3.CarMax Auto Finance Income

CAF provides financing to qualified customers purchasing vehicles at CarMax stores. 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.

We typically use securitizations to fund loans originated by CAF, as discussed in Note 2. 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. Although CAF benefits from certain indirect overhead expenditures, we present this information on a direct basis to avoid making subjective 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. 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.

Components of CAF Income


	Three Months Ended August 31								Six Months Ended August 31
(In millions)	2014			% (1)	2013			% (1)	2014		% (1)	2013			% (1)
Interest margin:
Interest and fee income		$	150.7	7.8		$	137.2	8.4	$	297.6	7.9		$	270.7	8.5
Interest expense			(23.9)	(1.2)			(22.6)	(1.4)		(47.0)	(1.2)			(45.4)	(1.4)
Total interest margin			126.8	6.6			114.6	7.0		250.6	6.6			225.3	7.1
Provision for loan losses			(20.4)	(1.1)			(18.0)	(1.1)		(36.2)	(1.0)			(29.3)	(0.9)
Total interest margin after
provision for loan losses			106.4	5.5			96.6	5.9		214.4	5.7			196.0	6.2

Other income			―	―			0.1	―		―	―			0.1	―

Direct expenses:
Payroll and fringe benefit expense			(6.3)	(0.3)			(5.6)	(0.3)		(12.5)	(0.3)			(11.1)	(0.4)
Other direct expenses			(7.5)	(0.4)			(6.7)	(0.4)		(14.7)	(0.4)			(13.6)	(0.4)

Total direct expenses			(13.8)	(0.7)			(12.3)	(0.7)		(27.2)	(0.7)			(24.7)	(0.8)
CarMax Auto Finance income		$	92.6	4.8		$	84.4	5.2	$	187.2	5.0		$	171.4	5.4

Total average managed receivables		$	7,724.5			$	6,516.3		$	7,557.3			$	6,334.4

(1)Annualized percentage of total average managed receivables.