the programs. The majority of our lease

contracts and a significant portion of our retail contracts are subvened. We may also offer cash and contractual

residual value support incentive programs in partnership with TMNA. Subvention and other cash incentive program

payments offered in partnership with TMNA are settled at the beginning of the retail or lease contract. We may also

offer our own cash incentives and other competitive rate programs. We defer the payments and recognize them over

the life of the contract as a yield adjustment for retail contracts and as rental income or a reduction to depreciation

expense for lease contracts.

Servicing

Our CSCs are responsible for servicing the consumer portfolio. A centralized department manages third party vendor

relationships responsible for bankruptcy administration, liquidation and post charge-off recovery activities, certain

administrative activities, customer services activities and pre-charge-off collections with support from the CSCs.

We use an online collection and auto dialer system that prioritizes collection efforts and signals our collections

personnel to make telephone contact with delinquent customers. We also use a behavioral-based collection strategy to

minimize risk of loss and employ various collection methods based on behavioral scoring models (which analyze

borrowers’ payment performance, vehicle valuation and credit bureau scores to predict future payment behavior). We

generally determine whether to commence repossession efforts after an account is approximately 80 days past due.

Repossessed vehicles are held for sale to comply with statutory requirements and then sold at private auctions, unless

public auctions are required by state law. Any unpaid amounts remaining after the repossessed vehicle is sold or after

taking the full balance charge-off are pursued by us to the extent practical and legally permissible. Any surplus

amounts remaining after recovery fees, disposition costs, and other expenses have been paid, and after any reserve

charge-backs, dealer guarantees and optional product refunds have been credited to the customer’s account, are

refunded to the customers. Collections of post-sale deficiencies and full-balance charge-offs are handled by third

party vendors and the CSCs. We charge-off uncollectible portions of accounts when an account is deemed to be

uncollectible or when the account balance becomes 120 days contractually delinquent, whichever occurs first.

However, the CSCs will continue to collect or pursue recovery of the vehicle up to 190 days after the account is past

due.

We may, in accordance with our customary servicing procedures, offer rebates or waive any prepayment charge, late

payment charge, or any other fees that may be collected in the ordinary course of servicing the consumer portfolio. In

addition, we may defer a customer’s obligation to make a payment by extending the contract term. Refer to Item 1A.

Risk Factors, “Industry and Business Risk”-“We face various risks related to health epidemics and other outbreaks,

which have had and may continue to have material adverse effects on our business, financial condition, results of

operations and cash flows” and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of

Operations, “Recent Developments Related to COVID-19” for further discussion of payment relief programs offered

to customers affected by the coronavirus.

Substantially all of our retail and lease contracts are purchased as non-recourse from the dealers. This relieves the

dealers of financial responsibility in the event of a customer default.

We may experience a higher risk of loss if customers fail to maintain required insurance coverage. The terms of our

retail contracts require customers to maintain physical damage insurance covering loss or damage to the financed

vehicle in an amount not less than the full value of the vehicle and to provide evidence of such insurance upon our

request. The terms of each contract allow but do not require us to obtain any such insurance coverage on behalf of the

customer. In accordance with our customary servicing procedures, we do not exercise our right to obtain insurance

coverage on behalf of the customer. Our lease contracts require lessees to maintain minimum liability insurance and

physical damage insurance covering loss or damage to the leased vehicle in an amount not less than the full value of

the vehicle. We currently do not monitor ongoing customer insurance coverage as part of our customary servicing

procedures for the consumer portfolio.

Toyota Lease Trust, a Delaware business trust (the “Titling Trust”), acts as lessor and holds title to leased vehicles in

the U.S. This arrangement was established to facilitate lease securitizations. TMCC services lease contracts acquired

by the Titling Trust from Toyota and Lexus dealers. TMCC holds an undivided interest in lease contracts owned by

the Titling Trust, and these lease contracts are included in Investments in operating leases, net on our Consolidated

Balance Sheets.

Remarketing

The lessee may purchase the leased vehicle at the contractual residual value or return the leased vehicle to the dealer.

If the leased vehicle is returned to the dealer, the dealer may purchase the leased vehicle or return it to us. We are

responsible for disposing of the leased vehicle if the lessee or dealer does not purchase the vehicle at lease maturity.

In order to minimize losses when vehicles are returned to us, we have developed remarketing strategies to maximize

proceeds and minimize disposition costs on used vehicles. We use various channels to sell vehicles returned at lease-

end or repossessed prior to lease-end, including a dealer direct program (“Dealer Direct”) and physical auctions.

The goal of Dealer Direct is to increase dealer purchases of off-lease vehicles thereby reducing the disposition costs of

such vehicles. Through Dealer Direct, the dealer accepting return of the lease vehicle (the “grounding dealer”) has the

option to purchase the vehicle at the contractual residual value, purchase the vehicle at an assessed market value, or

return the vehicle to us. Vehicles not purchased by the grounding dealer are made available to all Toyota and Lexus

dealers through the Dealer Direct online auction. Vehicles not purchased through Dealer Direct are sold at physical

vehicle auction sites throughout the country. Where deemed necessary, we recondition used vehicles prior to sale in

order to enhance the vehicle values at auction. Refer to Item 1A. Risk Factors, “Industry and Business Risk”-“We

face various risks related to health epidemics and other outbreaks, which have had and may continue to have material

adverse effects on our business, financial condition, results of operations and cash flows”, -“A decrease in the residual

values of our off-lease vehicles and a higher number of returned lease assets could negatively affect our results of

operations and financial condition” and Item 7. Management’s Discussion and Analysis of Financial Condition and

Results of Operations, “Recent Developments Related to COVID-19” for further discussion of the impact of

coronavirus on our remarketing activities and residual values.

Dealer Financing

Dealer financing is comprised of wholesale financing and other financing options designed to meet dealer business

needs.

Wholesale Financing

We provide wholesale financing to dealers for inventories of new and used Toyota, Lexus and other domestic and

import vehicles. We acquire a security interest in the vehicle inventory, and/or other dealership assets, as appropriate,

which we perfect through UCC filings. Wholesale financing may also be backed by corporate or individual guarantees

from, or on behalf of, affiliated dealers, dealer groups, or dealer principals. In the event of a dealer default under a

wholesale loan agreement, we have the right to liquidate assets in which we have a perfected security interest and to

seek legal remedies pursuant to the wholesale loan agreement and any applicable guarantees.

TMCC and TMNA are parties to an agreement pursuant to which TMNA will arrange for the repurchase of new

Toyota and Lexus vehicles at the aggregate cost financed by TMCC in the event of a dealer default under wholesale

financing. In addition, we provide other types of wholesale financing to certain Toyota and Lexus dealers and other

third parties, at the request of TMNA or private Toyota distributors, and TMNA or the applicable private distributor

guarantees the payments by such borrowers.

Other Dealer Financing

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 insurance products and the creditworthiness of

each dealer.

Before establishing a wholesale loan or other dealer financing agreement, we perform a credit analysis of the dealer.

During this analysis, we:

• Review financial statements and we may obtain credit reports and bank references;

• Evaluate the dealer’s financial condition and history of servicing debt; and

• Assess the dealer’s operations and management.

On the basis of this analysis, we may approve the issuance of a loan or financing agreement and determine the

appropriate amount to lend.

As part of our monitoring processes, we may require dealers to submit periodic financial statements. We also perform

periodic physical audits of vehicle inventory as well as monitor the timeliness of dealer inventory financing payoffs in

accordance with the agreed-upon terms to identify possible risks.

INSURANCE OPERATIONS

TMIS offers vehicle and payment protection products on Toyota, Lexus and other domestic and import vehicles that

are sold by dealers as part of the dealer’s sale of a vehicle as further described below. Vehicle service agreements

offer vehicle owners and lessees mechanical breakdown protection for new and used vehicles secondary to the

manufacturer’s new vehicle warranty. Guaranteed auto protection agreements provide coverage for a lease or retail

contract deficiency balance in the event of a total loss or theft of the covered vehicle. Prepaid maintenance contracts

provide maintenance services at manufacturer recommended intervals. Excess wear and use agreements are available

on leases of Toyota and Lexus vehicles and protect against excess wear and use charges that may be assessed at lease

termination. Tire and wheel protection agreements provide coverage in the event that a covered vehicle’s tires or

wheels become damaged as a result of a road hazard or structural failure due to a defect in material or workmanship, to

the extent not covered by the manufacturer or the tire distributor warranties. Certain tire and wheel protection

agreements also cover expenses related either to replacing or reprogramming a vehicle key or vehicle key remote in

the event of loss or damage. Key replacement protection provides stand-alone coverage for expenses related either to

replacing or reprogramming a vehicle key or vehicle key remote in the event of loss or damage. Used vehicle limited

warranty agreements are included with the purchase of a used vehicle and provides for the repair or replacement of

certain covered components that have mechanically failed on the covered used vehicle.

TMIS provides TMNA contractual indemnity insurance coverage for limited warranties on certified Toyota and Lexus

pre-owned vehicles. TMIS also provides umbrella liability insurance to TMNA and other affiliates covering certain

dollar value layers of risk above various primary or self-insured retentions. On all layers in which TMIS provides

coverage, 99 percent of the risk is ceded to a reinsurer.

Effective September 2018, TMIS discontinued the wholesale inventory insurance program for which certain Toyota,

Lexus and other domestic and import dealers obtained coverage for eligible vehicle inventory. The discontinuation of

the wholesale inventory program did not have a significant impact on our results of operations or financial condition

for our insurance operations.

RELATIONSHIPS WITH AFFILIATES

TMCC is party to agreements with TMNA and certain TMNA subsidiaries. For ease of reference herein, we refer

solely to the parent entity, TMNA. As a result, all references to the agreements or activities of TMNA herein that are

carried out by a TMNA subsidiary are deemed to also make reference to and include the applicable TMNA subsidiary.

TMNA sponsors subvention, cash and contractual residual value support incentive programs on certain new and used

Toyota and Lexus vehicles. The level of incentive program activity varies based on TMNA marketing strategies,

economic conditions, and volume of vehicle sales.

TMCC and TMNA are parties to an agreement pursuant to which TMNA will arrange for the repurchase of new

Toyota and Lexus vehicles at the aggregate cost financed by TMCC in the event of a dealer default under wholesale

financing. In addition, we provide other types of financing to certain Toyota and Lexus dealers and other third parties,

at the request of TMNA or private Toyota distributors, and TMNA or the applicable private distributor guarantees the

payments by such borrowers.

TMNA provides shared services to TMCC, including certain technological and administrative services, such as

information systems support, facilities, insurance coverage, human resources and other corporate services. TMCC

also provides shared services to TMNA, including certain treasury and procurement services.

Prior to January 1, 2015, our employees were generally eligible to participate in the Toyota Motor Sales, U.S.A., Inc.

Pension Plan (the “Pension Plan”). Effective January 1, 2015, the Pension Plan was closed to employees first

employed or reemployed on or after such date. Employees meeting certain eligibility requirements may participate in

the Toyota Motor North America, Inc. Retirement Savings Plan (the “Savings Plan”). Certain employees hired on or

after January 1, 2015, may be eligible to receive an additional contribution to the Savings Plan calculated based on

their age and compensation. Various health, life and other post-retirement benefits are offered and sponsored by

TMNA, as discussed further in Note 10 – Pension and Other Benefit Plans of the Notes to Consolidated Financial

Statements.

TMCC is party to agreements with TMNA and other affiliates relating to the team member vehicle benefit program,

which allows team members to lease Toyota and Lexus vehicles on terms exclusive to the benefit program. TMNA

serves as the chief administrator of the program. TMCC acquires and services team member leases entered into after

the third quarter of fiscal 2018. A portion of the vehicles used for the team member vehicle benefit program are

acquired from TMNA. TMCC receives a per vehicle contribution from participating affiliates to assist with the costs

of its contribution to the benefit program, and TMCC pays a per vehicle participation fee to TMNA to participate in

the benefit program.

TMCC and Toyota Financial Savings Bank (“TFSB”), a Nevada thrift company owned by TFSIC, are parties to a

master shared services agreement under which TMCC and TFSB provide certain services to each other. TMCC and

TFSB are also parties to an expense reimbursement agreement, which provides that TMCC will reimburse certain

expenses incurred by TFSB in connection with providing certain financial products and services to TMCC’s customers

and dealers in support of TMCC’s customer loyalty strategy and programs.

TMCC is party to a revolving credit facility with TMS expiring in fiscal 2022 which may be used for general corporate

purposes. This agreement is further discussed in Item 7. Management’s Discussion and Analysis of Financial

Condition and Results of Operations, “Liquidity and Capital Resources.”

Credit support agreements exist between TMCC and TFSC and between TFSC and TMC. These agreements are

further discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,

“Liquidity and Capital Resources.”

TMIS provides administrative services and various types of coverage to TMNA and other affiliates, including

contractual indemnity coverage for limited warranties on TMNA’s certified pre-owned vehicle program and umbrella

liability insurance.

Refer to Note 12 – Related Party Transactions of the Notes to Consolidated Financial Statements for further

information.

COMPETITION

We operate in a highly competitive environment and compete with other financial institutions including national and

regional commercial banks, credit unions, savings and loan associations, online banks, and finance companies. To a

lesser extent, we compete with other automobile manufacturers’ affiliated finance companies that actively seek to

purchase retail contracts through Toyota and Lexus dealers. We also compete with national and regional commercial

banks and other automobile manufacturers’ affiliated finance companies for dealer financing. No single competitor is

dominant in the industry. We compete primarily through service quality, our relationship with TMNA, and financing

rates. We seek to provide exceptional customer service and competitive financing programs to our dealers and to their

customers. Our affiliation with TMNA offers an advantage in providing financing or leasing of Toyota and Lexus

vehicles.

Competition for the insurance products is primarily from national and regional independent service contract providers.

We compete primarily through service quality, our relationship with TMNA and product benefits. Our affiliation with

TMNA provides an advantage in selling our insurance products and services.

REGULATORY ENVIRONMENT

Our finance and insurance products are regulated under both federal and state law.

Federal Consumer Finance Regulation

Our finance operations are governed by, among other federal laws, the Equal Credit Opportunity Act, the Truth in

Lending Act, the Consumer Leasing Act, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the

unfair, deceptive and abusive practices (UDAAP) provisions of the Dodd-Frank Wall Street Reform and Consumer

Protection Act (the “Dodd-Frank Act”), and the consumer data privacy and security provisions of the Gramm-Leach

Bliley Act.

The Equal Credit Opportunity Act is designed to prevent credit discrimination on the basis of certain protected classes,

requires the distribution of specified credit decision notices and limits the information that may be requested and

considered in a credit transaction. The Truth in Lending Act and the Consumer Leasing Act place disclosure and

substantive transaction restrictions on consumer credit and leasing transactions. The Fair Credit Reporting Act

imposes restrictions and requirements regarding our use and sharing of credit reports, the reporting of data to credit

reporting agencies including the accuracy and integrity of information reported, credit decision notices, consumer

dispute handling procedures and identity theft prevention requirements. The Servicemembers Civil Relief Act

provides additional protections for certain customers in the military. For example, it requires us, in most

circumstances, to reduce the interest rate charged to customers who have subsequently joined, enlisted, been inducted

or called to active military duty, and also requires us to allow eligible servicemembers to terminate their lease

agreements with us early without penalty. UDAAP laws prohibit practices that are unfair, deceptive or abusive

towards consumers.

Federal privacy and data security laws place restrictions on our use and sharing of consumer data, impose privacy

notice requirements, give consumers the right to opt out of certain uses and sharing of their data and impose

safeguarding rules regarding the maintenance, storage, transmission and destruction of consumer data. Cybersecurity

and data privacy are areas of heightened legislative and regulatory focus. The timing and effects of potential

legislative or regulatory changes to data privacy regulations is uncertain.

In addition, the dealers who originate our retail and lease contracts also must comply with federal credit and trade

practice statutes and regulations. Failure of the dealers to comply with these statutes and regulations could result in

remedies that could have an adverse effect on us.

The Consumer Financial Protection Bureau (“CFPB”) has broad rulemaking, supervisory and enforcement authority

over entities offering consumer financial services or products, including non-bank companies, such as TMCC

(“Covered Entities”).

The CFPB’s supervisory authority has focused on fair lending compliance, the marketing and sale of certain optional

products, including products similar to those we finance or sell through TMIS and credit reporting.

The CFPB’s supervisory authority permits it to examine Covered Entities for compliance with consumer financial

protection laws. These examinations could result in enforcement actions, regulatory fines and mandated changes to our

business, products, policies and procedures.

The CFPB’s enforcement authority permits it to conduct investigations (which may include a joint investigation with

other agencies and regulators) of, and initiate enforcement actions related to, violations of federal consumer financial

protection laws. The CFPB has the authority to obtain cease and desist orders (which can include orders for restitution

or rescission of contracts, as well as other types of affirmative relief), or other forms of remediation, and/or impose

monetary penalties. The CFPB and the Federal Trade Commission (“FTC”) may investigate the products, services and

operations of credit providers, including banks and other finance companies engaged in auto finance activities. As a

result of such investigations, both the CFPB and FTC have announced various enforcement actions against lenders in

the past few years involving significant penalties, consent orders, cease and desist orders and similar remedies that, if

applicable to us or the products, services and operations we offer, may require us to cease or alter certain business

practices, which could have a material adverse effect on our results of operations, financial condition, and liquidity.

State Regulation

A majority of states (and Puerto Rico) have enacted legislation establishing licensing requirements to conduct

financing activities. We must renew these licenses periodically. Most states also impose limits on the maximum rate

of finance charges. In certain states, the margin between the present statutory maximum interest rates and borrowing

costs is sufficiently narrow that, in periods of rapidly increasing or high interest rates, there could be an adverse effect

on our operations in these states if we were unable to pass on increased interest costs to our customers. Some state

laws impose rate and other restrictions on credit transactions with customers in active military status in addition to

those imposed by the Servicemembers Civil Relief Act.

State laws also impose requirements and restrictions on us with respect to, among other matters, required credit

application and finance and lease disclosures, late fees and other charges, the right to repossess a vehicle for failure to

pay or other defaults under the retail or lease contract, other rights and remedies we may exercise in the event of a

default under the retail or lease contract, and other consumer protection matters. Many states are also focusing on

cybersecurity and data privacy as areas warranting consumer protection. Some states have passed complex legislation

dealing with consumer information, which impacts companies such as TMCC. For example, in California a new data

protection regime has taken effect, that grants consumers broad new rights relating to access to, deletion of, and

sharing of personal information that is collected by businesses and requiring regulated entities to establish measures to

identify, manage, secure, track, produce and delete personal information. In some jurisdictions, these laws and

regulations provide a private right of action that would allow customers to bring suit directly against us for

mishandling their data for certain violations of these laws and regulations.

TMIS operations are subject to state regulations and licensing requirements. State laws vary with respect to which

products are regulated and what types of corporate licenses and filings are required to offer certain products. Certain

products offered by TMIS are covered by state privacy laws as well as new cybersecurity and data privacy legislation.

Our insurance company subsidiaries must be appropriately licensed in certain states in which they conduct business,

must maintain minimum capital requirements and file annual financial information as determined by their state of

domicile and the National Association of Insurance Commissioners. Failure to comply with these requirements could

have an adverse effect on insurance operations in a particular state. We actively monitor applicable laws and

regulations in each state in order to maintain compliance.

State regulators are taking a more stringent approach to supervising and regulating providers of financial products and

services subject to their jurisdiction. We expect to continue to face greater supervisory scrutiny and enhanced

supervisory requirements for the foreseeable future.

Other Federal and International Regulation

Under the Volcker Rule, companies affiliated with U.S. insured depository institutions are generally prohibited from

engaging in “proprietary trading” and certain transactions with certain privately offered funds. The activities

prohibited by the Volcker Rule are not core activities for us. In the future, however, the federal financial regulatory

agencies charged with implementing the Volcker Rule could amend the rule or change their approach to administering,

enforcing or interpreting the rule, which could negatively affect us and potentially require us to limit or change our

activities or operations.

The Dodd-Frank Act amended the U.S. Commodity Exchange Act (“CEA”) to establish a comprehensive framework

for the regulation of certain over-the-counter (“OTC”) derivatives referred to as swaps. Under the Dodd-Frank Act,

the Commodity Futures Trading Commission (“CFTC”) is required to adopt certain rules and regulations governing

swaps. The CFTC has completed almost all of its regulations in this area, most of which are in effect.

The OTC derivatives provisions of the CEA, as amended by the Dodd-Frank Act, impose clearing, trading and margin

requirements on certain contracts. At present, we qualify for exceptions from these requirements for the swaps that we

enter into to hedge our commercial risks. However, if we were to no longer qualify for such exceptions, we could

become subject to some or all of these requirements, which would increase our cost of entering into and maintaining

such hedging positions.

If we reduce our use of OTC derivatives as a result of the Dodd-Frank Act and resulting regulations, our results of

operations may become more volatile and our cash flows may be less predictable, which could adversely affect our

ability to plan for and fund capital expenditures.

We continually review our operations for compliance with applicable laws. Future administrative rulings, judicial

decisions, legislation, regulations and regulatory guidance, and supervision and enforcement actions may result in

monetary penalties, increase our compliance costs, require changes in our business practices, affect our

competitiveness, impair our profitability, harm our reputation or otherwise adversely affect our business.

Refer to Part 1, Item 1A. Risk Factors – “The regulatory environment in which we operate could have a material

adverse effect on our business and results of operations.”

EMPLOYEE RELATIONS

At April 30, 2020, we had approximately 3,300 employees. We consider our employee relations to be satisfactory.

We are not subject to any collective bargaining agreements with our employees.

ITEM 1A. RISK FACTORS

We are exposed to certain risks and uncertainties that could have a material adverse impact on our business, results of

operations and financial condition. There may be additional risks and uncertainties not presently known to us or that

we currently consider immaterial that may also have a material adverse impact on our business, results of operations

and financial condition.

Industry and Business Risk

We face various risks related to health epidemics and other outbreaks, which have had and are expected to

continue to have material adverse effects on our business, financial condition, results of operations and cash flows.

