tmcc-10q_20170930.htm

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 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, 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.

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 October 31, 2017, 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.

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.

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Financing revenues:
Operating lease	$	2,016	$	1,925	$	3,997	$	3,816
Retail		490		459		964		915
Dealer		141		112		284		223
Total financing revenues		2,647		2,496		5,245		4,954
Depreciation on operating leases		1,719		1,683		3,400		3,272
Interest expense		452		297		900		604
Net financing revenues		476		516		945		1,078

Insurance earned premiums and contract revenues		221		199		437		392
Investment and other income, net		55		42		102		81
Realized gains, net on investments in marketable securities		1		70		42		83
Net financing revenues and other revenues		753		827		1,526		1,634

Expenses:
Provision for credit losses		127		161		212		213
Operating and administrative		337		317		650		596
Insurance losses and loss adjustment expenses		102		91		216		180
Total expenses		566		569		1,078		989

Income before income taxes		187		258		448		645
Provision for income taxes		70		95		166		241

Net income	$	117	$	163	$	282	$	404

	September 30,		March 31,
	2017		2017
ASSETS
Cash and cash equivalents	$	4,682	$	4,198
Restricted cash		1,028		1,087
Investments in marketable securities		6,128		5,692
Finance receivables, net		67,396		68,462
Investments in operating leases, net		38,823		38,152
Other assets		2,043		2,044
Total assets	$	120,100	$	119,635

LIABILITIES AND SHAREHOLDER’S EQUITY
Debt	$	98,223	$	98,233
Deferred income taxes		8,149		7,926
Other liabilities		3,922		3,952
Total liabilities		110,294		110,111

Commitments and contingencies (Refer to Note 12)

Shareholder’s equity:
Capital stock, no par value (100,000 shares authorized; 91,500 issued and outstanding) at September 30, 2017 and March 31, 2017		915		915
Additional paid-in capital		2		2
Accumulated other comprehensive income		25		25
Retained earnings		8,864		8,582
Total shareholder's equity		9,806		9,524
Total liabilities and shareholder's equity	$	120,100	$	119,635

The following table presents the assets and liabilities of our consolidated variable interest entities (Refer to Note 10).

					Accumulated
			Additional		other
	Capital		paid-in		comprehensive		Retained
	stock		capital		income		earnings		Total

Balance at March 31, 2016	$	915	$	2	$	165	$	8,315	$	9,397

Net income		-		-		-		404		404
Other comprehensive income, net of tax		-		-		1		-		1
Balance at September 30, 2016	$	915	$	2	$	166	$	8,719	$	9,802

Balance at March 31, 2017	$	915	$	2	$	25	$	8,582	$	9,524

Net income		-		-		-		282		282
Other comprehensive loss, net of tax		-		-		-		-		-
Balance at September 30, 2017	$	915	$	2	$	25	$	8,864	$	9,806

	Six Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net income	$	282		$	404
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,439			3,303
Recognition of deferred income		(951	)		(877	)
Provision for credit losses		212			213
Amortization of deferred costs		307			315
Foreign currency and other adjustments to the carrying value of debt, net		1,035			(114	)
Net realized gains on available-for-sale securities		(42	)		(83	)
Net change in:
Restricted cash		59			7
Derivative assets		(11	)		23
Other assets (Note 8) and accrued interest		(154	)		(179	)
Deferred income taxes		224			203
Derivative liabilities		(30	)		(2	)
Other liabilities		11			124
Net cash provided by operating activities		4,381			3,337

Cash flows from investing activities:
Purchase of investments in marketable securities		(5,757	)		(2,209	)
Proceeds from sales of investments in marketable securities		1,248			407
Proceeds from maturities of investments in marketable securities		4,107			1,711
Acquisition of finance receivables		(12,638	)		(12,572	)
Collection of finance receivables		12,004			12,173
Net change in wholesale and certain working capital receivables		1,651			466
Acquisition of investments in operating leases		(8,612	)		(9,595	)
Disposals of investments in operating leases		4,938			5,427
Net change in financing support provided to affiliates		232			973
Cash equivalents (restricted) to acquire finance receivables and investment in operating leases, net		-			(147	)
Other, net		(37	)		(32	)
Net cash used in investing activities		(2,864	)		(3,398	)

Cash flows from financing activities:
Proceeds from issuance of debt		11,707			13,089
Payments on debt		(11,380	)		(13,576	)
Net change in commercial paper		(1,371	)		1,093
Net change in financing support provided by affiliates		11			(9	)
Net cash (used in) provided by financing activities		(1,033	)		597
Net increase in cash and cash equivalents		484			536
Cash and cash equivalents at the beginning of the period		4,198			2,701
Cash and cash equivalents at the end of the period	$	4,682		$	3,237
Supplemental disclosures:
Interest paid, net	$	851		$	684
Income taxes paid (received), net	$	85		$	(5	)

The information furnished in these unaudited interim consolidated financial statements as of and for the three and six months ended September 30, 2017 and 2016 has been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, the unaudited consolidated financial information reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The results of operations for the three and six months ended September 30, 2017 do not necessarily indicate the results which may be expected for the full fiscal year ending March 31, 2018 (“fiscal 2018”).

These financial statements should be read in conjunction with the Consolidated Financial Statements, significant accounting policies, and other Notes to Consolidated Financial Statements included in Toyota Motor Credit Corporation’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2017 (“fiscal 2017”), which was filed with the Securities and Exchange Commission on June 1, 2017. 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.

Related party transactions are disclosed in Note 14 – Related Party Transactions.

In May 2014, the Financial Accounting Standards Board ("FASB") issued new guidance on the recognition of revenue from contracts with customers. This comprehensive standard will supersede virtually all existing revenue recognition guidance. In August 2015, the FASB issued a one-year deferral of the effective date, with early adoption as of the original effective date permitted. The FASB also subsequently issued guidance amending and clarifying various aspects of the new revenue recognition standard. We plan to adopt the new revenue guidance effective April 1, 2018 with a cumulative-effect adjustment to the current period opening balance of retained earnings. We do not expect the adoption of this standard to have a material impact on our operating lease, retail and dealer financing revenues as the majority of those revenues are outside the scope of the standard. However, certain products within our insurance operations fall within the scope of this guidance. Based on our evaluation of contracts related to those products, we expect the application of this guidance will result in changes to both the timing of recognition and the classification of revenues and expenses. While our assessment is not complete, we do not expect these changes to have a material impact on our income before taxes. We continue to assess the impact of this guidance on our consolidated financial statements and related disclosures.

In January 2016, the FASB issued new guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments and will require entities to measure equity investments at fair value and recognize any changes in fair value in earnings. We will adopt this new guidance effective April 1, 2018 with a cumulative-effect adjustment to the current period opening balance of retained earnings. This guidance also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from changes in instrument-specific credit risk for instruments where the entity has elected the fair value option. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued new guidance that introduces a lessee model that brings most leases on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the new revenue recognition standard. The new leasing standard represents a wholesale change to lease accounting for lessees. Upon adoption, we expect to recognize lease liabilities and right-of-use assets (at their present value) in our Consolidated Balance Sheets related to predominantly all of the future minimum lease payments as disclosed in Note 12 – Commitments and Contingencies. This accounting guidance is effective for us on April 1, 2019. We continue to evaluate the other potential impacts of this guidance on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued new guidance that 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. We expect this new guidance will result in an increase in our allowance for credit losses; the magnitude of which is under evaluation. This accounting guidance is effective for us on April 1, 2020. We are currently evaluating the other potential impacts of this guidance on our consolidated financial statements.

In August 2016, the FASB issued new guidance that is intended to reduce diversity in practice in the classification of certain items in the statement of cash flows. This accounting guidance is effective for us on April 1, 2018. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.

In November 2016, the FASB issued new guidance that clarifies how restricted cash and cash equivalents should be classified and presented in the statement of cash flows and requires new disclosures related to restricted cash and cash equivalents. This guidance was intended to reduce diversity in practice in the classification of restricted cash and cash equivalents on the statement of cash flows. This accounting guidance is effective for us on April 1, 2018 at which time we will no longer report the change in restricted cash and cash equivalents in the operating or investing sections in our Consolidated Statements of Cash Flows, and cash and cash equivalents at the beginning and end of the period will include restricted cash and cash equivalents. These changes will be applied using a retrospective transition method to each period presented.

In March 2017, the FASB issued new guidance that requires certain premiums on callable debt securities to be amortized to the earliest call date. This accounting guidance is effective for us on April 1, 2019. We are currently evaluating the potential impact of this guidance on our consolidated financial statements.

In August 2017, the FASB issued new guidance that makes targeted improvements to accounting for hedging activities. This guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires, for qualifying hedges, the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance provides new alternatives for applying hedge accounting and measuring the hedged item in fair value hedges of interest rate risk. The guidance also modifies the accounting for components excluded from the assessment of hedge effectiveness, eases documentation and assessment requirements and modifies certain disclosure requirements. This accounting guidance is effective for us on April 1, 2019. We are currently evaluating the potential impact of this guidance on our consolidated financial statements and disclosures.

In April 2017, we adopted new FASB accounting guidance which clarifies that a change in the counterparty to a designated derivative hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The adoption of this guidance did not have an impact on our consolidated financial statements.

In April 2017, we adopted new FASB accounting guidance which clarifies whether an embedded contingent put or call option is clearly and closely related to the debt host when bifurcating an embedded derivative. The adoption of this guidance did not have an impact on our consolidated financial statements.

In April 2017, we adopted new FASB accounting guidance that further amends the analysis a reporting entity must perform to determine whether it should consolidate certain legal entities. This guidance specifically addresses interests held through related parties that are under common control. The adoption of this guidance did not change our consolidation conclusions and therefore did not have an impact on our consolidated financial statements.

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

	September 30, 2017
									Counterparty
									netting &			Fair
	Level 1		Level 2			Level 3			collateral			value
Cash equivalents:
Money market instruments	$	447	$	1,251		$	-		$	-		$	1,698
Certificates of deposit		-		2,700			-			-			2,700
Cash equivalents total		447		3,951			-			-			4,398
Available-for-sale securities:
Debt instruments:
U.S. government and agency obligations		2,538		30			-			-			2,568
Municipal debt securities		-		11			-			-			11
Certificates of deposit		-		875			-			-			875
Commercial paper		-		5			-			-			5
Corporate debt securities		146		197			8			-			351
Mortgage-backed securities:
U.S. government agency		-		42			-			-			42
Non-agency residential		-		-			2			-			2
Non-agency commercial		-		-			38			-			38
Asset-backed securities		-		-			36			-			36
Equity instruments:
Fixed income mutual funds:
Fixed income mutual funds measured at net asset value													669
Total return bond funds		1,531		-			-			-			1,531
Available-for-sale securities total		4,215		1,160			84			-			6,128
Derivative assets:
Interest rate swaps		-		426			-			-			426
Interest rate floors		-		1			-			-			1
Foreign currency swaps		-		314			-			-			314
Counterparty netting and collateral		-		-			-			(679	)		(679	)
Derivative assets total		-		741			-			(679	)		62
Assets at fair value		4,662		5,852			84			(679	)		10,588
Derivative liabilities:
Interest rate swaps		-		(244	)		(12	)		-			(256	)
Foreign currency swaps		-		(360	)		-			-			(360	)
Counterparty netting and collateral		-		-			-			600			600
Liabilities at fair value		-		(604	)		(12	)		600			(16	)
Net assets at fair value	$	4,662	$	5,248		$	72		$	(79	)	$	10,572

