CarMax Auto Finance grew income 1.6% year over year to $109.7 million in part due to a decrease in fees paid to a third-party lender that has experienced a decline in performance, according to Wednesday’s earnings report.
The used car retailer has its financing arm but also works with third-party lenders that it breaks out into two groups: tier 2 and tier 3. Lenders in tier 2 do not receive a fee from CarMax to offer financial packages in its stores, while tier 3 lenders do receive a fee from the retailer.
The penetration of tier 3 subprime lenders decreased to 8.8% in the second quarter ending in August compared with 9.6% penetration the same period the year prior. Because the mix of loans increased in the non-fee tier 2 category and decreased to tier 3, CarMax gained back a $1.9 million expense it had initially planned.
“The degradation in tier 3 was a combination of increased volume but a decrease in the performance by [one] lender,” Tom Reedy, CarMax’s executive vice president and chief financial officer, said during the call without disclosing the name of the lender. “That’s why we have multiple partners because different institutions have different credit [commitments], they get different leadership at different points in their evolution, and they can change their mind about how they want to behave.”
CarMax Auto Finance’s average receivables increased 8.6% year over year during the quarter, which also helped raise income. Additionally, originations grew by 8.8% year over year to $1.7 billion “due to our sales growth, an increase in the average amount financed, and the slight increase in CAF penetration rate,” Reedy said.
