TOYOTA MOTOR CREDIT CORP - FORM 10-Q - November 5, 2010

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EX-31.2 - EXHIBIT 31.2 - 302 CERTIFICATION - TOYOTA MOTOR CREDIT CORPexhibit_31-2.htm
EX-32.1 - EXHIBIT 32.1 - 906 CERTIFICATION - TOYOTA MOTOR CREDIT CORPexhibit_32-1.htm
EX-31.1 - EXHIBIT 31.1 - 302 CERTIFICATION - TOYOTA MOTOR CREDIT CORPexhibit_31-1.htm
EX-12.1 - EXHIBIT 12.1 - RATIO OF EARNINGS TO FIXED CHARGES - TOYOTA MOTOR CREDIT CORPexhibit_12-1.htm
EX-32.2 - EXHIBIT 32.2 - 906 CERTIFICATION - TOYOTA MOTOR CREDIT CORPexhibit_32-2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
 
OR
 
[ ]  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
(State or other jurisdiction of
incorporation or organization)
95-3775816
(I.R.S. Employer
Identification No.)
   
19001 S. Western Avenue
Torrance, California
(Address of principal executive offices)
90501
(Zip Code)

Registrant's telephone number, including area code:       (310) 468-1310
 
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   x   No                                  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes                 No                        

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

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

As of October 31, 2010, 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 Americas Corporation.

Reduced Disclosure Format

The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.

 
 
 
TOYOTA MOTOR CREDIT CORPORATION
FORM 10-Q
For the quarter ended September 30, 2010
 
INDEX
    
PART I
…………………………………………………………………………………………………3
  
   Item 1
Financial Statements……………………………………………………………………………………………
  3
 
Consolidated Statement of Income……………………….……………………………………………………
  3
 
Consolidated Balance Sheet……………………………………………………………………………………
  4
 
Consolidated Statement of Shareholder’s Equity………..……………………………………………………
  5
 
Consolidated Statement of Cash Flows………………….…………………………………………………..…
  6
 
Notes to Consolidated Financial Statements……………………….……………………………………..……
  7
   Item 2
Management’s Discussion and Analysis…………………………………………………………………...….
49
   Item 3
Quantitative and Qualitative Disclosures About Market Risk………………………………………....………
78
   Item 4
Controls and Procedures......................................................................................................................................
78
PART II
…………………………………………………………………………………………………79
  
   Item 1
Legal Proceedings………………………………………………………………………………………………
79
   Item 1A
Risk Factors…………………………………………………………………..…………………………………
80
   Item 2
Unregistered Sales of Equity Securities and Use of Proceeds……………………………..……………………
81
   Item 3
Defaults Upon Senior Securities…………………………………………………………….…………………
81
   Item 4
(Removed and Reserved)………………………………………………………………………………………
81
   Item 5
Other Information………………………………………………………………………………………………
81
   Item 6
Exhibits…………………………………………………………………………………………………………
81
   Signatures
………………………………………………………………………………………………………………….
82
   Exhibit Index
………………………………………………………………………………………………………………….
83
 
 
 
- 2 -
 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
 (Unaudited)

 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
  
2009
2010
  
2009
Financing revenues:
            
Operating lease
$1,216
  
$1,175
$2,416
  
$2,371
Retail
720
  
790
1,450
  
1,571
Dealer
96
  
78
190
  
171
Total financing revenues
2,032
  
2,043
4,056
  
4,113
             
Depreciation on operating leases
824
  
836
1,635
  
1,729
Interest expense
593
  
618
1,084
  
1,117
Net financing revenues
615
  
589
1,337
  
1,267
             
Insurance earned premiums and contract revenues
132
  
114
255
  
224
Investment and other income, net
54
  
47
89
  
105
Net financing revenues and other revenues
801
  
750
1,681
  
1,596
             
Expenses:
            
Provision for credit losses
(14)
  
11
(303)
  
339
Operating and administrative
323
  
174
507
  
351
Insurance losses and loss adjustment expenses
58
  
56
116
  
113
Total expenses
367
  
241
320
  
803
             
Income before income taxes
434
  
509
1,361
  
793
Provision for income taxes
165
  
199
522
  
307
             
Net income
$269
  
$310
$839
  
$486
             
See Accompanying Notes to Consolidated Financial Statements.
        



 
- 3 -
 

TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
 (Unaudited)

(Dollars in millions)
September 30, 2010
  
March 31, 2010
ASSETS
      
       
Cash and cash equivalents
$4,501
  
$4,343
Restricted cash
475
  
173
Investments in marketable securities
3,012
  
2,521
Finance receivables, net
56,862
  
55,087
Investments in operating leases, net
18,670
  
17,151
Other assets
2,428
  
1,918
Total assets
85,948
  
$81,193
       
LIABILITIES AND SHAREHOLDER'S EQUITY
      
       
Debt
$72,724
  
$69,179
Deferred income taxes
3,851
  
3,290
Other liabilities
3,487
  
3,451
Total liabilities
80,062
  
75,920
       
Commitments and contingencies (See Note 13)
      
       
Shareholder's equity:
      
Capital stock, no par value and $10,000 par value (100,000 shares
      
authorized; 91,500 issued and outstanding) at September 30, and March 31, 2010, respectively
915
  
915
Additional paid-in-capital
1
  
1
Accumulated other comprehensive income
144
  
104
Retained earnings
4,826
  
4,253
Total shareholder's equity
5,886
  
5,273
Total liabilities and shareholder's equity
$85,948
  
$81,193

The following table presents the assets of consolidated variable interest entities that can only be used to settle obligations of the consolidated variable interest entities and the liabilities of those entities for which creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and liabilities are included in the consolidated balance sheet above.

(Dollars in millions)
September 30, 2010
ASSETS
  
Finance receivables, net
$8,752
Total assets
$8,752
   
LIABILITIES
  
Debt
$7,495
Other liabilities
2
Total liabilities
$7,497

See Accompanying Notes to Consolidated Financial Statements.

 
- 4 -
 

 TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY
 (Unaudited)

(Dollars in millions)
Capital stock
  
Additional
paid-in capital
  
Accumulated other comprehensive (loss) income
  
Retained earnings
  
Total
                   
BALANCE AT MARCH 31, 2009
$915
  
$1
  
($63)
  
$3,240
  
$4,093
                   
Net income for the six months ended
     September 30, 2009
-
  
-
  
-
  
486
  
486
Net unrealized gain on available-for-sale
marketable securities, net of tax provision of $85 million
-
  
-
  
139
  
-
  
139
Reclassification adjustment for net loss included in net income, net of tax benefit of $4 million
-
  
-
  
7
  
-
  
7
Total comprehensive income
-
  
-
  
146
  
486
  
632
                   
BALANCE AT SEPTEMBER 30, 2009
$915
  
$1
  
$83
  
$3,726
  
$4,725
                   
BALANCE AT MARCH 31, 2010
$915
  
$1
  
$104
  
$4,253
  
$5,273
                   
Net income for the six months ended
September 30, 2010
-
  
-
  
-
  
839
  
839
Net unrealized gain on available-for-sale marketable securities, net of tax provision of $20 million
-
  
-
  
35
  
-
  
35
Reclassification adjustment for net loss included in net income, net of tax benefit of $3 million
-
  
-
  
5
  
-
  
5
Total comprehensive income
-
  
-
  
40
  
839
  
879
 Dividends
-
  
-
  
-
  
(266)
  
(266)
BALANCE AT SEPTEMBER 30, 2010
$915
  
$1
  
$144
  
$4,826
  
$5,886
                   
See Accompanying Notes to Consolidated Financial Statements.
    