	March 31, 2017
									Counterparty
									netting &			Fair
	Level 1		Level 2			Level 3			collateral			value
Cash equivalents:
Money market instruments	$	287	$	1,045		$	-		$	-		$	1,332
Certificates of deposit		-		2,630			-			-			2,630
Cash equivalents total		287		3,675			-			-			3,962
Available-for-sale securities:
Debt instruments:
U.S. government and agency obligations		2,273		33			2			-			2,308
Municipal debt securities		-		11			-			-			11
Certificates of deposit		105		650			-			-			755
Corporate debt securities		211		150			8			-			369
Mortgage-backed securities:
U.S. government agency		-		45			-			-			45
Non-agency residential		-		-			2			-			2
Non-agency commercial		-		-			37			-			37
Asset-backed securities		-		-			31			-			31
Equity instruments:
Fixed income mutual funds:
Fixed income mutual funds measured at net asset value													1,740
Total return bond funds		394		-			-			-			394
Available-for-sale securities total		2,983		889			80			-			5,692
Derivative assets:
Interest rate swaps		-		474			1			-			475
Interest rate floors		-		2			-			-			2
Foreign currency swaps		-		122			-			-			122
Counterparty netting and collateral		-		-			-			(548	)		(548	)
Derivative assets total		-		598			1			(548	)		51
Assets at fair value		3,270		5,162			81			(548	)		9,705
Derivative liabilities:
Interest rate swaps		-		(271	)		(6	)		-			(277	)
Foreign currency swaps		-		(1,114	)		(62	)		-			(1,176	)
Counterparty netting and collateral		-		-			-			1,407			1,407
Liabilities at fair value		-		(1,385	)		(68	)		1,407			(46	)
Net assets at fair value	$	3,270	$	3,777		$	13		$	859		$	9,659

Transfers between levels of the fair value hierarchy are recognized at the end of their respective reporting periods. Transfers between levels of the fair value hierarchy during the three and six months ended September 30, 2017 and 2016 resulted from changes in the transparency of inputs and were not significant.

The following tables summarize the rollforward of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs:

	Three Months Ended September 30, 2017
															Total net
															assets
	Available-for-sale securities											Derivative instruments, net			(liabilities)

									Total
	Corporate		Mortgage-			Asset-			available-			Interest
	debt		backed			backed			for-sale			rate
	securities		securities			securities			securities			swaps
Fair value, July 1, 2017	$	8	$	43		$	35		$	86		$	12		$	98
Total gains (losses)
Included in earnings		-		-			-			-			5			5
Included in other comprehensive income		-		-			1			1			-			1
Purchases, issuances, sales, and settlements
Purchases		-		-			5			5			-			5
Issuances		-		-			-			-			-			-
Sales		-		-			-			-			-			-
Settlements		-		(3	)		(5	)		(8	)		(29	)		(37	)
Transfers in to Level 3		-		-			-			-			-			-
Transfers out of Level 3		-		-			-			-			-			-
Fair value, September 30, 2017	$	8	$	40		$	36		$	84		$	(12	)	$	72
The amount of total gains (losses) included in earnings attributable to assets held at the reporting date												$	5			5

	Three Months Ended September 30, 2016
																							Total net
																							assets
	Available-for-sale securities													Derivative instruments, net									(liabilities)

	U.S.										Total									Total
	government		Corporate		Mortgage-			Asset-			available-			Interest			Foreign			derivative
	and agency		debt		backed			backed			for-sale			rate			currency			assets
	obligations		securities		securities			securities			securities			swaps			swaps			(liabilities)
Fair value, July 1, 2016	$	2	$	7	$	45		$	35		$	89		$	62		$	(42	)	$	20		$	109
Total gains (losses)
Included in earnings		-		-		-			-			-			-			(8	)		(8	)		(8	)
Included in other comprehensive income		-		1		-			-			1			-			-			-			1
Purchases, issuances, sales, and settlements
Purchases		-		-		-			1			1			-			-			-			1
Issuances		-		-		-			-			-			-			-			-			-
Sales		-		-		-			-			-			-			-			-			-
Settlements		-		-		(4	)		(2	)		(6	)		(29	)		1			(28	)		(34	)
Transfers in to Level 3		-		-		-			-			-			-			-			-			-
Transfers out of Level 3		-		-		-			-			-			-			-			-			-
Fair value, September 30, 2016	$	2	$	8	$	41		$	34		$	85		$	33		$	(49	)	$	(16	)	$	69
The amount of total gains (losses) included in earnings attributable to assets held at the reporting date														$	-		$	(8	)	$	(8	)	$	(8	)

	Six Months Ended September 30, 2017
																								Total net
																								assets
	Available-for-sale securities														Derivative instruments, net									(liabilities)

	U.S.											Total									Total
	government			Corporate		Mortgage-			Asset-			available-			Interest			Foreign			derivative
	and agency			debt		backed			backed			for-sale			rate			currency			assets
	obligations			securities		securities			securities			securities			swaps			swaps			(liabilities)
Fair value, April 1, 2017	$	2		$	8	$	39		$	31		$	80		$	(5	)	$	(62	)	$	(67	)	$	13
Total gains (losses)
Included in earnings		-			-		-			-			-			18			7			25			25
Included in other comprehensive income		-			-		-			1			1			-			-			-			1
Purchases, issuances, sales, and settlements
Purchases		-			-		5			16			21			-			-			-			21
Issuances		-			-		-			-			-			-			-			-			-
Sales		-			-		-			-			-			-			-			-			-
Settlements		-			-		(4	)		(12	)		(16	)		(25	)		55			30			14
Transfers in to Level 3		-			-		-			-			-			-			-			-			-
Transfers out of Level 3		(2	)		-		-			-			(2	)		-			-			-			(2	)
Fair value, September 30, 2017	$	-		$	8	$	40		$	36		$	84		$	(12	)	$	-		$	(12	)	$	72
The amount of total gains (losses) included in earnings attributable to assets held at the reporting date															$	18		$	-		$	18		$	18

	Six Months Ended September 30, 2016
																							Total net
																							assets
	Available-for-sale securities													Derivative instruments, net									(liabilities)

	U.S.										Total									Total
	government		Corporate		Mortgage-			Asset-			available-			Interest			Foreign			derivative
	and agency		debt		backed			backed			for-sale			rate			currency			assets
	obligations		securities		securities			securities			securities			swaps			swaps			(liabilities)
Fair value, April 1, 2016	$	2	$	7	$	45		$	37		$	91		$	39		$	(14	)	$	25		$	116
Total gains (losses)
Included in earnings		-		-		-			-			-			20			(32	)		(12	)		(12	)
Included in other comprehensive income		-		1		1			-			2			-			-			-			2
Purchases, issuances, sales, and settlements
Purchases		-		-		-			3			3			-			-			-			3
Issuances		-		-		-			-			-			-			-			-			-
Sales		-		-		-			-			-			-			-			-			-
Settlements		-		-		(5	)		(6	)		(11	)		(26	)		(3	)		(29	)		(40	)
Transfers in to Level 3		-		-		-			-			-			-			-			-			-
Transfers out of Level 3		-		-		-			-			-			-			-			-			-
Fair value, September 30, 2016	$	2	$	8	$	41		$	34		$	85		$	33		$	(49	)	$	(16	)	$	69
The amount of total gains (losses) included in earnings attributable to assets held at the reporting date														$	20		$	(32	)	$	(12	)	$	(12	)

Nonrecurring fair value measurements include Level 3 net finance receivables that are not measured at fair value on a recurring basis, but are subject to fair value adjustments utilizing the fair value of the underlying collateral when there is evidence of impairment. We did not have any significant nonrecurring fair value items as of September 30, 2017 and March 31, 2017.

The Level 3 financial assets and liabilities recorded at fair value which are subject to recurring and nonrecurring fair value measurement, and the corresponding change in the fair value measurements of these assets and liabilities, were not significant to our Consolidated Balance Sheets or Consolidated Statements of Income as of and for the three and six months ended September 30, 2017 and as of and for the year ended March 31, 2017.

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

	September 30, 2017
	Carrying								Total Fair
	value		Level 1		Level 2		Level 3		Value

Financial assets
Finance receivables, net
Retail loan	$	51,283	$	-	$	-	$	51,349	$	51,349
Wholesale		9,198		-		-		9,252		9,252
Real estate		4,637		-		-		4,560		4,560
Working capital		2,143		-		-		2,177		2,177

Financial liabilities
Commercial paper	$	25,247	$	-	$	25,247	$	-	$	25,247
Unsecured notes and loans payable		58,327		-		57,166		2,058		59,224
Secured notes and loans payable		14,649		-		-		14,672		14,672

	March 31, 2017
	Carrying								Total Fair
	value		Level 1		Level 2		Level 3		Value

Financial assets
Finance receivables, net
Retail loan	$	50,682	$	-	$	-	$	50,733	$	50,733
Wholesale		10,819		-		-		10,881		10,881
Real estate		4,602		-		-		4,459		4,459
Working capital		2,218		-		-		2,222		2,222

Financial liabilities
Commercial paper	$	26,632	$	-	$	26,632	$	-	$	26,632
Unsecured notes and loans payable		57,282		-		55,838		2,385		58,223
Secured notes and loans payable		14,319		-		-		14,322		14,322

The carrying value of each class of finance receivables includes accrued interest and deferred fees and costs, net of deferred income and the allowance for credit losses. Finance receivables, net, excludes related party transactions, for which the fair value approximates the carrying value, of $131 million and $136 million at September 30, 2017 and March 31, 2017, respectively.

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, 2017
	Amortized		Unrealized		Unrealized			Fair
	cost		gains		losses			value
Available-for-sale securities:
Debt instruments:
U.S. government and agency obligations	$	2,576	$	-	$	(8	)	$	2,568
Municipal debt securities		9		2		-			11
Certificates of deposit		875		-		-			875
Commercial paper		5		-		-			5
Corporate debt securities		347		5		(1	)		351
Mortgage-backed securities:
U.S. government agency		41		1		-			42
Non-agency residential		1		1		-			2
Non-agency commercial		38		-		-			38
Asset-backed securities		36		-		-			36
Equity instruments:
Fixed income mutual funds:
Short-term floating NAV fund II		30		-		-			30
U.S. government sector fund		189		5		(1	)		193
Municipal sector fund		8		-		-			8
Investment grade corporate sector fund		95		1		-			96
High-yield sector fund		30		3		-			33
Real return sector fund		5		-		-			5
Mortgage sector fund		146		3		-			149
Asset-backed securities sector fund		56		2		-			58
Emerging market sector fund		38		4		-			42
International sector fund		54		1		-			55
Total return bond funds		1,510		21		-			1,531
Total investments in marketable securities	$	6,089	$	49	$	(10	)	$	6,128

	March 31, 2017
	Amortized		Unrealized		Unrealized			Fair
	cost		gains		losses			value
Available-for-sale securities:
Debt instruments:
U.S. government and agency obligations	$	2,314	$	1	$	(7	)	$	2,308
Municipal debt securities		10		1	-				11
Certificates of deposit		755	-		-				755
Corporate debt securities		368		2		(1	)		369
Mortgage-backed securities:
U.S. government agency		45		1		(1	)		45
Non-agency residential		2	-		-				2
Non-agency commercial		37		1		(1	)		37
Asset-backed securities		31	-		-				31
Equity instruments:
Fixed income mutual funds:
Short-term floating NAV fund II		39	-		-				39
U.S. government sector fund		389	-		-				389
Municipal sector fund		20	-		-				20
Investment grade corporate sector fund		252		9	-				261
High-yield sector fund		83		6	-				89
Real return sector fund		147		5	-				152
Mortgage sector fund		390		2	-				392
Asset-backed securities sector fund		140		10	-				150
Emerging market sector fund		105		7	-				112
International sector fund		136	-		-				136
Total return bond funds		389		5	-				394
Total investments in marketable securities	$	5,652	$	50	$	(10	)	$	5,692

The Fixed income mutual funds, exclusive of the Total return bond funds, 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.

