CarMax 2015 Annual Report Download - page 57

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The allowance for loan losses represents an estimate of the amount of net losses inherent in our portfolio of managed
receivables as of the applicable reporting date and anticipated to occur during the following 12 months. The allowance
is primarily based on the credit quality of the underlying receivables, historical loss trends and forecasted forward loss
curves. We also take into account recent trends in delinquencies and losses, recovery rates and the economic
environment. The provision for loan losses is the periodic expense of maintaining an adequate allowance.
PAST DUE RECEIVABLES
As of February 28
(In millions) 2015 % (1) 2014 % (1)
Total ending managed receivables $ 8,458.7 100.0 $ 7,184.4 100.0
Delinquent loans:
31-60 days past due $ 152.1 1.8 $ 126.6 1.8
61-90 days past due 52.5 0.6 42.6 0.6
Greater than 90 days past due 16.8 0.2 16.0 0.2
Total past due $ 221.4 2.6 $ 185.2 2.6
(1) Percent of total ending managed receivables.
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives. We use derivatives to manage certain risks arising from both our
business operations and economic conditions, particularly with regard to future issuances of fixed-rate debt and
existing and future issuances of floating-rate debt. Primary exposures include LIBOR and other rates used as
benchmarks in our securitizations. We enter into derivative instruments to manage exposures that arise from business
activities that result in the future known receipt or payment of uncertain cash amounts, the values of which are
impacted by interest rates. Our derivative instruments are used to manage differences in the amount of our known or
expected cash receipts and our known or expected cash payments principally related to the funding of our auto loan
receivables. In December 2014, we entered into an interest rate derivative contract related to the closing of a
$300 million floating rate term loan to manage exposure to variable interest rates associated with the term loan, as
further discussed at Note 11.
We do not anticipate significant market risk from derivatives as they are predominantly used to match funding costs
to the use of the funding. However, disruptions in the credit or interest rate markets could impact the effectiveness of
our hedging strategies.
Credit risk is the exposure to nonperformance of another party to an agreement. We mitigate credit risk by dealing
with highly rated bank counterparties.
Designated Cash Flow Hedges – Securitizations. Our objectives in using interest rate derivatives in conjunction with
our securitization program are to add stability to CAF’s interest expense, to manage our exposure to interest rate
movements and to better match funding costs to the interest received on the receivables being securitized. To
accomplish these objectives, we primarily use interest rate swaps that involve the receipt of variable amounts from a
counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the
underlying notional amount. These interest rate swaps are designated as cash flow hedges of forecasted interest
payments in anticipation of permanent funding in the term securitization market.
For these derivatives that are designated and qualify as cash flow hedges, the effective portion of changes in the fair
value is initially recorded in accumulated other comprehensive loss (“AOCL”) and is subsequently reclassified into
CAF income in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the
change in fair value of the derivatives is recognized directly in CAF income. Amounts reported in AOCL related to
these derivatives will be reclassified to CAF income as interest expense is incurred on our future issuances of fixed-
rate debt. During the next 12 months, we estimate that an additional $10.1 million will be reclassified as a decrease
to CAF income.