 
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TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
 (Unaudited)
 
Six months ended September 30,
  
(Dollars in millions)
2010
  
2009
Cash flows from operating activities:
      
Net income
$839
  
$486
    Adjustments to reconcile net income to net cash provided by operating activities:
      
Depreciation and amortization
1,691
  
1,786
Recognition of deferred income
(613)
  
(495)
Provision for credit losses
(303)
  
339
Amortization of deferred origination costs
138
  
166
Fair value adjustments and amortization of premiums and
     discounts associated with debt, net
1,279
  
4,050
Net gain from sale of marketable securities
(31)
  
(1)
Other-than-temporary impairment on marketable securities
-
  
6
Net change in:
      
Restricted cash
(302)
  
-
Derivative assets
(335)
  
(698)
Other assets
8
  
(157)
Deferred income taxes
537
  
454
Derivative liabilities
(226)
  
(957)
Other liabilities
239
  
401
Net cash provided by operating activities
2,921
  
5,380
Cash flows from investing activities:
      
Purchase of investments in marketable securities
(2,109)
  
(324)
Disposition of investments in marketable securities
1,712
  
387
Acquisition of finance receivables
(11,861)
  
(10,987)
Collection of finance receivables
10,823
  
10,087
Net change in dealer receivables (excluding term loans)
(278)
  
2,617
Acquisition of investments in operating leases
(5,736)
  
(3,020)
Disposals of investments in operating leases
2,850
  
2,578
Advances to affiliates
(1,315)
  
(1,663)
Repayments from affiliates
1,130
  
2,262
Other, net
(14)
  
(9)
Net cash (used in) provided by investing activities
(4,798)
  
1,928
Cash flows from financing activities:
      
Proceeds from issuance of debt
11,912
  
3,728
Payments on debt
(6,718)
  
(9,780)
Net change in commercial paper
(2,918)
  
(6,607)
Advances from affiliates (Note 15)
25
  
2,001
Repayments to affiliates (Note 15)
-
  
(19)
Dividends paid to TFSA
(266)
  
-
Net cash provided by (used in) financing activities
2,035
  
(10,677)
Net increase (decrease) in cash and cash equivalents
158
  
(3,369)
Cash and cash equivalents at the beginning of the period
4,343
  
6,298
Cash and cash equivalents at the end of the period
$4,501
  
$2,929
Supplemental disclosures:
      
Interest paid
$919
  
$1,140
Income taxes (paid) received, net
($53)
  
$4

See Accompanying Notes to Consolidated Financial Statements.

 
- 6 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data

Basis of Presentation

The information furnished in these unaudited interim financial statements for the three and six months ended September 30, 2010 and 2009 has been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).  In the opinion of management, the unaudited financial information reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented.  The results of operations for the three and six months ended September 30, 2010 do not necessarily indicate the results that may be expected for the full fiscal year.

These financial statements should be read in conjunction with the Consolidated Financial Statements, significant accounting policies, and other notes to the Consolidated Financial Statements included in Toyota Motor Credit Corporation’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2010 (“fiscal 2010”), which was filed with the Securities and Exchange Commission (“SEC”) on June 10, 2010.  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.

Summary of Significant Accounting Policies

Investments in Marketable Securities

Investments in marketable securities consist of debt and equity securities.  Debt and equity securities designated as available-for-sale (“AFS”) are carried at fair value using quoted market prices where available with unrealized gains or losses included in Accumulated Other Comprehensive Income (“AOCI”), net of applicable taxes.  We use the specific identification method to determine realized gains and losses related to our investment portfolio.  Realized investment gains and losses are reflected in Investment and Other Income, net in the Consolidated Statement of Income.

Other-Than-Temporary Impairment

We periodically evaluate unrealized losses on our AFS debt securities portfolio for other-than-temporary impairment (“OTTI”).  If we have no intent to sell and we believe that it is more likely than not we will not be required to sell these securities prior to recovery, the credit loss component of the unrealized losses is recognized in Investment and Other Income, net in the Consolidated Statement of Income, while the remainder of the loss is recognized in AOCI. The credit loss component recognized in Investment and Other Income, net in the Consolidated Statement of Income is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected using a credit cash flow analysis for debt securities.

We perform periodic reviews of our AFS equity securities to determine whether unrealized losses are temporary in nature.  If losses are considered to be other-than-temporary, the cost basis of the security is written down to fair value and the write down is reflected in Investment and Other Income, net in the Consolidated Statement of Income.

 
- 7 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data (Continued)

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

New Accounting Guidance

In October 2010, the Financial Accounting Standards Board (“FASB”) issued accounting guidance on the capitalization of costs relating to the acquisition or renewal of insurance contracts. This accounting guidance is effective for us on April 1, 2012 and is not expected to have a material impact on our consolidated financial condition or results of operations.

In July 2010, the FASB issued accounting guidance in which entities must provide additional disclosures regarding the nature of credit risk inherent in their portfolio of financing receivables, how credit risk is analyzed and assessed in arriving at the allowance for credit losses, and the reasons for changes in the allowance for credit losses. This accounting guidance is effective for us on December 31, 2010 and will not have a material impact on our consolidated financial condition or results of operations.

In October 2009, the FASB issued accounting guidance that sets forth the requirements that must be met for a company to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. This accounting guidance is effective for us on April 1, 2011 and is not expected to have a material impact on our consolidated financial condition or results of operations.

In October 2009, the FASB issued accounting guidance that changes the accounting model for revenue arrangements that include both tangible products and software elements that function together to deliver the product’s essential functionality. The accounting guidance more closely reflects the underlying economics of these transactions. This accounting guidance is effective for us on April 1, 2011 and is not expected to have a material impact on our consolidated financial condition or results of operations.

Recently Adopted Accounting Guidance

On April 1, 2010, we adopted new FASB accounting guidance for transfers of financial assets.  The new accounting guidance removes the concept of a qualifying special purpose entity and revises the accounting criteria for transfer of financial assets to be considered a sale.  The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

On April 1, 2010, we adopted new FASB accounting guidance on consolidation of variable interest entities.  The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

On March 31, 2010, we adopted new FASB accounting guidance requiring disclosure of gross transfers in and out of Level 3 as well as transfers between Levels 1 and 2 of the fair value hierarchy.


 
- 8 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements

Fair Value Measurement – Definition and Hierarchy

The accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  This guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs by requiring that observable inputs be used when available.  Fair value should be based on assumptions that market participants would use, including a consideration of nonperformance risk.  The standard describes three levels of inputs that may be used to measure fair value:

Level 1:  Quoted (unadjusted) prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.  Examples of assets currently utilizing Level 1 inputs are most U.S. government securities, actively exchange-traded equity mutual funds, and money market funds.

Level 2:  Quoted prices in active markets for similar assets and liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.  Examples of assets and liabilities currently utilizing Level 2 inputs are certificates of deposit, commercial paper, U.S. government agency securities, corporate debt securities, mortgage-backed and asset-backed securities, private placement investments in fixed income mutual funds, and most over-the-counter derivatives.