The Total return bond funds are investments in actively traded open-end mutual funds. Redemptions are subject to normal terms and conditions as described in each fund’s prospectus.

Investments in marketable securities in a continuous loss position for less than twelve months and for greater than twelve months were not significant as of September 30, 2017 and March 31, 2017.

The following table represents realized gains and losses on our available-for-sale securities presented in our Consolidated Statements of Income:

The amortized cost, fair value, and contractual maturities of available-for-sale debt instruments 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.

Finance receivables, net consist of retail receivables and dealer financing, which includes accrued interest and deferred fees and costs, net of the allowance for credit losses and deferred income. Finance receivables, net also includes securitized retail receivables, which represent retail receivables that have been sold for legal purposes to securitization trusts but continue to be included in our consolidated financial statements, as discussed further in Note 10 – 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.

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.

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

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

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

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

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

	Wholesale				Real Estate				Working Capital
	September 30,		March 31,		September 30,		March 31,		September 30,		March 31,
	2017		2017		2017		2017		2017		2017
Credit quality indicators:
Performing	$	8,123	$	9,592	$	3,993	$	4,010	$	2,020	$	2,082
Credit Watch		1,094		1,269		660		613		129		143
At Risk		55		12		55		45		22		5
Default		42		78		34		45		4		5
Total	$	9,314	$	10,951	$	4,742	$	4,713	$	2,175	$	2,235

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

	Impaired								Individually Evaluated
	Finance Receivables				Unpaid Principal Balance				Allowance
	September 30,		March 31,		September 30,		March 31,		September 30,		March 31,
	2017		2017		2017		2017		2017		2017

Impaired account balances individually evaluated for impairment with an allowance:
Wholesale	$	75	$	93	$	75	$	93	$	13	$	12
Real estate		88		94		88		94		9		12
Working capital		44		31		44		31		23		9
Total	$	207	$	218	$	207	$	218	$	45	$	33

Impaired account balances individually evaluated for impairment without an allowance:
Wholesale	$	98	$	134	$	98	$	134
Real estate		98		105		98		105
Working capital		-		-		-		-
Total	$	196	$	239	$	196	$	239

Impaired account balances aggregated and evaluated for impairment:
Retail loan	$	220	$	220	$	218	$	217
Total	$	220	$	220	$	218	$	217

Total impaired account balances:
Retail loan	$	220	$	220	$	218	$	217
Wholesale		173		227		173		227
Real estate		186		199		186		199
Working capital		44		31		44		31
Total	$	623	$	677	$	621	$	674

As of September 30, 2017 and March 31, 2017, the impaired finance receivables balance for accounts in the dealer products portfolio segment that were on nonaccrual status was $220 million and $251 million, respectively, and there were no charge-offs against the allowance for credit losses for these finance receivables. Therefore, the impaired finance receivables balance is equal to the unpaid principal balance. As of September 30, 2017 and March 31, 2017, impaired finance receivables in the retail portfolio segment recorded at the fair value of the collateral less estimated selling costs were not significant and therefore excluded from the table above. Refer to Note 6 – Allowance for Credit Losses for details related to the retail loan portfolio segment’s impaired account balances which are aggregated and evaluated for impairment when determining the allowance for credit losses.

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

	Average Impaired Finance Receivables								Interest Income Recognized
	Three Months Ended September 30,				Six Months Ended September 30,				Three Months Ended September 30,				Six Months Ended September 30,
	2017		2016		2017		2016		2017		2016		2017		2016

Impaired account balances individually evaluated for impairment with an allowance:
Wholesale	$	101	$	59	$	98	$	72	$	-	$	1	$	1	$	1
Real estate		91		87		92		98		1		-		2		1
Working capital		44		33		40		34		1		1		1		1
Total	$	236	$	179	$	230	$	204	$	2	$	2	$	4	$	3

Impaired account balances individually evaluated for impairment without an allowance:
Wholesale	$	116	$	160	$	122	$	168	$	1	$	-	$	2	$	2
Real estate		97		112		100		108		1		2		2		3
Working capital		-		-		-		1		-		-		-		-
Total	$	213	$	272	$	222	$	277	$	2	$	2	$	4	$	5

Impaired account balances aggregated and evaluated for impairment:
Retail loan	$	222	$	224	$	221	$	225	$	4	$	4	$	8	$	8
Total	$	222	$	224	$	221	$	225	$	4	$	4	$	8	$	8

Total impaired account balances:
Retail loan	$	222	$	224	$	221	$	225	$	4	$	4	$	8	$	8
Wholesale		217		219		220		240		1		1		3		3
Real estate		188		199		192		206		2		2		4		4
Working capital		44		33		40		35		1		1		1		1
Total	$	671	$	675	$	673	$	706	$	8	$	8	$	16	$	16

The primary source of interest income recognized on the loans in the table above is from performing troubled debt restructurings. Interest income recognized using a cash-basis method of accounting during the three and six months ended September 30, 2017 and 2016 was not significant.

For accounts not under bankruptcy protection, the amount of finance receivables modified as a troubled debt restructuring during the three and six months ended September 30, 2017 and 2016 was not significant for each class of finance receivables. Troubled debt restructurings for non-bankrupt accounts within the retail loan class of finance receivables are comprised exclusively of contract term extensions that reduce the monthly payment due from the customer. For the three classes of finance receivables within the dealer products portfolio segment, troubled debt restructurings include contract term extensions, interest rate adjustments, waivers of loan covenants, or any combination of the three. Troubled debt restructurings of accounts not under bankruptcy protection did not include forgiveness of principal or interest rate adjustments during the three and six months ended September 30, 2017 and 2016.

We consider finance receivables under bankruptcy protection within the retail loan class to be troubled debt restructurings as of the date we receive notice of a customer filing for bankruptcy protection, regardless of the ultimate outcome of the bankruptcy proceedings. The bankruptcy court may impose modifications as part of the proceedings, including interest rate adjustments and forgiveness of principal. For the three and six months ended September 30, 2017 and 2016, 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.

Finance receivables modified as troubled debt restructurings for which there was a subsequent payment default during the three and six months ended September 30, 2017 and 2016, and for which the modification occurred within twelve months of the payment default, were not significant for all classes of such receivables.

Investments in operating leases, net consist of leases, net of deferred fees and costs, deferred income, accumulated depreciation and the allowance for credit losses. 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 10 - 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.

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

Charge-offs are shown net of recoveries of $22 million and $45 million for the three and six months ended September 30, 2017, respectively, and recoveries of $20 million and $40 million for the three and six months ended September 30, 2016 , respectively.

The following tables provide information related to our allowance for credit losses for finance receivables and finance receivables by portfolio segment:

	Three Months Ended September 30, 2017
	Retail Loan			Dealer Products			Total
Allowance for Credit Losses for Finance Receivables:
Beginning balance, July 1, 2017	$	322		$	131		$	453
Charge-offs		(86	)		-			(86	)
Recoveries		13			-			13
Provisions		110			(8	)		102
Ending balance, September 30, 2017	$	359		$	123		$	482

	Six Months Ended September 30, 2017
	Retail Loan			Dealer Products			Total
Beginning balance, April 1, 2017	$	344		$	123		$	467
Charge-offs		(165	)		-			(165	)
Recoveries		26			-			26
Provisions		154			-			154
Ending balance, September 30, 2017	$	359		$	123		$	482

Allowance for Credit Losses for Finance Receivables:
Ending balance: Individually evaluated for impairment	$	-		$	45		$	45
Ending balance: Collectively evaluated for impairment	$	359		$	78		$	437

Finance Receivables:
Ending balance, September 30, 2017	$	52,155		$	16,231		$	68,386
Ending balance: Individually evaluated for impairment	$	-		$	403		$	403
Ending balance: Collectively evaluated for impairment	$	52,155		$	15,828		$	67,983

The ending balance of finance receivables collectively evaluated for impairment in the above table includes approximately $220 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 September 30, 2017, 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 September 30, 2017 includes $1,086 million in finance receivables that are guaranteed by Toyota Motor Sales, U.S.A., Inc. (“TMS”), and $175 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 TMS and third party private Toyota distributors.

	Three Months Ended September 30, 2016
	Retail Loan			Dealer Products			Total
Allowance for Credit Losses for Finance Receivables:
Beginning balance, July 1, 2016	$	278		$	88		$	366
Charge-offs		(99	)		-			(99	)
Recoveries		13			-			13
Provisions		103			6			109
Ending balance, September 30, 2016	$	295		$	94		$	389

	Six Months Ended September 30, 2016
	Retail Loan			Dealer Products			Total
Beginning balance, April 1, 2016	$	289		$	132		$	421
Charge-offs		(181	)		-			(181	)
Recoveries		26			-			26
Provisions		161			(38	)		123
Ending balance, September 30, 2016	$	295		$	94		$	389

Allowance for Credit Losses for Finance Receivables:
Ending balance: Individually evaluated for impairment	$	-		$	27		$	27
Ending balance: Collectively evaluated for impairment	$	295		$	67		$	362

Finance Receivables:
Ending balance, September 30, 2016	$	50,711		$	15,445		$	66,156
Ending balance: Individually evaluated for impairment	$	-		$	435		$	435
Ending balance: Collectively evaluated for impairment	$	50,711		$	15,010		$	65,721

The ending balance of finance receivables collectively evaluated for impairment in the above table includes approximately $224 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 September 30, 2016, 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 September 30, 2016 includes $1,054 million in finance receivables that are guaranteed by TMS, and $158 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 TMS and third party private Toyota distributors.

The following table shows aggregate balances of finance receivables and investments in operating leases 60 or more days past due:

Substantially all finance receivables and investments in operating leases do not involve recourse to the dealer in the event of customer default. Finance receivables and investments in operating leases 60 or more days past due 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.

	September 30, 2017
	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	$	691	$	179	$	81	$	951	$	51,204	$	52,155	$	59
Wholesale		-		-		-		-		9,314		9,314		-
Real estate		-		-		-		-		4,742		4,742		-
Working capital		-		-		-		-		2,175		2,175		-
Total	$	691	$	179	$	81	$	951	$	67,435	$	68,386	$	59

	March 31, 2017
	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	$	586	$	129	$	63	$	778	$	50,631	$	51,409	$	41
Wholesale		-		-		-		-		10,951		10,951		-
Real estate		-		-		-		-		4,713		4,713		-
Working capital		3		-		-		3		2,232		2,235		-
Total	$	589	$	129	$	63	$	781	$	68,527	$	69,308	$	41

Our liabilities consist mainly of fixed and floating 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, interest rate caps and foreign currency swaps to 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.

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. As of September 30, 2017, we have daily valuation and collateral exchange arrangements with all of our counterparties. Our collateral agreements with substantially all of our counterparties include a zero threshold, full collateralization arrangement. However, 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 September 30, 2017 if our credit ratings were to decline, since we fully collateralize without regard to credit ratings with these counterparties.