We face various risks related to health epidemics and other outbreaks, including the global outbreak of coronavirus

(“COVID-19”). The COVID-19 pandemic, changes in consumer behavior related to illness, pandemic fears and

market downturns, and restrictions intended to slow the spread of COVID-19, including quarantines, government-

mandated actions, stay-at-home orders and other restrictions, have led to disruption and volatility in the global capital

markets, which has increased our cost of capital and adversely affected our ability to access the capital markets. For

more information on how a disruption in the global capital markets affects our liquidity, please see risk factor “A

disruption in our funding sources and access to the capital markets would have an adverse effect on our liquidity”.

In addition, the COVID-19 pandemic and restrictions intended to slow the spread of COVID-19 have adversely

affected our business, and the business of our affiliate, TMNA, and our ultimate parent, TMC, in a number of ways.

Similar to relief options we offer to customers and dealers impacted by natural disasters such as hurricanes, floods,

tornadoes and wildfires, we are offering payment relief options to customers and dealers impacted by COVID-19,

including finance contract extensions, lease deferred payments, temporary interest deferrals for dealer floorplan

financing, and principal payment deferral options for dealer real estate and working capital loans, and temporarily

suspended outbound collection activities in states with state-wide stay-at-home orders and repossession activities

nationwide for a period of time, but have since resumed outbound collection activities in nearly all states (collectively,

the “COVID-19 Relief”). Our payment relief programs currently allow existing customers who request assistance to

defer their loan or lease payments for up to 120 days and waive certain fees, but with interest continuing to accrue.

We may terminate, or modify the scope, duration and terms of, our COVID-19 payment relief programs at any time.

Unlike the relief options offered for natural disasters, which were limited to the affected geographies, the COVID-19

Relief is being offered nationwide due to the global impact of the COVID-19 pandemic, and may not be successful in

reducing future increases to our provisions for credit losses. The COVID-19 pandemic has increased our residual

value losses, and has adversely affected our business, financial condition, results of operations, and cash flows and

may continue to do so if there is not a substantial economic recovery. We have also temporarily transitioned nearly all

of our team members to remote work arrangements, and many Toyota and Lexus dealerships have temporarily closed

and more may voluntarily close, or be mandated to close, in the near future. TMNA temporarily suspended production

at all of its automobile and components plants in North America from March 23, 2020 through May 8, 2020 and TMC

has temporarily suspended production at selected plants in countries outside of North America. Although TMNA and

many of its suppliers are resuming production, unexpected delays affecting the supply chain or logistics network could

negatively impact dealer inventory levels, vehicle sales, the sale of our financing and insurance products, dealer

profitability and creditworthiness, and our future results of operations.

These events have disrupted the supply chains of the vehicles we finance, and have had a material adverse effect on

the sale of vehicles and our financing and insurance products. These events have also caused an unprecedented level

of unemployment claims, resulted in a significant decline in consumer confidence and spending, and a sharp decline in

economic conditions. In addition, these events have caused a significant decline in used vehicle prices, and significant

increase in delinquencies and may cause an increase in dealer defaults, which have resulted in materially increased

provisions for credit losses and residual value losses, which may continue if there is not a substantial economic

recovery. The foregoing events, and the uncertainty relating thereto, have also adversely affected our credit rating and

may result in further actions or downgrades by credit ratings agencies. For more information regarding impacts of

credit rating changes on TMCC, please see risk factor “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”.

If significant portions of our workforce are unable to work effectively as a result of the COVID-19 pandemic,

including because of illness, quarantines, facility closures, ineffective remote work arrangements or technology

failures or limitations, our operations would be adversely impacted. Certain of our third-party suppliers and business

partners that we rely on to deliver our products and services and to operate our business have informed us that they

will be unable to perform fully, and we may receive similar notifications from other suppliers and business partners in

the near future, which could adversely impact our ability to operate our business and increase our costs and expenses.

These increased costs and expenses may not be fully recoverable or adequately covered by insurance. We are working

with our stakeholders (including customers, dealers, team members, suppliers and business partners) to assess the

ongoing impact of the COVID-19 pandemic and to take actions in an effort to mitigate adverse consequences.

The duration and possible resurgence of the COVID-19 pandemic is uncertain. The extension of curtailed economic

activities as a result of further outbreak of COVID-19, extended or additional government restrictions intended to slow

the spread of the virus, or delayed consumer response once restrictions have been lifted could have further negative

impact on used vehicle values, consumer economics, dealerships, and auction sites, which could have a material

adverse impact on our future results of operations. If the number of our customers and dealers experiencing hardship

increases or it becomes necessary to further extend our payment relief options, it could have a material adverse effect

on our business, financial condition and our future results of operations.

The foregoing impacts and other unforeseen impacts not referenced herein, as well as the ultimate impact of the

COVID-19 pandemic, are difficult to predict and have had and are expected to have a material adverse effect on our

business, financial condition, results of operations and cash flows.

General business, economic, and geopolitical conditions, as well as other market events, may adversely affect our

business, results of operations and financial condition.

Our results of operations and financial condition are affected by a variety of factors, including changes in the overall

market for retail contracts, wholesale motor vehicle financing, leasing or dealer financing, the new and used vehicle

market, changes in the level of sales of Toyota and Lexus vehicles, the rate of growth in the number and average

balance of customer accounts, the U.S. regulatory environment, competition from other financiers, rate of default by

our customers, the interest rates we are required to pay on the funding we require to support our business, amounts of

funding available to us, changes in the U.S. and international wholesale capital funding markets, our credit ratings, the

success of efforts to expand our product lines, levels of operating and administrative expenses (including, but not

limited to, personnel costs, technology costs and premises costs (including costs associated with reorganization or

relocation), general economic conditions, inflation, and fiscal and monetary policies in the U.S., Europe and other

countries in which we issue debt. Further, a significant and sustained increase in fuel prices could lead to lower new

and used vehicle purchases. This could reduce the demand for retail, lease and wholesale financing. In turn, lower

used vehicle values could affect return rates, charge-offs and depreciation on operating leases.

Economic slowdown and recession in the United States may lead to diminished consumer and business confidence,

lower household incomes, increases in unemployment rates, higher consumer debt levels as well as higher consumer

and commercial bankruptcy filings, any of which could adversely affect vehicle sales and discretionary consumer

spending. These conditions may decrease the demand for our financing products, as well as increase our

delinquencies and credit losses. In addition, because our credit exposures are generally collateralized by vehicles, the

severity of losses can be particularly affected by declines in used vehicle values. Dealers are also be affected by

economic slowdown and recession, which increases the risk of default of certain dealers within our dealer portfolio.

Elevated levels of market disruption and volatility, such as in the U.S., Europe and Asia, could increase our cost of

capital and adversely affect our ability to access the global capital markets and fund our business in a similar manner,

and at a similar cost to the funding raised in the past. These market conditions could also have an adverse effect on

our results of operations and financial condition by diminishing the value of our investment portfolio and increasing

our cost of funding. If as a result we increase the rates we charge to our customers and dealers, our competitive

position could be negatively affected.

Challenging market conditions may result in less liquidity, greater volatility, widening of credit spreads and lack of

price transparency in credit markets. Changes in investment markets, including changes in interest rates, exchange

rates and returns from equity, property and other investments, will affect (directly or indirectly) our financial

performance.

If there is a continued and sustained period of market disruption and volatility:

• there can be no assurance that we will continue to have access to the capital markets in a similar manner

and at a similar cost as we have had in the past;

• issues of debt securities may be undertaken at spreads above benchmark rates that are greater than those

on similar issuances undertaken during the prior several years;

• we may be subject to over-reliance on a particular funding source or a simultaneous increase in funding

costs across a broad range of sources; and

• the ratio of our short-term debt outstanding to total debt outstanding may increase if negative conditions in

the debt markets lead us to replace some maturing long-term liabilities with short-term liabilities (for

example, commercial paper).

Any of these developments could have an adverse effect on our results of operations and financial condition.

Geopolitical conditions and other market events may also impact our results of operations. Restrictive exchange or

import controls or other disruptive trade policies, disruption of operations as a result of systemic political or economic

instability, social unrest, outbreak of war or expansion of hostilities, health epidemics and other outbreaks, and acts of

terrorism, could each have a material adverse effect on our results of operations and financial condition.

Developments related to the United Kingdom’s recent withdrawal from the European Union (“Brexit”) have created

significant political and economic uncertainty in the United Kingdom and in other European Union member states.

While we operate in the U.S. and Puerto Rico, the global financial, trade, and legal implications of Brexit could lead to

declines in market liquidity and activity levels, volatile market conditions, a contraction of available credit,

fluctuations in interest rates, weaker economic growth, and reduced business confidence on an international level, each

of which could have a material adverse effect on our results of operations and financial condition.

Our results of operations and financial condition are substantially dependent upon the sale of Toyota and Lexus

vehicles, as well as our ability to offer competitive financing and insurance products.

We primarily provide a variety of finance and insurance products to authorized Toyota and Lexus dealers and their

customers in the U.S. Accordingly, our business is substantially dependent upon the sale of Toyota and Lexus

vehicles in the U.S. Changes in the volume of sales may result from governmental action or changes in governmental

regulation or trade policies, changes in consumer demand, new vehicle incentive programs, recalls, the actual or

perceived quality, safety or reliability of Toyota and Lexus vehicles, economic conditions, increased competition,

increases in the price of vehicles due to increased raw material costs, changes in import fees or tariffs on raw materials

or imported vehicles, changes to or withdrawals from trade agreements (including the United States-Mexico-Canada

Agreement, which is expected to go into effect during fiscal year 2021, currency fluctuations, fluctuations in interest

rates, decreased or delayed vehicle production due to natural disasters, supply chain interruptions or other events. In

addition, many manufacturers have increased their level of incentive programs on new vehicles in an attempt to

maintain and grow market share; these incentives historically have included a combination of subvention, price

rebates, and other incentives. Any negative impact on the volume of TMNA sales could have a material adverse effect

on our business, results of operations, and financial condition.

TMS, a subsidiary of TMNA, is the primary distributor of Toyota and Lexus vehicles in the U.S. While TMNA

conducts extensive market research before launching new or refreshed vehicles and introducing new services, many

factors both within and outside TMNA’s control affect the success of new or existing products and services in the

marketplace. Offering vehicles and services that customers want and value can mitigate the risks of increasing price

competition and declining demand, but products and services that are perceived to be less desirable (whether in terms

of product mix, price, quality, styling, safety, overall value, fuel efficiency, or other attributes) and the level of

availability of products and services that are desirable can exacerbate these risks. With increased consumer

interconnectedness through the internet, social media, and other media, mere allegations relating to quality, safety, fuel

efficiency, corporate social responsibility, or other key attributes can negatively impact TMNA’s reputation or market

acceptance of its products or services, even where such allegations prove to be inaccurate or unfounded.

In addition, the volume of TMNA sales may also be affected by Toyota’s ability to successfully grow through

investments in the area of emerging opportunities such as mobility and connected services, vehicle electrification, fuel

cell technology and autonomy, which depends on many factors, including advancements in technology, regulatory

changes, and other factors that are difficult to predict.

We operate in a highly competitive environment and compete with other financial institutions and, to a lesser extent,

other automobile manufacturers’ affiliated finance companies primarily through service, quality, our relationship with

TMNA, and financing rates. TMNA sponsors subvention, cash, and contractual residual value support incentive

programs offered by us on certain new and used Toyota and Lexus vehicles. Our ability to offer competitive financing

and insurance products in the U.S. depends in part on the level of TMNA sponsored subvention, cash, and contractual

residual value support incentive program activity, which varies based on TMNA marketing strategies, economic

conditions, and the volume of vehicle sales, among other factors. Any negative impact on the level of TMNA

sponsored subvention, cash, and contractual residual value support incentive programs could in turn have a material

adverse effect on our business, results of operations, and financial condition.

Changes in consumer behavior could affect the automotive industry, TMNA and TMC, and, as a result, our

business, results of operations and financial condition.

A number of trends are affecting the automotive industry. These include a market shift from cars to sport utility

vehicles (“SUVs”) and trucks, high demand for incentives, the rise of mobility services such as vehicle sharing and

ride hailing, the development of autonomous and alternative-energy vehicles, the impact of demographic shifts on

attitudes and behaviors toward vehicle ownership and use, the development of flexible alternatives to traditional

financing and leasing such as subscription service offerings, changing expectations around the vehicle buying

experience, adjustments in the geographic distribution of new and used vehicle sales, and advancements in

communications and technology. Any one or more of these trends could adversely affect the automotive industry,

TMNA and TMC, and could in turn have an impact on our business, results of operations and financial condition.

Recalls and other related announcements by TMNA could affect our business, results of operations and financial

condition.

TMNA periodically conducts vehicle recalls which could include temporary suspensions of sales and production of

certain Toyota and Lexus models. Because our business is substantially dependent upon the sale of Toyota and Lexus

vehicles, such events could adversely affect our business. A decrease in the level of sales, including as a result of the

actual or perceived quality, safety or reliability of Toyota and Lexus vehicles or a change in standards of regulatory

bodies will have a negative impact on the level of our financing volume, insurance volume, earning assets, Net

financing revenues and insurance revenues. The credit performance of our dealer and consumer portfolios may also be

adversely affected. In addition, a decline in the values of used Toyota and Lexus vehicles would have a negative

effect on residual values and return rates, which, in turn, could increase depreciation expense and credit

losses. Further, certain of TMCC’s affiliated entities are or may become subject to litigation and governmental

investigations and have been or may become subject to fines or other penalties. These factors could affect sales of

Toyota and Lexus vehicles and, accordingly, could have a negative effect on our business, results of operations and

financial condition.

If we are unable to compete successfully or if competition increases in the businesses in which we operate, our

results of operations could be negatively affected.

We operate in a highly competitive environment. We compete with other financial institutions including national and

regional commercial banks, credit unions, savings and loan associations, finance companies, and to a lesser extent,

other automobile manufacturers’ affiliated finance companies. In addition, online financing options provide

consumers with alternative financing sources. Increases in competitive pressures could have an adverse impact on our

contract volume, market share, Net financing revenues, insurance revenues and margins. Further, the financial

condition and viability of our competitors and peers may have an adverse impact on the financial services industry in

which we operate, resulting in a decrease in the demand for our products and services. This could have an adverse

impact on the volume of our business and our results of operations.

A failure or interruption in our operations could adversely affect our results of operations and financial condition.

Operational risk is the risk of loss resulting from, among other factors, lack of established processes, inadequate or

failed processes, systems or internal controls, theft, fraud, natural disasters or other catastrophes (including without

limitation, explosions, fires, floods, earthquakes, terrorist attacks, riots, civil disturbances and health epidemics and

other outbreaks). Operational risk can occur in many forms including, but not limited to, errors, business

interruptions, failure of controls, failure of systems or other technology, deficiencies in our insurance risk management

program, inappropriate behavior or misconduct by our employees or those contracted to perform services for us, and

vendors that do not perform in accordance with their contractual agreements. We have established business recovery

plans to address interruptions in our operations, but we can give no assurance that these plans will be adequate to

remediate all events that we may face. A catastrophic event that results in the destruction or disruption of any of our

critical business or information technology systems could harm our ability to conduct normal business

operations. These events can potentially result in financial losses or other damage to us, including damage to our

reputation.

We rely on a framework of internal controls designed to provide a sound and well-controlled operating

environment. Due to the complexity of our business and the challenges inherent in implementing control structures

across large organizations, control issues could be identified in the future that could have a material adverse effect on

our operations.

We are currently in the process of consolidating our field operations, which consist of DSSO’s, three regional

management offices, and two dealer funding teams, into three new regional dealer service centers. Our dealer lending

function will be centralized at the new dealer service center located in Plano, Texas. Refer to Item 1. Business,

“General” for further discussion of the field operations restructuring. We can give no assurance that the restructuring

of our field operations will be completed as planned or within the expected timing or budget, and the expected benefits

may not be fully realized due to associated disruption to field operations and personnel.

In addition, many parts of our business are dependent on key personnel. Our future success depends on our ability to

retain existing, and attract, hire and integrate new key personnel and other necessary employees. Any failure to do so

could adversely affect our business, results of operations and financial condition.

Our private label financial services for third-party automotive and mobility companies may expose us to additional

risks that could adversely affect our business, results of operations and financial condition.

As of April 1, 2020, we began providing private label financial services to third-party automotive and mobility

companies commencing with the provision of services to Mazda Motor of America, Inc. (“Mazda”). Pursuant to our

previously disclosed agreement with Mazda, we currently offer exclusive private label automotive retail, lease, and

dealer financing products and services, and later in fiscal year 2021 intend to offer exclusive vehicle protection

products and services, marketed under the brand Mazda Financial Services to Mazda customers and dealers in the

United States. Our agreement with Mazda is for an initial term of approximately five years.

Although we intend to leverage our strengths and capabilities to serve and retain new Mazda customers, we may

encounter additional costs and may fail to realize the anticipated benefits of our private label finance services program.

The provision of wholesale and retail financing to Mazda dealers and customers may result in additional credit risk

exposure, which if we are unable to appropriately monitor and mitigate may result in an adverse effect on our results

of operations and financial condition. Our private label finance services may also expose us to additional operating

risks related to consumer demand for Mazda vehicles, the profitability and financial condition of Mazda, the level of

Mazda’s incentivized retail financing, recalls announced by Mazda and the perceived quality, safety or reliability of

Mazda vehicles, and changes in prices of Mazda used vehicles and their effect on residual values of Mazda off-lease

vehicles and return rates, each of which may adversely affect our business, results of operations and financial

condition.

Financial Market and Economic Risks

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.

The availability and cost of financing is influenced by credit ratings, which are intended to be an indicator of the

creditworthiness of a particular company, security or obligation. Our credit ratings depend, in large part, on the

existence of the credit support arrangements with TFSC and TMC and on the financial condition and results of

operations of TMC. If these arrangements (or replacement arrangements acceptable to the rating agencies) become

unavailable to us, or if the credit ratings of the credit support providers were lowered, our credit ratings would be

adversely impacted.

Credit rating agencies which rate the credit of TMC and its affiliates, including TMCC, may qualify or alter ratings at

any time. Global economic conditions and other geopolitical factors may directly or indirectly affect such ratings.

Any downgrade in the sovereign credit ratings of the U.S. or Japan may directly or indirectly have a negative effect on

the ratings of TMC and TMCC. Downgrades or placement on review for possible downgrades could result in an

increase in our borrowing costs as well as reduced access to the global unsecured debt capital markets. These factors

would have a negative impact on our competitive position, results of operations, liquidity and financial condition.

A disruption in our funding sources and access to the capital markets would have an adverse effect on our liquidity.

Liquidity risk is the risk arising from our ability to meet obligations in a timely manner when they come due. Our

liquidity strategy is to maintain the capacity to fund assets and repay liabilities in a timely and cost-effective manner

even in adverse market conditions. A disruption in our funding sources may adversely affect our ability to meet our

obligations as they become due. An inability to meet obligations in a timely manner would have a negative impact on

our ability to refinance maturing debt and fund new asset growth and would have an adverse effect on our results of

operations and financial condition.

Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity

and Capital Resources” for further discussion of liquidity risk.

Our allowance for credit losses may not be adequate to cover actual losses, which may adversely affect our results

of operations and financial condition.

We maintain an allowance for credit losses to cover probable and estimable losses as of the balance sheet date

resulting from the non-performance of our customers and dealers under their contractual obligations. The

determination of the allowance involves significant assumptions, complex analyses, and management judgment and

requires us to make significant estimates of current credit risks using existing qualitative and quantitative information.

Actual results may differ from our estimates or assumptions. For example, we review and analyze external factors,

including changes in economic conditions, actual or perceived quality, safety and reliability of Toyota and Lexus

vehicles, unemployment levels, the used vehicle market, and consumer behavior, among other factors. Internal

factors, such as purchase quality mix and operational changes are also considered. A change in any of these factors

would cause a change in estimated probable losses. As a result, our allowance for credit losses may not be adequate to

cover our actual losses. In addition, changes in accounting rules and related guidance, new information regarding

existing portfolios, and other factors, both within and outside of our control, may require changes to the allowance for

credit losses. A material increase in our allowance for credit losses may adversely affect our results of operations and

financial condition.

Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical

Accounting Estimates” for further discussion of the estimates involved in determining the allowance for credit losses

and Note 5 – Allowance for Credit Losses of the Notes to Consolidated Financial Statements for further discussion of

the methodology used in determining the allowance for credit losses.

Our business and operations make extensive use of quantitative models, estimates and assumptions. If our design,

implementation or use of models is flawed or if actual results differ from our estimates or assumptions, our results

of operations and financial condition could be materially and adversely affected.

We use quantitative models, estimates and assumptions to price products and services, measure risk, estimate asset and

liability values, assess liquidity, manage our balance sheet, and otherwise conduct our business and operations. If the

design, implementation, or use of any of these models is flawed or if actual results different from our estimates or

assumptions, it may adversely affect our results of operations and financial condition. In addition, to the extent that

any inaccurate model outputs are used in reports to regulatory agencies or the public, we could be subjected to

supervisory actions, litigation, and other proceedings that may adversely affect our business, results of operations and

financial condition.

Assumptions and estimates often involve matters that require the exercise of management’s judgment, are inherently

difficult to predict and are beyond our control (for example, macro-economic conditions). In addition, such

assumptions and estimates often involve complex interactions between a number of dependent and independent

variables, factors, and other assumptions. As a result, our actual experience may differ materially from these estimates

and assumptions. A material difference between our estimates and assumptions and our actual experience may

adversely affect our results of operations and financial condition.

Fluctuations in the valuation of investment securities or significant fluctuations in investment market prices could

negatively affect our Net financing revenues and results of operations.

Investment market prices, in general, are subject to fluctuation, which may result from perceived changes in the

underlying characteristics of the investment, the relative price of alternative investments, geopolitical conditions, or

general market conditions. Negative fluctuations in the fair value of equity investments and credit losses on available-

for-sale debt securities may adversely affect our Net financing revenues and results of operations. Additionally, the

amount realized in the subsequent sale of an investment may significantly differ from the reported market value and

could negatively affect our Net financing revenues and other revenues.

A decrease in the residual values of our off-lease vehicles and a higher number of returned lease assets could

negatively affect our results of operations and financial condition.

