Jon Daniels: Thanks, Enrique. Good morning, everyone. During the third quarter, CarMax Auto Finance originated approximately $2 billion, resulting in penetration of 44% net of three-day payoffs, which was up from Q2 and relatively in line with the 44.4% observed during the third quarter last year. The weighted average contract rate charged to new customers was 11.3%, an increase of 150 basis points from the same period last year and up 20 basis points from Q2. Tier 2 penetration in the quarter was sequentially in line with Q2 at 18%, but remains lower year-over-year as we have yet to fully comp over the partner tightening observed in the back half of calendar 2022. Tier 3 accounted for 6.9% of sales as compared to 6.1% last year, impacting each of these results as CAF’s decreased percentage in Tier 3 as well as the increased test volume in Tier 2.
CAF income for the quarter was $149 million, down $3.5 million from the same period last year, but up $14 million sequentially. The provision for the quarter was $68.3 million as compared to $85.7 million in the prior year’s Q3. The $17 million favorability was offset by a year-over-year reduction in total interest margin of $20 million, driven by additional interest expense of $81 million. Note fair market value adjustments from our hedging strategy accounted for $6 million in expense this year versus $5 million of income last year. The total interest margin of the portfolio decreased to 5.9% from the 6.1% seen last quarter. This slight reduction is primarily a result of increased funding costs, including the fair market value adjustments along with CAF’s deliberate credit tightening that began last year, which inherently removes higher margin, higher loss assets from new originations.
CAF continued to offset these headwinds by adjusting customer rates but with a careful eye on three-day payoffs, sales and overall CarMax profitability. We are pleased with our ability to maintain a relatively stable net interest margin despite the volatile interest rate environment. The $68 million provision within the quarter resulted in a reserve balance of $512 million or 2.92% of receivables compared to 3.08% at the end of the second quarter. This 16 basis point reduction has occurred even with CAF’s continued investment in the Tier 2 space and is evidence of the growing impact that our broader credit tightening is having on the overall portfolio. While CAF delinquency levels remain elevated versus historic norms, as has been the case industry-wide, we believe our reserve adjustment adequately reflects the anticipated future loss performance of our portfolio.
The underwriting adjustments executed to date have been the right strategic moves to ensure we hit targeted loss levels, preserve our access to efficient funding yet still deliver strong future CAF earnings. We are well poised to recapture Tier 1 and Tier 3 volume as economic conditions improve and our continued learning in the Tier 2 space should provide a future growth opportunity. Now I’ll turn the call back over to Bill.
Bill Nash: Great. Thank you, Jon and Enrique. As I mentioned at the beginning of the call, we’re excited about the contributions we are seeing from our omnichannel investments. Our omnichannel capabilities offer our customers a uniquely personalized car buying experience that enables them to do as much or as little online and in-stores they want. I’m proud of the progress that we’ve made on our journey to deliver the most customer-centric experience in the industry. As we have said before, we believe consumers in the used car industry will increasingly prefer to have the ability to progress digitally. We are seeing this in our data. At the end of fiscal year ’20 when we completed our initial omnichannel rollout, approximately 40% of our customers leverage some or all of our digital capabilities to complete their transactions.
That has grown to approximately 70% this year. I recognize that the market volatility over the past few years has made it challenging to see the direct benefits omnichannel has delivered to our business, so I want to share some proof points that we are seeing. First, our data indicates that omnichannel is driving incremental retail customers to CarMax. Customers who fully complete an online transaction are 10% more likely to be new to CarMax compared with our omnichannel and in-store customers. We have also found that our online consumers skew younger, which creates the opportunity to participate in more of their lifetime purchase cycles. Additionally, since initially completing our omnichannel rollout, we have seen outsized market share growth in our oldest 15 markets where we have not opened new stores since calendar 2013.
In calendar 2019, the market share annual growth rate for these markets doubled from the average annual growth rate for the previous five years. Moreover, from the beginning of calendar 2019 to the end of calendar ’22, the market share average annual growth rate for these older markets continue to exceed their pre omnichannel average growth rate. Second, instant offer, our online consumer-facing appraisal tool that is a core part of our omnichannel capabilities is significantly driving our vehicle purchases and wholesale sales. We doubled our bots from consumers of the year we launched instant offer. This enabled us to grow our self-sufficiency to over 70%, which we have maintained since we launched the tool. Online buyouts have also fueled our wholesale volume, which grew approximately 65% during the launch year and has remained well above the volume prior to instant offer.
It’s worth noting that our instant offer algorithms also support our dealer-facing Max offer vehicle sourcing application. Third, our omnichannel products are supporting double-digit web traffic growth. Finance based shopping has been our number one lead source. This multi-lender prequalification products gives customers the ability to digitally receive quick credit decisions across our inventory with no impact to their credit score. Over 80% of our customers are using this online tool as they begin the credit process. Finally, omnichannel is on track to be a more efficient cost structure compared to our store-only model. Our omnichannel cost structure has more fixed costs than our historical store-only structure. We continue to show sequential year-over-year improvements in key cost efficiency metrics for omnichannel overhead model.