Level 3:  Unobservable inputs that are supported by little or no market activity and may require significant judgment in order to determine the fair value of the assets and liabilities.  Examples of assets and liabilities currently utilizing Level 3 inputs are structured over-the-counter derivatives with limited activity or less transparency around inputs to the valuation.

The use of observable and unobservable inputs is reflected in the fair value hierarchy assessment disclosed in the tables within this section.  The availability of observable inputs can vary based upon the financial instrument and other factors, such as instrument type, market liquidity and other specific characteristics particular to the financial instrument.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires additional judgment by management. The degree of management’s judgment can result in financial instruments being classified as or transferred to the Level 3 category.

We review the appropriateness of fair value measurements including validation processes, key model inputs, and the reconciliation of period-over-period fluctuations based on changes in key market inputs.  All fair value measurements are subject to our analysis.  Review and approval by management is required as part of the validation process.


 
- 9 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Fair Value Methods

Fair value is based on quoted market prices, if available.  If listed prices or quotes are not available, fair value is based upon internally developed models that primarily use as inputs market-based or independently sourced market parameters.  We use prices and inputs that are current as of the measurement date, including during periods of market dislocation.  In periods of market dislocation, the availability of prices and inputs may be reduced for certain financial instruments.  This condition could result in a financial instrument being reclassified from Level 1 to Level 2 or from Level 2 to Level 3.

Valuation Adjustments

Counterparty Credit Valuation Adjustments – Adjustments are required when the market price (or parameter) is not indicative of the credit quality of the counterparty.

Non-Performance Credit Valuation Adjustments – Adjustments reflect our own non-performance risk when our liabilities are measured at fair value.

Liquidity Valuation Adjustments – Adjustments are necessary when we are unable to observe prices for a financial instrument due to market illiquidity.

Valuation Methods

For financial instruments measured at fair value, the following section describes the valuation methodologies, key inputs and significant assumptions.

Cash Equivalents

Cash equivalents, consisting primarily of money market instruments, represent highly liquid investments with maturities of three months or less at purchase.  Generally, quoted market prices are used to determine the fair value of money market instruments.

Marketable Securities

The marketable securities portfolio consists of debt and equity securities.  We use quoted prices of identical securities for all U.S. government bonds, exchange-traded equity mutual funds and all other securities if available.

If quoted market prices are not available for specific securities, then we may estimate the value of such instruments using observed transaction prices, independent pricing services, and either internally or externally developed pricing models or discounted cash flows.  Where there is limited market activity or less transparency around inputs to the valuation model for certain collateralized mortgage and debt obligations, asset-backed securities, and high-yield debt securities, the determination of fair value may require benchmarking yields to that of similar instruments or analyzing default rates.  In addition, asset-backed securities may be valued based on external prices or market spreads, using current market assumptions on prepayment speeds and default rates.  For certain other asset-backed securities where the external price is not observable, we may incorporate the deal collateral performance and tranche level attributes into our valuation analysis.

 
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

We hold investments in exchange-traded equity mutual funds and private placement fixed income mutual funds. Where the funds produce a daily net asset value that is quoted in an active market, that value is used to value the fund investment and is classified in Level 1 of the fair value hierarchy. Where the funds produce a daily net asset value that is based on a combination of quoted prices from identical and similar securities and/or observable inputs, the funds are classified within Level 2.

Derivatives

As part of our risk management strategy, we enter into derivative transactions to mitigate our interest rate and foreign currency exposures.  These derivative transactions are considered over-the-counter for valuation purposes.  All of our derivative counterparties to which we had credit exposure at September 30, 2010 were assigned investment grade ratings by a nationally recognized statistical rating organization (“NRSRO”).

We estimate the fair value of our derivatives using industry standard valuation models that require observable market inputs, including market prices, yield curves, credit curves, interest rates, foreign exchange rates, volatilities and the contractual terms of the derivative instruments.  For derivatives that trade in liquid markets, such as interest rate swaps, model inputs can generally be verified and do not require significant management judgment.

Certain other derivative transactions trade in less liquid markets with limited pricing information.  For such derivatives, key inputs to the valuation process include quotes from counterparties, and other market data used to corroborate and adjust values where appropriate.  Other market data includes values obtained from a market participant that serves as a third party pricing agent.  In addition, pricing is validated internally using valuation models to assess the reasonableness of changes in factors such as market prices, yield curves, credit curves, interest rates, foreign exchange rates and volatilities.

Our derivative fair value measurements consider assumptions about counterparty credit risk and our own non-performance risk.  Generally, we assume that a valuation that uses the London Interbank Offered Rate (“LIBOR”) curve to convert future values to present value is appropriate for derivative assets and liabilities.  We consider counterparty credit risk and our own non-performance risk through credit valuation adjustments.  In situations in which our net position with a derivative counterparty is an asset, the counterparty credit valuation adjustment calculation uses the credit default probabilities of our derivative counterparties over a particular time period.  In situations in which our net position with a derivative counterparty is a liability, we use our own credit default probability to calculate the required non-performance credit valuation adjustment.  We use a relative fair value approach to allocate the credit valuation adjustments to our derivatives portfolio.

As of September 30, 2010, we reduced our derivative liabilities by $1 million to account for our own non-performance risk.  Derivative assets were reduced $17 million to account for counterparty credit risk.  As of March 31, 2010, we reduced our derivative liabilities by $4 million to account for our own non-performance risk.  Derivative assets were reduced $10 million to account for counterparty credit risk.


 
- 11 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Finance Receivables

Our finance receivables are not carried at fair value on a recurring basis on the balance sheet.  In certain instances, for finance receivables for which there is evidence of impairment we may use an observable market price or the fair value of collateral if the loan is collateral dependent.  The fair values of impaired finance receivables based on the collateral value or market prices where available are reported at fair value on a nonrecurring basis.  We may consider additional adjustments to reflect current market conditions in estimating fair value.



 
- 12 -
 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The following table summarizes our financial assets and liabilities that were accounted for at fair value as of September 30, 2010, by level within the fair value hierarchy:
 
Fair value measurements on a recurring basis
(Dollars in millions)
     Level 1
     Level 2
     Level 3
    Counterparty
    netting &
    collateral 1
    Fair
    value
Cash equivalents
$4,334
$-
$-
$-
$4,334
Available-for-sale securities:
          
Debt instruments:
          
U.S. government and agency obligations
79
21
-
-
100
Municipal debt securities
-
16
-
-
16
Certificates of deposit and commercial paper
-
519
-
-
519
Foreign government debt securities
-
7
-
-
7
Corporate debt securities
-
108
-
-
108
Mortgage-backed securities:
          
U.S. government agency
-
75
-
-
75
Non-agency residential
-
8
-
-
8
Non-agency commercial
-
13
-
-
13
Asset-backed securities
-
144
-
-
144
Equity instruments:
          
Fixed income mutual funds
          
Short-term sector fund
-
38
-
-
38
U.S. government sector fund
-
445
-
-
445
Municipal sector fund
-
45
-
-
45
Investment grade corporate sector fund
-
315
-
-
315
High-yield sector fund
-
23
-
-
23
Real return sector fund
-
76
-
-
76
Mortgage sector fund
-
493
-
-
493
Asset-backed securities sector fund
-
38
-
-
38
Emerging market sector fund
-
57
-
-
57
International sector fund
-
138
-
-
138
Equity mutual fund – S&P 500 index
354
-
-
-
354
Available-for-sale securities total
433
2,579
-
-
3,012
Derivative assets: 2
          
