CarMax 2004 Annual Report Download - page 37

CARMAX 2004 35
CARMAX AUTO FINANCE INCOME
The company’s finance operation, CAF, originates automobile
loans to prime-rated customers at competitive market rates of
interest. The company sells substantially all of the loans it
originates each month in a securitization transaction discussed in
Note 4. The majority of the profit contribution from CAF is
generated by the spread between the interest rate charged to the
customer and the cost of funds. A gain, recorded at the time of the
securitization transaction, results from recording a receivable equal
to the present value of the expected residual cash flows generated
by the securitized receivables. The cash flows are calculated taking
into account expected prepayment and default rates.
CarMax Auto Finance income was as follows:
Years Ended February 29 or 28
(In millions) 2004 2003 2002
Gains on sales of loans $65.1 $68.2 $56.4
Other income:
Servicing fee income 21.8 17.3 14.0
Interest income 16.0 11.5 7.7
Total other income 37.8 28.8 21.7
Direct expenses:
CAF payroll and
fringe benefit expense 8.2 7.0 5.7
Other direct CAF expenses 9.7 7.6 5.9
Total direct expenses 17.9 14.6 11.6
CarMax Auto Finance income $85.0 $82.4 $66.5
CarMax Auto Finance income does not include any
allocation of indirect costs or income. The company presents
this information on a direct basis to avoid making arbitrary
decisions regarding the indirect benefit or costs that could be
attributed to CAF. Examples of indirect costs not included are
retail store expenses, retail financing commissions, and
corporate expenses such as human resources, administrative
services, marketing, information systems, accounting, legal,
treasury, and executive payroll.
SECURITIZATIONS
The company uses a securitization program to fund
substantially all of the automobile loan receivables originated
by CAF. The company sells the automobile loan receivables to
a wholly owned, bankruptcy-remote, special purpose entity
that transfers an undivided interest in the receivables to a group
of third-party investors. The special purpose entity and
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investors have no recourse to the company’s assets. The
company’s risk is limited to the retained interests on the
company’s consolidated balance sheets. The investors issue
commercial paper supported by the transferred receivables, and
the proceeds from the sale of the commercial paper are used to
pay for the securitized receivables. This program is referred to
as the warehouse facility.
The company periodically uses public securitizations to
refinance the receivables previously securitized through the
warehouse facility. In a public securitization, a pool of
automobile loan receivables is sold to a bankruptcy-remote,
special purpose entity that in turn transfers the receivables to a
special purpose securitization trust. The securitization trust
issues asset-backed securities, secured or otherwise supported
by the transferred receivables, and the proceeds from the sale of
the securities are used to pay for the securitized receivables. The
earnings impact of refinancing receivables in a public
securitization has not been material to the operations of the
company. However, because securitization structures could
change from time to time, this may not be representative of the
potential impact of future securitizations.
The transfers of receivables are accounted for as sales in
accordance with SFAS No. 140. When the receivables are
securitized, the company recognizes a gain or loss on the sale of
the receivables as described in Note 3.
Years Ended February 29 or 28
(In millions) 2004 2003 2002
Net loans originated $1,407.6 $1,189.0 $941.0
Loans sold $1,390.2 $1,185.9 $938.5
Gains on sales of loans $65.1 $ 68.2 $ 56.4
Gains on sales of loans as a
percentage of loans sold 4.7% 5.8% 6.0%
Retained Interests
The company retains various interests in the automobile loan
receivables that it securitizes. The retained interests, presented
as current assets on the company’s consolidated balance sheets,
serve as a credit enhancement for the benefit of the investors in
the securitized receivables. These retained interests include the
present value of the expected residual cash flows generated by
the securitized receivables, or “interest-only strip receivables,”
the restricted cash on deposit in various reserve accounts, and
an undivided ownership interest in the receivables securitized
through the warehouse facility and certain public
securitizations, or “required excess receivables,” as described