In its fiscal third quarter ended Nov. 30, CarMax Inc.’s captive finance arm received fewer applications for loans from consumers with low credit scores than a year earlier, the company said.
CarMax Auto Finance also experienced an uptick in loan charge-offs in the quarter resulting in a “modest” increase in loan loss provision.
“In Q3 we experienced a year-over-year decline in credit applications across the lower end of credit, with moderate growth at the higher end,” Tom Reedy, CarMax CFO, said during a conference all detailing CarMax’s quarterly earnings.
In January 2014, CarMax Auto Finance began a test, financing customers it typically would have handed off to subprime lenders, to learn more about those customers and how best to handle them in the future.
Finance income up
Vehicles financed in that test as well as by CarMax’s subprime lenders -- which it calls Tier 3 loan providers -- together represented 13.7 percent of retail units sold by the retailer in the latest quarter, down from 15.2 percent in the year-earlier period.
CarMax pays a fee to its Tier 3 providers to accept the risk of its customers defaulting on their loans.
Income generated by CarMax Auto Finance rose 2.9 percent to $92.3 million in the three-month period. That was driven by an increase in average managed receivables and was largely offset by a lower total interest margin percentage.
Total interest margin, which reflects the spread between interest and fees charged to consumers and the company’s funding costs, declined to 6 percent of average managed receivables from 6.4 percent in the same quarter last year.
Net down 1.4%
CarMax Auto Finance saw an uptick in loan charge-offs in the quarter prompting a “modest” increase in its loan-loss provision, Reedy said. “At $91 million, our ending allowance for loan losses was 0.97 percent of managed receivables, consistent with last year’s third quarter at 0.98 percent,” he said.
Average managed receivables grew 15.4 percent to $9.3 billion, the company reported.
Revenues from sales of CarMax’s extended protection plan was flat “as the effect of the growth in our retail unit sales was offset by an increase in estimated cancellation reserves,” the company said.
CarMax net profits eased 1.4 percent to $128.2 million, even as sales and operating revenues increased 4.1 percent to $3.54 billion. Total retail used sales rose 3.2 percent to 143,673 vehicles.
The used-car giant operates 155 used-car stores in 77 markets.