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

	September 30, 2017
	Hedge accounting				Non-hedge
	derivatives				accounting derivatives				Total
			Fair				Fair				Fair
	Notional		value		Notional		value		Notional		value
Other assets:
Interest rate swaps	$	-	$	-	$	64,717	$	426	$	64,717	$	426
Interest rate floors		-		-		847		1		847		1
Foreign currency swaps		271		21		5,519		293		5,790		314
Total	$	271	$	21	$	71,083	$	720	$	71,354	$	741

Counterparty netting and collateral held												(679	)
Carrying value of derivative contracts – Other assets											$	62

Other liabilities:
Interest rate swaps	$	-	$	-	$	47,224	$	256	$	47,224	$	256
Interest rate caps		-		-		30		-		30		-
Foreign currency swaps		93		3		6,651		357		6,744		360
Total	$	93	$	3	$	53,905	$	613	$	53,998	$	616

Counterparty netting and collateral posted												(600	)
Carrying value of derivative contracts – Other liabilities											$	16

As of September 30, 2017, we held collateral of $309 million, which offset derivative assets, and posted collateral of $230 million, which offset derivative liabilities. We also held excess collateral of $7 million, which we did not use to offset derivative assets, and we posted excess collateral of $4 million which we did not use to offset derivative liabilities.

	March 31, 2017
	Hedge accounting				Non-hedge
	derivatives				accounting derivatives				Total
			Fair				Fair				Fair
	Notional		value		Notional		value		Notional		value
Other assets:
Interest rate swaps	$	-	$	-	$	62,525	$	475	$	62,525	$	475
Interest rate floors		-		-		1,673		2		1,673		2
Foreign currency swaps		271		28		1,648		94		1,919		122
Total	$	271	$	28	$	65,846	$	571	$	66,117	$	599

Counterparty netting and collateral held												(548	)
Carrying value of derivative contracts – Other assets											$	51

Other liabilities:
Interest rate swaps	$	-	$	-	$	45,297	$	277	$	45,297	$	277
Interest rate caps		-		-		30		-		30		-
Foreign currency swaps		93		1		12,570		1,175		12,663		1,176
Total	$	93	$	1	$	57,897	$	1,452	$	57,990	$	1,453

Counterparty netting and collateral posted												(1,407	)
Carrying value of derivative contracts – Other liabilities											$	46

As of March 31, 2017, we held collateral of $154 million which offset derivative assets, and posted collateral of $1,013 million which offset derivative liabilities. We also held excess collateral of $5 million which we did not use to offset derivative assets, and we posted excess collateral of $5 million which we did not use to offset derivative liabilities.

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

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Interest expense on debt	$	484		$	377		$	951		$	736
Interest income on derivatives		(18	)		(5	)		(34	)		(7	)
Interest expense on debt and derivatives, net		466			372			917			729

Loss (gain) on hedge accounting derivatives:
Foreign currency swaps		3			(4	)		10			(37	)
Loss (gain) on hedge accounting derivatives		3			(4	)		10			(37	)
Less hedged item: change in fair value of fixed rate debt denominated in a foreign currency		(3	)		4			(10	)		37
Ineffectiveness related to hedge accounting derivatives		-			-			-			-

Loss (gain) on debt denominated in foreign currencies and U.S. dollar non-hedge accounting derivatives:
Loss (gain) on non-hedge accounting debt denominated in foreign currencies		373			156			1,023			(62	)
(Gain) loss on non-hedge accounting foreign currency swaps		(383	)		(156	)		(1,033	)		32
Gain on U.S. dollar non-hedge accounting interest rate swaps		(4	)		(75	)		(7	)		(95	)
Total interest expense	$	452		$	297		$	900		$	604

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

The relative fair value allocation of derivative credit value adjustments for counterparty and non-performance credit risk within interest expense was not significant for the three and six months ended September 30, 2017 and 2016 as we are fully collateralized on substantially all of our derivatives without regard to credit ratings.

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

The carrying value of our debt includes unamortized premiums, discounts and debt issuance costs of $313 million and $307 million as of September 30, 2017 and March 31, 2017, respectively. The face value of commercial paper, unsecured notes and loans payable and secured notes and loans payable was $25.3 billion, $58.6 billion, and $14.7 billion, respectively, as of September 30, 2017, and $26.7 billion, $57.4 billion and $14.3 billion, respectively, as of March 31, 2017.

As of September 30, 2017, our commercial paper had a weighted average remaining maturity of 99 days, while our unsecured and secured notes and loans payable mature on various dates through fiscal 2047. Weighted average contractual interest rates are calculated based on original notional or par value before consideration of premium or discount.

Our unsecured notes and loans payable consist of both fixed and variable rate debt with contractual interest rates ranging from 0.0 percent to 5.8 percent at September 30, 2017 and March 31, 2017. Upon issuance of fixed rate notes, we generally elect to enter into interest rate swaps to convert fixed rate payments on notes to floating rate payments.

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

Certain unsecured notes and loans payable are denominated in various foreign currencies, and include the impact of translation adjustments. At September 30, 2017 and March 31, 2017, the carrying values of these foreign currency denominated unsecured notes and loans payable were $12.3 billion and $13.3 billion, respectively. Concurrent with the issuance of these foreign currency unsecured notes and loans payable, we entered into currency swaps in the same notional amount to convert non-U.S. currency payments to U.S. dollar denominated payments.

Our secured notes and loans payable are denominated in U.S. dollars and consist of both fixed and variable rate debt with contractual interest rates ranging from 0.9 percent to 2.1 percent at September 30, 2017 and 0.8 percent to 2.1 percent at March 31, 2017. Secured notes and loans payable are issued using on-balance sheet securitization trusts, as further discussed in Note 10 – Variable Interest Entities. These notes are repayable only from collections on the underlying securitized retail finance receivables and the beneficial interests in investments in operating leases and from related credit enhancements.

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

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

Restricted Cash shown in the table above represents collections from the underlying Gross Securitized Assets shown in the table above and certain reserve deposits held by TMCC for the VIEs and is included as part of Restricted cash on our Consolidated Balance Sheets. Gross Securitized Assets represent finance receivables and beneficial interests in investments in operating leases securitized for the asset-backed securities issued. Net Securitized Assets shown in the table above are presented net of deferred fees and costs, deferred income, accumulated depreciation and the allowance for credit losses. Other Assets represent used vehicles held-for-sale that were repossessed by or returned to TMCC for the benefit of the VIEs. The related debt of these consolidated VIEs is presented net of $1,578 million and $1,526 million of securities retained by TMCC at September 30, 2017 and March 31, 2017, respectively. Other Liabilities represents accrued interest on the debt of the consolidated VIEs.

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

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

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

The transfers of the Securitized Assets to the special purpose entities in our securitizations are considered to be sales for legal purposes. However, the Securitized Assets and the related debt remain on our Consolidated Balance Sheets. We recognize financing revenue on the Securitized Assets and interest expense on the secured debt issued by the special purpose entities. We also maintain an allowance for credit losses on the Securitized 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 provide lending to Toyota and Lexus dealers through the Toyota Dealer Investment Group’s Dealer Capital Program (“TDIG Program”) operated by our affiliate TMS, which has an equity interest in these dealerships. Dealers participating in this program have been determined to be VIEs. We do not consolidate the dealerships in this program as we are not the primary beneficiary and any exposure to loss is limited to the amount of the credit facility. Amounts due from these dealers under the TDIG Program that are classified as Finance receivables, net in our Consolidated Balance Sheets as of September 30, 2017 and March 31, 2017 and revenues earned from these dealers during the three and six months ended September 30, 2017 and 2016 were not significant.

We also have other lending relationships, which have been determined to be VIEs, but these relationships are not consolidated as we are not the primary beneficiary. Amounts due under these relationships as of September 30, 2017 and March 31, 2017 and revenues earned under these relationships during the three and six months ended September 30, 2017 and 2016 were not significant.

For additional liquidity purposes, we maintain syndicated credit facilities with certain banks.

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

In November 2016, 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 2018, 2020, and 2022, 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 September 30, 2017 and March 31, 2017. We are currently in compliance with the covenants and conditions of the credit agreements described above.

TMCC has entered into additional unsecured credit facilities with various banks. As of September 30, 2017, TMCC had committed bank credit facilities totaling $5.6 billion of which $2.2 billion, $400 million, $2.3 billion, and $725 million mature in fiscal 2018, 2019, 2020, and 2021, 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 September 30, 2017 and March 31, 2017. We are currently in compliance with the covenants and conditions of the credit agreements described above.

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

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

In July 2017, we entered into a 15-year lease agreement, which expires in August 2032, with Toyota Motor North America, Inc. (“TMNA”) for our new headquarters facility in Plano, Texas. Minimum lease commitments in the table above include $114 million and $10 million for facilities leases with affiliates at September 30, 2017 and March 31, 2017, respectively. At September 30, 2017, minimum future commitments under lease agreements to which we are a lessee, including those with affiliates, are as follows:

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 business and the credit worthiness of each dealer. Amounts drawn under these facilities are reviewed for collectability on a quarterly basis, in conjunction with our evaluation of the allowance for credit losses.

We are in the process of moving our corporate headquarters operations from Torrance, California to Plano, Texas as part of Toyota Motor Corporation’s consolidation of its three North American headquarters for manufacturing, sales and marketing, and finance operations to a single new headquarters facility. The relocation of our headquarters operations is expected to be substantially complete by the end of calendar year 2017. Relocation costs for employees and other relocation expenses are currently estimated to be approximately $120 million and are being expensed as incurred. To date, the Company has incurred $96 million in relocation expenses. The relocation costs incurred during the three and six months ended September 30, 2017 were $23 million and $34 million, respectively, compared to $11 million and $17 million during the same periods of fiscal 2017. We have not incurred significant lease termination costs as a result of our relocation.

TMCC has guaranteed bond obligations totaling $100 million in principal that were issued by Putnam County, West Virginia and Gibson County, Indiana to finance the construction of pollution control facilities at manufacturing plants of certain TMCC affiliates. The bonds mature in the following fiscal years ending March 31: 2028 - $20 million; 2029 - $50 million; 2030 - $10 million; 2031 - $10 million; and 2032 - $10 million. TMCC would be required to perform under the guarantees in the event of non-payment on the bonds and other related obligations. TMCC is entitled to reimbursement by the applicable affiliates for any amounts paid. TMCC receives an annual fee of $78 thousand for guaranteeing such payments. TMCC has not been required to perform under any of these affiliate bond guarantees as of September 30, 2017 and March 31, 2017.

In the ordinary course of business, we enter into agreements containing indemnification provisions standard in the industry related to several types of transactions, including, but not limited to, debt funding, derivatives, securitization transactions, and our vendor and supplier agreements. Performance under these indemnities would occur upon a breach of the representations, warranties or covenants made or given, or a third party claim. In addition, we have agreed in certain debt and derivative issuances, and subject to certain exceptions, to gross-up payments due to third parties in the event that withholding tax is imposed on such payments. In addition, certain of our funding arrangements may require us to pay lenders for increased costs due to certain changes in laws or regulations. Due to the difficulty in predicting events which could cause a breach of the indemnification provisions or trigger a gross-up or other payment obligation, we are not able to estimate our maximum exposure to future payments that could result from claims made under such provisions. We have not made any material payments in the past as a result of these provisions, and as of September 30, 2017, we determined that it is not probable that we will be required to make any material payments in the future. As of September 30, 2017 and March 31, 2017, no amounts have been recorded under these indemnification provisions.

Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against us with respect to matters arising in the ordinary course of business. Certain of these actions are or purport to be class action suits, seeking sizeable damages and/or changes in our business operations, policies and practices. Certain of these actions are similar to suits that have been filed against other financial institutions and captive finance companies. 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 possible loss or range of loss, whether in excess of any related accrued liability or where there is no accrued liability. Given the inherent uncertainty associated with legal matters, the actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts for which accruals have been established. Based on available information and established accruals, we do not believe it is reasonably possible that the results of these proceedings, either individually or in the aggregate, will have a material adverse effect on our consolidated financial condition or results of operations.