Foreign currency swaps
-
3,896
133
-
4,029
Interest rate swaps
-
430
21
-
451
Counterparty netting and collateral1
-
-
-
(3,561)
(3,561)
  Derivative assets total
-
4,326
154
(3,561)
919
  Embedded derivative assets
-
-
1
-
1
Total assets 3
4,767
6,905
155
(3,561)
8,266
   Derivative liabilities: 2
          
Foreign currency swaps
-
(356)
(8)
-
(364)
Interest rate caps
-
(1)
-
-
(1)
Interest rate swaps
-
(1,519)
(1)
-
(1,520)
Counterparty netting and collateral1
-
-
-
1,594
1,594
   Derivative liabilities total
-
(1,876)
(9)
1,594
(291)
   Embedded derivative liabilities
-
-
(50)
-
(50)
Total liabilities 3
-
(1,876)
(59)
1,594
(341)
Total net assets
$4,767
$5,029
$96
($1,967)
$7,925
1   We meet the accounting guidance for setoff criteria and elected to net derivative assets and derivative liabilities and the related cash collateral received and paid when legally
    enforceable master netting agreements exist.
2   Includes derivative asset counterparty credit valuation adjustment of $17 million and derivative liability non-performance credit valuation adjustment of $1 million.
3   Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
- 13 -
 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The following table summarizes our financial assets and liabilities that were accounted for at fair value as of March 31, 2010, by level within the fair value hierarchy:
 
Fair value measurements on a recurring basis1
(Dollars in millions)
     Level 1
     Level 2
     Level 3
    Counterparty
    netting &
    collateral 2
    Fair
    value
Cash equivalents
$4,256
$-
$-
$-
$4,256
Available-for-sale securities:
          
Debt instruments:
          
U.S. government and agency obligations
25
24
-
-
49
Municipal debt securities
-
6
-
-
6
Certificates of deposit and commercial paper
  
50
    
50
Foreign government debt securities
-
22
-
-
22
Corporate debt securities
-
93
-
-
93
Mortgage-backed securities:
          
U.S. government agency
-
120
-
-
120
Non-agency residential
-
8
-
-
8
Non-agency commercial
-
23
-
-
23
Asset-backed securities
-
641
3
-
644
Equity instruments:
          
Fixed income mutual funds
          
Short-term sector fund
-
32
-
-
32
U.S. government sector fund
-
250
-
-
250
Municipal sector fund
-
39
-
-
39
Investment grade corporate sector fund
-
260
-
-
260
High-yield sector fund
-
22
-
-
22
Mortgage sector fund
-
360
-
-
360
Asset-backed securities sector fund
-
30
-
-
30
Emerging market sector fund
-
37
-
-
37
International sector fund
-
117
-
-
117
Equity mutual fund – S&P 500 index
359
-
-
-
359
Available-for-sale securities total
384
2,134
3
-
2,521
Derivative assets: 3
          
Foreign currency swaps
-
2,454
158
-
2,612
Interest rate swaps
-
288
39
-
327
Counterparty netting and collateral2
-
-
-
(2,358)
(2,358)
  Derivative assets total
-
2,742
197
(2,358)
581
  Embedded derivative assets
-
-
4
-
4
Total assets 4
4,640
4,876
204
(2,358)
7,362
   Derivative liabilities: 3
          
Foreign currency swaps
-
(370)
(89)
-
(459)
Interest rate caps
-
(1)
-
-
(1)
Interest rate swaps
-
(1,180)
(23)
-
(1,203)
Counterparty netting and collateral2
-
-
-
1,130
1,130
   Derivative liabilities total
-
(1,551)
(112)
1,130
(533)
   Embedded derivative liabilities
-
-
(34)
-
(34)
Total liabilities 4
-
(1,551)
(146)
1,130
(567)
Total net assets
$4,640
$3,325
$58
($1,228)
$6,795
1   Prior period amounts have been reclassified to conform to the current period presentation.
2    We meet the accounting guidance for setoff criteria and elected to net derivative assets and derivative liabilities and the related cash collateral received and paid when legally
    enforceable master netting agreements exist.
3   Includes derivative asset counterparty credit valuation adjustment of $10 million and derivative liability non-performance credit valuation adjustment of $4 million.
4    Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
- 14 -
 


 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The determination in classifying a financial instrument within Level 3 of the fair value hierarchy is based upon the significance of the unobservable factors to the overall fair value measurement.  There were no transfers between Level 1 and Level 2 securities during the three and six months ended September 30, 2010 and 2009.  The following tables summarize the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended September 30, 2010 and 2009:

Three Months Ended September 30, 2010

 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Available-for-sale securities
  
Derivatives
Total net assets (liabilities)
(Dollars in millions)
Asset-backed securities
Available-for-sale securities total
  
Interest rate swaps
Foreign currency swaps
Embedded derivative
liabilities, net
Total Derivatives
  
Fair value, July 1, 2010
$-
$-
  
$55
$66
($32)
$89
$89
Total gains/(losses)
                
Included in earnings
-
-
  
20
272
(17)
275
275
Included in other comprehensive income
-
-
  
-
-
-
-
-
Purchases, issuances, sales, and settlements
                
Purchases
-
-
  
-
-
-
-
-
Issuances
-
-
  
-
-
-
-
-
Sales
-
-
  
-
-
-
-
-
Settlements
-
-
  
(20)
(10)
-
(30)
(30)
Transfers in to Level 3 1
-
-
  
-
-
-
-
-
Transfers out of Level 3 1
-
-
  
(35)
(203)
-
(238)
(238)
Fair value, September 30, 2010
$-
$-
  
$20
$125
($49)
$96
$96
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at the reporting date
      
$11
$95
($18)
$88
$88

1 Transfers in and transfers out are recognized at the end of the reporting period.





 
- 15 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Three Months Ended September 30, 2009

 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Available-for-sale securities
  
Derivatives
Total net assets (liabilities)
 
 
 
 
 
(Dollars in millions)
Non-agency residential mortgage-backed securities
Asset-backed securities
Available-for-sale securities total
  
Interest rate swaps
Foreign currency swaps
Embedded derivative
liabilities, net
Total Derivatives
  
Fair value, July 1, 2009
$1
$1
$2
  
($28)
($38)
($5)
($71)
($69)
Total gains/(losses)
                  
Included in earnings
-
-
-
  
76
158
(24)
210
210
Included in other comprehensive income
-
-
-
  
-
-
-
-
-
Purchases, issuances, sales, and settlements
                  
Purchases
1
-
1
  
-
-
-
-
1
Issuances
-
-
-
  
-
-
-
-
-
Sales
-
-
-
  
-
-
-
-
-
Settlements
-
-
-
  
(24)
-
-
(24)
(24)
Transfers in to Level 3 1
-
-
-
  
-
-
-
-
-
Transfers out of Level 3 1
(1)
-
(1)
  
-
-
-
-
(1)
Fair value, September 30, 2009
$1
$1
$2
  
$24
$120
($29)
$115
$117
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at the reporting date
        
$70
$152
($22)
$200
$200

1 Transfers in and transfers out are recognized at the end of the reporting period.


 
- 16 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Six Months Ended September 30, 2010

 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Available-for-sale securities
  
Derivatives
Total net assets (liabilities)
 
 
 
 
 