We are exposed to residual value risk on the disposition of leased vehicles if sales proceeds realized upon the sale of

returned lease assets are not sufficient to cover the residual value that was estimated at lease inception and if the

number of returned lease assets is higher than anticipated. 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 resulting in additional depreciation expense over the term of the lease contract so that the carrying

value at lease-end will approximate the estimated end-of-term market value. Among other factors, local, regional and

national economic conditions, new vehicle pricing, new vehicle incentive programs, new vehicle sales, the actual or

perceived quality, safety or reliability of our vehicles, future plans for new Toyota and Lexus product introductions,

competitive actions and behavior, product attributes of popular vehicles, the mix of used vehicle supply, the level of

current used vehicle values and inventory levels, and fuel prices heavily influence used vehicle values and thus the

actual residual value of off-lease vehicles. In addition, disruptions or delays in the used vehicle auction market

resulting from the inability to transport off-lease vehicles to physical auctions or the temporary closure of physical

auctions as a result of government mandated stay-at-home orders have caused an increase in used vehicle inventories

that has caused a decline in used vehicle values and actual residual values, which may worsen if the COVID-19

pandemic continues. Differences between the actual residual values realized on leased vehicles and our estimates of

such values at lease inception could have a negative impact on our results of operations and financial condition, due to

the impact of higher-than-anticipated Depreciation on operating leases recorded in our Consolidated Statements of

Income. Actual return volumes may be higher than expected which can be impacted by higher contractual lease-end

residual values relative to market values, a higher market supply of certain models of used vehicles, new vehicle

incentive programs, and general economic conditions. The return of a higher number of leased vehicles could also

impact the amount of depreciation expense recorded in our Consolidated Statements of Income, which could adversely

affect our results of operations and financial condition.

Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Financial

Condition – Residual Value Risk”, “Financial Condition – Disposition of Off-Lease Vehicles” and “Financial

Condition – Depreciation on Operating Leases” for further discussion of current lease trends.

We are exposed to customer and dealer credit risk, which could negatively affect our results of operations and

financial condition.

Credit risk is the risk of loss arising from the failure of a customer or dealer to meet the terms of any retail, lease or

dealer financing contract with us or otherwise fail to perform as agreed. An increase in credit risk would increase our

provision for credit losses, which would have a negative impact on our results of operations and financial condition.

There can be no assurance that our monitoring of credit risk and our efforts to mitigate credit risk are or will be

sufficient to prevent an adverse effect on our results of operations and financial condition.

The level of credit risk in our consumer portfolio is influenced primarily by two factors: the total number of contracts

that experience default (“default frequency”) and the amount of loss per occurrence (“loss severity”), which in turn are

influenced by various economic factors, the used vehicle market, purchase quality mix, contract term length, and

operational changes. The used vehicle market is impacted by the supply of, and demand for, used vehicles, interest

rates, inflation, new vehicle incentive programs, the manufacturer’s actual or perceived reputation for quality, safety,

and reliability, and the general economic outlook.

The level of credit risk in our dealer portfolio is influenced primarily by the financial strength of dealers within our

portfolio, dealer concentration, collateral quality, and other economic factors. The financial strength of dealers within

our portfolio is influenced by general macroeconomic conditions, the overall demand for new and used vehicles, and

the financial condition of automotive manufacturers, among other factors.

Economic slowdown and recession in the U.S., natural disasters, health epidemics, and other factors increase the risk

that a customer or dealer may not meet the terms of a retail, lease or dealer financing contract with us or may

otherwise fail to perform as agreed. A weak economic environment evidenced by, among other things,

unemployment, underemployment, and consumer bankruptcy filings, may affect some of our customers’ and dealers’

ability to make their scheduled payments.

Our results of operations, financial condition and cash flows may be adversely affected by changes in interest rates,

foreign currency exchange rates and market prices.

Market risk is the risk that changes in interest rates and foreign currency exchange rates cause volatility in our results

of operations, financial condition and cash flows. An increase in interest rates could have an adverse effect on our

business, financial condition and results of operations by increasing our cost of capital and the rates we charge to our

customers and dealers, which could, in turn, decrease our financing volumes and market share, thereby resulting in a

decline in our competitive position. We use various derivative instruments to manage our market risk. However,

changes in interest rates, foreign currency exchange rates and market prices cannot always be predicted or hedged. In

July 2017, the U.K. Financial Conduct Authority, which regulates the London Inter-bank Offered Rate (“LIBOR”),

announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after calendar year

2021. It is not possible to predict whether LIBOR will cease to exist after calendar year 2021, whether additional

reforms to LIBOR may be enacted, or whether the Secured Overnight Financing Rate (“SOFR”) or other alternative

reference rates will gain market acceptance, and any of these outcomes could increase our interest rate risk related to

our dealer financing activities, derivative contracts, secured and unsecured debt, and investment securities currently

tied to LIBOR. Changes in interest rates or foreign currency exchange rates could affect our interest expense and the

value of our derivatives, which could result in volatility in our results of operations, financial condition, and cash

flows.

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.

We have exposure to many different financial institutions, and we routinely execute transactions with counterparties in

the financial industry. Our debt, derivative and investment transactions, and our ability to borrow under committed

and uncommitted credit facilities, could be adversely affected by the actions and commercial soundness of other

financial institutions. We cannot guarantee that our ability to borrow under committed and uncommitted credit

facilities will continue to be available on reasonable terms or at all. Deterioration of social, political, labor, or

economic conditions in a specific country or region may also adversely affect the ability of financial institutions,

including our derivative counterparties and lenders, to perform their contractual obligations. Financial institutions are

interrelated as a result of trading, clearing, lending and other relationships, and as a result, financial and political

difficulties in one country or region may adversely affect financial institutions in other jurisdictions, including those

with which we have relationships. The failure of any financial institutions and other counterparties to which we have

exposure, directly or indirectly, to perform their contractual obligations, and any losses resulting from that failure, may

materially and adversely affect our liquidity, results of operations or financial condition.

Our insurance operations could suffer losses if our reserves are insufficient to absorb actual losses.

Our insurance operations are subject to the risk of loss if our reserves for unearned premium and contract revenues on

agreements in force are not sufficient. Using historical loss experience as a basis for recognizing revenue over the

term of the contract or policy may result in the timing of revenue recognition varying materially from the actual loss

development. Our insurance operations are also subject to the risk of loss if our reserves for reported losses, losses

incurred but not reported, and loss adjustment expenses are not sufficient. Because we use estimates in establishing

reserves, actual losses may vary from amounts established in earlier periods as a result of changes in frequency and

severity.

We are exposed to risk transfer credit risk which could negatively impact our insurance operations.

Risk transfer credit risk is the risk that a reinsurer or other company assuming liabilities relating to our insurance

operations will be unable to meet its obligations under the terms of our agreement with them. Such failure could result

in losses to our insurance operations.

Regulatory, Legal and Other Risks

Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) could adversely

affect our results of operations and financial condition.

Our accounting and financial reporting policies conform to accounting principles generally accepted in the U.S., which

are periodically revised and/or expanded. The application of accounting principles is also subject to varying

interpretations over time. Accordingly, we are required to adopt new or revised accounting standards or comply with

revised interpretations that are issued from time to time by various parties, including accounting standard setters and

those who interpret the standards, such as the FASB and the SEC and our independent registered public accounting

firm. The FASB has proposed new financial accounting standards that may result in significant changes that could

adversely affect our results of operations and financial condition.

Refer to Note 1 – Basis of Presentation and Significant Accounting Policies of the Notes to the Consolidated Financial

Statements for further discussion of these new accounting standards, including the potential impact to TMCC’s

consolidated financial statements.

A failure or interruption of our information systems could adversely affect our business, results of operations and

financial condition.

We rely on internal and third party information and technological systems to manage our operations, which creates

meaningful operational risk for us. Any failure or interruption of our information systems or the third party

information systems on which we rely as a result of inadequate or failed processes or systems, human errors, employee

misconduct, catastrophic events, external or internal security breaches, acts of vandalism, computer viruses, malware,

ransomware, misplaced or lost data, or other events could disrupt our normal operating procedures, damage our

reputation and have an adverse effect on our business, results of operations and financial condition.

In addition, we periodically upgrade or replace our existing transaction systems, which could have a significant impact

on our ability to conduct our core business operations and increase our risk of loss resulting from disruptions of

normal operating processes and procedures that may occur during and after the implementation of new systems. For

example, the development and implementation of these new systems and any future upgrades related thereto may

require significant expenditures and divert management’s attention and other resources from our core business

operations. There are no assurances that these new systems will provide us with the anticipated benefits and

efficiencies. There can also be no assurance that the time and resources our management will need to devote to

implementation and upgrades, potential delays in the implementation or upgrade or any resulting service interruptions,

or any impact on the reliability of our data from any upgrade of our legacy system, will not have a material adverse

effect on our business, results of operations and financial condition.

A security breach or a cyber-attack could adversely affect our business, results of operations and financial

condition.

We collect and store certain personal and financial information from customers, employees, and other third

parties. Security breaches or cyber-attacks involving our systems or facilities, or the systems or facilities of our

service providers, could expose us to a risk of loss of personally identifiable information of customers, employees and

third parties or other confidential, proprietary or competitively sensitive information, business interruptions, regulatory

scrutiny, actions and penalties, litigation, reputational harm, a loss of confidence, and other financial and non-financial

costs, all of which could potentially have an adverse impact on our future business with current and potential

customers, results of operations and financial condition.

We rely on encryption and other information security technologies licensed from third parties to provide security

controls necessary to help in securing online transmission of confidential information pertaining to customers,

employees and other aspects of our business. Advances in information system capabilities, new discoveries in the

field of cryptography or other events or developments may result in a compromise or breach of the technology that we

use to protect sensitive data. A party who is able to circumvent our security measures by methods such as hacking,

fraud, trickery or other forms of deception could misappropriate proprietary information or cause interruption in our

operations. We may be required to expend capital and other resources to protect against such security breaches or

cyber-attacks or to remediate problems caused by such breaches or attacks. Our security measures are designed to

protect against security breaches and cyber-attacks, but our failure to prevent such security breaches and cyber-attacks

could subject us to liability, decrease our profitability and damage our reputation. Even if a failure of, or interruption

in, our systems or facilities is resolved timely or an attempted cyber incident or other security breach is successfully

avoided or thwarted, it may require us to expend substantial resources or to take actions that could adversely affect

customer satisfaction or behavior and expose us to reputational harm.

We could also be subjected to cyber-attacks that could result in slow performance and loss or temporary unavailability

of our information systems. Information security risks have increased because of new technologies, the use of the

internet and telecommunications technologies (including mobile devices) to conduct financial and other business

transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers,

terrorists, and others. We may not be able to anticipate or implement effective preventative measures against all

security breaches of these types, especially because the techniques used change frequently and because attacks can

originate from a wide variety of sources. The occurrence of any of these events could have a material adverse effect

on our business, results of operations and financial condition.

Our enterprise data practices, including the collection, use, sharing, disposal and security of personally identifiable

and financial information of our customers and employees are subject to increasingly complex, restrictive, and

punitive laws and regulations which could adversely affect our business, results of operations and financial

condition.

Under these laws and regulations, the failure to maintain compliant data practices could result in consumer complaints,

lawsuits and regulatory inquiry, resulting in civil or criminal penalties, as well as brand impact or other harm to our

business. In addition, increased consumer sensitivity to real or perceived failures in maintaining acceptable data

practices could damage our reputation and deter current and potential customers from using our products and

services. For example, recent, well-publicized allegations involving the misuse or inappropriate sharing of personal

information have led to expanded governmental scrutiny of practices relating to the safeguarding of personal

information and the use or sharing of personal data by companies in the U.S. and other countries. That scrutiny has in

some cases resulted in, and could in the future lead to, the adoption of stricter laws and regulations relating to the use

and sharing of personal information. For example, in California a new data protection regime has taken effect, that

grants consumers broad new rights relating to access to, deletion of, and sharing of personal information that is

collected by businesses and requiring regulated entities to establish measures to identify, manage, secure, track,

produce and delete personal information. In some jurisdictions, these laws and regulations provide a private right of

action that would allow customers to bring suit directly against us for certain violations of these laws and

regulations. These types of laws and regulations could prohibit or significantly restrict financial services providers

such as TMCC from sharing information among affiliates or with third parties such as vendors, and thereby increase

compliance costs, or could restrict TMCC’s use of personal data when developing or offering products or services to

customers. These restrictions could inhibit TMCC’s development or marketing of certain products or services, or

increase the costs of offering them to customers. Because many of these laws and regulations are new, there is little

clarity as to their interpretation, as well as a lack of precedent for the scope of enforcement. The cost of compliance

with these laws and regulations will be high and is likely to increase in the future. Any failure or perceived failure to

comply with applicable privacy or data protection laws and regulations could result in requirements to modify or cease

certain operations or practices, significant liabilities or fines, penalties or other sanctions.

The regulatory environment in which we operate could have a material adverse effect on our business and results

of operations.

Regulatory risk includes risk arising from failure or alleged failure to comply with applicable regulatory requirements

and risk of liability and other costs imposed under various laws and regulations, including changes in applicable law,

regulation and regulatory guidance.

Consumer Finance Regulation

As a provider of finance and insurance products, we operate in a highly regulated environment. We are subject to

licensing requirements at the state level, and to laws and regulations, as well as periodic examinations and

investigations at the state and federal levels. Compliance with applicable law is costly and can affect our results of

operations. Compliance requires forms, processes, procedures, controls and the infrastructure to support these

requirements. Compliance may create operational constraints and place limits on pricing, as the laws and regulations

in the financial services industry are designed primarily for the protection of consumers. Changes in laws and

regulations could restrict our ability to operate our business as currently operated, could impose substantial additional

costs or require us to implement new processes, which could adversely affect our business, prospects, financial

performance or financial condition. The failure to comply with applicable laws and regulations could result in

significant statutory civil and criminal fines, penalties, monetary damages, attorney or legal fees and costs, restrictions

on our ability to operate our business, possible revocation of licenses and damage to our reputation, brand and valued

customer relationships. Any such costs, restrictions, revocations or damage could adversely affect our business,

prospects, results of operations or financial condition.

Our principal consumer finance regulator at the federal level is the CFPB, which has broad regulatory, supervisory and

enforcement authority over us. The CFPB’s supervisory authority allows it, among other things, to conduct

comprehensive and rigorous examinations to assess our compliance with consumer financial protection laws, which

could result in enforcement actions, regulatory fines and mandated changes to our business products, policies and

procedures.

The CFPB’s rulemaking authority includes the authority to promulgate rules regarding, among other practices, debt

collection practices that would apply to third-party collectors and first-party collectors, such as ourselves, and rules

regarding consumer credit reporting practices. The timing and impact of these rules on our business remain uncertain.

In addition, the CFPB has focused on the area of auto finance, particularly with respect to indirect financing

arrangements, dealer compensation and fair lending compliance, and questioned the value and increased scrutiny of

the marketing and sale of certain ancillary or add-on products, including products similar to those we finance or sell

through TMIS.

The CFPB and FTC may investigate the products, services and operations of credit providers, including banks and

other finance companies engaged in auto finance activities. As a result of such investigations, the CFPB and FTC

have announced various enforcement actions against lenders in the past few years involving significant penalties,

consent orders, cease and desist orders and similar remedies that, if applicable to us or the products, services and

operations we offer, may require us to cease or alter certain business practices, which could have a material adverse

effect on our results of operations, financial condition, and liquidity. Supervision and investigations by these agencies,

if any, may result in monetary penalties, increase our compliance costs, require changes in our business practices,

affect our competitiveness, impair our profitability, harm our reputation or otherwise adversely affect our business.

Refer to Item 1. Business, “Regulatory Environment” for further discussion of the CFPB’s authority and activities.

At the state level, state regulators are taking a more stringent approach to supervising and regulating financial products

and services subject to their jurisdiction. We expect to continue to face greater supervisory scrutiny and enhanced

supervisory requirements for the foreseeable future.

Other Federal Regulation

Under the Volcker Rule companies affiliated with U.S. insured depository institutions are generally prohibited from

engaging in “proprietary trading” and certain transactions with certain privately offered funds. The activities

prohibited by the Volcker Rule are not core activities for us. In the future, however, the federal financial regulatory

agencies charged with implementing the Volcker Rule could change their approach to administering, enforcing or

interpreting the rule, which could negatively affect us and potentially require us to limit or change our activities or

operations.

The Dodd-Frank Act amended the CEA to establish a framework for the regulation of certain OTC derivatives referred

to as swaps. The OTC derivatives provisions of the CEA, as amended by the Dodd-Frank Act, impose clearing,

trading and margin requirements on certain contracts. At present, we qualify for exceptions from these requirements

for the swaps that we enter into to hedge our commercial risks. However, if we were to no longer qualify for such

exceptions, we could become subject to some or all of these requirements, which would increase our cost of entering

into and maintaining such hedging positions.

If we reduce our use of OTC derivatives as a result of the Dodd-Frank Act and resulting regulations, our results of

operations may become more volatile and our cash flows may be less predictable, which could adversely affect our

ability to plan for and fund capital expenditures.

Refer to Item 1. Business, “Regulatory Environment” for additional information on our regulatory environment.

Adverse economic conditions or changes in state laws in states in which we have customer concentrations may

negatively affect our results of operations and financial condition.

We are exposed to geographic customer concentration risk in our retail, lease, dealer, and insurance products in certain

states. Factors adversely affecting the economies and applicable laws in the states where we have concentration risk

could have an adverse effect on our results of operations and financial condition.

Refer to Note 1 – Basis of Presentation and Significant Accounting Policies of the Notes to Consolidated Financial

Statements for additional information and disclosure about customer concentrations in certain states.

ITEM 1B. UNRESOLVED STAFF COMMENTS

There are no unresolved SEC staff comments to report.

ITEM 2. PROPERTIES

Our headquarters operations are located in Plano, Texas, and our facilities are leased from TMNA.

Additional operations for both finance and insurance are located in three CSCs and field operation locations. The

Central region CSC is located in Cedar Rapids, Iowa, and is leased from TMNA. The Western region CSC is located

in Chandler, Arizona. The Eastern region CSC is located in Owings Mills, Maryland. To better serve our dealer

partners, we are currently in the process of consolidating field operation locations, which are located in various cities

throughout the U.S., into three new regional dealer service centers. The Central DSC is located in Plano, Texas. The

Western DSC will be located in Chandler, Arizona. The Eastern DSC will be located in Alpharetta, Georgia. Our

dealer lending function is centralized at the Central DSC. We also have a sales and operations office in Puerto Rico.

All premises are occupied under lease.

We believe that our properties are suitable to meet the current requirements of our business. Refer to Item 1.

Business, “General” for further discussion of the field operations restructuring.

ITEM 3. LEGAL 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. 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. Certain of these actions are similar to suits that have been filed against

other financial institutions and captive finance companies. 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 reasonably probable loss or range of loss, whether in excess of any

related accrued liability or where there is no accrued liability. Refer to Note 9 – Commitments and Contingencies of

the Notes to Consolidated Financial Statements. 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 financial condition or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS

AND ISSUER PURCHASES OF EQUITY SECURITIES

TMCC is a wholly-owned subsidiary of TFSIC, and accordingly, all shares of TMCC’s stock are owned by TFSIC.

There is no market for TMCC's stock.

ITEM 6. SELECTED FINANCIAL DATA

Years ended March 31,

(Dollars in millions)

2020

2019

2018

2017

2016

INCOME STATEMENT DATA

Financing revenues:

Operating lease

$8,775

$8,694

$8,167

$7,720

$7,141

Retail

2,558

2,235

1,974

1,850

1,859

Dealer

696

711

576

476

403

Total financing revenues

12,029

11,640

10,717

10,046

9,403

Depreciation on operating leases

6,820

6,909

7,041

6,853

5,914

Interest expense

2,834

2,747

1,851

1,754

1,137

Net financing revenues

2,375

1,984

1,825

1,439

2,352

Insurance earned premiums and contract revenues

933

904

882

804

719

Gain on sale of commercial finance business

197

Investment and other income, net

322

292

257

396

164

Net financing revenues and other revenues

3,630

3,180

2,964

2,639

3,432

Expenses:

Provision for credit losses

590

372

401

582

441

Operating and administrative

1,561

1,385

1,357

1,277

1,161

Insurance losses and loss adjustment expenses

455

446

425

371

318

Total expenses

2,606

2,203

2,183

2,230

1,920

Income before income taxes

1,024

977

781

409

1,512

Provision (benefit) for income taxes

111

182

(2,629)

142

580

Net income

$913

$795

$3,410

$267

$932

March 31,

(Dollars in millions)

2020

2019

2018

2017

2016

BALANCE SHEET DATA

Finance receivables, net

73,996

70,517

69,647

68,462

65,636

Investments in operating leases, net

36,387

37,927

38,697

38,152

36,488

Total assets

125,555

116,516

120,546

119,635

114,592

Debt

97,740

92,922

98,353

98,233

93,594

Capital stock

915

Retained earnings

13,571

12,658

11,992

8,582

8,315

Total shareholder's equity

14,503

13,578

12,880

9,524

9,397

No dividends were declared in fiscal 2020. In fiscal 2019, TMCC recorded a dividend to TFSIC related to an asset

purchase agreement in the amount of $10 million, which was recorded net of tax. Payment related to the asset

purchase agreement was made in fiscal 2020. No dividends were declared or paid during fiscal 2018, 2017, and 2016.

As of and for the years ended March 31,

2020

2019

2018

2017

2016

KEY FINANCIAL DATA

Debt to equity

6.7

6.8

7.6

10.3

10.0

Return on assets

0.75

0.67

2.84

0.23

0.83

Allowance for credit losses as a percentage of

gross earning assets

0.73

0.55

0.58

0.52

Net charge-offs as a percentage of average

gross earning assets

0.34

0.39

0.47

0.38

60 or more days past due as a percentage of

gross earning assets

0.39

0.31

0.30

0.27

0.26

Fiscal 2020 debt excludes the principal amount drawn on the revolving credit facility with TMS of $3.0 billion which is

recorded in Other liabilities in our Consolidated Balance Sheet.