We have received a request for documents and information from the New York State Department of Financial Services relating to our lending practices (including fair lending), and a request for documents and information pursuant to a civil investigative demand from the Commonwealth of Massachusetts Office of the Attorney General relating to our financing of guaranteed auto protection insurance products on retail contracts. We will continue to cooperate with these requests, but are unable to predict their outcome given their preliminary status.

Our effective tax rate was 37 percent for the three and six months ended September 30, 2017 and 2016. Our provision for income taxes was $70 million and $166 million for the three and six months ended September 30, 2017, compared to $95 million and $241 million for the same periods in fiscal 2017. The decrease in the provision for income taxes for the three and six months ended September 30, 2017 is consistent with the decrease in our income before tax compared to the same periods in fiscal 2017.

As of September 30, 2017, we remain under IRS examination for fiscal 2017 and fiscal 2018. The IRS examination for fiscal 2016 was concluded in the first quarter of fiscal 2018.

We periodically review our uncertain tax positions. Our assessment is based on many factors including any ongoing IRS audits. For the quarter ended September 30, 2017, our assessment did not result in a material change in unrecognized tax benefits.

Our deferred tax assets were $3.0 billion and $1.0 billion at September 30, 2017 and March 31, 2017, and were primarily due to the deferred deduction of allowance for credit and residual value losses and federal tax loss carryforward that expires in fiscal 2038. The total deferred tax liability, net of these deferred tax assets, was $8.1 billion and $7.9 billion at September 30, 2017 and March 31, 2017, respectively. Realization with respect to the federal tax loss carryforward is dependent on generating sufficient income prior to expiration of the loss carryforward. Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized. The amount of the deferred tax assets considered realizable could be reduced if management’s estimates change.

As of September 30, 2017, there were no material changes to our related party agreements or relationships as described in our fiscal 2017 Form 10-K. The tables below summarize amounts included in our Consolidated Statements of Income and in our Consolidated Balance Sheets under various related party agreements or relationships:

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2017		2016		2017			2016
Total financing revenues:
Manufacturers’ subvention and other revenues	$	382	$	334	$	750		$	670

Interest expense:
Credit support fees incurred	$	24	$	23	$	47		$	46
Interest and other expenses	$	-	$	-	$	1		$	1

Insurance earned premiums and contract revenues:
Insurance premiums and contract revenues	$	45	$	35	$	89		$	69

Investment and other income, net:
Interest and other income	$	3	$	3	$	7		$	5

Expenses:
Operating and administrative	$	23	$	17	$	42		$	34
Insurance losses and loss adjustment expenses¹	$	1	$	-	$	(4	)	$	1

	September 30,			March 31,
	2017			2017
Assets:
Investments in marketable securities
Investments in commercial paper	$	5		$	-

Finance receivables, net
Accounts receivable	$	133		$	138
Deferred retail subvention income	$	(1,095	)	$	(967	)

Investments in operating leases, net
Investments in operating leases, net	$	6		$	4
Deferred lease subvention income	$	(1,428	)	$	(1,174	)

Other assets
Notes receivable	$	591		$	823
Other receivables, net	$	243		$	202

Liabilities:
Other liabilities
Unearned affiliate insurance premiums and contract revenues	$	330		$	332
Other payables, net	$	59		$	74
Notes payable	$	24		$	13

TMCC receives subvention payments from TMS which results in a gross monthly subvention receivable. As of September 30, 2017 and March 31, 2017, the subvention receivable from TMS was $227 million and $165 million, respectively. The subvention receivable is recorded in Other receivables, net in Other assets as of September 30, 2017 and March 31, 2017. We have a master netting agreement with TMS and TMNA which allows us to net settle payments for shared services and subvention transactions.

Financial information for our reportable operating segments is summarized as follows:

	Three Months Ended September 30, 2017
	Finance		Insurance		Intercompany
	operations		operations		eliminations			Total

Total financing revenues	$	2,647	$	-	$	-		$	2,647
Depreciation on operating leases		1,719		-		-			1,719
Interest expense		455		-		(3	)		452
Net financing revenues		473		-		3			476

Insurance earned premiums and contract revenues		-		221		-			221
Investment and other income, net		36		22		(3	)		55
Realized gains, net on investments in marketable securities		-		1		-			1
Net financing and other revenues		509		244		-			753

Expenses:
Provision for credit losses		127		-		-			127
Operating and administrative expenses		259		78		-			337
Insurance losses and loss adjustment expenses		-		102		-			102
Total expenses		386		180		-			566

Income before income taxes		123		64		-			187
Provision for income taxes		47		23		-			70

Net income	$	76	$	41	$	-		$	117

	Six Months Ended September 30, 2017
	Finance		Insurance		Intercompany
	operations		operations		eliminations			Total

Total financing revenues	$	5,245	$	-	$	-		$	5,245
Depreciation on operating leases		3,400		-		-			3,400
Interest expense		906		-		(6	)		900
Net financing revenues		939		-		6			945

Insurance earned premiums and contract revenues		-		437		-			437
Investment and other income, net		68		40		(6	)		102
Realized gains, net on investments in marketable securities		-		42		-			42
Net financing and other revenues		1,007		519		-			1,526

Expenses:
Provision for credit losses		212		-		-			212
Operating and administrative expenses		492		158		-			650
Insurance losses and loss adjustment expenses		-		216		-			216
Total expenses		704		374		-			1,078

Income before income taxes		303		145		-			448
Provision for income taxes		112		54		-			166

Net income	$	191	$	91	$	-		$	282

Total assets at September 30, 2017	$	116,463	$	4,741	$	(1,104	)	$	120,100

	Three Months Ended September 30, 2016
	Finance		Insurance			Intercompany
	operations		operations			eliminations		Total

Total financing revenues	$	2,496	$	-		$	-	$	2,496
Depreciation on operating leases		1,683		-			-		1,683
Interest expense		297		-			-		297
Net financing revenues		516		-			-		516

Insurance earned premiums and contract revenues		-		199			-		199
Investment and other income, net		24		18			-		42
Realized gains (losses), net on investments in marketable securities		76		(6	)		-		70
Net financing and other revenues		616		211			-		827

Expenses:
Provision for credit losses		161		-			-		161
Operating and administrative expenses		242		75			-		317
Insurance losses and loss adjustment expenses		-		91			-		91
Total expenses		403		166			-		569

Income before income taxes		213		45			-		258
Provision for income taxes		80		15			-		95

Net income	$	133	$	30		$	-	$	163

	Six Months Ended September 30, 2016
	Finance		Insurance			Intercompany
	operations		operations			eliminations			Total

Total financing revenues	$	4,954	$	-		$	-		$	4,954
Depreciation on operating leases		3,272		-			-			3,272
Interest expense		604		-			-			604
Net financing revenues		1,078		-			-			1,078

Insurance earned premiums and contract revenues		-		392			-			392
Investment and other income, net		47		34			-			81
Realized gains (losses), net on investments in marketable securities		87		(4	)		-			83
Net financing and other revenues		1,212		422			-			1,634

Expenses:
Provision for credit losses		213		-			-			213
Operating and administrative expenses		452		144			-			596
Insurance losses and loss adjustment expenses		-		180			-			180
Total expenses		665		324			-			989

Income before income taxes		547		98			-			645
Provision for income taxes		205		36			-			241

Net income	$	342	$	62		$	-		$	404

Total assets at September 30, 2016	$	112,355	$	4,417		$	(979	)	$	115,793

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

Certain statements contained in this Form 10-Q or incorporated by reference herein are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and currently available information. However, since these statements are based on factors that involve risks and uncertainties, our performance and results may differ materially from those described or implied by such forward-looking statements. Words such as “believe,” “anticipate,” “expect,” “estimate,” “project,” “should,” “intend,” “will,” “may” or words or phrases of similar meaning are intended to identify forward-looking statements. We caution that the forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause actual results to differ materially from those in the forward-looking statements, including, without limitation, the risk factors set forth in “Item 1A. Risk Factors” of our Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2017 (“fiscal 2017”), including the following:

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.

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 financing operations using the following metrics: financing volume, market share, financing margins, operating expense, residual value and credit loss metrics.

In our insurance operations, we generate revenue 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 incentives, 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 pressures. Our financial results may also be affected by the regulatory environment in which we operate, including as a result of 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 contract and dealer financing volume. Changes in the volume of vehicle sales, utilization of our insurance programs, or the level of coverage purchased by affiliates 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.

During the first half of the fiscal year ending March 31, 2018 (“fiscal 2018”), the United States (“U.S.”) economy experienced stability as consumer confidence increased, the housing market remained strong and unemployment rates remained low. However, consumer debt levels continue to be elevated, which could result in an increase in our delinquencies and credit losses in the future.

Industry-wide vehicle sales in the U.S. decreased slightly despite elevated sales incentives during the first half of fiscal 2018 as compared to the same period in fiscal 2017. Vehicle sales by TMS increased 4 percent in the first half of fiscal 2018 compared to the same period in fiscal 2017 due to a combination of higher incentives and increased consumer demand for Toyota vehicles. Our financing volume decreased 6 percent and our overall market share decreased 5 percentage points for the first half of fiscal 2018 compared to the same period in fiscal 2017. The decreases in financing volume and market share are primarily due to competition from other financial institutions.

Used vehicle values for Toyota and Lexus vehicles have declined over the last year due to an increase in the supply of used vehicles as a result of an increased industry-wide focus on leasing in recent years. Further declines in used vehicle values resulting from increases in the supply of used vehicles, increases in new vehicle incentive programs and a larger lease portfolio resulting in higher future maturities could continue to unfavorably impact return rates, residual values, depreciation expense and credit losses in the future.

We continue to maintain broad global access to both domestic and international markets. Conditions in the global capital markets were generally stable during the first half of fiscal 2018. During the first half of fiscal 2018, our interest expense increased compared to the same period in fiscal 2017 due to higher weighted average interest rates as well as an increase in the amount of outstanding debt. Future changes in interest rates in the U.S. and foreign markets could result in further volatility in our interest expense, which could affect our results of operations.

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

Our consolidated net income was $282 million and $117 million for the first half and second quarter of fiscal 2018 compared to net income of $404 million and $163 million for the same periods of fiscal 2017. The decrease in net income for the first half of fiscal 2018 compared to the same period in fiscal 2017 was primarily due to a $296 million increase in interest expense, a $128 million increase in depreciation on operating leases, and a $54 million increase in operating and administrative expenses, partially offset by a $291 million increase in total financing revenues, and a $75 million decrease in provision for income taxes. The decrease in net income for the second quarter of fiscal 2018 compared to the same period in fiscal 2017 was primarily due to a $155 million increase in interest expense, a $69 million decrease in realized gains, net on investments in marketable securities, and a $36 million increase in depreciation on operating leases, partially offset by a $151 million increase in total financing revenues, a $34 million decrease in provision for credit losses, and a $25 million decrease in provision for income taxes.

Our overall capital position increased $0.3 billion, bringing total shareholder’s equity to $9.8 billion at September 30, 2017 as compared to $9.5 billion at March 31, 2017. Our debt remained consistent at $98.2 billion at September 30, 2017 and March 31, 2017. Our debt-to-equity ratio decreased to 10.0 at September 30, 2017 from 10.3 at March 31, 2017.