(Dollars in millions)
Asset-backed securities
Available-for-sale securities total
  
Interest rate swaps
Foreign currency swaps
Embedded derivative
liabilities, net
Total Derivatives
  
Fair value, April 1, 2010
$3
$3
  
$16
$69
($30)
$55
$58
Total gains/(losses)
                
Included in earnings
-
-
  
72
303
(19)
356
356
Included in other comprehensive income
-
-
  
-
-
-
-
-
Purchases, issuances, sales, and settlements
                
Purchases
-
-
  
-
-
-
-
-
Issuances
-
-
  
-
-
-
-
-
Sales
-
-
  
-
-
-
-
-
Settlements
-
-
  
(33)
(44)
-
(77)
(77)
Transfers in to Level 3 1
-
-
  
-
-
-
-
-
Transfers out of Level 3 1
(3)
(3)
  
(35)
(203)
-
(238)
(241)
Fair value, September 30, 2010
$-
$-
  
$20
$125
($49)
$96
$96
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at the reporting date
      
 
 
 
 
$22
 
 
 
 
$151
 
 
 
 
($19)
 
 
 
 
$154
 
 
 
 
$154

1 Transfers in and transfers out are recognized at the end of the reporting period.


 
- 17 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Six Months Ended September 30, 2009

 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Available-for-sale securities
  
Derivatives
Total net assets (liabilities)
 
 
 
 
 
(Dollars in millions)
Non-agency residential mortgage-backed securities
Asset-backed securities
Available-for-sale securities total
  
Interest rate swaps
Foreign currency swaps
Embedded derivative
liabilities, net
Total Derivatives
  
Fair value, April 1, 2009
$-
$-
$-
  
$88
($145)
($1)
($58)
($58)
Total gains/(losses)
                  
Included in earnings
-
-
-
  
(11)
286
(28)
247
247
Included in other comprehensive income
-
-
-
  
-
-
-
-
-
Purchases, issuances, sales, and settlements
                  
Purchases
1
-
1
  
-
-
-
-
1
Issuances
-
-
-
  
-
-
-
-
-
Sales
-
-
-
  
-
-
-
-
-
Settlements
-
-
-
  
(43)
(21)
-
(64)
(64)
Transfers in to Level 3 1
-
1
1
  
-
-
-
-
1
Transfers out of Level 3 1
-
-
-
  
(10)
-
-
(10)
(10)
Fair value, September 30, 2009
$1
$1
$2
  
$24
$120
($29)
$115
$117
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at the reporting date
        
$5
$292
($29)
$268
$268

1 Transfers in and transfers out are recognized at the end of the reporting period.


Significant Changes to Level 3 Assets During the Period

Level 3 assets net, reported at fair value on a recurring basis increased $7 million and $38 million for the three and six months ended September 30, 2010, respectively.  The increase is primarily attributable to an increase in derivative assets, specifically foreign currency derivatives, due to the weakening of the U.S. dollar during the first half of the fiscal year ending March 31, 2011 (“fiscal 2011”).  Certain derivatives previously categorized as Level 3 in prior periods were valued using observable inputs and were transferred into Level 2 during the quarter ended September 30, 2010.




 
- 18 -
 


TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Assets Measured at Fair Value on a Nonrecurring Basis

Certain assets are not measured at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances, for example, when there is evidence of impairment.  For these assets, we disclose the fair value on a nonrecurring basis and any changes in fair value during the reporting period.

The following tables present the financial instruments carried on the Consolidated Balance Sheet by caption and by level within the fair value hierarchy for which a fair value measurement on a nonrecurring basis has been recorded during the reporting period:

Fair value measurements on a nonrecurring basis as of September 30, 2010:

(Dollars in millions)
 Level 1
 Level 2
Level 3
Total fair value
Finance receivables, net
$-
$-
$194
$194
Total assets at fair value on a nonrecurring basis
$-
$-
$194
$194


Fair value measurements on a nonrecurring basis as of March 31, 2010:

(Dollars in millions)
 Level 1
 Level 2
Level 3
Total fair value
Finance receivables, net
$-
$-
$143
$143
Total assets at fair value on a nonrecurring basis
$-
$-
$143
$143


Nonrecurring Fair Value Changes

The following table presents the total change in fair value of financial instruments measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the Consolidated Statement of Income:
 
 
 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
2009
2010
2009
Finance receivables, net
$7
($26)
$22
($17)
Total nonrecurring fair value gain (loss)
$7
($26)
$22
($17)


 
- 19 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 3 - Fair Value of Financial Instruments

The accounting guidance for financial instruments requires disclosures of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair value.  Financial instruments that are within the scope of this accounting guidance are included in the table below.

The following is a description of financial instruments for which the ending balances as of September 30, 2010 and March 31, 2010 are not carried at fair value in their entirety on the Consolidated Balance Sheet.

Finance Receivables

Fair value of finance receivables is generally determined by valuing expected discounted cash flows using a securitization model.  We estimate cash flows expected to be collected using contractual principal and interest cash flows adjusted for specific factors, such as prepayments, default rates, loss severity, credit scores, and collateral type.  The securitization model utilizes quoted secondary market rates if available, or estimated market rates that incorporate management’s best estimate of investor assumptions about the portfolio.

Commercial Paper

The carrying value of commercial paper issued is assumed to approximate fair value due to its short duration and generally negligible credit risk.  We validate this assumption using quoted market prices where available.

Unsecured Notes and Loans Payable

We use quoted market prices for debt when available.  When quoted market prices are not available, fair value is estimated based on current market rates and credit spreads for debt with similar maturities.


 
- 20 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 3 - Fair Value of Financial Instruments (Continued)

Secured Notes and Loans Payable

Fair value is estimated based on current market rates and credit spreads for debt with similar maturities.  We also use internal assumptions, including prepayment speeds and expected credit losses on the underlying securitized assets, to estimate the timing of cash flows to be paid on these instruments.

The carrying value and estimated fair value of certain financial instruments at September 30, 2010 and March 31, 2010 were as follows:



 
September 30, 2010
March 31, 2010
 
(Dollars in millions)
  Carrying value
     Fair value
  Carrying value
Fair value
Financial assets
        
Finance receivables, net1
$56,588
$58,400
$54,775
$56,568
         
Financial liabilities
        
Commercial paper
$16,553
$16,553
$19,466
$19,466
Unsecured notes and loans payable2
$48,676
$49,478
$46,713
$47,189
Secured notes and loans payable
$7,495
$7,513
$3,000
$3,006

1  Finance receivables are presented net of allowance for credit losses.  Amounts exclude related party transactions and direct finance leases.
2  Carrying value of unsecured notes and loans payable represents the sum of unsecured notes and loans payable and carrying value adjustment.  Also included in unsecured notes
    and loans payable is $4.2 billion and $4.1 billion of loans payable to affiliates at September 30, 2010 and March 31, 2010, respectively, that are carried at amounts that
    approximate fair value.


