3.CarMax Auto Finance

CAF provides financing to qualified customers purchasing vehicles at CarMax. CAF provides us the opportunity to capture additional sales, profits and cash flows while managing our reliance on third-party finance sources. Management regularly analyzes CAF's operating results by assessing profitability, the performance of the auto loan receivables including trends in credit losses and delinquencies, and CAF direct expenses. This information is used to assess CAF's performance and make operating decisions including resource allocation. In addition, except for auto loan receivables, which are disclosed in Note 4, CAF assets are not separately reported nor do we allocate assets to CAF because such allocation would not be useful to management in making operating decisions.

We typically use securitizations to fund loans originated by CAF, as discussed in Note 2(F). CAF income primarily reflects the interest and fee income generated by the auto loan receivables less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct CAF expenses.

CAF income does not include any allocation of indirect costs. We present this information on a direct basis to avoid making arbitrary decisions regarding the indirect benefits or costs that could be attributed to CAF. Examples of indirect costs not allocated to CAF include retail store expenses and corporate expenses such as human resources, administrative services, marketing, information systems, accounting, legal, treasury and executive payroll.

Components of CAF Income


		Years Ended February 28 or 29
(In millions)	2014		% (1)	2013		% (1)	2012		% (1)
Interest margin:
Interest and fee income	$	548.0	8.3	$	495.3	9.2	$	448.7	9.6
Interest expense		(90.0)	(1.4)		(95.1)	(1.8)		(106.1)	(2.3)
Total interest margin		458.0	6.9		400.2	7.4		342.6	7.3
Provision for loan losses		(72.2)	(1.1)		(56.2)	(1.0)		(36.4)	(0.8)
Total interest margin after
provision for loan losses		385.8	5.8		344.0	6.4		306.2	6.6

Other income		0.1	―		―	―		1.5	―

Direct expenses:
Payroll and fringe benefit expense		(22.6)	(0.3)		(21.2)	(0.4)		(20.7)	(0.4)
Other direct expenses		(27.1)	(0.4)		(23.5)	(0.4)		(24.8)	(0.5)

Total direct expenses		(49.7)	(0.8)		(44.7)	(0.8)		(45.5)	(1.0)
CarMax Auto Finance income	$	336.2	5.1	$	299.3	5.6	$	262.2	5.6

Total average managed receivables	$	6,629.5		$	5,385.5		$	4,662.4

(1) Percent of total average managed receivables.