	Three Months Ended							Six Months Ended
	September 30,				Percentage			September 30,				Percentage
(Dollars in millions)	2017		2016		Change			2017		2016		Change
Financing revenues:
Operating lease	$	2,016	$	1,925		5	%	$	3,997	$	3,816		5	%
Retail		490		459		7	%		964		915		5	%
Dealer		141		112		26	%		284		223		27	%
Total financing revenues		2,647		2,496		6	%		5,245		4,954		6	%
Depreciation on operating leases		1,719		1,683		2	%		3,400		3,272		4	%
Interest expense¹		455		297		53	%		906		604		50	%
Net financing revenues		473		516		(8	)%		939		1,078		(13	)%

Investment and other income, net		36		24		50	%		68		47		45	%
Realized gains, net on investments in marketable securities		-		76		(100	)%		-		87		(100	)%
Net financing and other revenues		509		616		(17	)%		1,007		1,212		(17	)%

Expenses:
Provision for credit losses		127		161		(21	)%		212		213	-%
Operating and administrative expenses		259		242		7	%		492		452		9	%
Total expenses		386		403		(4	)%		704		665		6	%

Income before income taxes		123		213		(42	)%		303		547		(45	)%
Provision for income taxes		47		80		(41	)%		112		205		(45	)%

Net income from finance operations	$	76	$	133		(43	)%	$	191	$	342		(44	)%

Our finance operations reported net income of $191 million and $76 million for the first half and second quarter of fiscal 2018, respectively, compared to net income of $342 million and $133 million for the same periods in fiscal 2017. Finance operations results for the first half of fiscal 2018 decreased compared to same period in fiscal 2017 driven by a $302 million increase in interest expense, a $128 million increase in depreciation on operating leases, a $87 million decrease in realized gains, net on investments in marketable securities, and a $40 million increase in operating and administrative expenses, partially offset by a $291 million increase in total financing revenues, and a $93 million decrease in provision for income taxes. Finance operations results for the second quarter of fiscal 2018 decreased compared to the same period in fiscal 2017, primarily due to a $158 million increase in interest expense, a $76 million decrease in realized gains, net on investments in marketable securities, and a $36 million increase in depreciation on operating leases, partially offset by a $151 million increase in total financing revenues, a $34 million decrease in provision for credit losses, and a $33 million decrease in provision for income taxes.

Total financing revenues increased 6 percent during the first half and second quarter of fiscal 2018 as compared to the same periods in fiscal 2017 due to the following:

Our total portfolio yield, which includes operating lease revenues net of depreciation, as well as retail and dealer financing revenues, increased slightly to 3.4 percent and 3.5 percent for the first half and second quarter of fiscal 2018, respectively, compared to 3.3 percent and 3.2 percent for the same periods in fiscal 2017.

Depreciation on operating leases increased 4 percent and 2 percent during the first half and second quarter of fiscal 2018, respectively, as compared to the same periods in fiscal 2017. The increase in depreciation during the first half and second quarter of fiscal 2018 as compared to the same periods in fiscal 2017 was primarily attributable to an increase in average operating lease units outstanding as well as deterioration in expected used vehicle values for Toyota and Lexus vehicles over the last year. In the first half and second quarter of fiscal 2017, we experienced higher maturities of short-term leases which increased depreciation expense as our severity on short-term leases is typically higher.

	Three Months Ended						Six Months Ended
	September 30,						September 30,
(Dollars in millions)	2017			2016			2017			2016
Interest expense on debt	$	484		$	377		$	951		$	736
Interest income on derivatives		(18	)		(5	)		(34	)		(7	)
Interest expense on debt and derivatives		466			372			917			729

Ineffectiveness related to hedge accounting derivatives		-			-			-			-
Loss (gain) on non-hedge accounting debt denominated in foreign currencies		373			156			1,023			(62	)
(Gain) loss on non-hedge accounting foreign currency swaps		(383	)		(156	)		(1,033	)		32
Gain on U.S. dollar non-hedge accounting interest rate swaps		(4	)		(75	)		(7	)		(95	)
Total interest expense	$	452		$	297		$	900		$	604

During the first half and second quarter of fiscal 2018, total interest expense increased to $900 million and $452 million, respectively, from $604 million and $297 million, respectively, in the same periods in fiscal 2017. The increase in total interest expense for the first half and second quarter of fiscal 2018 compared to the same periods in fiscal 2017 is primarily attributable to an increase in interest expense on debt, and lower gains on U.S. dollar non-hedge accounting 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, commercial paper and derivatives, and includes amortization of discounts, premiums, debt issuance costs, and basis adjustments. Interest expense on debt and derivatives in the first half and second quarter of fiscal 2018 increased to $917 million and $466 million, respectively, from $729 million and $372 million, in the same periods in fiscal 2017. The increases in interest expense on debt and derivatives are primarily due to higher weighted average interest rates as well as an increase in the amount of outstanding debt.

Gain or loss on non-hedge accounting debt denominated in foreign currencies represents the impact of translation adjustments. We use non-hedge accounting foreign currency swaps to economically hedge the debt denominated in foreign currencies. During both the first half and second quarter of fiscal 2018, we recorded a net gain of $10 million as gains on our non-hedge accounting foreign currency swaps were largely offset by losses on our non-hedge accounting debt denominated in foreign currencies as a result of offsetting foreign currency swap rates across the various currencies in which our debt is denominated. During the first half of fiscal 2017, the net gains of $30 million on our debt denominated in foreign currencies, net of foreign currency swaps, resulted primarily from a decrease in most foreign currency swap rates in which our debt is denominated. During the second quarter of fiscal 2017, changes in debt denominated in foreign currencies directly offset changes in foreign currency swaps as a result of minimal changes in foreign currency swap rates.

Gain or loss on U.S. dollar non-hedge accounting interest rate swaps represents the change in the valuation of interest rate swaps. During the first half of fiscal 2018, we recorded gains of $7 million primarily as a result of slight decreases in the longer tenor U.S. dollar swap rates, with the gains from our longer-term pay-float swaps exceeding the losses on our shorter-term pay-fixed swaps. During the second quarter of fiscal 2018, we recorded gains of $4 million as a result of increases in U.S. dollar swap rates across all relevant tenors, with the gains on our shorter-term pay-fixed swaps exceeding the losses on our longer-term pay-float swaps. During the first half and second quarter of fiscal 2017, we recorded gains of $95 million and $75 million, respectively, as a result of an increase in U.S. dollar swap rates in the short and medium term tenors.

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

During the first half and second quarter of fiscal 2017, our finance operations reported realized gains, net on investments in marketable securities of $87 million and $76 million, respectively. The realized gains, net on marketable securities were due to the sale of a portion of our fixed income mutual funds to take advantage of favorable market conditions, that occurred in the second quarter of fiscal 2017.

The provision for credit losses remained relatively consistent at $212 million and $213 million for the first half of fiscal 2018 and fiscal 2017, respectively. We recorded a provision for credit losses of $127 million and $161 million for the second quarter of fiscal 2018 and fiscal 2017, respectively. The decrease in the provision for credit losses for the second quarter of fiscal 2018 compared to the same period in fiscal 2017 was attributable to favorable credit loss experience.

Operating and administrative expenses increased 9 percent and 7 percent during the first half and second quarter of fiscal 2018, respectively, compared to the same periods in fiscal 2017 primarily due to increases in general operating expenses and information technology expenditures, including the continued development of future enhancements to our core servicing program. We continue to incur expenses associated with the relocation of our headquarters operations to Plano, Texas including deferred compensation expense, employee relocation and other relocation related expenses. We expect to incur additional expenses over the next few years relating to our relocation.

	Three Months Ended								Six Months Ended
	September 30,					Percentage			September 30,					Percentage
	2017		2016			Change			2017		2016			Change
Agreements (units in thousands)
Issued		650		629			3	%		1,285		1,229			5	%
Average in force		8,194		7,241			13	%		8,077		7,121			13	%

(Dollars in millions)
Insurance earned premiums and contract revenues	$	221	$	199			11	%	$	437	$	392			11	%
Investment and other income, net		22		18			22	%		40		34			18	%
Realized gains (losses), net on investments in marketable securities		1		(6	)		117	%		42		(4	)		1150	%
Revenues from insurance operations		244		211			16	%		519		422			23	%

Expenses:
Insurance losses and loss adjustment expenses		102		91			12	%		216		180			20	%
Operating and administrative expenses		78		75			4	%		158		144			10	%
Total expenses		180		166			8	%		374		324			15	%

Income before income taxes		64		45			42	%		145		98			48	%
Provision for income taxes		23		15			53	%		54		36			50	%

Net income from insurance operations	$	41	$	30			37	%	$	91	$	62			47	%

Our insurance operations reported net income of $91 million and $41 million for the first half and second quarter of fiscal 2018, respectively, compared to $62 million and $30 million for the same periods in fiscal 2017. The increase in net income for the first half of fiscal 2018 was primarily due to a $46 million increase in realized gains, net on investments in marketable securities, and a $45 million increase in insurance earned premiums and contract revenues, partially offset by a $36 million increase in insurance losses and loss adjustment expenses, a $18 million increase in provision for income taxes, and a $14 million increase in operating and administrative expenses. The increase in net income for the second quarter of fiscal 2018, compared to the same period in fiscal 2017, was primarily due to a $22 million increase in insurance earned premiums and contract revenues, and a $7 million increase in realized gains, net on investments in marketable securities, partially offset by a $11 million increase in insurance losses and loss adjustment expenses, and a $8 million increase in provision for income taxes.

Agreements issued increased 5 percent and 3 percent during the first half and second quarter of fiscal 2018, respectively, compared to the same periods in fiscal 2017. The average number of agreements in force increased 13 percent during the first half and second quarter of fiscal 2018 compared to the same periods in fiscal 2017. The increases in the agreements issued in both periods were primarily due to increased sales of guaranteed auto protection agreements, partially offset by a decrease in sales of certified pre-owned vehicle warranties. The increases in the average in force agreements in both periods were primarily due to increased sales of prepaid maintenance contracts, tire and wheel protection agreements, and guaranteed auto protection agreements.

Our insurance operations reported insurance earned premiums and contract revenues of $437 million and $221 million for the first half and second quarter of fiscal 2018, respectively, compared to $392 million and $199 million for the same periods in fiscal 2017. Insurance earned premiums and contract revenues represent revenues from in force agreements and are affected by sales volume 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 and administrative expenses. The increase in insurance earned premiums and contract revenues in the first half and second quarter of fiscal 2018, respectively, compared to the same periods in fiscal 2017 was primarily due to an increase in the average in force agreements.

Our insurance operations reported realized gains, net on investments in marketable securities of $42 million and $1 million for the first half and second quarter of fiscal 2018, respectively, compared to realized losses, net on investments in marketable securities of $4 million and $6 million for the same periods in fiscal 2017. The increase in realized gains, net on investments in marketable securities for the first half of fiscal 2018 compared to the same period in fiscal 2017 was due to the sale of a portion of our fixed income mutual funds portfolio to take advantage of favorable market conditions, which occurred in the first quarter of fiscal 2018.

Our insurance operations reported insurance losses and loss adjustment expenses of $216 million and $102 million for the first half and second quarter of fiscal 2018, respectively, compared to $180 million and $91 million for the same periods in fiscal 2017. 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 the first half and second quarter of fiscal 2018 compared to the same periods in fiscal 2017 was primarily due to an increase in our prepaid maintenance, guaranteed auto protection, and tire and wheel protection losses. The increases in both our prepaid maintenance and tire and wheel protection losses were due to a higher number of average in force agreements, as well as an increase in the severity of prepaid maintenance claims. The increase in our guaranteed auto protection losses was the result of increases in both frequency and severity of claims due to deterioration in used vehicle values.

