This excerpt taken from the KMX 10-K filed May 12, 2006.
CARMAX 2006 28
GAIN INCOME AND LOANS SOLD
Fiscal 2006 Versus Fiscal 2005. CAF income rose 26% to $104.3 million in fiscal 2006. The fiscal 2006 total gain income benefited from the growth in retail vehicle sales, $0.06 per share of favorable valuation adjustments, $0.02 per share of favorable effects from new public securitizations completed during the year, and $0.01 per share from the repurchase and resale of receivables in existing public securitizations. In fiscal 2005, CAFs gains on sales of loans included a benefit of $0.01 per share resulting from a favorable valuation adjustment and $0.01 per share from the repurchase and resale of receivables in existing public securitizations. The increases in other CAF income and direct CAF expenses in fiscal 2006 were proportionate to the growth in managed receivables during the year.
The $0.06 per share of favorable valuation adjustments in fiscal 2006 and $0.01 per share of favorable valuation adjustments in fiscal 2005 resulted primarily from lowering the loss rate assumptions on pools of previously securitized receivables. These pools of receivables experienced loss rates lower than our initial expectations, reflecting the implementation of a new credit scorecard in fiscal 2003, operating efficiencies resulting from system enhancements, and a favorable economic environment. The $0.02 per share favorable effect of new public securitizations in fiscal 2006 resulted from the refinancing of receivables from the warehouse facility into three new public securitizations.
The companys public securitizations typically contain an option to repurchase the securitized receivables when the outstanding balance in a pool of automobile loan receivables falls below 10% of the original pool balance. The company exercised this option twice in fiscal 2006 and once in fiscal 2005. All eligible receivables were subsequently resold into the warehouse facility. In each year, the remaining receivables carried relatively high interest rates that, combined with the relatively low short-term funding costs, resulted in an earnings benefit of approximately $0.01 per share.
In future years, the effect of refinancing, repurchase, and resale activity could be favorable or unfavorable depending on the securitization structure and market conditions at the transaction date.
Fiscal 2005 Versus Fiscal 2004. CAF income declined 3% to $82.7 million in fiscal 2005, primarily reflecting the decline in the gain spread to 3.7% in fiscal 2005 from 4.8% in fiscal 2004. As anticipated, this decrease in CAF income resulted primarily from a return to more normal gain spread levels, as CAFs cost of funds increased more rapidly than consumer loan rates during fiscal 2005. During the first half of fiscal 2004, we benefited from higher-than-normal gain spreads resulting from consumer loan rates falling more slowly than our cost of funds. In fiscal 2005, the increases in other CAF income and direct CAF expenses were proportionate to the increase in managed receivables during the year.