ITEM 7. 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-K 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 such as the

following that may cause actual results to differ materially from those stated:

• 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 TMNA sales volume and the level of TMNA sponsored subvention, cash, and contractual

residual value support incentive programs;

• Natural disasters, changes in fuel prices, manufacturing disruptions and production suspensions of

Toyota and Lexus vehicles and related parts supply;

• Increased competition from other financial institutions seeking to increase their share of financing Toyota

and Lexus vehicles;

• Changes in consumer behavior;

• Recalls announced by TMNA and the perceived quality of Toyota and Lexus 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;

• Changes in our credit ratings and those of TMC;

• 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 of our investment securities or market prices;

• 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 insurance

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

• Other risks and uncertainties set forth in Part I, Item 1A. Risk Factors.

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, financing margins, operating and administrative expense, residual value and credit

loss metrics.

In our insurance operations, we generate revenue primarily through marketing, underwriting, and providing claims

administration for products that cover certain risks of dealers and their customers. We measure the performance of our

insurance operations using the following metrics: issued agreement volume, average number of agreements 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 and Lexus sales volume, new vehicle 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 and Lexus 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

insurance operations, and our gross margins on consumer and dealer financing volume. Changes in the volume of

vehicle sales, sales of our insurance and vehicle and payment protection products, or the level of insurance losses

could materially and adversely impact our insurance 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.

Our primary competitors are other financial institutions including national and regional commercial banks, credit

unions, savings and loan associations, independent insurance service contract providers, online banks, finance

companies and, to a lesser extent, other automobile manufacturers’ affiliated finance companies that actively seek to

purchase consumer contracts through Toyota and Lexus dealers. We strive to achieve the following:

Exceptional Customer Service: Our relationship with Toyota and Lexus dealers and their customers offer us a

competitive advantage. We seek to leverage this opportunity by providing exceptional service to the dealers and

their customers. Through our field operations, we work closely with the dealers to improve the quality of

service we provide to them. We also focus on assisting the dealers with the quality of their customer service

operations to enhance customer loyalty for the dealers and the Toyota and Lexus brands. By providing

consistent and reliable support, training, and resources to our dealer network, we continue to develop and

improve our dealer relationships. In addition to marketing programs targeted toward customer retention, we

work closely with TMNA and other third party distributors to offer special retail, lease, dealer financing, and

insurance programs. We also focus on providing a positive customer experience to existing retail, lease, and

insurance customers through our CSCs.

Risk-Based Origination and Pricing: We price and structure our retail and lease contracts to compensate us for

the credit risk we assume. The objective of this strategy is to maximize operating results and better match

contract rates across a broad range of risk levels. To achieve this objective, we evaluate our existing portfolio

for key opportunities to expand volume in targeted markets. We deliver timely strategic information to the

dealers to assist them in benefiting from market opportunities. We continuously strive to refine our strategy and

methodology for risk-based pricing.

Liquidity: Our liquidity strategy is to maintain the capacity to fund assets and repay liabilities in a timely and

cost-effective manner even in adverse market conditions. This capacity is primarily driven by our ability to raise

funds in the global capital markets and through loans, credit facilities, and other transactions, as well as our

ability to generate liquidity from our earnings assets. Our pursuit of this strategy has led us to develop a

diversified borrowing base that is distributed across a variety of markets, geographies, investors, and financing

structures, among other factors.

Fiscal 2020 Operating Environment

During the first three quarters of fiscal 2020, the U.S. economy expanded, the unemployment rate was at historically

low levels, and consumer confidence was at historically high levels; however, uncertainties surrounding geopolitical

events, trade policy, the future path of U.S. monetary policy, and caution by global central banks continued to impact

the outlook for future economic growth.

Average used vehicle values for Toyota and Lexus vehicles remained relatively consistent for the majority of fiscal

2020 compared to fiscal 2019; and industry-wide vehicle sales and sales incentives in the U.S. were relatively

consistent for the majority of fiscal 2020 as compared to fiscal 2019.

Conditions in the global capital markets were generally stable during the first three quarters of fiscal 2020, despite

intermittent period of volatility caused by uncertainty regarding geopolitical events, trade policy, and the future path of

U.S. monetary policy.

During the last quarter of fiscal 2020, the global outbreak of COVID-19 and the introduction of extraordinary

governmental measures intended to slow its spread, including quarantines, government-mandated actions, stay-at-

home orders and other restrictions, severely curtailed economic activities. These curtailments resulted in a global

economic contraction that negatively impacted our business, and the business of our affiliate, TMNA, and our ultimate

parent, TMC, in a number of ways, in the second half of March 2020 and adversely impacted our fourth quarter and

fiscal 2020 results of operations. Refer to “Recent Developments Related to COVID-19” below for further discussion

of the impact of the COVID-19 pandemic on our business and results of operations.

Despite the economic downturn, which had a negative impact at the end of the fiscal year, and lower levels of

subvention throughout the year, our financing volume increased 8 percent, and our market share increased

approximately 4 percentage points for fiscal 2020 compared to fiscal 2019, as a result of TMNA and TMCC cash

incentive programs and our other competitive rate programs offered throughout fiscal 2020.

Recent Developments Related to COVID-19

During the fourth quarter of fiscal 2020, the most notable COVID-19 pandemic impacts on our results of operations

were a higher provision for credit losses and higher depreciation expense due to the sharp decline in economic

conditions and the significant decline in used vehicle values at the end of March 2020. This resulted from higher

probable credit losses on our loan and lease portfolios and lower expected end-of-term market values for our

investment in operating leases. Continuation of higher credit losses for our loan and lease portfolios and lower

expected end-of-term market values for our investment in operating leases is also expected to have an adverse effect

on our future results of operations. Refer to Refer to Item 7. Management’s Discussion and Analysis of Financial

Condition and Results of Operations, “Financial Condition” for a further discussion of the COVID-19 pandemic

impact on the provision for credit losses and depreciation expense.

Increasing unemployment levels, lack of consumer credit availability, and reduction in household income during a

period of economic contraction has affected some of our customers’ ability to make their scheduled payments. We are

offering payment relief options to our customers and dealers impacted by COVID-19. Unlike the payment relief

options offered for natural disasters, such as hurricanes, floods, tornadoes and wildfires, which were limited to the

affected geographies, the COVID-19 payment relief options are being offered nationwide, and may not be successful

in reducing future increases to our provision for credit losses. The payment relief options we offered to customers and

dealers included finance contract extensions, lease deferred payments, temporary interest deferrals for dealer floorplan

financing, and principal payment deferral options for dealer real estate and working capital loans. Our payment relief

programs currently allow existing customers to defer their loan or lease payments for up to 120 days and waive certain

fees, but with interest continuing to accrue. We may terminate, or modify the scope, duration and terms of, our

COVID-19 payment relief programs at any time. Accounts with payment extensions and deferrals under our COVID-

19 relief programs are not considered past due. From March 13, 2020 through May 31, 2020, we granted payment

extensions and deferrals to approximately 13% of our retail customers and 11% of our lease customers. For

comparison, from March 13, 2019 through May 31, 2019, TMCC had granted payment extensions and deferrals for

retail and lease customers who requested payment relief to approximately 1% of our retail customers and 0.5% of our

lease customers. The COVID-19 pandemic has increased our expected residual value losses and adversely affected

our business, fourth quarter and fiscal 2020 results of operations, and may continue to do so if there is not a substantial

recovery. We also temporarily suspended outbound collection activities in states with state-wide stay-at-home orders

and repossession activities nationwide for a period of time, but have since resumed outbound collection activities in

nearly all states. Due to the duration of, and number of customers and dealers participating in, our payment relief

programs, we expect that our future results of operations will also be adversely impacted.

While industry-wide vehicle sales and sales incentives in the U.S. were relatively consistent for the majority of fiscal

2020 as compared to fiscal 2019 both experienced a significant decline at the end of our fiscal year as a result of the

sharp decline in economic conditions caused by the COVID-19 pandemic. Our business is substantially dependent on

upon the sale of Toyota and Lexus vehicles, which declined significantly beginning in the second half of March 2020

and continued into May 2020 as dealers temporarily closed showrooms and adjusted their operations and consumers

adjusted their behavior in response to restrictions designed to slow the spread of COVID-19 and an unprecedented

increase in unemployment claims and a significant decline in consumer confidence and spending. Consistent with the

decline in Toyota and Lexus vehicle sales, we experienced significant declines of approximately 38% in financing

volume and 45% in the number of insurance agreements issuances from April 1, 2020 through May 31, 2020

compared to April 1, 2019 through May 31, 2019. We expect that these trends will continue to have an adverse effect

on our results of operations. To mitigate these trends, dealers have increased their utilization of online sales channels

and we have partnered with TMNA to offer competitive incentive programs, including first payment deferred 90 days

on select Toyota and Lexus models. A sustained decline in vehicle sales, could have a material adverse effect on the

sale of our financing and insurance products, dealer profitability and creditworthiness, and our future results of

operations.

During the fourth quarter of the fiscal year, capital markets experienced significant disruption and volatility as a result

of the COVID-19 pandemic. While our ability to access the capital markets remains largely intact, our funding

spreads have increased across both short-term and long-term markets and our long-term credit ratings have been

downgraded or put on negative outlook and may be subject in the future to further actions or downgrades by credit

rating agencies. For liquidity purposes, we hold cash in excess of our immediate funding needs. Subsequent to our

fiscal year end, from April 1, 2020 through May 31, 2020 we raised an additional $15.3 billion through the public

secured and unsecured capital markets and private term loan and asset-backed securitization credit markets, excluding

commercial paper issuances. As of May 31, 2020, we maintained excess funds of $22.1 billion. As of May 31, 2020,

we and our co-borrowers had $15.7 billion in committed, undrawn bank credit facilities and we had an additional $4.1

billion in stand-alone committed, undrawn bank credit facilities. 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. For

additional information, refer to our Liquidity and Capital Resources section.

Nearly all of our workforce has been temporarily transitioned to a remote work arrangement to mitigate health risks.

Our remote work arrangements have been designed to allow for continued operation of all business-critical functions.

The length of time we may be required to operate under these circumstances remains uncertain. While we have not

experienced material adverse disruptions to our internal operations, we continue to monitor for evolving risks and

developments. In addition, from March 23, 2020 to May 8, 2020, TMNA suspended production at all of its

automobile and components plants in North America at various times due to the increasing social and economic

impact of the COVID-19 pandemic and a significant decline in vehicle demand. Although TMNA and many of its

suppliers are resuming production, unexpected delays affecting the supply chain or logistics network could negatively

impact dealer inventory levels, vehicle sales, the sale of our financing and insurance products, dealer profitability and

creditworthiness, and our future results of operations.

The extension of curtailed economic activities as a result of further outbreak of COVID-19, extended or additional

government restrictions intended to slow the spread of the virus, or delayed consumer response once restrictions have

been lifted could have further negative impact on used vehicle values, consumer economics, dealerships, and auction

sites, which could have a material adverse impact on the future results of operations. If the number of our customers

and dealers experiencing hardship increases or it becomes necessary to further extend our payment relief options, it

could have a material adverse effect on our business, financial condition and our future results of operations.

Although the duration and severity of the COVID-19 pandemic is uncertain, and its ultimate impact on our results of

operations is difficult to predict, it could have material adverse effect on our business, financial condition and our

future results of operations.

RESULTS OF OPERATIONS

Years ended March 31,

(Dollars in millions)

2020

2019

2018

Net income:

Finance operations

684

593

3,178

Insurance operations

229

202

232

Total net income

913

795

3,410

Refer to Note 14 – Segment Information of the Notes to Consolidated Financial Statement for the total asset balances of our

finance and insurance operations.

Fiscal 2020 Compared to Fiscal 2019

Our consolidated net income was $913 million in fiscal 2020, compared to $795 million in fiscal 2019. The increase

in net income for fiscal 2020 compared to fiscal 2019 was primarily due to a $389 million increase in total financing

revenues, an $89 million decrease in depreciation on operating leases, a $71 million decrease in provision for income

taxes, and a $30 million increase in investment and other income, net, partially offset by a $218 million increase in

provision for credit losses, a $176 million increase in operating and administrative expense, and a $87 million increase

in interest expense.

Our overall capital position increased $0.9 billion, bringing total shareholder’s equity to $14.5 billion at March 31,

2020, as compared to $13.6 billion at March 31, 2019. Our debt increased to $97.7 billion at March 31, 2020 from

$92.9 billion at March 31, 2019. Our debt-to-equity ratio decreased to 6.7 at March 31, 2020 from 6.8 at March 31,

2019.

Fiscal 2019 Compared to Fiscal 2018

Our consolidated net income was $795 million in fiscal 2019, compared to $3,410 million in fiscal 2018. The

decrease in net income for fiscal 2019 compared to fiscal 2018 was primarily due to the enactment of the Tax Cuts and

Jobs Act of 2017 (“TCJA”), which resulted in a one-time tax benefit of $2.9 billion in fiscal 2018. Our net income for

fiscal 2019 compared to fiscal 2018 was favorably impacted by a $923 million increase in total financing revenues, a

$132 million decrease in depreciation on operating leases, and a $35 million increase in investment and other income,

net, partially offset by a $896 million increase in interest expense.

Our overall capital position increased $0.7 billion, bringing total shareholder’s equity to $13.6 billion at March 31,

2019, as compared to $12.9 billion at March 31, 2018. Our debt decreased to $92.9 billion at March 31, 2019 from

$98.4 billion at March 31, 2018. As a result, our debt-to-equity ratio decreased to 6.8 at March 31, 2019 from 7.6 at

March 31, 2018.

Finance Operations

The following table summarizes key results of our Finance Operations:

Years ended March 31,

Percentage change

(Dollars in millions)

2020

2019

2018

2020 to 2019

2019 to 2018

Financing revenues:

Operating lease

8,775

8,694

8,167

Retail

2,558

2,235

1,974

Dealer

696

711

576

Total financing revenues

12,029

11,640

10,717

Depreciation on operating leases

6,820

6,909

7,041

Interest expense

2,854

2,769

1,863

Net financing revenues

2,355

1,962

1,813

Investment and other income, net

155

188

140

(18

Net financing and other revenues

2,510

2,150

1,953

Expenses:

Provision for credit losses

590

372

401

Operating and administrative

expenses

1,197

1,038

1,028

Total expenses

1,787

1,410

1,429

Income before income taxes

723

740

524

Provision (benefit) for income taxes

147

(2,654

)

(73

106

Net income from finance operations

684

593

3,178

(81

Our finance operations reported net income of $684 million and $593 million during fiscal 2020 and 2019,

respectively. The increase in net income from finance operations for fiscal 2020 compared to fiscal 2019 was

primarily due to a $389 million increase in total financing revenues, an $89 million decrease in depreciation on

operating leases, and a $108 million decrease in provision for income taxes, partially offset by $218 million increase

in provision for credit losses, a $159 million increase in operating and administrative expenses, and an $85 million

increase in interest expense.

Financing Revenues

Total financing revenues increased 3 percent during fiscal 2020 compared to fiscal 2019 due to the following:

• Operating lease revenues remained relatively unchanged in fiscal 2020 as compared to fiscal 2019.

• Retail financing revenues increased 14 percent in fiscal 2020 as compared to fiscal 2019, due to higher

portfolio yields as well as higher average earning asset balances.

• Dealer financing revenues decreased 2 percent in fiscal 2020 as compared to fiscal 2019, due to lower

portfolio yields partially offset by higher average earning asset balances outstanding.

As a result of the above, our total portfolio yield, which includes operating lease, retail and dealer financing revenues,

increased to 4.6 percent for fiscal 2020, compared to 4.3 percent for fiscal 2019.

Depreciation on Operating Leases

We recorded depreciation on operating leases of $6,820 million during fiscal 2020 compared to $6,909 million during

fiscal 2019. Throughout most of fiscal 2020 we experienced lower depreciation on operating leases compared to fiscal

2019 due to lower expectations of residual value losses on our more recent originations and lower average operating

units outstanding; however, the economic difficulties in the fourth quarter, as a result of the COVID-19 pandemic,

resulted in a significant decline in used vehicle values at the end of the quarter and expected end-of-term market

values on our investment in operating leases. As a result, we experienced an increase in depreciation expense of $136

million in the fourth quarter of fiscal 2020 compared to fiscal 2019 due to the increase in expected residual value

losses, which for fiscal 2020 substantially offset the decrease in depreciation expense from earlier in the fiscal year.

Interest Expense

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, interest rate floors 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. The

following table summarizes the components of interest expense:

Years ended March 31,

(Dollars in millions)

2020

2019

2018

Interest expense on debt

2,488

2,559

1,970

Interest expense (income) on derivatives

180

(53

)

(67

)

Interest expense on debt and derivatives

2,668

2,506

1,903

(Gains) losses on debt denominated in foreign currencies

(703

)

(1,078

)

1,344

Losses (gains) on foreign currency swaps

650

1,015

(1,306

)

Losses (gains) on U.S. dollar interest rate swaps

219

304

(90

)

Total interest expense

2,834

2,747

1,851

During fiscal 2020, total interest expense increased to $2,834 million from $2,747 million in fiscal 2019. The increase

is attributable to an increase in interest expense on debt and derivatives combined with lower gains on foreign

currency swaps net of losses on debt denominated in foreign currencies, partially offset by lower losses on U.S. dollar

interest rate swaps.

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 fiscal 2020, interest expense on debt and derivatives increased to $2,668

million from $2,506 million in fiscal 2019, primarily due to our interest expense on pay-float swaps being offset to a

lesser degree from income received on pay-fixed swaps as a result of decreases in the weighted average notional of our

pay-fixed derivatives.

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 fiscal 2020 and

2019, we recorded net gains of $53 million and $63 million, respectively, primarily as a result of decreases in foreign

currency swap rates across the 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

fiscal 2020 and 2019, we recorded losses of $219 million and $304 million, respectively, as losses on our higher

notional, shorter-term pay-fixed swaps exceeded the gains on our longer-term pay-float swaps, primarily as a result of

decreases in U.S. dollar swap rates.

Future changes in interest and foreign currency exchange rates could 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 $155 million for fiscal 2020, compared to $188 million for fiscal

2019. The decrease in investment and other income, net for fiscal 2020 compared to fiscal 2019 was primarily due to

a decrease in our average marketable securities portfolio balance.

Provision for Credit Losses

We recorded a provision for credit losses of $590 million for fiscal 2020, compared to $372 million for fiscal 2019.

Throughout most of fiscal 2020, our provision for credit losses was relatively consistent compared to fiscal 2019;

however, the sharp decline in economic conditions in the fourth quarter due to the COVID-19 pandemic resulted in a

significant increase in probable credit losses on both our consumer and dealer portfolios for which $264 million

additional provision for credit losses was recorded.

Operating and Administrative Expenses

We recorded operating and administrative expenses of $1,197 million during fiscal 2020 compared to $1,038 million

during fiscal 2019. The increase in operating and administrative expenses for fiscal 2020, compared to fiscal 2019,

was due to an increase in marketing expenses in an effort to increase brand awareness, as well as increases in

employee, technology, and general operating expenses.

Insurance Operations

The following table summarizes key results of our Insurance Operations:

Years ended March 31,

Percentage change

2020

2019

2018

2020 to

2019

2019 to

2018

Agreements (units in thousands)

Issued

2,593

2,475

2,489

Average in force

9,503

8,975

8,272

(Dollars in millions)

Insurance earned premiums and contract

revenues

933

904

882

Investment and other income, net

187

126

129

Revenues from insurance operations

1,120

1,030

1,011

Expenses:

Insurance losses and loss adjustment

expenses

455

446

425

Operating and administrative expenses

364

347

329

Total expenses

819

793

754

Income before income taxes

301

237

257

Provision for income taxes

106

Net income from insurance operations

229

202

232

(13

Our insurance operations reported net income of $229 million for fiscal 2020 compared to $202 million for fiscal

2019. The increase in net income from insurance operations for fiscal 2020 compared to fiscal 2019 was primarily due

to a $61 million increase in investment and other income, net, partially offset by a $37 million increase in provision for

income taxes.

Agreements issued increased 5 percent and the number of average in force agreements increased 6 percent during

fiscal 2020 compared to fiscal 2019. The average number of agreements in force has increased due to insurance

portfolio growth in recent years, most notably in tire and wheel protection agreements, guaranteed auto protection

agreements, and prepaid maintenance agreements.

Consistent with the decline in Toyota and Lexus vehicle sales, we experienced a significant decline of approximately

45% in the number of insurance agreement issuances from April 1, 2020 through May 31, 2020 compared to April 1,

2019 through May 31, 2019.

Revenue from Insurance Operations

Our insurance operations reported insurance earned premiums and contract revenues of $933 million for fiscal 2020

compared to $904 million for fiscal 2019. Insurance earned premiums and contract revenues represent revenues from

in force agreements and are affected by issuances as well as the level, age, and mix of in force agreements. Insurance

earned premiums and contract revenues are recognized over the term of the agreements in relation to the timing and

level of anticipated claims. The increase in insurance earned premiums and contract revenues in fiscal 2020 compared

to fiscal 2019 was primarily due to insurance portfolio growth in recent years.

Investment and Other Income, Net

Our insurance operations reported investment and other income, net of $187 million for fiscal 2020 compared to $126

million for fiscal 2019. Investment and other income, net, consists primarily of dividend and interest income, realized

gains and losses on investments in marketable securities, changes in fair value from equity investments, and other-than-

temporary impairment on available-for-sale debt securities, if any. The increase in investment and other income, net in

fiscal 2020, compared to fiscal 2019, was primarily due to increased gains from changes in fair value of equity

investments and increased dividend income from our equity investments.

Insurance Losses and Loss Adjustment Expenses

Our insurance operations reported insurance losses and loss adjustment expenses of $455 million for fiscal 2020

compared to $446 million for fiscal 2019. Insurance losses and loss adjustment expenses incurred are a function of the

amount of covered risks, the frequency and severity of claims associated with in force agreements and the level of risk

retained by our insurance operations. Insurance losses and loss adjustment expenses include amounts paid and

accrued for reported losses, estimates of losses incurred but not reported, and any related claim adjustment expenses.

The increase in insurance losses and loss adjustment expenses in fiscal 2020 compared to fiscal 2019 was primarily

due to increases in losses in our guaranteed auto protection agreements, tire and wheel protection agreements, and

prepaid maintenance agreements, partially offset by a decrease in losses due to discontinuing the wholesale inventory

insurance program in fiscal 2019. The increase in our guaranteed auto protection losses in fiscal 2020 compared to

fiscal 2019 was due to an increase in the severity of claims. The increase in our tire and wheel protection losses in

fiscal 2020 compared to fiscal 2019 was due to increases in both frequency and severity of claims. The increase in our

prepaid maintenance losses in fiscal 2020 as compared to fiscal 2019 was due to an increase in the frequency of

claims.