 
- 21 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities

We classify all of our investments in marketable securities as available-for-sale.  The amortized cost and estimated fair value of investments in marketable securities and related unrealized gains and losses were as follows:

 
September 30, 2010
(Dollars in millions)
Amortized
cost
  
Unrealized
gains
  
Unrealized
losses
  
Fair
value
Available-for-sale securities:
              
Debt instruments:
              
U.S. government and agency obligations
$96
  
$4
  
$-
  
$100
Municipal debt securities
15
  
1
  
-
  
16
Certificates of deposit and commercial paper
519
  
-
  
-
  
519
Foreign government debt securities
7
  
-
  
-
  
7
Corporate debt securities
100
  
8
  
-
  
108
Mortgage-backed securities:
              
U.S. government agency
72
  
3
  
-
  
75
Non-agency residential
7
  
1
  
-
  
8
Non-agency commercial
12
  
1
  
-
  
13
Asset-backed securities
143
  
1
  
-
  
144
Equity instruments:
              
Fixed income mutual funds:
              
Short-term sector fund
37
  
1
  
-
  
38
U.S. government sector fund
424
  
21
  
-
  
445
Municipal sector fund
39
  
6
  
-
  
45
Investment grade corporate sector fund
273
  
42
  
-
  
315
High-yield sector fund
16
  
7
  
-
  
23
Real return sector fund
75
  
1
  
-
  
76
Mortgage sector fund
466
  
27
  
-
  
493
Asset-backed securities sector fund
34
  
4
  
-
  
38
Emerging market sector fund
54
  
3
  
-
  
57
International sector fund
137
  
2
  
(1)
  
138
Equity mutual fund – S&P 500 Index
256
  
98
  
-
  
354
Total investments in marketable securities
$2,782
  
$231
  
($1)
  
$3,012




 
- 22 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities (Continued)

 
March 31, 20101
(Dollars in millions)
Amortized
cost
  
Unrealized
gains
  
Unrealized
losses
  
Fair
value
Available-for-sale securities:
              
Debt instruments:
              
U.S. government and agency obligations
$49
  
$-
  
$-
  
$49
Municipal debt securities
6
  
-
  
-
  
6
Certificates of deposit and commercial paper
50
  
-
  
-
  
50
Foreign government debt securities
22
  
-
  
-
  
22
Corporate debt securities
89
  
4
  
-
  
93
Mortgage-backed securities:
              
U.S. government agency
116
  
4
  
-
  
120
Non-agency residential
7
  
1
  
-
  
8
Non-agency commercial
20
  
3
  
-
  
23
Asset-backed securities
635
  
9
  
-
  
644
Equity instruments:
              
Fixed income mutual funds:
              
Short-term sector fund
32
  
-
  
-
  
32
U.S. government sector fund
271
  
-
  
(21)
  
250
Municipal sector fund
35
  
4
  
-
  
39
Investment grade corporate sector fund
235
  
25
  
-
  
260
High-yield sector fund
15
  
7
  
-
  
22
Mortgage sector fund
345
  
15
  
-
  
360
Asset-backed securities sector fund
29
  
1
  
-
  
30
Emerging market sector fund
33
  
4
  
-
  
37
International sector fund
111
  
6
  
-
  
117
Equity mutual fund – S&P 500 Index
252
  
107
  
-
  
359
Total investments in marketable securities
$2,352
  
$190
  
($21)
  
$2,521
1 Prior period amounts have been reclassified to conform to the current period presentation.

Total fair value of certificates of deposit and commercial paper at September 30, and March 31, 2010 was $519 million and $50 million, respectively.  The balance at March 31, 2010 includes commercial paper issued by an affiliated entity with a fair value of $50 million.

Total fair value of mortgage-backed securities at September 30, and March 31, 2010 was $96 million and $151 million, respectively.  Total fair value of the mortgage sector fund at September 30, and March 31, 2010 was $493 million and $360 million, respectively.  The total fair value related to subprime mortgage-backed securities was $41 million and $37 million at September 30, and March 31, 2010, respectively.

Total fair value of asset-backed securities at September 30, and March 31, 2010 was $144 million and $644 million, respectively.  The majority of our asset-backed securities is secured by automobile related receivables.  The fair value of asset-backed securities with collateral consisting primarily of receivables relating to Toyota vehicles was $126 million and $627 million at September 30, and March 31, 2010, respectively.

The fixed income mutual funds are private placement funds.  The total fair value of private placement fixed income mutual funds was $1.7 billion and $1.1 billion at September 30, and March 31, 2010, respectively.  For each fund, cash redemption limits may apply to each 90 day period.

 
- 23 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities (Continued)

OTTI Recognition and Measurement

As of September 30, 2010, there were no AFS debt or equity securities deemed to be other-than-temporarily impaired, and therefore, all unrealized losses on AFS debt and equity securities were recognized in AOCI.  In addition, there were no other-than-temporary impairment losses for the three months ended September 30, 2010 and September 30, 2009.  The following table presents other-than-temporary impairment losses for the six months ended September 30, 2010 and September 30, 2009:

 
Six months ended September 30,
 
2010
     2009
(Dollars in millions)
Non-agency
residential
mortgage
backed
securities
Asset-backed securities
Total
  
Non-agency
residential
mortgage
backed
securities
Asset-backed securities
Total
Total other-than-temporary impairment losses
$-
$-
$-
  
$4
$2
$6
Less: Portion of loss recognized in other
          comprehensive income (pre-tax)1
-
-
-
  
-
-
-
Net impairment losses recognized in income2
$-
$-
$-
  
$4
$2
$6

1 Represents the non-credit component impact of the other-than-temporary impairment on AFS debt securities.
2 Represents the other-than-temporary impairment on AFS debt and equity securities included in Investment and other income, net in the Consolidated Statement of Income.

Unrealized Losses on Securities

The following tables present the aging of fair value and gross unrealized losses for AFS securities:

 
September 30, 2010
 
Less than 12 months
 
12 months or more
  
Total
(Dollars in millions)
Fair
value
Unrealized losses
  
Fair
value
Unrealized losses
  
Fair
value
Unrealized losses
Available-for-sale securities:
                
Equity instruments:
                
International sector fund
$109
($1)
  
$-
$-
  
$109
($1)
Total investments in marketable securities
$109
($1)
  
$-
$-
  
$109
($1)

 
March 31, 2010
 
Less than 12 months
 
12 months or more
  
Total
(Dollars in millions)
Fair
value
Unrealized losses
  
Fair
value
Unrealized losses
  
Fair
value
Unrealized losses
Available-for-sale securities:
                
Equity instruments:
                
U.S. government sector fund
$-
$-
  
$250
($21)
  
$250
($21)
Total investments in marketable securities
$-
$-
  
$250
($21)
  
$250
($21)


 
- 24 -
 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
Note 4 – Investments in Marketable Securities (Continued)

At September 30, 2010, we did not own any investments that have been in a continuous unrealized loss position for 12 consecutive months or more.  At March 31, 2010, total gross unrealized loss and fair value of investments that had been in a continuous unrealized loss position for 12 consecutive months or more were $21 million and $250 million, respectively.  These predominantly investment grade securities were comprised of private placement fixed income mutual funds. Investments with unrealized losses decreased at September 30, 2010 primarily due to improvements in liquidity and market spreads.

Contractual Maturities and Yields

The contractual maturities of investments in marketable securities at September 30, 2010 are summarized in the following table (dollars in millions).  Prepayments may cause actual maturities to differ from scheduled maturities.
 
