Company: KMX
Filing Date: 2025-04-11
Form Type: 10-K
Source: 0001170010-25-000024
Chunk: 72

Company: CARMAX INC
Filing Date: 2025-04-11
Form: 10-K
Item: Item 7
Chunk 72
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 fiscal 2025.  During March 2025, CAF began a measured expansion by recapturing profitable portions of Tier 1 originations that we had shifted to our Tier 2 lenders as we tightened lending standards.  We expect this expansion will grow our penetration by 100 to 150 basis points in the near-term, which is enabled by our non-prime securitization program, allowing us to efficiently fund these non-prime receivables while retaining the full economic value of the contracts.  We continue to learn from our new underwriting models and corresponding tests currently in place and anticipate capturing additional volume across Tier 2 and Tier 3 during the back half of fiscal 2026.  We will continue to monitor consumer behavior and the broader economy and will adjust our origination strategy as needed.  We would expect each additional percentage point of CAF penetration to generate $10 million to $12 million in lifetime pre-tax income per year of origination, net of the impact to finance partner participation fees.  Our pre-tax income expectations will be impacted by the volume of loans originated, interest rates charged to customers, loan terms, loss rates, average credit scores and the broader macroeconomic and lending environments.  While this income is earned over time, the provision for lifetime losses is recognized at the time of origination.  We believe our unique finance platform with a full-spectrum in-house lending operation, coupled with a robust network of partner lenders, will strengthen our competitive advantage.

Historically, CAF has originated a small portion of auto loans to customers who typically would be financed by our Tier 2 and Tier 3 finance providers, in order to better understand the performance of these loans, mitigate risk and add incremental profits.  The targeted percentage of Tier 2 and Tier 3 originations has fluctuated over the past several years.  With the testing of the new full-spectrum credit scoring models, we intend to continue our investment in this space during fiscal 2026, but remain within the target of originating less than 15% and 5% of the total Tier 2 and Tier 3 loan volume, respectively.  Any future adjustments in Tier 2 and Tier 3 will consider the broader lending environment, which includes funding availability, along with the long-term sustainability of the change.  These loans have higher loss and delinquency rates than the remainder of the CAF portfolio, as well as higher contract rates.

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CAF expanded its asset-backed securitization program to allow