Our insurance operations reported operating and administrative expenses of $158 million and $78 million for the first half and second quarter of fiscal 2018, respectively, compared to $144 million and $75 million for the same periods in fiscal 2017. The increase in operating and administrative expenses in the first half and second quarter of fiscal 2018 compared to the same periods in fiscal 2017 was attributable to higher product and general operating expenses driven by the continued growth of our insurance business, as well as an increase in insurance dealer back-end program expenses. Insurance dealer back-end program expenses are incentives or expense reduction programs we provide to dealers based on certain performance criteria. We continue to incur expenses associated with the relocation of our headquarters operations to Plano, Texas including deferred compensation expense, employee relocation and other relocation related expenses. We expect to incur additional expenses over the next few years relating to our relocation.

Our overall provision for income taxes was $166 million and $70 million for the first half and second quarter of fiscal 2018, respectively, compared to $241 million and $95 million for the same periods in fiscal 2017. Our effective tax rate was 37 percent for the first half and second quarter of both fiscal 2018 and fiscal 2017. The decrease in the provision for income taxes for the first half and second quarter of fiscal 2018 compared to the same periods in fiscal 2017 is consistent with the decrease in our income before taxes.

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

	Three Months Ended									Six Months Ended
	September 30,						Percentage			September 30,						Percentage
(units in thousands):	2017			2016			Change			2017			2016			Change
TMS new sales volume¹		539			500			8	%		1,009			968			4	%

Vehicle financing volume²
New retail contracts		172			167			3	%		319			311			3	%
Used retail contracts		64			74			(14	)%		132			146			(10	)%
Lease contracts		139			154			(10	)%		270			306			(12	)%
Total		375			395			(5	)%		721			763			(6	)%

TMS subvened vehicle financing volume (units included in the above table):
New retail contracts		99			104			(5	)%		181			195			(7	)%
Used retail contracts		16			21			(24	)%		37			43			(14	)%
Lease contracts		130			132			(2	)%		249			260			(4	)%
Total		245			257			(5	)%		467			498			(6	)%

TMS subvened vehicle financing volume as a percent of vehicle financing volume:
New retail contracts		57.6	%		62.3	%					56.7	%		62.7	%
Used retail contracts		25.0	%		28.4	%					28.0	%		29.5	%
Lease contracts		93.5	%		85.7	%					92.2	%		85.0	%
Overall subvened contracts		65.3	%		65.1	%					64.8	%		65.3	%

Market share:³
Retail contracts		31.9	%		33.2	%					31.5	%		32.0	%
Lease contracts		25.6	%		30.0	%					26.6	%		30.7	%
Total		57.5	%		63.2	%					58.1	%		62.7	%

The volume of our retail and lease contracts, which are acquired primarily from Toyota and Lexus dealers, is substantially dependent upon TMS new sales volume as well as the level of TMS sponsored subvention. Vehicle sales by TMS increased 4 percent and 8 percent for the first half and second quarter of fiscal 2018 compared to the same periods in fiscal 2017 primarily due to a combination of higher incentives and increased consumer demand for Toyota vehicles. Our financing volume decreased 6 percent and 5 percent and our overall market share decreased 5 percentage points and 6 percentage points for the first half and second quarter of fiscal 2018, respectively, compared to the same periods in fiscal 2017 primarily due to competition from other financial institutions. Our financing volume and market share were further impacted by increased competition for non-subvened lease contracts.

	September 30,		March 31,
(Dollars in millions)	2017		2017		Change
Net Earning Assets
Finance receivables, net
Retail finance receivables, net	$	51,287	$	50,686		1	%
Dealer financing, net¹		16,109		17,776		(9	)%
Total finance receivables, net		67,396		68,462		(2	)%
Investments in operating leases, net		38,823		38,152		2	%
Net earning assets	$	106,219	$	106,614		-	%

Dealer Financing
(Number of dealers serviced)
Toyota and Lexus dealers¹		988		993		(1	)%
Dealers outside of the Toyota/Lexus dealer network		368		371		(1	)%
Total number of dealers receiving wholesale financing		1,356		1,364		(1	)%

Dealer inventory outstanding (units in thousands)		286		340		(16	)%

Our new retail contract volume increased 3 percent during the first half and second quarter of fiscal 2018 as compared to the same periods in fiscal 2017 driven by an increase in TMS new vehicle sales volume. Our retail market share decreased 1 percentage point during the first half and second quarter of fiscal 2018 compared to the same periods in fiscal 2017. Our retail finance receivables, net increased slightly at September 30, 2017 as compared to March 31, 2017.

Our lease contract volume decreased 12 percent and 10 percent during the first half and second quarter of fiscal 2018, respectively, as compared to the same periods in fiscal 2017. Our lease market share decreased 4 percentage points during the first half and second quarter of fiscal 2018 as compared to the same periods in fiscal 2017. Much of the decrease in both lease contract volume and market share during the first half and second quarter of fiscal 2018 was attributable to competition from other financial institutions and a decline in the volume of subvened lease contracts. Our lease contract volume and market share were further impacted by increased competition for non-subvened contracts. Despite the decrease in lease financing volume and market share, higher leasing in recent years has resulted in our investments in operating leases, net, increasing 2 percent at September 30, 2017, as compared to March 31, 2017.

Dealer financing, net at September 30, 2017, decreased 9 percent from March 31, 2017 due primarily to a decrease in dealer inventory outstanding.

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.

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

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

Depreciation expense on operating leases increased 4 percent and 2 percent during the first half and second quarter of fiscal 2018, respectively, as compared to the same periods in fiscal 2017, due to an increase in the average operating lease units outstanding as well as deterioration in expected used vehicle values over the last year for Toyota and Lexus vehicles. In the first half and second quarter of fiscal 2017, we experienced higher maturities of short-term leases which increased depreciation expense as our severity on short-term leases is typically higher. As a result of the increased focus on leasing in recent years, by both us and the automotive finance industry, we expect that maturities will remain at a high level in the future, which will result in an increase in the supply of used vehicles and could unfavorably impact used vehicle values. Higher average operating lease units outstanding and the resulting increase in future maturities, a higher supply of used vehicles, as well as deterioration in actual and expected used vehicle values for Toyota and Lexus vehicles could unfavorably impact return rates, residual values, and depreciation expense.

Our credit loss experience may be affected by a number of factors including the economic environment, our purchasing and servicing practices, used vehicle market conditions and subvention. 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.

	September 30,			March 31,			September 30,
	2017			2017			2016
Net charge-offs as a percentage of average gross earning assets¹
Finance receivables		0.40	%		0.52	%		0.47	%
Operating leases		0.31	%		0.39	%		0.36	%
Total		0.37	%		0.47	%		0.43	%

Default frequency as a percentage of outstanding contracts		1.48	%		1.53	%		1.46	%
Average loss severity per unit²	$	7,406		$	7,787		$	7,631

Aggregate balances for accounts 60 or more days past due as a percentage of gross earning assets³
Finance receivables⁴		0.38	%		0.28	%		0.36	%
Operating leases⁴		0.32	%		0.25	%		0.28	%
Total		0.36	%		0.27	%		0.33	%

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 decreased from 0.43 percent at September 30, 2016 to 0.37 percent at September 30, 2017 due to favorable credit loss experience as well as a recent focus on early and late stage collection activities. Default frequency as a percentage of outstanding contracts increased slightly to 1.48 percent for the first half of fiscal 2018 compared to 1.46 percent in the same period in fiscal 2017. Our average loss severity for the first half of fiscal 2018 decreased to $7,406 from $7,631 in the first half of fiscal 2017. The decreases in net charge-offs, default frequency and average loss severity compared to March 31, 2017 are also due to a recent focus on early and late stage collection activities. Our delinquencies increased to 0.36 percent at September 30, 2017 compared to 0.27 percent at March 31, 2017 and 0.33 percent at September 30, 2016. Despite declines in our net charge-offs and average loss severity for the first half of fiscal 2018 as compared to the same period in fiscal 2017, we have seen increasing trends in delinquencies, default frequency, and average loss severity over the last few years. 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 result in increases to our 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 involves significant assumptions, complex analyses, and management judgment.

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 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.

The following table provides information related to our allowance for credit losses:

Our allowance for credit losses increased $110 million from $526 million at September 30, 2016 to $636 million at September 30, 2017 as a result of increasing trends in our credit loss experience over the last few years. In addition, our allowance for credit losses was also impacted by deterioration in the financial performance of certain dealers and an increase in the specific reserve for certain impaired dealers. Our allowance for credit losses increased $14 million from $622 million at March 31, 2017 to $636 million at September 30, 2017 primarily due to increasing trends in our credit loss experience over the last few years. Changes in the economy that impact the consumer such as increasing interest rates, a rise in the unemployment rate and higher debt balances, coupled with deterioration in actual and expected used vehicle values, could result in increases to our allowance for credit losses.

We have evaluated our allowance for credit losses in relation to the recent natural disasters in Texas, Florida, and Puerto Rico and have recorded an amount that estimates the probable incurred losses based on our analysis of portfolio information as well as similar historical events. The amount we recorded as of September 30, 2017 related to these events was not significant.

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 borrowing base that is distributed across a variety of markets, geographies, investors and financing structures, among other factors.

The following table summarizes the components of our outstanding funding sources at carrying value:

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. Our funding volume is primarily based on the expected net change in earning assets and debt maturities.

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, 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 $7.7 billion to $11.4 billion with an average balance of $9.6 billion during the quarter ended September 30, 2017.

We may lend to or 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.

Credit support is provided to us by our indirect parent Toyota Financial Services Corporation (“TFSC”), and, in turn to TFSC by TMC. Taken together, these credit support agreements provide an additional source of liquidity to us, although we do not rely upon such credit support in our liquidity planning and capital and risk management. The credit support agreements are not a guarantee by TMC or TFSC of any securities or obligations of TFSC or TMCC, respectively. The fees paid pursuant to these agreements are disclosed in Note 14 – Related Party Transactions of the Notes to Consolidated Financial Statements.

TMC’s obligations under its credit support agreement with TFSC rank pari passu with TMC’s senior unsecured debt obligations. Refer to Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations “Liquidity and Capital Resources” in our Form 10-K for the fiscal year ended March 31, 2017 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 - Liquidity Facilities and Letters of Credit” section and “Part I, Item 1A. Risk Factors - The failure or commercial soundness of our counterparties and other financial institutions may have an effect on our liquidity, results of operations or financial condition” in our Form 10-K for the fiscal year ended March 31, 2017 for further discussion.

Short-term funding needs are met through the issuance of commercial paper in the U.S. Commercial paper outstanding under our commercial paper programs ranged from approximately $25.3 billion to $26.8 billion during the quarter ended September 30, 2017, with an average outstanding balance of $26.1 billion. Our commercial paper programs are supported by the liquidity facilities discussed under the heading “Liquidity Facilities and Letters of Credit.” We believe we have ample capacity to meet our short-term funding requirements and manage our liquidity.

The following table summarizes the components of our unsecured notes and loans payable:

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 February 2018. 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.

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 2017, 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 €26.5 billion was available for issuance at September 30, 2017. 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. Debt securities issued under our EMTN program prior to October 2007 are also subject to cross-default provisions. We are currently in compliance with these covenants.

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. In addition, we may issue other debt securities through the global capital markets or enter into other unsecured financing arrangements.

Asset-backed securitization of our earning asset portfolio provides us with an alternative source of funding. 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.

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:

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 debt. This arrangement enables the special purpose entities to mitigate the interest rate risk inherent in issuing variable rate debt that is secured by fixed rate Securitized Assets.