 
Fair Value of Available-for-Sale Securities:
Due in 1 Year or Less
  
Due after 1 Year through 5 Years
  
Due after 5 Years through 10 Years
  
Due after 10 Years
  
Total
Amount
  
Yield1
  
Amount
  
Yield1
  
Amount
  
Yield1
  
Amount
  
Yield1
  
Amount
  
Yield1
Debt Instruments:
                                      
U.S. government and agency obligations
$1
  
0.17%
  
$15
  
2.01%
  
$75
  
2.91%
  
$9
  
3.47%
  
$100
  
2.67%
Municipal debt securities
-
  
-
  
-
  
-
  
-
  
-
  
16
  
5.41
  
16
  
5.41
Certificates of deposit and commercial paper
519
  
0.33
  
-
  
-
  
-
  
-
  
-
  
-
  
519
  
0.33
Foreign government debt
   securities
2
  
1.87
  
3
  
2.93
  
-
  
-
  
2
  
1.63
  
7
  
2.64
Corporate debt securities
2
  
2.85
  
56
  
4.43
  
43
  
4.56
  
7
  
5.68
  
108
  
4.53
Mortgage-backed securities:
                                      
U.S. government agency
-
  
-
  
-
  
-
  
3
  
5.59
  
72
  
4.66
  
75
  
4.71
Non-agency residential
-
  
-
  
-
  
-
  
-
  
-
  
8
  
13.68
  
8
  
13.68
Non-agency commercial
-
  
-
  
-
  
-
  
-
  
-
  
13
  
5.18
  
13
  
5.18
Asset-backed securities
-
  
-
  
139
  
2.17
  
1
  
0.93
  
4
  
0.69
  
144
  
2.14
Debt instruments total
524
  
0.82
  
213
  
2.53
  
122
  
3.63
  
131
  
5.05
  
990
  
2.43
                                       
Equity instruments:
                                      
Fixed income mutual funds
                                
1,668
  
4.11
Equity mutual funds
                                
354
  
2.87
Equity instruments total
                                
2,022
  
3.93
                                       
Total Fair Value
$524
  
0.82%
  
$213
  
2.53%
  
$122
  
3.63%
  
$131
  
5.05%
  
$3,012
  
3.65%
 
Total Amortized Cost
$524
      
$206
      
$117
      
$124
      
$2,7822
    

1Yields are calculated based on average outstanding amortized cost of the securities.
2 Includes amortized cost on equity securities that do not have a maturity date.

Securities on Deposit

In accordance with statutory requirements, we had on deposit with state insurance authorities U.S. debt securities with amortized cost and fair value of $6 million at September 30 and March 31, 2010.

 
- 25 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 5 – Finance Receivables, Net

Finance receivables, net consisted of the following:

(Dollars in millions)
September 30, 2010
  
March 31, 2010
Retail receivables
$37,373
  
$42,184
Pledged retail receivables1
8,885
  
3,037
Dealer financing
11,859
  
11,513
 
58,117
  
56,734
Deferred origination costs
671
  
666
Unearned income
(931)
  
(833)
Allowance for credit losses
      
Retail and pledged retail receivables
(854)
  
(1,276)
Dealer financing
(141)
  
(204)
Total allowance for credit losses
(995)
  
(1,480)
Finance receivables, net2
$56,862
  
$55,087

1  Represents finance receivables that have been sold for legal purposes to securitization trusts but continue to be included in our consolidated financial statements.  Cash flows from these 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.
2  Includes direct finance lease receivables, net of $238 million and $265 million at September 30, and March 31, 2010, respectively.

The tables below summarize information about impaired finance receivables:

(Dollars in millions)
September 30, 2010
  
March 31, 2010
Impaired account balances with an allowance
$246
  
$217
Impaired account balances without an allowance
17
  
17
Total impaired account balances
263
  
234
Allowance for credit losses
(69)
  
(91)
Impaired account balances, net
$194
  
$143

Impaired finance receivables primarily consist of dealer financing accounts for which an allowance has been recorded based on either discounted cash flows, market value or the fair value of the underlying collateral.  If a loan is collateral dependent, the repayment of the loan is expected to be provided by the underlying collateral.  The allowance for the impaired dealer financing accounts was recorded based on the fair value of the underlying collateral.  For dealer financing accounts for which the fair value of the underlying collateral was in excess of the outstanding balance, no allowance was provided.

 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
2009
2010
2009
Average balance of accounts during the period that
    were impaired as of September 30
        
Dealer financing
$266
$381
$273
$407
         
Interest income recognized on impaired account
    balances during the period
        
Dealer financing
$2
$2
$4
$4


 
- 26 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 6 – Investments in Operating Leases, Net

Investments in operating leases, net consisted of the following at the dates indicated:

(Dollars in millions)
September 30, 2010
March 31, 2010
Vehicles
$24,678
$23,460
Equipment and other
811
812
 
25,489
24,272
Deferred origination fees
(167)
(123)
Deferred income
(770)
(577)
Accumulated depreciation
(5,688)
(6,196)
Allowance for credit losses
(194)
(225)
Investments in operating leases, net
$18,670
$17,151



 
- 27 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 7 – Allowance for Credit Losses

The following table provides information related to our allowance for credit losses on finance receivables and investments in operating leases:

 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
2009
2010
2009
Allowance for credit losses at beginning of period
$1,316
$2,004
$1,705
$1,864
Provision for credit losses
(14)
11
(303)
339
Charge-offs, net of recoveries1
(113)
(178)
(213)
(366)
Allowance for credit losses at end of period
$1,189
$1,837
$1,189
$1,837


(Dollars in millions)
September 30, 2010   
March 31, 2010
Aggregate balances 60 or more days past due2
    
Finance receivables3
$251   
$247   
Operating leases3
75   
77   
Total
$326   
$324   
 
1 Net of recoveries of $34 million and $73 million for the three and six months ended September 30, 2010, respectively, and $33 million and $66 million for the three and
  six months ended September 30, 2009, respectively.
2  Substantially all retail, direct finance lease, and operating lease receivables do not involve recourse to the dealer in the event of customer default.
3 Includes accounts in bankruptcy and excludes accounts for which vehicles have been repossessed.

 
- 28 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense

Derivative Instruments

We use derivatives as part of our risk management strategy to hedge against changes in interest rate and foreign currency risks.  We manage these risks by entering into derivative transactions with the intent to minimize fluctuations in earnings, cash flows and fair value adjustments of assets and liabilities caused by market volatility.  Our use of derivatives is limited to the management of interest rate and foreign currency risks.

Our derivative activities are authorized and monitored by our Asset-Liability Committee, which provides a framework for financial controls and governance to manage market risks.  We use internal models for analyzing and incorporating data from internal and external sources in developing various hedging strategies.  We incorporate the resulting hedging strategies into our overall risk management strategies.

Our liabilities consist mainly of fixed and floating rate debt, denominated in various currencies, which we issue in the global capital markets.  We hedge our interest rate and foreign currency risk inherent in these liabilities by entering into interest rate swaps, foreign currency swaps and foreign currency forwards, which effectively convert our obligations into U.S. dollar denominated, 3-month LIBOR based payments.

Our assets consist primarily of U.S. dollar denominated, fixed rate receivables.  Our approach to asset-liability management involves hedging our risk exposures so that changes in interest rates have a limited effect on our net interest margin and cash flows.  We use pay fixed interest rate swaps and caps, executed on a portfolio basis, to manage the interest rate risk of these assets.  Our resulting asset liability profile is consistent with the overall risk management strategy directed by the Asset-Liability Committee.