Operating and Administrative Expenses

Our insurance operations reported operating and administrative expenses of $364 million for fiscal 2020 compared to

$347 million for fiscal 2019. The increase in operating and administrative expenses in fiscal 2020 as compared to

fiscal 2019 was attributable to higher dealer back-end program expenses as well as higher product expenses driven by

the continued growth of our insurance business. Insurance dealer back-end program expenses are incentives or

expense reduction programs we offer to dealers based on certain performance criteria.

Provision for Income Taxes

Our effective tax rate for fiscal 2020 and fiscal 2019 was 11 percent and 19 percent, respectively. Our overall

provision for income taxes for fiscal 2020 and fiscal 2019 was $111 million and $182 million, respectively. The

decrease in the effective tax rate and provision for income taxes for fiscal 2020, compared to fiscal 2019, is primarily

due to the favorable rate differential by carrying back fiscal 2019 federal net operating loss to an earlier tax year under

the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The decrease in the effective tax rate also reflects

state tax law changes taking effect during fiscal year 2020, as well as the tax benefit from the federal tax credit for fuel

cell vehicles which was extended by the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (H.R. 1865) in

December 2019 and applies retroactively to fuel cell vehicles purchased on or after January 1, 2018.

FINANCIAL CONDITION

Vehicle Financing Volume and Net Earning Assets

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

Years ended March 31,

Percentage change

(units in thousands):

2020

2019

2018

2020 to

2019

2019 to

2018

Vehicle financing volume:

New retail contracts

630

567

644

(12

Used retail contracts

337

263

255

Lease contracts

470

498

516

Total

1,437

1,328

1,415

TMNA subvened vehicle financing volume (units included in the above table):

New retail contracts

201

316

420

(36

(25

Used retail contracts

(33

Lease contracts

426

471

481

(10

Total

675

822

953

(18

(14

Market share:

63.4

59.8

61.6

Total financing volume was comprised of approximately 79 percent Toyota, 17 percent Lexus, and 4 percent non-Toyota/Lexus

for fiscal 2020. Total financing volume was comprised of approximately 80 percent Toyota, 17 percent Lexus and 3 percent non-

Toyota/Lexus for both fiscal 2019 and fiscal 2018.

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 and sales of a private Toyota distributor.

Vehicle Financing Volume

The volume of our retail and lease contracts, which are acquired primarily from Toyota and Lexus dealers, is

substantially dependent upon TMNA new sales volume, the level of TMNA sponsored subvention and other incentive

programs, as well as TMCC competitive rate and other incentive programs. Despite the economic downturn, which

had a negative impact at the end of the fiscal year, and lower levels of subvention throughout the year, our financing

volume increased 8 percent and our market share increased approximately 4 percentage points in fiscal 2020,

respectively, compared to fiscal 2019, as a result of TMNA and TMCC cash incentive programs and other competitive

rate programs offered throughout fiscal 2020.

While industry-wide vehicle sales and sales incentives in the U.S. were relatively consistent for the majority of fiscal

2020 as compared to fiscal 2019 both experienced a significant decline at the end of our fiscal year as a result of the

sharp decline in economic conditions caused by the COVID-19 pandemic. Our business is substantially dependent

upon the sale of Toyota and Lexus vehicles, which declined significantly beginning in the second half of March 2020

and continued into May 2020 as dealers temporarily closed showrooms and adjusted their operations, and consumers

adjusted their behavior in response to restrictions designed to slow the spread of COVID-19, an unprecedented level of

unemployment claims and a significant decline in consumer confidence and spending. Consistent with the decline in

Toyota and Lexus vehicle sales, we experienced a significant decline of approximately 38% in financing volume from

April 1, 2020 through May 31, 2020 compared to April 1, 2019 through May 31, 2019. We expect that these trends

will continue to have an adverse effect on our results of operations. To mitigate these trends, dealers have increased

their utilization of online sales channels and we have partnered with TMNA to offer competitive incentive programs,

including first payment deferred 90 days on select Toyota and Lexus models. A sustained decline in vehicle sales,

could have a material adverse effect on the sale of our financing and insurance products, dealer profitability and

creditworthiness, and our future results of operations.

The composition of our net earning assets is summarized below:

Years ended March 31,

Percentage change

(Dollars in millions)

2020

2019

2018

2020 to

2019

2019 to

2018

Net Earning Assets

Finance receivables, net

Retail finance receivables, net

56,364

53,016

52,378

Dealer financing, net

17,632

17,501

17,269

Total finance receivables, net

73,996

70,517

69,647

Investments in operating leases, net

36,387

37,927

38,697

Net earning assets

110,383

108,444

108,344

Average original contract term in months

Lease contracts

Retail contracts

Dealer Financing

(Number of dealers serviced)

Toyota and Lexus dealers

938

956

988

Dealers outside of the Toyota/Lexus dealer network

386

372

364

Total number of dealers receiving wholesale financing

1,324

1,328

1,352

Dealer inventory outstanding (units in thousands)

294

309

334

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

Lease contract terms range from 24 months to 60 months.

Retail contract terms range from 24 months to 85 months.

Retail Contract Volume and Earning Assets

Despite the economic downturn, which had a negative impact at the end of the fiscal year, and lower levels of

subvention throughout the year, our new retail contract volume increased 11 percent during fiscal 2020 compared to

fiscal 2019 as a result of TMNA and TMCC cash incentive programs and other competitive rate programs offered

throughout fiscal 2020. Our retail finance receivables, net increased 6 percent at March 31, 2020 as compared to

March 31, 2019 as a result of an increase in retail contract volume and in the average amount financed.

Lease Contract Volume and Earning Assets

Our lease contract volume decreased 6 percent, compared to fiscal 2019 primarily due to lower levels of subvention.

Our investments in operating leases, net, decreased 4 percent at March 31, 2020 as compared to March 31, 2019, due

to decreased lease contract volume.

Dealer Financing and Earning Assets

Dealer financing, net remained relatively unchanged at March 31, 2020, as compared to March 31, 2019, as an

increase in working capital loans was largely offset by decreases in dealer inventory outstanding.

Residual Value Risk

We are exposed to risk on the disposition of leased vehicles to the extent that sales proceeds realized upon the sale of

returned lease vehicles are not sufficient to cover the residual value that was estimated at lease inception.

Factors Affecting Exposure to Residual Value Risk

Residual value represents an estimate of the end-of-term market value of a leased vehicle. 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 future maturities, a higher supply of used vehicles, as well as further deterioration in actual and expected

used vehicle values for Toyota and Lexus vehicles could unfavorably impact return rates, residual values, and

depreciation expense. The evaluation of these factors involves significant assumptions, complex analyses, and

management judgment. Refer to “Critical Accounting Estimates” for further discussion of the estimates involved in

the determination of accumulated depreciation on investments in operating leases.

Residual Values at Lease Inception

Residual values of lease vehicles are estimated at lease inception by examining external industry data, the anticipated

Toyota and Lexus product pipeline and our own experience. Factors considered in this evaluation include,

macroeconomic forecasts, historical portfolio trends, new vehicle pricing, new vehicle incentive programs, new

vehicle sales, product attributes of popular vehicles, the mix and level of used vehicle supply, current and projected

used vehicle values, the actual or perceived quality, safety or reliability of Toyota and Lexus vehicles, and fuel prices.

We use various channels to sell vehicles returned at lease-end. Refer to Part 1, Item 1. Business, “Finance Operations

– Retail and Lease Financing – Remarketing” for additional information on remarketing.

End-of-term Market Values

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. Factors

affecting the estimated end-of-term market value are similar to those considered in the evaluation of residual values at

lease inception discussed above. These factors are evaluated in the context of their historical trends to anticipate

potential changes in the relationship among these factors in the future. 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.

Lease Return Rate

The lease return rate represents the number of leased vehicles returned to us for sale as a percentage of lease contracts

that were originally scheduled to mature in the same period less certain qualified early terminations. When the market

value of a leased vehicle at contract maturity is less than its contractual residual value (i.e., the price at which the lease

customer or dealer may purchase the leased vehicle), there is a higher probability that the vehicle will be returned to

us. In addition, a higher market supply of certain models of used vehicles generally results in a lower market value for

those vehicles, resulting in a higher probability that the vehicle will be returned to us. A higher rate of vehicle returns

exposes us to greater residual value risk which impacts depreciation expense at lease termination.

Impairment of Operating Leases

We evaluate our investment in operating leases portfolio for potential impairment when we determine a triggering

event has occurred. When a triggering event has occurred, we perform a test of recoverability by comparing the

expected undiscounted future cash flows (including expected residual values) over the remaining lease terms to the

carrying value of the asset group. If the test of recoverability identifies a possible impairment, the asset group’s fair

value is measured in accordance with the fair value measurement framework. An impairment charge is recognized for

the amount by which the carrying value of the asset group exceeds its estimated fair value and would be recorded in

our Consolidated Statements of Income. As of March 31, 2020, 2019, and 2018 and during the years then ended, there

was no impairment in our investment in operating leases portfolio.

Disposition of Off-Lease Vehicles

The following table summarizes our vehicle sales at lease termination and our scheduled maturities related to our lease

portfolio by period:

Years ended March 31,

Percentage Change

2020 to

2019 to

(Units in thousands)

2020

2019

2018

2019

2018

Scheduled maturities

562

578

460

Vehicles sold through:

Dealer Direct program

Grounding dealer

119

114

Dealer Direct online program

Physical auction

137

117

Total vehicles sold at lease termination

316

308

248

Scheduled maturities decreased 3 percent in fiscal 2020 compared to fiscal 2019. Despite the decreases in scheduled

maturities, vehicles sold at lease termination increased 3 percent in fiscal 2020 compared to fiscal 2019, primarily due

to a reduction in inventory of off-lease vehicles. Refer to Part 1, Item 1. Business, “Finance Operations – Retail and

Lease Financing - Remarketing” for additional information on disposal of lease vehicles.

Depreciation on Operating Leases

Depreciation expense is recorded on a straight-line basis over the lease term and is based upon the depreciable basis of

the leased vehicle. The depreciable basis is originally established as the difference between a leased vehicle’s original

acquisition cost and its residual value established at lease inception. Changes to residual values have an effect on

depreciation expense. 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. Refer to “Critical Accounting

Estimates” for a further discussion of the assumptions involved in the determination of residual values.

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

Years ended March 31,

Percentage Change

2020

2019

2018

2020 to 2019

2019 to 2018

Depreciation on operating leases

(dollars in millions)

6,820

6,909

7,041

Average operating lease units

outstanding

(in thousands)

1,400

1,473

1,469

We recorded depreciation expense on operating leases of $6,820 million for fiscal 2020, compared to $6,909 million

for fiscal 2019. Throughout most of fiscal 2020, we experienced lower depreciation on operating leases compared to

fiscal 2019 due to lower expectations of residual value losses on our more recent originations and lower average

operating units outstanding; however, the economic difficulties in the fourth quarter, as a result of the COVID-19

pandemic, resulted in a significant decline in used vehicle values at the end of the quarter and estimated end-of-term

market values on our operating leases. As a result, we experienced an increase in depreciation expense of $136

million in the fourth quarter of fiscal 2020 compared to fiscal 2019 due to the increase in expected residual value

losses, which for fiscal 2020 substantially offset the lower depreciation expense from earlier in the fiscal year.

Credit Risk

We are exposed to credit risk on our consumer and dealer portfolios. Credit risk on our earning assets is the risk of

loss arising from the failure of consumers or dealers to make contractual payments. The level of credit risk on our

consumer portfolio is influenced by two factors: default frequency and loss severity, which in turn are influenced by

various factors such as economic conditions, the used vehicle market, purchase quality mix, and operational changes.

The level of credit risk on our dealer portfolio is influenced by the financial strength of dealers within our portfolio,

dealer concentration, collateral quality, and other economic factors. The financial strength of dealers within our

portfolio is influenced by, among other factors, general economic conditions, the overall demand for new and used

vehicles and the financial condition of automotive manufacturers in general.

Factors Affecting Consumer Portfolio Credit Risk

Economic Factors

General economic conditions such as changes in unemployment rates, housing values, bankruptcy rates, consumer

debt levels, fuel prices, consumer credit performance, interest rates, inflation, household disposable income and

unforeseen events such as natural disasters or health epidemics, among other factors, can influence both default

frequency and loss severity.

Used Vehicle Market

Changes in used vehicle values directly affect the proceeds from sales of repossessed vehicles, and accordingly, the

level of loss severity we experience. The supply of, and demand for, used vehicles, interest rates, inflation, the level of

manufacturer incentive programs on new vehicles, the manufacturer’s actual or perceived reputation for quality,

safety, or reliability, and general economic outlook are some of the factors affecting the used vehicle market.

Purchase Quality Mix

A change in the mix of contracts acquired at various risk levels may change the amount of credit risk we assume. An

increase in the number of contracts acquired with lower credit quality (as measured by scores that establish a

consumer’s creditworthiness based on present financial condition, experience, and credit history) can increase the

amount of credit risk. Conversely, an increase in the number of contracts with higher credit quality can lower credit

risk. An increase in the mix of contracts with lower credit quality can also increase operational risk unless appropriate

controls and procedures are established. We strive to price contracts to achieve an appropriate risk adjusted return on

our investment.

The average original contract term of retail and lease contracts influences credit losses. Longer term contracts

generally experience a higher rate of default and thus affect default frequency. In addition, the carrying values of

vehicles under longer term contracts decline at a slower rate, resulting in a longer period during which we may be

subject to used vehicle market volatility, which may in turn lead to increased loss severity.

The types and models of the vehicles in our retail and lease portfolios have an effect on loss severity. Vehicle product

mix can be influenced by factors such as customer preferences, fuel efficiency and fuel prices. These factors impact

the demand for and values of used vehicles and consequently, loss severity.

Operational Changes

Operational changes and ongoing implementation of new information and transaction systems and improved methods

of consumer evaluation are designed to have a positive effect on the credit risk profile of our consumer portfolio.

Customer service improvements in the management of delinquencies and credit losses increase operational efficiency

and effectiveness. We remain focused on our service operations and credit loss mitigation methods.

In an effort to mitigate credit losses, we regularly evaluate our purchasing practices. We limit our risk exposure by

limiting approvals of lower credit quality contracts and requiring certain loan-to-value ratios.

We continue to refine our credit risk management and analysis to ensure that the appropriate level of collection

resources are aligned with portfolio risk, and we adjust capacity accordingly. We continue to focus on early and late

stage delinquencies to increase the likelihood of resolution. We have also increased efficiency in our collections

through the use of technology.

Factors Affecting Dealer Portfolio Credit Risk

The financial strength of dealers to which we extend credit directly affects our credit risk. Lending to dealers with

lower credit quality, or a negative change in the credit quality of existing dealers, increases the risk of credit loss we

assume. Extending a substantial amount of financing or commitments to a specific dealer or group of dealers creates a

concentration of credit risk, particularly when the financing may not be secured by fully realizable collateral assets.

Collateral quality influences credit risk in that lower quality collateral increases the risk that in the event of default and

subsequent liquidation of collateral, the value of the collateral may be less than the amount owed to us.

We assign risk classifications to each of our dealers and dealer groups based on their financial condition, the strength

of the collateral, and other quantitative and qualitative factors including input from our field personnel. Our

monitoring processes of the dealers and dealer groups are based on these risk classifications. We periodically update

the risk classifications based on changes in financial condition. As part of our monitoring processes, we may require

dealers to submit periodic financial statements. We also perform periodic physical audits of vehicle inventory as well

as monitor the timeliness of dealer inventory financing payoffs in accordance with the agreed-upon terms in order to

identify possible risks. We continue to enhance our risk management processes to mitigate dealer portfolio risk and to

focus on higher risk dealers through enhanced risk governance, inventory audits, and credit watch processes. Where

appropriate, we increase the frequency of our audits and examine more closely the financial condition of the dealer or

dealer group. We continue to be diligent in underwriting dealers and have conducted targeted personnel training to

address dealer credit risk.

Dealer portfolio credit risk is mitigated by a repurchase agreement between TMCC and TMNA. Pursuant to this

agreement, TMNA will arrange for the repurchase of new Toyota and Lexus vehicles at the aggregate cost financed by

TMCC in the event of a dealer default under wholesale financing. In addition, we provide other types of financing to

certain Toyota and Lexus dealers and other third parties at the request of TMNA or private Toyota distributors, and the

credit risk associated with such financing is mitigated by guarantees from TMNA or the applicable private distributors.

We also provide financing for some dealerships which sell products not distributed by TMNA or any of its affiliates.

A significant adverse change in a non-Toyota/Lexus manufacturer such as restructuring and bankruptcy may increase

the risk associated with the dealers we have financed that sell these products.

Credit Loss 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. For information regarding the potential impact of current market conditions, refer to Part I.

Item 1A. Risk Factors.

The following table provides information related to our credit loss experience:

Years ended March 31,

2020

2019

2018

Net charge-offs as a percentage of average gross

earning assets

Finance receivables

0.44

0.39

0.44

Operating leases

0.15

0.23

0.31

Total

0.34

0.39

Default frequency as a percentage of outstanding

Contracts

1.22

1.45

1.46

Average loss severity per unit

7,859

7,281

7,497

Aggregate balances for accounts 60 or more days

past due as a percentage of gross earning assets

Finance receivables

0.41

0.34

0.32

Operating leases

0.34

0.27

Total

0.39

0.31

0.30

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

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

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

The level of credit losses primarily reflects two factors: default frequency and loss severity. Net charge-offs as a

percentage of average gross earning assets remained relatively unchanged at 0.34 percent at both March 31, 2020 and

March 31, 2019. Default frequency as a percentage of outstanding contracts decreased to 1.22 percent for fiscal 2020

compared to 1.45 percent for fiscal 2019, primarily due to a continued focus on late stage collection activities. During

fiscal 2020, we implemented new strategies in an effort to optimize insurance collections that required additional time

and effort to analyze and process vehicle total loss accounts. Implementation of the new strategies temporarily

increased our delinquency rates and impacted our default frequency and average loss severity. Our average loss

severity for fiscal 2020 increased to $7,859 from $7,281 in fiscal 2019 primarily due to the new strategies discussed

above as well as higher average amounts financed. Our aggregate balances for accounts 60 or more days past due

increased to 0.39 percent for fiscal 2020 compared to 0.31 percent for fiscal 2019 primarily as a result of the new

strategies discussed above.

Allowance for Credit Losses

We maintain an allowance for credit losses to cover probable and estimable losses as of the balance sheet date

resulting from the non-performance of our customers and dealers under their contractual obligations. The

determination of the allowance for credit losses involves significant assumptions, complex analyses, and management

judgment. Refer to “Critical Accounting Estimates” for further discussion of the estimates involved in determining the

allowance for credit losses.

The allowance for credit losses for our consumer portfolio is established through a process that estimates probable

losses incurred as of the balance sheet date based upon consistently applied statistical analyses of portfolio data. This

process utilizes delinquency migration analysis, in which historical delinquency and credit loss experience is applied

to the current aging of the portfolio, and incorporates current and expected trends and other relevant factors, including

used vehicle market conditions, economic conditions, unemployment rates, purchase quality mix, and operational

factors. This process, along with management judgment, is used to establish the allowance for credit losses to cover

probable and estimable losses incurred as of the balance sheet date. Movement in any of these factors would cause

changes in estimated probable losses.

The allowance for credit losses for our dealer portfolio is established by aggregating dealer financing receivables into

loan-risk pools, which are determined based on the risk characteristics of the loan (e.g. secured by vehicles, real estate

or dealership assets). We analyze the loan-risk pools using internally developed risk ratings for each dealer. In

addition, we have established procedures that focus on managing high risk loans in our dealer portfolio. Our field

operations management and special assets group are consulted each quarter to determine if any specific dealer loan is

considered impaired. If impaired loans are identified, specific reserves are established, as appropriate, and the loan is

removed from the loan-risk pool for separate monitoring. This process, along with management judgment, is used to

establish the allowance for credit losses to cover probable and estimable losses incurred as of the balance sheet date.

Movement in any of these factors would cause changes in estimated probable losses.

The following table provides information related to our allowance for credit losses:

Years ended March 31,

(Dollars in millions)

2020

2019

2018

Allowance for credit losses at beginning of period

602

597

622

Charge-offs

(470

)

(464

)

(516

)

Recoveries

Provision for credit losses

590

372

401

Allowance for credit losses at end of period

817

602

597

Years ended March 31,

2020

2019

2018

Allowance for credit losses as a percentage of gross earning

Assets

Finance receivables

0.97

0.70

0.66

Operating leases

0.25

0.27

0.35

Total

0.73

0.55

Our allowance for credit losses increased $215 million from $602 million at March 31, 2019 to $817 million at March

31, 2020. The total allowance for credit losses as a percentage of gross earning assets was 0.73 percent for fiscal

2020, compared to 0.55 percent in fiscal 2019. The allowance for credit losses as a percentage of gross earning assets

for finance receivables increased to 0.97 percent in fiscal 2020 from 0.70 percent in fiscal 2019. The increase in the

allowance is primarily due to higher probable credit losses on our retail consumer and dealer portfolios of $233 million

as of March 31, 2020 as a result of the economic impact of COVID-19 in March 2020. The allowance for credit losses

as a percentage of gross earning assets for operating leases decreased to 0.25 percent in fiscal 2020 from 0.27 percent

in fiscal 2019 due to lower credit loss experience; however, the decrease in credit loss experience was partially offset

by an increase in probable credit losses on the lease portfolio of $31 million as of March 31, 2020 as a result of the

economic impact of COVID-19. A sustained economic slowdown as a result of COVID-19 with continued high levels

of unemployment and a decline in consumer confidence and spending, or future changes in the economy that impact

the consumer such as increasing interest rates, 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, as a result of government

restrictions enacted as a result of COVID-19 or otherwise, could also increase our allowance for credit losses.

LIQUIDITY AND CAPITAL RESOURCES

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 $2.4 billion to $8.8 billion with an average balance of

$5.4 billion during fiscal 2020. The amount of excess funds we hold may fluctuate, depending on market conditions

and other factors.

