CarMax posted strong earnings yesterday for the quarter that ended on Aug. 31, and the company’s executive vice president and chief financial officer, Keith Browning, offered a detailed review of the company auto finance business during the company’s conference call with investors yesterday. His report:
This year’s adjustments included a $28.5 million of mark-to-market write-ups in the value of our retained subordinated bonds, another $5.6 million more from favorable funding terms and costs for loans that were funded in the warehouse facility at the start of the quarter, and $2 million of other net favorable items.
The mark-to-market write-ups reflect significant narrowing in the automotive ABS spreads that has occurred over the last few months. At the start of the quarter we implemented additional tightening in CAF’s lending standards. We felt that it was prudent to do so in order to increase the [financability] of our new CAF loan originations and reduce CAF’s credit enhancements associated with future CAF securitizations.
We expect loss rates on new originations will be significantly reduced, which will in turn, lower our required credit enhancements. As a result of our capital preservation strategy CAF’s loan penetration rate net of three day payoffs, was below 30% for this year’s second quarter versus a penetration rate in the mid 30’s in last year’s second quarter.
On a combined basis this tightening together with the tightening CAF implemented in the second half of 2009, adversely affected our second quarter used unit comps by several percentage points. During the quarter we also renewed our warehouse facility agreement.
The facility limit was reduced to $1.2 billion from $1.4 billion primarily reflecting our reduced originations. While the funding cost spread increased from the previous agreement it was considerably lower then what we originally anticipated.
Our funding cost spread assumption on the new warehouse facility is approximately 270 basis points above the applicable benchmark rate. At August 31 we had $625 million available warehouse capacity.
Excluding the adjustments related to prior period originations, CAF income still climbed more than 70% versus last year’s quarter primarily due to an increase in the gain origination and higher interest income. The gain percentage was 4.2% this quarter versus 1.8% in last year’s second quarter and it benefited from both lower benchmark funding rates and from lower enhancement requirements resulting from the tightening of our lending standards.
CAF interest income includes the interest that we’re earning on the retained subordinated bonds, and we’re currently holding roughly twice the amount of the sub bonds compared with a year ago. Now I’ll turn the call back over to Tom.