Credit Risk Related Contingent Features

Certain of our derivative contracts are governed by International Swaps and Derivatives Association (“ISDA”) Master Agreements.  Substantially all of these ISDA Master Agreements contain reciprocal ratings triggers providing either party with an option to terminate the agreement at market value in the event of a ratings downgrade of the other party below a specified threshold.  In addition, upon specified downgrades in a party’s credit ratings, the threshold at which that party would be required to post collateral to the other party would be lowered.

The aggregate fair value of derivative instruments that contain credit risk related contingent features that were in a net liability position at September 30, 2010 was $292 million, excluding embedded derivatives and adjustments made for our own non-performance risk. In the normal course of business, we posted collateral of $20 million to counterparties with which we were in a net liability position at September 30, 2010.  If our ratings were to have declined to “A+”, we would have been required to post $50 million of additional collateral to the counterparties with which we were in a liability position at September 30, 2010.  If our ratings were to have declined to “BBB+” or below, we would have been required to post $292  million of additional collateral to the counterparties with which we were in a liability position at September 30, 2010.  In order to settle all derivative instruments that were in a net liability position at September 30, 2010, excluding embedded derivatives and adjustments made for our own non-performance risk, we would have been required to pay $292 million.



 
- 29 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

Derivative Activity Impact on Financial Statements

The table below shows the location and amount of derivatives at September 30, 2010 as reported in the Consolidated Balance Sheet:
 
   
Hedge accounting derivatives
  
Non-hedge
accounting derivatives
  
Total
(Dollars in millions)
  
Notional
Fair
value
  
Notional
Fair
value
  
Notional
Fair
value
Other assets
                  
Interest rate swaps
  
$465
$73
  
$9,623
$378
  
$10,088
$451
Foreign currency swaps
  
7,855
1,797
  
14,415
2,232
  
22,270
4,029
Embedded derivatives
  
-
-
  
10
1
  
10
1
Total
  
$8,320
$1,870
  
$24,048
$2,611
  
$32,368
$4,481
                   
Counterparty netting
                
(1,574)
Collateral held
                
(1,987)
             
            Carrying value of derivative contracts – Other assets
          
$920
                   
Other liabilities
                  
Interest rate swaps
  
$-
$-
  
$58,869
$1,520
  
$58,869
$1,520
Foreign currency swaps
  
3,082
355
  
330
9
  
3,412
364
Interest rate caps
  
-
-
  
50
1
  
50
1
Embedded derivatives
  
-
-
  
317
50
  
317
50
Total
  
$3,082
$355
  
$59,566
$1,580
  
$62,648
$1,935
                   
Counterparty netting
                
(1,574)
Collateral posted
                
(20)
         
     Carrying value of derivative contracts – Other liabilities
      
$341


 
- 30 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

The table below shows the location and amount of derivatives at March 31, 2010 as reported in the Consolidated Balance Sheet:

   
Hedge accounting derivatives
  
Non-hedge
accounting derivatives
  
Total
(Dollars in millions)
  
Notional
Fair
value
  
Notional
Fair
value
  
Notional
Fair
value
Other assets
                  
Interest rate swaps
  
$541
$52
  
$7,999
$275
  
$8,540
$327
Foreign currency swaps
  
8,271
1,451
  
13,609
1,161
  
21,880
2,612
Embedded derivatives
  
-
-
  
58
4
  
58
4
Total
  
$8,812
$1,503
  
$21,666
$1,440
  
$30,478
$2,943
                   
Counterparty netting
                
(1,073)
Collateral held
                
(1,285)
             
            Carrying value of derivative contracts – Other assets
          
$585
                   
Other liabilities
                  
Interest rate swaps
  
$-
$-
  
$57,993
$1,203
  
$57,993
$1,203
Foreign currency swaps
  
3,590
364
  
1,639
95
  
5,229
459
Interest rate caps
  
-
-
  
50
1
  
50
1
Embedded derivatives
  
-
-
  
310
34
  
310
34
Total
  
$3,590
$364
  
$59,992
$1,333
  
$63,582
$1,697
                   
Counterparty netting
                
(1,073)
Collateral posted
                
(57)
         
     Carrying value of derivative contracts – Other liabilities
      
$567


 
 

 
- 31 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

The following table summarizes the components of interest expense, including the location and amount of gains or losses on derivative instruments and related hedged items, for the three and six months ended September 30, 2010 and 2009 as reported in our Consolidated Statement of Income:

 
Three months ended September 30,
Six months ended September 30,
(Dollars in millions)
2010
2009
2010
2009
Interest expense on debt1
$539
$606
$990
$1,230
Interest expense on pay float hedge accounting derivatives1
(142)
(202)
(251)
(385)
Interest expense on pay float non-hedge accounting derivatives1, 3
(167)
(182)
(298)
(319)
Interest expense on debt, net of pay float swaps
230
222
441
526
         
Interest expense on non-hedge pay fixed swaps1
255
345
564
646
         
(Gain) loss on hedge accounting derivatives:
        
Interest rate swaps2
(9)
(9)
(22)
15
Foreign currency swaps2
(1,056)
(925)
(542)
(2,309)
Gain on hedge accounting derivatives
(1,065)
(934)
(564)
(2,294)
Less hedged item:  change in fair value of fixed rate debt
1,062
913
552
2,294
Ineffectiveness related to hedge accounting derivatives2
(3)
(21)
(12)
-
         
Loss on foreign currency transactions
1,436
819
828
1,677
Gain on currency swaps and forwards 2
(1,533)
(860)
(1,030)
(1,656)
         
Loss (gain) on other non-hedge accounting derivatives:
        
Pay float swaps2
(45)
(6)
(91)
133
Pay fixed swaps2
253
119
384
(209)
Total interest expense
$593
$618
$1,084
$1,117

1   Amounts represent net interest settlements and changes in accruals.
2   Amounts exclude net interest settlements and changes in accruals.
3   Includes interest expense on both non-hedge accounting foreign currency swaps and forwards, and non-hedge interest rate derivatives.


 
- 32 -
 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)


The following table summarizes the relative fair value allocation of derivative credit valuation adjustments within interest expense.    

 
Three months ended September 30,
Six months ended September 30,
(Dollars in millions)
2010
2009
2010
2009
         
Ineffectiveness related to hedge accounting derivatives
$2
($7)
$3
$20
Loss on currency swaps and forwards
7
1
5
15
Loss (gain) on non-hedge accounting derivatives:
        
     Pay float swaps
-
(1)
-
1
     Pay fixed swaps
3
-
2
28
Total credit valuation adjustment allocated to interest expense
$12
($7)
$10
$64



 
- 33 -
 

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 9 – Other Assets and Other Liabilities

Other assets and other liabilities consisted of the following:

(Dollars in millions)
September 30, 2010
  
March 31, 2010
Other assets:
      
Notes receivable from affiliates
$491
  
$306
Used vehicles held for sale
212
  
220
Deferred charges
184
  
195
Income taxes receivable
165
  
97
Derivative assets
920
  
585
Other assets
456
  
515
Total other assets
$2,428
  
$1,918
       
Other liabilities:
      
Unearned insurance premiums and contract revenues
$1,483
  
$1,382
Derivative liabilities
341
  
567
Accounts payable and accrued expenses
1,060
  
902
Deferred income
250
  
244
Other liabilities
353
  
356
Total other liabilities
$3,487
  
$3,451



 
- 34 -
 

 
TOYOTA MOTOR CREDIT CORPORATION