During the fourth quarter of the fiscal year, and subsequent to our fiscal year-end, capital markets experienced

significant disruption and volatility as a result of the COVID-19 pandemic. While our ability to access the capital

markets remains largely intact, our funding spreads have increased across both short-term and long-term markets and

our long-term credit ratings have been downgraded or put on negative outlook and may be subject in the future to

further actions or downgrades by credit rating agencies. For liquidity purposes, we hold cash in excess of our

immediate funding needs. Subsequent to our fiscal year end, from April 1, 2020 through May 31, 2020, we raised an

additional $15.3 billion through the public secured and unsecured capital markets and private term loan and asset-

backed securitization credit markets, excluding commercial paper issuances. As of May 31, 2020, we maintained

excess funds of $22.1 billion. As of May 31, 2020, we and our co-borrowers had $15.7 billion in committed, undrawn

bank credit facilities and we had $4.1 billion in stand-alone committed, undrawn bank credit facilities. We also have

access to liquidity under a $5.0 billion credit facility with TMS, which as of March 31, 2020 was drawn upon for the

principal amount of $3.0 billion and is 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.

Credit support is provided to us by our indirect parent 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 12 – 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 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” 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. We do not currently have exposure to sovereign counterparties in countries experiencing significant

economic, fiscal or political strain or any other sovereign counterparties. 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” 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:

March 31, 2020

March 31, 2019

(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

27,040

26,968

1.85

25,374

25,273

2.62

U.S. medium term note

("MTN") program

33,658

33,527

2.44

33,540

33,397

2.82

Euro medium term note

("EMTN") program

17,074

16,974

1.69

15,916

15,810

1.90

Other debt

5,705

5,703

2.06

6,045

6,041

3.12

Total Unsecured notes and loans

payable

83,477

83,172

2.07

80,875

80,521

2.60

Secured notes and loans payable

14,597

14,568

2.13

12,421

12,401

2.62

Total debt

98,074

97,740

2.08

93,296

92,922

2.60

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

MTNs

EMTNs

Other

Total

Unsecured

notes and

loans

payable

Balance at March 31, 2019

25,374

33,540

15,916

6,045

80,875

Issuances

1,666

10,323

2,745

3,899

18,633

Maturities and terminations

(10,205

)

(1,016

)

(4,200

)

(15,421

)

Non-cash changes in foreign currency rates

(571

)

(39

)

(610

)

Balance at March 31, 2020

27,040

33,658

17,074

5,705

83,477

Issuances during the two months ended

May 31, 2020

13,891

7,000

3,405

24,296

Changes in Commercial paper are shown net in fiscal 2020 due to its short duration within Issuances.

Commercial paper

Short-term funding needs are met through the issuance of commercial paper in the U.S. Amounts outstanding under

our commercial paper programs ranged from approximately $24.7 billion to $28.7 billion during fiscal 2020, with an

average outstanding balance of $26.7 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 SEC to provide for the issuance of debt securities in the U.S.

capital markets to retail and institutional investors. We 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 2021. 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 2019, 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 €50.0 billion, or the equivalent in other currencies, of which €15.3 billion was available for

issuance at May 31, 2020. 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.

We may issue other debt securities through the global capital markets or enter into other unsecured financing

arrangements, including those in which we agree to use the proceeds solely to acquire retail or lease contracts

financing new Toyota and Lexus vehicles of specified “green” models. The terms of these “green” bond transactions

are consistent with the terms of other similar transactions except that the proceeds we receive are included in

Restricted cash and cash equivalents in our Consolidated Balance Sheets, when applicable.

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, 2019

12,421

Issuances

10,120

Maturities and terminations

(7,944

)

Balance at March 31, 2020

14,597

Issuances during the two months ended May 31, 2020

4,987

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

probable 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.

We periodically enter into term securitization transactions whereby we agree to use the proceeds solely to acquire

retail and lease contracts financing new Toyota and Lexus vehicles of certain specified “green” models. The terms of

these “green” securitization transactions are consistent with the terms of our other similar transactions except that the

proceeds we receive are included in Restricted cash and cash equivalents in our Consolidated Balance Sheets, when

applicable.

In June 2019, we completed an offering of secured notes under a new 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 five year 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 2021. 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 March 31, 2020 and 2019, 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 as described below:

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

In November 2019, TMCC, Toyota Credit de Puerto Rico Corp. (“TCPR”) and other Toyota affiliates entered into 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 2021, 2023, and 2025, 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 may be used for general corporate purposes and none were drawn upon as of March 31,

2020. We are currently in compliance with the covenants and conditions of the credit agreements described above.

Other Unsecured Credit Agreements

TMCC has entered into additional unsecured credit facilities with various banks. As of March 31, 2020, TMCC had

committed bank credit facilities totaling $4.6 billion, of which, $2.5 billion and $2.1 billion mature in fiscal 2021 and

2023, 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 as of March 31, 2020 and 2019. 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 TMS, an affiliate, expiring in fiscal 2022.

This credit facility was drawn upon as of March 31, 2020 for a principal amount of $3.0 billion with an interest rate of

1.86%, maturing on September 30, 2020. The amount is recorded in Other liabilities on our Consolidated Balance

Sheet and will be used for general corporate purposes.

From time to time, we may borrow from affiliates based upon a number of business factors such as funds availability,

cash flow timing, relative costs 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.”

Credit Support Agreements

Under the terms of a credit support agreement between TMC and TFSC, TMC has agreed to:

• maintain 100 percent ownership of TFSC;

• cause TFSC and its subsidiaries to have a tangible net worth (the aggregate amount of issued capital,

capital surplus and retained earnings less any intangible assets) of at least JPY 10 million, equivalent to

$92,989 at March 31, 2020; and

• make sufficient funds available to TFSC so that TFSC will be able to (i) service the obligations arising out

of its own bonds, debentures, notes and other investment securities and commercial paper and (ii) honor

its obligations incurred as a result of guarantees or credit support agreements that it has extended

(collectively, “Securities”).

The agreement is not a guarantee by TMC of any securities or obligations of TFSC. TMC’s obligations under the

credit support agreement rank pari passu with TMC’s senior unsecured debt obligations. Either party may terminate

the agreement upon 30 days written notice to the other party. However, such termination cannot take effect unless and

until (1) all Securities issued on or prior to the date of the termination notice have been repaid or (2) each rating

agency that has issued a rating in respect of TFSC or any Securities upon the request of TMC or TFSC has confirmed

to TFSC that the debt ratings of all such Securities will be unaffected by such termination. In addition, with certain

exceptions, the agreement may be modified only by the written agreement of TMC and TFSC, and no modification or

amendment can have any adverse effect upon any holder of any Securities outstanding at the time of such modification

or amendment. The agreement is governed by, and construed in accordance with, the laws of Japan.

Under the terms of a similar credit support agreement between TFSC and TMCC, TFSC has agreed to:

• maintain 100 percent ownership of TMCC;

• cause TMCC and its subsidiaries to have a tangible net worth (the aggregate amount of issued capital,

capital surplus and retained earnings less any intangible assets) of at least $100,000; and

• make sufficient funds available to TMCC so that TMCC will be able to service the obligations arising out

of its own bonds, debentures, notes and other investment securities and commercial paper (collectively,

“TMCC Securities”).

The agreement is not a guarantee by TFSC of any TMCC Securities. The agreement contains termination and

modification provisions that are similar to those in the agreement between TMC and TFSC as described above. The

agreement is governed by, and construed in accordance with, the laws of Japan. TMCC Securities do not include the

securities issued by securitization trusts in connection with TMCC’s securitization programs or any indebtedness

under TMCC’s credit facilities or term loan agreements.

Holders of TMCC Securities have the right to claim directly against TFSC and TMC to perform their respective

obligations under the credit support agreements by making a written claim together with a declaration to the effect that

the holder will have recourse to the rights given under the credit support agreements. If TFSC and/or TMC receive

such a claim from any holder of TMCC Securities, TFSC and/or TMC shall indemnify, without any further action or

formality, the holder against any loss or damage resulting from the failure of TFSC and/or TMC to perform any of

their respective obligations under the credit support agreements. The holder of TMCC Securities who made the claim

may then enforce the indemnity directly against TFSC and/or TMC.

In addition, TMCC and TFSC are parties to a credit support fee agreement which requires TMCC to pay to TFSC a fee

which is based upon the weighted average outstanding amount of TMCC Securities entitled to credit support.

TCPR is the beneficiary of a credit support agreement with TFSC containing the same provisions as the credit support

agreement between TFSC and TMCC but pertaining to TCPR bonds, debentures, notes and other investment securities

and commercial paper (collectively, “TCPR Securities”). Holders of TCPR Securities have the right to claim directly

against TFSC and TMC to perform their respective obligations as described above. This agreement is not a guarantee

by TFSC of any securities or other obligations of TCPR. TCPR has agreed to pay TFSC a fee which is based upon the

weighted average outstanding amount of TCPR Securities entitled to credit support.

DERIVATIVE INSTRUMENTS

Risk Management Strategy

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, interest rate floors, 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 (“ALCO”) which provides a framework for financial controls and governance to

manage market risk.

Accounting for Derivative Instruments

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 held with the same counterparty on a net basis. Changes in the fair value of derivatives 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 in our Consolidated Balance Sheet.

The 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. When we meet this condition, we elect to present such balances on a net basis.

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. 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 March 31,

2020, 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.

We categorize derivatives as those designated for hedge accounting (“hedge accounting derivatives”) and those that

are not designated for hedge accounting (“non-hedge accounting derivatives”). At the inception of a derivative

contract, we may elect to designate a derivative as a hedge accounting derivative. As of March 31, 2020, we had no

hedge accounting derivatives.

Refer to Note 6 – Derivatives, Hedging Activities and Interest Expense of the Notes to Consolidated Financial

Statements.

Derivative Assets and Liabilities

The following table summarizes our derivative assets and liabilities, which are included in Other assets and Other

liabilities in our Consolidated Balance Sheets:

March 31,

(Dollars in millions)

2020

2019

Gross derivatives assets, net of credit valuation adjustment

1,437

544

Less: Counterparty netting

(966

)

(441

)

Less: Collateral held

(420

)

(42

)

Derivative assets, net

Gross derivative liabilities, net of credit valuation adjustment

3,116

1,407

Less: Counterparty netting

(966

)

(441

)

Less: Collateral posted

(2,105

)

(940

)

Derivative liabilities, net

Collateral represents cash received or deposited under reciprocal arrangements that we have entered into with our

derivative counterparties. As of March 31, 2020, we held excess collateral of $10 million which we did not use to

offset derivative assets, and we posted excess collateral of $1 million which we did not use to offset derivative

liabilities. As of March 31, 2019, we held excess collateral of $2 million which we did not use to offset derivative

assets, and we posted excess collateral of $17 million which we did not use to offset derivative liabilities.

LIBOR TRANSITION

In July 2017, the U.K. Financial Conduct Authority, which regulates the London Inter-bank Offered Rate (“LIBOR”),

announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after calendar year

2021. We have exposures 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 are evaluating SOFR, among other

alternatives and actions, as a potential alternative reference rate 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 purchase transactions.

We are also actively assessing how the discontinuation of LIBOR could impact accounting and financial reporting.

We also continue to monitor the activities of the standard setters such as the FASB, which has issued new accounting

standard updates that provide certain relief related to the transition away from LIBOR. For example, in March 2020,

the FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on

Financial Reporting, as further discussed in Note 1 to the Consolidated Financial Statements. This guidance provides

temporary, optional guidance to ease the potential burden in accounting for reference rate reform. We are currently in

the process of evaluating the amendments.

Refer to Part I, Item 1A. Risk Factors – “Our results of operations, financial condition and cash flows may be

adversely affected by changes in interest rates, foreign currency exchange rates and market prices” for further

discussion.

OFF-BALANCE-SHEET ARRANGEMENTS

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. 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.

Other than this fee, there are no corresponding expenses or cash flows arising from our guarantees. The nature,

business purpose, and amounts of these guarantees are described in Note 9 – Commitments and Contingencies of the

Notes to Consolidated Financial Statements.

Commitments

We provide fixed and variable rate credit facilities to dealers and various multi-franchise organizations referred to as

dealer groups. These credit facilities are typically used for facilities refurbishment, real estate purchases, business

acquisitions, and working capital requirements. These loans are typically secured with liens on real estate, vehicle

inventory, and/or other dealership assets, as appropriate, and may be guaranteed by the individual or corporate

guarantees of the affiliated dealers, dealer groups, or dealer principals when deemed prudent. 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 dealer support required for the facility 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. Refer to Note 9 – Commitments and Contingencies of the Notes to Consolidated Financial Statements

for additional discussion and disclosure.

We have also extended credit facilities to affiliates as described in Note 12 – Related Party Transactions 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. We have not made any material payments in the past as a result

of these provisions, and as of March 31, 2020, we determined that it is not probable that we will be required to make

any material payments in the future. As of March 31, 2020 and 2019, no amounts have been recorded under these

indemnification provisions.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

We have certain obligations to make future payments under contracts and commitments. Aggregate contractual

obligations and commitments in existence at March 31, 2020 are summarized as follows:

(Dollars in millions)

Payments due by period

Contractual obligations

Total

2021

2022

2023

2024

2025

Thereafter

Debt

99,519

51,784

19,688

12,414

4,042

5,095

6,496

Estimated interest payments for

debt

4,558

1,389

907

569

353

232

1,108

Estimated net payments (receipts)

under interest rate swap

agreements

)

383

181

(28

)

(38

)

(542

)

Premises occupied under lease

139

Purchase obligations

Total

104,228

53,592

20,799

13,039

4,379

5,299

7,120

Debt reflects the remaining principal obligation. Our foreign currency debt is stated in U.S. dollars at amounts representing our

contractual obligations under the foreign currency swaps that are used to hedge the corresponding debt. Debt excludes

unamortized premium/discount of $170 million and debt issuance costs of $164 million, net of foreign currency adjustments of

$1,445 million. Debt also excludes the principal amount drawn on the revolving credit facility with TMS of $3.0 billion which is

recorded in Other liabilities in our Consolidated Balance Sheet.

Interest payments for debt and swap agreements payable in foreign currencies or based on variable interest rates are estimated

using the applicable current rates as of March 31, 2020.

Purchase obligations represent fixed or minimum payment obligations under supplier contracts. The amounts included herein

represent the minimum contractual obligations in certain situations; however, actual amounts incurred may be substantially

higher depending on the particular circumstance, including in the case of information technology contracts, the amount of usage

once we have implemented it. Contracts that do not specify fixed payments or provide for a minimum payment are not included.

The contracts noted herein contain voluntary provisions under which the contract may be terminated for a specified fee

depending upon the contract.

The contractual obligations and commitments in the above table do not include term loans and revolving lines of credit

we extend to dealers and dealer groups as the amount and timing of future payments is uncertain. Refer to Note 9 –

Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional discussion and

disclosure.

NEW ACCOUNTING GUIDANCE

Refer to Note 1 – Basis of Presentation and Significant Accounting Policies 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

accounting estimates we consider to be critical are the following:

• Accumulated depreciation on investment in operating leases; and

• Allowance for credit losses

Accumulated Depreciation on Investment in Operating Leases

Accumulated depreciation on investment in operating leases reduces the value of the leased vehicles from their

original value at acquisition to their expected market value at the end of the lease term.

Nature of Estimates and Assumptions Required

The accumulated depreciation on investment in operating leases is based on assumptions of end-of-term market value

of the leased vehicles and the number of vehicles that will be returned at maturity. At the inception of a lease, the

residual values are estimated by examining external industry data, the anticipated Toyota and Lexus product pipeline

and our own experience. Factors considered in this evaluation include, but are not limited to, local, regional and

national economic forecasts, new vehicle pricing, new vehicle incentive programs, new vehicle sales, competitor

actions and behavior, product attributes of popular vehicles, the mix and level of used vehicle supply, current and

projected used vehicle values, the actual or perceived quality, safety or reliability of Toyota and Lexus vehicles,

buying and leasing behavior trends, and fuel prices. We review the estimated end-of-term market values of leased

vehicles to assess the appropriateness of their carrying values on a quarterly basis. To the extent the estimated end-of-

term market value of a leased vehicle is lower than the contractual 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. Factors affecting the estimated end-of-term market value are similar to those

considered in the evaluation of the contractual residual values at lease inception. These factors are evaluated in the

context of their historical trends to anticipate potential changes in the relationship among those factors in the future.

The vehicle lease return rate represents the number of end-of-term leased vehicles returned to us for sale as a

percentage of lease contracts that were originally scheduled to mature in the same period less certain qualified early

terminations. When the market value of a leased vehicle at maturity is less than its contractual residual value (i.e., the

price at which the lease customer may purchase the leased vehicle), there is a higher probability that the vehicle will

be returned. In addition, a higher market supply of certain models of used vehicles generally results in a lower relative

level of demand for those vehicles, resulting in a higher probability that the vehicle will be returned.

Sensitivity Analysis

At March 31, 2020, holding other estimates constant, if end-of-term market values for returned units were to decrease

by one percent from our present estimates, the effect would be to increase depreciation expense by approximately

$114 million. If the forecasted end-of-term market value of a leased vehicle is less than the contractual residual value,

additional depreciation expense is recorded.

At March 31, 2020, holding other estimates constant, if the return rate for our existing lease portfolio were to increase

by one percentage point from our present estimates, the effect would be to increase depreciation expense by

approximately $32 million. Adjustments are made on a straight-line basis over the remaining terms of the leases and

are included in Investment in operating leases, net in our Consolidated Balance Sheets and in Depreciation on

operating leases in our Consolidated Statements of Income.

Allowance for Credit Losses

We maintain an allowance for credit losses to cover probable and estimable losses as of the balance sheet date on our

earning assets resulting from the failure of customers or dealers to make required payments. For evaluation purposes,

exposures to credit losses are segmented into the two primary categories of “consumer” and “dealer”. Our consumer

portfolio consists, for accounting purposes, of our retail loan portfolio segment and our investment in operating leases

portfolio, both of which are characterized by smaller contract balances than our dealer portfolio. Our dealer portfolio

consists, for accounting purposes, of our dealer products portfolio segment. The overall allowance is evaluated at least

quarterly, considering a variety of assumptions and factors to determine whether reserves are considered adequate to

cover probable and estimable losses as of the balance sheet date. For further discussion of the accounting treatment of

our allowance for credit losses, refer to Note 5 – Allowance for Credit Losses of the Notes to Consolidated Financial

Statements.

Consumer Portfolio

The allowance for credit losses for the consumer portfolio is evaluated based on assumptions of default frequency and

loss severity using methodologies such as roll rate, credit risk grade/tier, and vintage analysis. Default frequency

represents the number of finance receivables and investment in operating lease contracts that we expect will default

over the loss emergence period, which represents the average length of time between when a loss event first occurs

and when the account is charged off. The loss severity assumption represents the expected difference between the

amount a customer owes when the finance contract is charged off and the amount received, net of expenses, from

selling the repossessed vehicle. In addition, we review and analyze external factors, such as changes in economic

conditions, actual or perceived quality, safety and reliability of Toyota and Lexus vehicles, unemployment levels, the

used vehicle market, and consumer behavior as well as internal factors, such as purchase quality mix, collection

strategies, and operational changes.

Dealer Portfolio

The allowance for credit losses for the dealer portfolio is evaluated based on assumptions of probability of default and

loss given default by aggregating dealer financing receivables into loan-risk pools, which are determined based on the

risk characteristics of the loan (e.g. secured by vehicle inventory, real estate, or dealership assets). We analyze the

loan-risk pools using internally developed risk ratings for each dealer. In addition, field operations management and

our special assets group are consulted each quarter to determine if any specific dealer loan is considered impaired. If

impaired loans are identified, specific reserves are established as appropriate, and the loan is removed from the loan-

risk pool for separate monitoring.

Sensitivity Analysis

The assumptions used in evaluating our exposure to credit losses involve estimates and significant judgment. The

majority of our credit losses are related to our consumer portfolio. Holding other estimates constant, a 10 percent

increase or decrease in either the estimated loss severity or the estimated default frequency on the consumer portfolio

would have resulted in a change in the allowance for credit losses of $58 million as of March 31, 2020.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

Our business and global capital market activities give rise to market sensitive assets and liabilities. This sensitivity is

considered market risk and is caused by changes in market prices of our financial instruments on the balance sheet

which is driven by various market factors such as interest rates, foreign exchange rates, credit spreads and other

market driven factors. Market risk is inherent in the financial instruments associated with our operations such as cash

equivalents, finance receivables, debt and equity securities, debt, and derivatives.

ALCO is responsible for the execution of our market risk management strategies and their activities are governed by

written policies and procedures. The principal objective of asset and liability management is to manage the sensitivity

of net interest margin to changing interest rates. When evaluating risk management strategies, we consider a variety of

factors, including, but not limited to, management’s risk tolerance, market conditions and portfolio composition.

We manage our exposure to certain market risks through our regular operating and financing activities and when

deemed appropriate, through the use of derivative instruments. These instruments are used to manage underlying

exposures; we do not use derivatives for trading, market making or speculative purposes. Refer to “Derivative

Instruments” within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

for information on risk management strategies, corporate governance and derivatives usage.

Interest Rate Risk

Interest rate risk can result from timing differences in the maturity or re-pricing of assets and liabilities. Changes in

the level and volatility of market interest rate curves also create interest rate risk as the re-pricing of assets and

liabilities are a function of implied forward interest rates. We are also exposed to basis risk, which is the difference in

re-pricing characteristics of two floating rate indices.

We use sensitivity simulations to assess and manage interest rate risk. Our simulations allow us to analyze the

sensitivity of our existing portfolio as well as the expected sensitivity of our new business. We measure the potential

volatility in our net interest margin and manage our interest rate risk by assessing the dollar impact given a 100 basis

point increase or decrease in the implied yield curve. We have established risk limits to monitor and control our

exposures. ALCO reviews the amount at risk and prescribes steps, if needed, to mitigate our exposure. Our current

exposure is considered within tolerable limits.