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 debt 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 maintain shelf registration statements with the Securities and Exchange Commission (“SEC”) to provide for the issuance of securities backed by Securitized Assets in the U.S. capital markets. We regularly sponsor public securitization trusts that issue securities backed by retail finance receivables, including registered securities that we retain. Funding obtained from our public term securitization transactions is repaid as the underlying Securitized Assets amortize. None of these securities have defaulted, experienced any events of default or failed to pay principal in full at maturity. As of September 30, 2017 and March 31, 2017, we did not have any outstanding lease securitization transactions registered with the SEC.

We periodically enter into public 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 the securitization transaction 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.

We also regularly execute private securitization transactions of Securitized Assets with bank-sponsored multi-seller asset-backed conduits. Funding obtained from our private securitization transactions is repaid as the underlying Securitized Assets amortize.

For additional liquidity purposes, we maintain syndicated credit facilities with certain banks.

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

The cost and availability of unsecured financing is influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation. Lower ratings generally result in higher borrowing costs as well as reduced access to capital markets. Credit ratings are not recommendations to buy, sell, or hold securities, and are subject to revision or withdrawal at any time by the assigning credit rating organization. Each credit rating organization may have different criteria for evaluating risk, and therefore ratings should be evaluated independently for each organization. Our credit ratings depend in part on the existence of the credit support agreements of TFSC and TMC. Refer to “Part I, Item 1A. Risk Factors - Our borrowing costs and access to the unsecured debt capital markets depend significantly on the credit ratings of TMCC and its parent companies and our credit support arrangements” in our fiscal 2017 Form 10-K.

Our liabilities consist mainly of fixed and floating 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, interest rate caps and foreign currency swaps to hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. Our use of derivative transactions is intended to reduce long-term fluctuations in the fair value of assets and liabilities caused by market movements. All of our derivative activities are authorized and monitored by our management and our Asset-Liability Committee which provides a framework for financial controls and governance to manage market risk.

All derivative instruments are recorded on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow us to net settle positive and negative 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.

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.

We may also, from time-to-time, issue debt which can be characterized as hybrid financial instruments. These obligations often contain an embedded derivative which may require bifurcation. Changes in the fair value of the bifurcated embedded derivative are reported in Interest expense in our Consolidated Statements of Income. As of September 30, 2017 and March 31, 2017, we had no outstanding embedded derivatives that are required to be bifurcated. Refer to Note 1 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our Form 10-K for the fiscal year ended March 31, 2017, and Note 7 – Derivatives, Hedging Activities and Interest Expense of the Notes to Consolidated Financial Statements in this Form 10-Q for additional information.

The following table summarizes our derivative assets and liabilities, which are included in Other assets and Other liabilities in our Consolidated Balance Sheets:

Collateral represents cash received or deposited under reciprocal arrangements that we have entered into with our derivative counterparties. As of September 30, 2017, we held collateral of $309 million, which offset derivative assets, and we posted collateral of $230 million, which offset derivative liabilities. We also held excess collateral of $7 million which we did not use to offset derivative assets, and we posted excess collateral of $4 million which we did not use to offset derivative liabilities. As of March 31, 2017, we held collateral of $154 million, which offset derivative assets, and we posted collateral of $1,013 million which offset derivative liabilities. We also held excess collateral of $5 million, which we did not use to offset derivative assets, and we posted excess collateral of $5 million which we did not use to offset derivative liabilities.

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 September 30, 2017 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 International Swaps and Derivatives Association (“ISDA”) Master Agreements contain reciprocal collateral arrangements which help mitigate our exposure to the credit risk associated with our counterparties. As of September 30, 2017, 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. Our collateral agreements include legal right of offset provisions, pursuant to which collateral amounts are netted against derivative assets or derivative liabilities, the net amount of which is included in Other assets or Other liabilities in our Consolidated Balance Sheets.

In addition, many of our ISDA Master Agreements contain reciprocal ratings triggers providing either party with an option to terminate the agreement and related transactions at market value in the event of a ratings downgrade below a specified threshold. Refer to “Part I. Item 1A. Risk Factors” in our fiscal 2017 Form 10-K for further discussion.

A summary of our net counterparty credit exposure by credit rating (net of collateral held) is presented below:

We exclude from the table above credit valuation adjustments of $2 million as of September 30, 2017 and March 31, 2017 related to non-performance risk of our counterparties. All derivative credit valuation adjustments are recorded in Interest expense in our Consolidated Statements of Income.

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

TMCC has guaranteed the payments of principal and interest with respect to the bond obligations that were issued by Putnam County, West Virginia and Gibson County, Indiana to finance the construction of pollution control facilities at manufacturing plants of certain TMCC affiliates. Refer to Note 12 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for further discussion.

A description of our lending commitments is included under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Off-Balance Sheet Arrangements” and Note 15 - Related Party Transactions of the Notes to Consolidated Financial Statements in our fiscal 2017 Form 10-K, as well as above in Note 12 - Commitments and Contingencies of the Notes to Consolidated Financial Statements.

Refer to Note 12 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for a description of agreements containing indemnification provisions.

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the principal executive officer and principal financial officer) and Chief Accounting Officer (the principal accounting officer), of the effectiveness of our “disclosure controls and procedures” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, the Chief Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”) concluded that the disclosure controls and procedures were effective as of September 30, 2017, to ensure that information required to be disclosed in reports filed under the Exchange Act was recorded, processed, summarized and reported within the time periods specified by the SEC’s rules, regulations, and forms and that such information is accumulated and communicated to our CEO and CAO, as appropriate, to allow timely decisions regarding required disclosures.

There have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against us with respect to matters arising in the ordinary course of business. Certain of these actions are or purport to be class action suits, seeking sizeable damages and/or changes in our business operations, policies and practices. Certain of these actions are similar to suits that have been filed against other financial institutions and captive finance companies. 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 possible loss or range of loss, whether in excess of any related accrued liability or where there is no accrued liability. Refer to Note 12 – 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 possible 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.

There are no material changes from the risk factors set forth under “Item 1A. Risk Factors” in our fiscal 2017 Form 10-K.

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

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

19001 S. Western Avenue, Torrance, California 90501
(Former name or former address, if changed since last report)

	September 30, 2017
	Amortized Cost		Fair Value
Available-for-sale debt instruments:
Due within 1 year	$	1,980	$	1,978
Due after 1 year through 5 years		1,606		1,604
Due after 5 years through 10 years		142		142
Due after 10 years		84		86
Mortgage-backed and asset-backed securities¹		116		118
Total	$	3,928	$	3,928

	September 30,			March 31,
	2017			2017
Retail receivables	$	39,732		$	38,338
Securitized retail receivables		12,423			13,071
Dealer financing		16,231			17,899
		68,386			69,308

Deferred origination (fees) and costs, net		642			644
Deferred income		(1,150	)		(1,023	)
Allowance for credit losses
Retail and securitized retail receivables		(359	)		(344	)
Dealer financing		(123	)		(123	)
Total allowance for credit losses		(482	)		(467	)
Finance receivables, net	$	67,396		$	68,462

	September 30,			March 31,
	2017			2017
Investments in operating leases	$	40,783		$	41,874
Securitized investments in operating leases		9,105			6,502
		49,888			48,376
Deferred origination (fees) and costs, net		(218	)		(201	)
Deferred income		(1,447	)		(1,196	)
Accumulated depreciation		(9,246	)		(8,672	)
Allowance for credit losses		(154	)		(155	)
Investments in operating leases, net	$	38,823		$	38,152

	September 30,		March 31,
	2017		2017
Commitments:
Credit facilities commitments with dealers	$	1,322	$	1,199
Minimum lease commitments		173		59
Total commitments		1,495		1,258
Guarantees of affiliate pollution control and solid waste disposal bonds		100		100
Total commitments and guarantees	$	1,595	$	1,358

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☐

Emerging growth company	☐

INDEX
PART I	3
Item 1. Financial Statements	3
Consolidated Statements of Income	3
Consolidated Statements of Comprehensive Income	3
Consolidated Balance Sheets	4
Consolidated Statements of Shareholder’s Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis	46
Item 3. Quantitative and Qualitative Disclosures About Market Risk	71
Item 4. Controls and Procedures	71
PART II	72
Item 1. Legal Proceedings	72
Item 1A. Risk Factors	72
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3. Defaults Upon Senior Securities	72
Item 4. Mine Safety Disclosures	72
Item 5. Other Information	72
Item 6. Exhibits	72
Exhibit Index	73
Signatures	74

					Weighted average
					contractual interest rates
	September 30,		March 31,		September 30,			March 31,
	2017		2017		2017			2017
Commercial paper	$	25,247	$	26,632		1.28	%		1.11	%
Unsecured notes and loans payable		58,327		57,282		2.02	%		1.91	%
Secured notes and loans payable		14,649		14,319		1.58	%		1.32	%
Total debt	$	98,223	$	98,233		1.76	%		1.60	%

	September 30, 2017
			VIE Assets						VIE Liabilities
			Gross		Net
	Restricted Cash		Securitized Assets		Securitized Assets		Other Assets		Debt		Other Liabilities
Retail finance receivables	$	712	$	12,423	$	12,219	$	6	$	10,232	$	6
Investments in operating leases		296		9,105		6,774		123		4,417		2
Total	$	1,008	$	21,528	$	18,993	$	129	$	14,649	$	8

	Future minimum
Years ending March 31,	lease payments
2018	$	15
2019		24
2020		20
2021		15
2022		18
Thereafter		81
Total	$	173

(Dollars in millions)	U.S. medium term notes ("MTNs") and domestic bonds				Euro MTNs ("EMTNs")				Other			Total unsecured notes and loans payable⁴
Balance at March 31, 2017¹	$	35,533			$	14,686			$	7,202		$	57,421
Issuances		6,168		²		889		³		-			7,057
Maturities and terminations		(3,310	)			(2,703	)			(1,222	)		(7,235	)
Non-cash changes in foreign currency rates		-				1,302				8			1,310
Balance at September 30, 2017¹	$	38,391			$	14,174			$	5,988		$	58,553

Exhibit Number	Description	Method of Filing

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

3.2	Bylaws as amended through December 8, 2000	(2)

4.1	Amended and Restated Agency Agreement, dated September 8, 2017, among Toyota Motor Credit Corporation, Toyota Motor Finance (Netherlands) B.V., Toyota Credit Canada Inc., Toyota Finance Australia Limited and The Bank of New York Mellon acting through its London branch	(3)

4.2	Amended and Restated Note Agency Agreement dated September 8, 2017, among Toyota Motor Credit Corporation, The Bank of New York Mellon SA/NV, Luxembourg Branch and The Bank of New York Mellon, acting through its London Branch	(4)

12.1	Calculation of ratio of earnings to fixed charges	Filed Herewith

31.1	Certification of Chief Executive Officer	Filed Herewith

31.2	Certification of Chief Accounting Officer	Filed Herewith

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

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

101.INS	XBRL instance document	Filed Herewith

101.CAL	XBRL taxonomy extension calculation linkbase document	Filed Herewith

101.DEF	XBRL taxonomy extension definition linkbase document	Filed Herewith

101.LAB	XBRL taxonomy extension labels linkbase document	Filed Herewith

101.PRE	XBRL taxonomy extension presentation linkbase document	Filed Herewith

101.SCH	XBRL taxonomy extension schema document	Filed Herewith

	TOYOTA MOTOR CREDIT CORPORATION
	(Registrant)

Date: November 8, 2017	By	/s/ Michael Groff
		Michael Groff
		President and Chief Executive Officer
		(Principal Executive Officer and Principal Financial Officer)

Date: November 8, 2017	By	/s/ Ron Chu
		Ron Chu
		Group Vice President and Chief Accounting Officer