Sensitivity Model Assumptions

Interest rate scenarios were derived from implied forward curves based on market expectations. Internal and external

data sources were used for the reinvestment of maturing assets, refinancing of maturing debt and replacement of

maturing derivatives. The prepayment of retail and lease contracts was based on our historical experience and attrition

projections, voluntary or involuntary. We monitor our balance sheet positions, economic trends and market

conditions, internal forecasts and expected business growth in an effort to maintain the reasonableness of the

sensitivity model.

The table below reflects the potential 12-month change in pre-tax cash flows based on hypothetical movements in

future market interest rates. The sensitivity analysis assumes instantaneous, parallel shifts in interest rate yield curves.

These interest rate scenarios do not represent management’s view of future interest rate movements. In reality, interest

rate movements are rarely instantaneous or parallel and rates could move more or less than the rate scenarios reflected

in the table below. In situations where existing interest rates are below one percent, the assumption of a 100 basis

point decrease in interest rates is subject to a floor of zero percent, which is reflected in the “-100bp” scenario for both

March 31, 2020 and 2019.

Sensitivity analysis

Immediate change in rates

(in millions)

+100bp

-100bp

March 31, 2020

(11.0

)

44.1

March 31, 2019

(9.7

)

10.1

Our net interest cash flow sensitivity results from the “+100bp” scenario show a slightly liability-sensitive position on

March 31, 2020 and on March 31, 2019. We regularly assess the viability of our business and hedging strategies to

reduce unacceptable risks to earnings and implement strategies to protect our net interest margins from the potential

negative effects of changes in interest rates.

Foreign currency risk

Foreign currency risk represents exposure to changes in the values of our current holdings and future cash flows

denominated in other currencies. To meet our funding objectives, we issue fixed and variable rate debt denominated

in a number of different currencies. Our policy is to minimize exposures to changes in foreign exchange rates.

Currency exposure related to foreign currency debt is economically hedged at issuance through the execution of

foreign currency swaps which effectively convert our obligations on foreign denominated debt into U.S. dollar

denominated 3-month LIBOR based payments. As a result, our economic exposure to foreign currency risk is

minimized.

Certain equity investments in our investment securities portfolio are exposed to foreign currency risk. The equity

investments may invest directly in foreign currencies, in securities that trade in and receive revenues in foreign

currencies, or in financial derivatives that provide exposure to foreign currencies. The equity investments may also

enter into foreign currency derivative contracts to hedge the currency exposure associated with some or all of the

equity investments’ securities. The market value of these holdings is translated into U.S. dollars based on the current

exchange rates each business day. The effect of changes in foreign currency on our portfolio is reflected in the net

asset value of the equity investment.

Derivative Counterparty Credit Risk

We manage derivative counterparty credit risk by maintaining policies for entering into derivative contracts,

exercising our rights under our derivative contracts, requiring the posting of collateral and actively monitoring our

exposure to counterparties.

All of our derivative counterparties to which we had credit exposure at March 31, 2020 were assigned investment

grade ratings by a credit rating organization. Our counterparty credit risk could be adversely affected by deterioration

of the global economy and financial distress in the banking industry.

Our ISDA Master Agreements permit multiple transactions to be cancelled and settled with a single net balance paid to

either party in the event of default or other termination event outside the normal course of business, such as a ratings

downgrade of either party to the contract. These ISDA Master Agreements also contain reciprocal collateral

arrangements which help mitigate our exposure to the credit risk associated with our counterparties. As of March 31,

2020, we have daily valuation and collateral exchange arrangements with all of our counterparties. Our collateral

agreements with substantially all our counterparties include a zero threshold, full collateralization requirement, which

has significantly reduced counterparty credit risk exposure. Under our ISDA Master Agreements, cash is the only

permissible form of collateral. Neither we nor our counterparties are required to hold collateral in a segregated

account. Upon default, the collateral agreement grants the party in a net asset position the right to set-off amounts

receivable against any posted collateral.

Issuer Credit Risk

Issuer credit risk represents exposures to changes in the creditworthiness of individual issuers or groups of issuers.

Changes in economic conditions may expose us to issuer credit risk where the value of an asset may be adversely

impacted by changes in the levels of credit spreads, by credit migration, or by defaults.

The following tables summarize our investments in marketable securities distribution by credit rating as of:

March 31, 2020

Distribution by credit rating

Amortized

Fair

(Dollars in millions)

cost

value

AAA

BBB

or below

Available-for-sale debt securities:

U.S. government and agency

obligations

160

176

Municipal debt securities

Certificates of deposit

250

249

Commercial paper

604

601

Corporate debt securities

188

197

112

Mortgage-backed securities

Asset-backed securities

Total available-for-sale

debt securities:

1,381

1,401

250

1,006

Equity investments

2,419

194

855

796

574

Total

3,820

444

896

1,802

655

March 31, 2019

Distribution by credit rating

Amortized

Fair

(Dollars in millions)

cost

value

AAA

BBB

or below

Available-for-sale debt securities:

U.S. government and agency

obligations

213

212

205

Municipal debt securities

Certificates of deposit

Commercial paper

Corporate debt securities

160

162

Mortgage-backed securities

Asset-backed securities

Total available-for-sale

debt securities:

629

633

259

132

Equity investments

2,275

412

1,316

522

Total

2,908

259

511

1,448

611

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of Toyota Motor Credit Corporation:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Toyota Motor Credit Corporation and its

subsidiaries (the “Company”) as of March 31, 2020 and 2019, and the related consolidated statements of income,

comprehensive income, shareholder’s equity and cash flows for each of the three years in the period ended March

31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). In our

opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the

Company as of March 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three

years in the period ended March 31, 2020 in conformity with accounting principles generally accepted in the United

States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is

to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public

accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and

are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and

the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the

consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is

not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As

part of our audits we are required to obtain an understanding of internal control over financial reporting but not for

the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial

statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures

included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial

statements. Our audits also included evaluating the accounting principles used and significant estimates made by

management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that

our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas

June 4, 2020

We have served as the Company’s auditor since 1983.

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in millions)

Years ended March 31,

2020

2019

2018

Financing revenues:

Operating lease

8,775

8,694

8,167

Retail

2,558

2,235

1,974

Dealer

696

711

576

Total financing revenues

12,029

11,640

10,717

Depreciation on operating leases

6,820

6,909

7,041

Interest expense

2,834

2,747

1,851

Net financing revenues

2,375

1,984

1,825

Insurance earned premiums and contract revenues

933

904

882

Investment and other income, net

322

292

257

Net financing revenues and other revenues

3,630

3,180

2,964

Expenses:

Provision for credit losses

590

372

401

Operating and administrative

1,561

1,385

1,357

Insurance losses and loss adjustment expenses

455

446

425

Total expenses

2,606

2,203

2,183

Income before income taxes

1,024

977

781

Provision (benefit) for income taxes

111

182

(2,629

)

Net income

913

795

3,410

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended March 31,

2020

2019

2018

Net income

913

795

3,410

Other comprehensive income (loss), net of tax:

Net unrealized gains (losses) on available-for-sale

marketable securities [net of tax (provision) benefit

of ($4), ($5) and $6, respectively]

(29

)

Reclassification adjustment for net (gains) losses on

available-for-sale marketable securities included in

investment and other income, net [net of tax

(benefit) provision of $0, ($3) and $16, respectively]

)

(25

)

Other comprehensive income (loss)

(54

)

Comprehensive income

925

815

3,356

Refer to the accompanying Notes to Consolidated Financial Statements.

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in millions except share data)

March 31,

2020

2019

ASSETS

Cash and cash equivalents

6,790

2,198

Restricted cash and cash equivalents

1,739

985

Investments in marketable securities

3,820

2,908

Finance receivables, net

73,996

70,517

Investments in operating leases, net

36,387

37,927

Other assets

2,823

1,981

Total assets

125,555

116,516

LIABILITIES AND SHAREHOLDER’S EQUITY

Debt

97,740

92,922

Deferred income taxes

5,458

5,452

Other liabilities

7,854

4,564

Total liabilities

111,052

102,938

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 March 31, 2020 and 2019

915

Additional paid-in capital

Accumulated other comprehensive income

Retained earnings

13,571

12,658

Total shareholder's equity

14,503

13,578

Total liabilities and shareholder's equity

125,555

116,516

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

March 31,

2020

2019

ASSETS

Finance receivables, net

12,375

11,075

Investments in operating leases, net

5,586

5,307

Other assets

131

192

Total assets

18,092

16,574

LIABILITIES

Debt

14,568

12,401

Other liabilities

Total liabilities

14,580

12,413

Refer to the accompanying Notes to Consolidated Financial Statements.

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

(Dollars in millions)

Accumulated

Additional

other

Capital

paid-in

comprehensive

Retained

stock

capital

income (loss)

earnings

Total

Balance at March 31, 2017

915

8,582

9,524

Net income

3,410

Other comprehensive loss, net of tax

(54

)

(54

)

Balance at March 31, 2018

915

(29

)

11,992

12,880

Cumulative-effect of change in accounting policy

(122

)

(110

)

Net income

795

Other comprehensive income, net of tax

Dividends, net of tax

)

Balance at March 31, 2019

915

12,658

13,578

Net income

913

Other comprehensive income, net of tax

Balance at March 31, 2020

915

13,571

14,503

Refer to the accompanying Notes to Consolidated Financial Statements.

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

Years ended March 31,

2020

2019

2018

Cash flows from operating activities:

Net income

913

795

3,410

Adjustments to reconcile net income to net cash provided by operating

activities:

Depreciation and amortization

6,930

7,023

7,123

Recognition of deferred income

(2,485

)

(2,346

)

(2,003

)

Provision for credit losses

590

372

401

Amortization of deferred costs

707

617

607

Foreign currency and other adjustments to the carrying value of

debt, net

(515

)

(938

)

1,502

Net gains from investments in marketable securities

(47

)

(41

)

Net change in:

Derivative assets

(10

)

Other assets and accrued interest

(482

)

(86

)

(117

)

Deferred income taxes

156

(2,578

)

Derivative liabilities

(40

)

Other liabilities

122

324

Net cash provided by operating activities

5,764

5,935

8,335

Cash flows from investing activities:

Purchase of investments in marketable securities

(2,392

)

(1,251

)

(7,137

)

Proceeds from sales of investments in marketable securities

345

1,740

1,376

Proceeds from maturities of investments in marketable securities

1,200

2,457

5,580

Acquisition of finance receivables

(29,375

)

(24,686

)

(25,713

)

Collection of finance receivables

25,668

24,082

24,100

Net change in wholesale and certain working capital receivables

)

(89

)

388

Acquisition of investments in operating leases

(15,350

)

(16,068

)

(16,575

)

Disposals of investments in operating leases

11,775

11,395

9,821

Long term loans to affiliates

(600

)

(569

)

Payments on long term loans from affiliates

Net change in financing support provided to affiliates

755

Other, net

(51

)

(63

)

(79

)

Net cash used in investing activities

(8,757

)

(3,016

)

(7,484

)

Cash flows from financing activities:

Proceeds from issuance of debt

26,847

21,153

21,768

Payments on debt

(23,375

)

(23,624

)

(23,814

)

Net change in commercial paper

1,861

(2,022

)

664

Loan from affiliate

3,000

Net change in financing support provided by affiliates

)

Dividend paid

(10

)

Net cash provided by (used in) financing activities

8,339

(4,495

)

(1,377

)

Net increase (decrease) in cash and cash equivalents and restricted cash and

cash equivalents

5,346

(1,576

)

(526

)

Cash and cash equivalents and restricted cash and cash equivalents at the

beginning of the period

3,183

4,759

5,285

Cash and cash equivalents and restricted cash and cash equivalents at the

end of the period

8,529

3,183

4,759

Supplemental disclosures:

Interest paid, net

2,568

2,239

1,722

Income taxes paid, net

269

Refer to the accompanying Notes to Consolidated Financial Statements.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 1 – Basis of Presentation and Significant Accounting Policies

Nature of Operations

Toyota Motor Credit Corporation (“TMCC”) is a wholly-owned subsidiary of Toyota Financial Services International

Corporation (“TFSIC”), a California corporation, which is a wholly-owned subsidiary of Toyota Financial Services

Corporation (“TFSC”), a Japanese corporation. TFSC, in turn, is a wholly-owned subsidiary of Toyota Motor

Corporation (“TMC”), a Japanese corporation. TFSC manages TMC’s worldwide financial services operations.

References herein to the “Company”, “we”, “our”, and “us” denote TMCC and its consolidated subsidiaries. TMCC is

marketed under the brands of Toyota Financial Services and Lexus Financial Services.

We provide a variety of finance and insurance products to authorized Toyota and Lexus dealers or dealer groups and,

to a lesser extent, other domestic and import franchise dealers (collectively referred to as “dealers”) and their

customers in the United States of America (excluding Hawaii) (the “U.S.”) and Puerto Rico. Our business is

substantially dependent upon the sale of Toyota and Lexus vehicles.

Our products fall primarily into the following categories:

• Finance - We acquire retail installment sales contracts from dealers in the U.S. and Puerto Rico (“retail

contracts”) and leasing contracts accounted for as operating leases (“lease contracts”) from dealers in the

U.S. We collectively refer to our retail and lease contracts as the “consumer portfolio.” We also provide

dealer financing, including wholesale financing, working capital loans, revolving lines of credit and real

estate financing to dealers in the U.S. and Puerto Rico. We collectively refer to our dealer financing

portfolio as the “dealer portfolio.”

• Insurance - Through Toyota Motor Insurance Services, Inc., a wholly-owned subsidiary, and its insurance

company subsidiaries (collectively referred to as “TMIS”), we provide marketing, underwriting, and

claims administration for vehicle and payment protection products sold by dealers in the U.S. Our vehicle

and payment protection products include vehicle service agreements, guaranteed auto protection

agreements, prepaid maintenance agreements, excess wear and use agreements, tire and wheel protection

agreements, key replacement protection, and used vehicle limited warranty agreements. TMIS also

provides coverage and related administrative services to certain of our affiliates in the U.S. Although the

vehicle and payment protection products are generally not regulated as insurance products, for ease of

reference we collectively refer to the group of products provided by TMIS herein as “insurance products.”

Our finance operations are located in the U.S. and Puerto Rico with earning assets principally sourced through Toyota

and Lexus dealers. As of March 31, 2020, approximately 23 percent of retail and lease contracts were concentrated in

California, 11 percent in Texas, 7 percent in New York, and 5 percent in New Jersey. Our insurance operations are

located in the U.S. As of March 31, 2020, approximately 25 percent of insurance policies and contracts were

concentrated in California, 6 percent in New York, and 5 percent in Maryland, New Jersey, and Virginia, respectively.

Any material adverse changes to the economies or applicable laws in these states could have an adverse effect on our

financial condition and results of operations.

Other Matters

On April 16, 2019, we announced that we will restructure our field operations over the next two years to better serve

our dealer partners by streamlining our field office structure into three regional locations and investing in new

technology. This restructure is expected to be completed in fiscal year 2021 and costs associated with this restructure

are not expected to be significant.

As of April 1, 2020, TMCC began providing private label financial services to third-party automotive and mobility

companies commencing with the provision of services to Mazda Motor of America, Inc. (“Mazda”). We currently

offer exclusive private label automotive retail, lease, and dealer financing products and services marketed under the

brand Mazda Financial Services to Mazda customers and dealers in the United States. TMCC’s agreement with

Mazda is for an initial term of approximately five years. We intend to leverage our existing processes and personnel

to service the newly originated assets, and we expect to make certain technology investments to support the Mazda

program. TMCC will not acquire any existing Mazda assets or liabilities pursuant to the agreement and we do not

expect launch costs to be significant through fiscal year 2021.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 1 – Basis of Presentation and Significant Accounting Policies (Continued)

Basis of Presentation and Principles of Consolidation

Our accounting and financial reporting policies conform to accounting principles generally accepted in the United

States of America (“U.S. GAAP”). Related party transactions presented in the Consolidated Financial Statements are

disclosed in Note 12 – Related Party Transactions.

The consolidated financial statements include the accounts of TMCC, its wholly-owned subsidiaries and all variable

interest entities (“VIE”) of which we are the primary beneficiary. All intercompany transactions and balances have

been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and

assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and

liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the

reporting period. Because of inherent uncertainty involved in making estimates, actual results could differ from those

estimates and assumptions. The accounting estimates that are most important to our business are the accumulated

depreciation related to our investments in operating leases and the allowance for credit losses.

Significant Accounting Policies

Our significant accounting policies are found in the respective Note for which the policy is applicable.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 1 – Basis of Presentation and Significant Accounting Policies (Continued)

Recently Adopted Accounting Guidance

On April 1, 2019, we adopted the following new accounting standards:

Leases

We adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), along with the

subsequently issued guidance amending and clarifying various aspects of the new lease guidance, using the modified

retrospective method. In accordance with that method, the comparative period’s information has not been restated and

continues to be reported under the lease accounting guidance in effect for that period. We also elected to apply the

package of practical expedients permitted under the transition guidance of the new standard which allowed us to not

reassess our historical lease classification, initial direct costs, and whether or not contracts entered into prior to

adoption are or contain leases. As a lessor, the adoption of ASU 2016-02, did not have a significant impact on our

financial statements. As a lessee, the adoption of ASU 2016-02 added right-of-use (“ROU”) assets of $115 million

and operating lease liabilities of $122 million, which are included in Other assets, and in Other liabilities, respectively,

in our Consolidated Balance Sheet. The adoption of this new guidance did not impact our Consolidated Statement of

Income and did not result in a cumulative-effect adjustment to opening retained earnings.

Refer to Note 4 – Investments in Operating Leases, Net and Note 9 – Commitments and Contingencies for additional

information.

Other Recently Adopted Standards

We adopted ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs, which requires certain premiums on

callable debt securities to be amortized to the earliest call date. The adoption of this guidance did not have a material

impact on our consolidated financial statements and related disclosures.

We adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging

Activities. The adoption of this guidance did not have an impact on our consolidated financial statements and related

disclosures as we no longer have hedge accounting derivatives.

In the second quarter of fiscal 2020, we adopted ASU 2019-07, Codification Updates to Securities and Exchange

Commission (“SEC”) Sections – Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-

10532, “Disclosure Update and Simplification,” and Nos. 33-10231 and 33-10442, “Investment Company Reporting

Modernization,” and Miscellaneous Updates. This guidance was effective upon issuance in July 2019 and aligns the

guidance in various SEC sections to the Financial Accounting Standards Board (“FASB”) Accounting Standard

Codification with the requirements of certain already effective SEC final rules. While most of the amendments in this

release eliminate outdated or duplicative disclosure requirements, the final rule release amends the interim financial

statement requirements to include a reconciliation of changes in shareholder’s equity for each period for which an

income statement is required to be filed. We have disclosed the required information in the Consolidated Statements

of Shareholder’s Equity. The other eliminations or amendments did 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)

Note 1 – Basis of Presentation and Significant Accounting Policies (Continued)

Accounting Guidance Issued But Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of

Credit Losses on Financial Instruments. This guidance introduces a new impairment model based on expected losses

rather than incurred losses for certain types of financial instruments. It also modifies the impairment model for

available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with

credit deterioration since their origination. The FASB subsequently issued guidance amending and clarifying aspects

of the new impairment model. This ASU and the related amendments are effective for us on April 1, 2020. Upon

adoption of the guidance on April 1, 2020, based on our current loan portfolio attributes and forecasts of future

economic conditions, we estimate an increase in our allowance for credit losses on finance receivables of

approximately $292 million and a corresponding reduction to our opening retained earnings, net of income taxes.

Additionally, the adoption of this ASU and the related amendments will not have a material impact to our available-

for-sale debt securities portfolio.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which modifies disclosure

requirements related to fair value measurement. This ASU is effective for us on April 1, 2020. The adoption of this

guidance will not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software, which

aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement

with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This ASU is

effective for us on April 1, 2020. The adoption of this guidance will not have a material impact on our consolidated

financial statements and related disclosures.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810), which requires indirect interests held

through related parties in common control arrangements to be considered on a proportional basis for determining

whether fees paid to decision makers and service providers are variable interests. This ASU is effective for us on

April 1, 2021. The adoption of this guidance will not have a material impact on our consolidated financial statements

and related disclosures.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—

Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The applicable provisions

of this ASU are effective for us on April 1, 2020. The adoption of guidance related to Topic 815, Derivatives and

Hedging, and Topic 825, Financial Instruments, will not have a material impact on our consolidated financial

statements. Our adoption status for Topic 326, Financial Instruments—Credit Losses is discussed above.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of

Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential

burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for

applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria

are met. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the

election is made. The provisions of this update are available until December 31, 2022, when the reference rate

replacement activity is expected to have completed. We are currently evaluating the impact of this standard on our

consolidated financial statements and related disclosures.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 2 – Cash and Cash Equivalents and Investments in Marketable Securities

Cash and cash equivalents

Cash and cash equivalents represent highly liquid investments with maturities of three months or less from the date of

acquisition and may include money market instruments, commercial paper, certificates of deposit, U.S. government

and agency obligations, or similar instruments.

Restricted cash and cash equivalents

Restricted cash and cash equivalents include customer collections on securitized receivables to be distributed to

investors as payments on the related secured notes and loans payable, which are primarily related to securitization

trusts. Restricted cash equivalents may also contain proceeds from certain debt issuances for which the use of the cash

is restricted.

Investments in marketable securities

Investments in marketable securities consist of debt securities and equity investments.

Debt securities are designated as available-for-sale (“AFS”) and are recorded at fair value with unrealized gains or

losses included in accumulated other comprehensive income (“AOCI”), net of applicable taxes. An unrealized loss

exists when the current fair value of an individual security is less than its amortized cost basis. We conduct periodic

reviews of AFS debt securities to determine whether the loss is deemed to be other-than-temporary.

If an other-than-temporary impairment (“OTTI”) loss is deemed to exist, we first determine whether we have the intent

to sell the debt security or if it is more likely than not that we will be required to sell the debt security before recovery

of its amortized cost basis. If so, the cost basis of the security is written down to fair value and the loss is reflected in

Investment and other income, net in our Consolidated Statements of Income. If we do not have the intent to sell nor is

it more likely than not that we will be required to sell, the credit loss component of the OTTI losses is recognized in

Investment and other income, net in our Consolidated Statements of Income, while the remainder of the loss is

recognized in AOCI. The credit loss component is identified as the portion of the amortized cost of the security not

expected to be collected over the remaining term as projected using a cash flow analysis for debt securities.

All equity investments are recorded at fair value with changes in fair value included in Investment and other 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 income, net within our

Consolidated Statements of Income.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 2 – Cash and Cash Equivalents and Investments in Marketable Securities (Continued)

Investments in marketable securities consisted of the following:

March 31, 2020

Amortized

Unrealized

Fair

cost

gains

losses

value

Available-for-sale debt securities:

U.S. government and agency obligations

160

176

Municipal debt securities

Certificates of deposit

250

)

249

Commercial paper

604

)

601

Corporate debt securities

188

)

197

Mortgage-backed securities:

U.S. government agency

Non-agency residential

Non-agency commercial

)

Asset-backed securities

)

Total available-for-sale debt securities

1,381

(10

)

1,401

Equity investments

2,419

Total investments in marketable securities

3,820

March 31, 2019

Amortized

Unrealized

Fair

cost

gains

losses

value

Available-for-sale debt securities:

U.S. government and agency obligations

213

)

212

Municipal debt securities

Certificates of deposit

Commercial paper

Corporate debt securities

160

)

162

Mortgage-backed securities:

U.S. government agency

Non-agency residential

Non-agency commercial

Asset-backed securities

Total available-for-sale debt securities

629

)

633

Equity investments

2,275

Total investments in marketable securities

2,908

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.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 2 – Cash and Cash Equivalents and Investments in Marketable Securities (Continued)

Unrealized Losses on Securities

Available-for-sale debt securities in a continuous loss position for less than twelve months and greater than twelve

months were not significant as of March 31, 2020 and 2019.

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:

Years ended March 31,

2020

2019

2018

Available-for-sale debt securities:

Realized gains (losses)

(12

)

Other-than-temporary impairment

)

Equity investments:

Unrealized gains recognized

Realized gains on sales

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.

March 31, 2020

Amortized cost

Fair value

Available-for-sale debt securities:

Due within 1 year

878

874

Due after 1 year through 5 years

128

132

Due after 5 years through 10 years

115

123

Due after 10 years

105

Mortgage-backed and asset-backed securities

170

167

Total

1,381

1,401

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)

Note 3 – Finance Receivables, Net

Finance receivables, net consist of the retail loan and the dealer products portfolio segments, which includes accrued

interest and deferred fees and costs, net of the allowance for credit losses and deferred income. Finance receivables,

net also includes securitized retail receivables, which represent retail receivables that have been sold for legal purposes

to securitization trusts but continue to be included in our consolidated financial statements, as discussed further in

Note 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 are classified as held-for-investment if the Company has the intent and ability to hold the

receivables for the foreseeable future or until maturity or payoff. As of March 31, 2020 and 2019, all finance

receivables were classified as held-for-investment.

Revenues associated with retail and dealer financing are recognized so as to approximate a constant effective yield

over the contract term. Incremental direct fees and costs incurred in connection with the acquisition of retail contracts

and dealer financing receivables, including incentive and rate participation payments made to dealers, are capitalized

and amortized so as to approximate a constant effective yield over the term of the related contracts. Payments

received on subvention and other consumer incentives are deferred and recognized to approximate a constant effective

yield over the term of the related contracts.

The accrual of revenue is discontinued at the time a retail receivable is determined to be uncollectible. These finance

receivables may be restored to accrual status when future payments are reasonably assured. For retail loan finance

receivables in non-accrual status, subsequent financing revenue is recognized only to the extent a payment is received.

Payments are applied first to outstanding interest and then to the unpaid principal balance.

Impaired receivables in the dealer products portfolio segment are placed on nonaccrual status if full payment of

principal or interest is in doubt, or when principal or interest is 90 days or more past due. Interest accrued, but not

collected at the date a dealer financing receivable is placed on nonaccrual status, is reversed against interest income.

In addition, the amortization of net deferred fees is suspended. Interest income on nonaccrual dealer financing

receivables is recognized only to the extent it is received in cash. Dealer financing receivables are restored to accrual

status only when interest and principal payments are brought current and future payments are reasonably assured.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 3 – Finance Receivables, Net (Continued)

Finance receivables, net consisted of the following:

March 31,

2020

2019

Retail receivables

44,414

42,621

Securitized retail receivables

12,674

11,318

Dealer financing

17,873

17,696

74,961

71,635

Deferred origination costs

890

695

Deferred income

(1,128

)

(1,314

)

Allowance for credit losses

Retail and securitized retail receivables

(486

)

(304

)

Dealer financing

(241

)

(195

)

Total allowance for credit losses

(727

)

(499

)

Finance receivables, net

73,996

70,517

Contractual maturities on retail receivables and dealer financing are as follows:

Contractual maturities

Years ending March 31,

Retail receivables

Dealer financing

2021

14,437

13,267

2022

13,358

1,476

2023

11,780

876

2024

9,103

676

2025

5,696

454

Thereafter

2,714

1,124

Total

57,088

17,873

A portion of our finance receivables has historically settled prior to contractual maturity. Contractual maturities

shown above should not be considered indicative of future cash collections.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

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 outstanding. The aging for each class of finance receivables is updated monthly.

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

Retail loan

March 31,

2020

2019

Aging of finance receivables:

Current

56,064

53,047

30-59 days past due

717

657

60-89 days past due

203

162

90 days or greater past due

104

Total

57,088

53,939

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 3 – Finance Receivables, Net (Continued)

Wholesale

Real estate

Working capital

March 31,

2020

2019

2020

2019

2020

2019

Credit quality indicators:

Performing

8,750

9,155

3,974

4,019

3,132

2,448

Credit Watch

962

1,127

576

554

195

At Risk

152

Default

Total

9,826

10,440

4,628

4,671

3,419

2,585

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 in bankruptcy and contracts greater than 120 days past due, which are recorded at the fair

value of collateral less estimated costs to sell. Contracts for which vehicles have been repossessed are excluded.

The following tables summarize the aging of finance receivables by class:

March 31, 2020

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

717

203

104

1,024

56,064

57,088

Wholesale

9,826

Real estate

4,627

4,628

Working capital

3,419

Total

717

203

105

1,025

73,936

74,961

March 31, 2019

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

657

162

892

53,047

53,939

Wholesale

10,439

10,440

Real estate

4,671

Working capital

2,581

2,585

Total

657

162

897

70,738

71,635

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 3 – Finance Receivables, Net (Continued)

Impaired Finance Receivables

A finance receivable is considered impaired when, based on current information and events, it is probable that we will

be unable to collect all amounts due according to the terms of the contract. Factors such as payment history,

compliance with terms and conditions of the underlying loan agreement and other subjective factors related to the

financial stability of the borrower are considered when determining whether a finance receivable is impaired.

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

Impaired

Individually evaluated

finance receivables

allowance

March 31,

2020

2019

2020

2019

Impaired account balances individually evaluated for impairment with an

allowance:

Wholesale

104

161

Real estate

Working capital

Total

268

321

Impaired account balances individually evaluated for impairment without an allowance:

Wholesale

130

Real estate

148

152

Working capital

Total

260

302

Impaired account balances aggregated and evaluated for impairment:

Retail loan

253

231

Total impaired account balances:

Retail loan

253

231

Wholesale

197

291

Real estate

220

245

Working capital

111

Total

781

854

The primary source of interest income recognized on the loans in the table above is from performing troubled debt

restructurings. Interest income on impaired finance receivables and interest income recognized using a cash-basis

method of accounting during fiscal 2020 and 2019 were not significant. As of March 31, 2020 and 2019, the impaired

finance receivables balance for accounts in the dealer products portfolio segment that were on nonaccrual status was

$288 million and $329 million, respectively, and there were no charge-offs against the allowance for credit losses for

these finance receivables. Therefore, the impaired finance receivables balance is equal to the unpaid principal balance.

As of March 31, 2020 and 2019, impaired finance receivables in the retail loan portfolio segment recorded at the fair

value of the collateral less estimated selling costs were not significant and therefore excluded from the table above.

Refer to Note 5 – Allowance for Credit Losses for details related to the retail loan portfolio segment’s impaired

account balances which are aggregated and evaluated for impairment when determining the allowance for credit

losses.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 3 – Finance Receivables, Net (Continued)

Troubled Debt Restructuring

A troubled debt restructuring occurs when a finance receivable is modified through a concession to a borrower

experiencing financial difficulty. A finance receivable modified under a troubled debt restructuring is considered to be

impaired. In addition, troubled debt restructurings include finance receivables for which the customer has filed for

bankruptcy protection. For such finance receivables, we no longer have the ability to modify the terms of the

agreement without the approval of the bankruptcy court and the court may impose term modifications that we are

obligated to accept.

For accounts not under bankruptcy protection, the amount of finance receivables modified as a troubled debt

restructuring during fiscal 2020 and 2019 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 fiscal 2020 and 2019.

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 fiscal 2020 and 2019, 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.

We have offered several programs to provide relief to customers and dealers during the COVID-19 pandemic. These

programs, which were broadly available to our customers and dealers, included payment extensions and deferrals. We

concluded that these programs did not meet troubled debt restructuring criteria.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 4 – Investments in Operating Leases, Net

In conjunction with the April 1, 2019 adoption of ASU 2016-02 as described in Note 1 – Basis of Presentation and

Significant Accounting Policies, we updated our accounting policies and disclosures below.

Investments in operating leases, net primarily consists of vehicle lease contracts acquired from dealers. Generally,

lessees have the ability to extend their lease term in six month increments up to a total of 12 months from the original

lease maturity date. A lease can be terminated at any time by satisfying the obligations under the lease contract. Early

termination programs may be occasionally offered to eligible lessees. At the end of the lease, the customer has the

option to buy the leased vehicle or return the vehicle to the dealer.

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.

Operating lease revenues are recognized on a straight-line basis over the term of the lease. We have made an

accounting policy election to exclude from the consideration in the contract, and from variable payments not included

in the consideration in the contract, sales and other taxes assessed by a governmental authority that are both imposed

on and concurrent with a specific lease revenue-producing transaction and collected from customers. Deferred fees

and costs, including incentive payments made to dealers and acquisition fees collected from customers, and payments

received on affiliate sponsored subvention and other incentive programs are capitalized or deferred and amortized on a

straight-line basis over the contract term. The accrual of revenue on investments in operating leases is discontinued at

the time an account is determined to be uncollectible and subsequent revenue is recognized only to the extent a

payment is received. Operating leases may be restored to accrual status when future payments are reasonably assured.

Vehicle Lease Residual Values

Contractual residual values of vehicle lease contracts are estimated at lease inception by examining external industry

data, the anticipated Toyota and Lexus product pipeline and our own experience. Factors considered in this evaluation

include, macroeconomic forecasts, new vehicle pricing, new vehicle incentive programs, new vehicle sales, vehicle

features and specifications, the mix and level of used vehicle supply, the level of current used vehicle values, and fuel

prices. We are exposed to a risk of loss to the extent the customer returns the vehicle and the value of the vehicle is

lower than the residual value estimated at inception of the lease and if the number of returned vehicles is higher than

anticipated.

Depreciation on operating leases is recognized using the straight-line method over the lease term. The depreciable

basis is the original acquisition cost of the vehicle less the estimated residual value of the vehicle at the end of the

lease term. On a quarterly basis, we review the estimated end-of-term market values and return rates of leased

vehicles to assess the appropriateness of the carrying values at lease-end. Factors affecting the estimated end-of-term

market value are similar to those considered in the evaluation of residual values at lease inception discussed above.

Adjustments to depreciation expense to reflect revised estimates of expected market values at lease termination and

revised return rates are recorded prospectively on a straight-line basis over the remaining lease term.

We use various channels to sell vehicles returned at lease-end. Upon disposition, the difference between the net book

value of the lease and the proceeds received from the disposition of the asset, including any insurance proceeds is

recorded as an adjustment to Depreciation on operating leases.

We evaluate our investment in operating leases portfolio for potential impairment when we determine a triggering

event has occurred. When a triggering event has occurred, we perform a test of recoverability by comparing the

expected undiscounted future cash flows (including expected residual values) over the remaining lease terms to the

carrying value of the asset group. If the test of recoverability identifies a possible impairment, the asset group’s fair

value is measured in accordance with the fair value measurement framework. An impairment charge would be

recognized for the amount by which the carrying value of the asset group exceeds its estimated fair value and would be

recorded in our Consolidated Statements of Income. As of March 31, 2020 and 2019, there was no impairment in our

investment in operating leases portfolio.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 4 – Investments in Operating Leases, Net (Continued)

Investments in operating leases, net consisted of the following:

March 31,

2020

2019

Investments in operating leases

40,698

42,869

Securitized investments in operating leases

7,940

7,532

48,638

50,401

Deferred origination (fees) and costs, net

(223

)

(225

)

Deferred income

(1,962

)

(2,085

)

Accumulated depreciation

(9,976

)

(10,061

)

Allowance for credit losses

(90

)

(103

)

Investments in operating leases, net

36,387

37,927

Future minimum rentals on investments in operating leases are as follows:

Years ending March 31,

Future minimum

rentals on operating leases

2021

5,981

2022

3,772

2023

1,339

2024

106

2025

Thereafter

Total

11,203

A portion of our operating lease contracts has historically terminated prior to maturity. Future minimum rentals shown

above should not be considered indicative of future cash collections.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 5 – Allowance for Credit Losses

We maintain an allowance for credit losses to cover probable and estimable losses incurred on our finance receivables

and investments in operating leases resulting from the failure of customers or dealers to make contractual payments.

Management evaluates the allowance at least quarterly, considering a variety of factors and assumptions to determine

whether the allowance is considered adequate to cover probable and estimable losses incurred as of the balance sheet

date.

Management develops and documents the allowance for credit losses on finance receivables based on two portfolio

segments. The determination of portfolio segments is based primarily on the qualitative consideration of the nature of

our business operations and the characteristics of the underlying finance receivables, as follows:

• Retail Loan Portfolio Segment – The retail loan portfolio segment consists of retail contracts acquired

from dealers in the U.S. and Puerto Rico. Under a retail contract, we are granted a security interest in the

underlying collateral which consists primarily of Toyota and Lexus vehicles. Based on the common risk

characteristics associated with the finance receivables, the retail loan portfolio segment is considered a

single class of finance receivable.

• Dealer Products Portfolio Segment – The dealer products portfolio segment consists of wholesale

financing, working capital loans, revolving lines of credit and real estate loans to dealers in the U.S. and

Puerto Rico. Wholesale financing is primarily collateralized by new or used vehicle inventory with the

outstanding balance fluctuating based on the level of inventory. Working capital loans and revolving lines

of credit are granted for working capital purposes and are secured by dealership assets. Real estate loans

are collateralized by the underlying real estate, are underwritten primarily on a loan-to-value basis and are

typically for a fixed term. Based on the risk characteristics associated with the underlying finance

receivables, the dealer products portfolio segment consists of three classes of finance receivables:

wholesale, working capital (including revolving lines of credit), and real estate.

We also separately develop and document the allowance for credit losses for investments in operating leases.

Investments in operating leases are not within the scope of accounting guidance governing the disclosure of portfolio

segments.

Methodology Used to Develop the Allowance for Credit Losses

Retail Loan Portfolio Segment and Investments in Operating Leases

The level of credit risk in our retail loan portfolio segment and our investments in operating leases is influenced

primarily by two factors: default frequency and loss severity, which in turn are influenced by various factors such as

economic conditions, the used vehicle market, purchase quality mix, contract term length, and collection strategies and

practices.

We evaluate the retail loan portfolio segment and investments in operating leases using methodologies that include roll

rate, credit risk grade/tier, and vintage analysis. We review and analyze external factors, including changes in

economic conditions, actual or perceived quality, safety and reliability of Toyota and Lexus vehicles, unemployment

levels, the used vehicle market, and consumer behavior. In addition, internal factors, such as purchase quality mix and

operational changes are also considered in the analyses. This process, along with management judgment, is used to

establish the allowance for credit losses to cover probable and estimable losses incurred as of the balance sheet date.

We utilize a loss emergence period assumption in developing our allowance for credit losses. This assumption

represents the average length of time between when a loss event first occurs and when the account is charged off. We

apply judgment in estimating the loss emergence period using available credit information and trends.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 5 – Allowance for Credit Losses (Continued)

Dealer Products Portfolio Segment

The level of credit risk in our dealer products portfolio segment is influenced primarily by the financial strength of

dealers within our portfolio, dealer concentration, collateral quality, and other economic factors. The financial

strength of dealers within our portfolio is influenced by, among other factors, general economic conditions, the overall

demand for new and used vehicles and the financial condition of automotive manufacturers.

We evaluate the dealer portfolio by aggregating dealer financing receivables into loan-risk pools, which are

determined based on the risk characteristics of the loan (e.g. secured by vehicles, real estate or dealership assets). We

analyze the loan-risk pools using internally developed risk ratings for each dealer. We also utilize a loss emergence

period assumption in developing our allowance for credit losses. The loss emergence period represents the time period

between the date at which the loss event is estimated to have occurred and the ultimate realization of that loss through

charge-off. In addition, field operations management and our special assets group are consulted each quarter to

determine if any specific dealer loan is considered impaired. If impaired loans are identified, specific reserves are

established, as appropriate, and the loan is removed from the loan-risk pool for separate monitoring. We apply

judgment in estimating the loss emergence period using available credit information and trends. This process, along

with management judgment, is used to establish the allowance for credit losses to cover probable and estimable losses

incurred as of the balance sheet date.

Accounting for the Allowance for Credit Losses and Impaired Receivables

The majority of the allowance for credit losses covers estimated losses on the retail loan portfolio segment and

investments in operating leases which are collectively evaluated for impairment. The remainder of the allowance for

credit losses covers the estimated losses on the dealer products portfolio segment. Within the dealer products portfolio

segment, we establish specific reserves to cover the estimated losses on individual impaired loans (including loans

modified in a troubled debt restructuring). The specific reserves are assessed based on discounted cash flows, the

loan’s observable market price, or the fair value of the underlying collateral if the loan is collateral dependent.

Increases to the allowance for credit losses are accompanied by corresponding charges to the Provision for credit

losses on our Consolidated Statements of Income. The uncollectible portion of finance receivables and investments in

operating leases is charged to the 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. In the event we repossess the collateral, the

receivable is charged-off and we record the collateral at its estimated fair value less costs to sell and report it in Other

assets in our Consolidated Balance Sheets. Recoveries of finance receivables and investments in operating leases

previously charged off as uncollectible are credited to the allowance for credit losses.

The following table provides information related to our allowance for credit losses on finance receivables and

investments in operating leases:

Years ended March 31,

2020

2019

Allowance for credit losses at beginning of period

602

597

Charge-offs

(470

)

(464

)

Recoveries

Provision for credit losses

590

372

Allowance for credit losses at end of period

817

602

During the fourth quarter of 2020, the broader economy experienced a significant deterioration in the macroeconomic

environment driven by the COVID-19 pandemic, which resulted in a $264 million of additional provision for credit

losses.

TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

Note 5 – Allowance for Credit Losses (Continued)

Allowance for Credit Losses and Finance Receivables by Portfolio Segment

The following tables provide information related to our allowance for credit losses for finance receivables and finance

receivables by portfolio segment:

Year ended March 31, 2020

Allowance for Credit Losses for Finance Receivables:

Retail loan

Dealer products

Total

Beginning balance, April 1, 2019

304

195

499

Charge-offs

(358

)

(12

)

(370

)

Recoveries

Provision for credit losses

490

548

Ending balance, March 31, 2020

486

241

727

Ending balance: Individually evaluated for impairment

Ending balance: Collectively evaluated for impairment

486

176

662

Finance Receivables:

Ending balance, March 31, 2020

57,088

17,873

74,961

Ending balance: Individually evaluated for impairment

528

Ending balance: Collectively evaluated for impairment

57,088

17,345

74,433

The ending balance of finance receivables collectively evaluated for impairment in the above table includes

approximately $253 million of finance receivables within the retail loan portfolio segment that are specifically

identified as impaired. These amounts are aggregated within their respective portfolio segment when determining the

allowance for credit losses as of March 31, 2020, as they are deemed to be insignificant for individual evaluation and

we have determined that the allowance for credit losses is not significant and would not be materially different if the

amounts had been individually evaluated for impairment. The ending balance of finance receivables for the dealer

products portfolio segment collectively evaluated for impairment as of March 31, 2020 includes $1,047 million in

finance receivables that are guaranteed by Toyota Motor North America, Inc. (“TMNA”) and $140 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)

Note 5 – Allowance for Credit Losses (Continued)

Year ended March 31, 2019

Allowance for Credit Losses for Finance Receivables:

Retail loan

Dealer products

Total

Beginning balance, April 1, 2018

312

151

463

Charge-offs

(330

)

(330

)

Recoveries

Provision for credit losses

272

316

Ending balance, March 31, 2019

304

195

499

Ending balance: Individually evaluated for impairment

Ending balance: Collectively evaluated for impairment

304

400

Finance Receivables:

Ending balance, March 31, 2019

53,939

17,696

71,635

Ending balance: Individually evaluated for impairment

623

Ending balance: Collectively evaluated for impairment

53,939

17,073

71,012

The ending balance of finance receivables collectively evaluated for impairment in the above table includes

approximately $231 million of finance receivables within the retail loan portfolio segment that are specifically

identified as impaired. These amounts are aggregated within their respective portfolio segment when determining the

allowance for credit losses as of March 31, 2019, as they are deemed to be insignificant for individual evaluation and

we have determined that the allowance for credit losses is not significant and would not be materially different if the

amounts had been individually evaluated for impairment. The ending balance of finance receivables for the dealer

products portfolio segment collectively evaluated for impairment as of March 31, 2019 includes $1,091 million in

finance receivables that are guaranteed by TMNA and $132 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)

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, interest rate floors, 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.

We categorize derivatives as those designated for hedge accounting (“hedge accounting derivatives”) and those that

are not designated for hedge accounting (“non-hedge accounting derivatives”). At the inception of a derivative

contract, we may elect to designate a derivative as a hedge accounting derivative if certain criteria are met. As of

September 30, 2018, we no longer have any hedge accounting derivatives.

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

recognized as a component of Interest expense in our Consolidated Statements of Income. The derivative instruments

are included as a component of Other assets or Other liabilities in our Consolidated Balance Sheets.

Offsetting of Derivatives