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Note C - Finance Receivables, Net

12 Months Ended

Apr. 30, 2021

C - Finance Receivables, Net

The Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts, which carry a fixed interest rate of 15% or 16.5% per annum (19.5% to 21.5% in Illinois), are collateralized by the vehicle sold and typically provide for payments over periods ranging from 18 to 54 months. The Company’s finance receivables are defined as one segment and one class of loans, which is sub-prime consumer automobile contracts. The level of risks inherent in our financing receivables is managed as one homogeneous pool. The components of finance receivables as of April 30, 2021 and 2020 are as follows:

(In thousands)	April 30, 2021			April 30, 2020

Gross contract amount	$	980,757		$	728,841
Less unearned finance charges		(171,220	)		(107,659	)
Principal balance		809,537			621,182
Less allowance for credit losses		(184,418	)		(155,041	)

Finance receivables, net	$	625,119		$	466,141

Changes in the finance receivables, net for the years ended April 30, 2021, 2020 and 2019 are as follows:

	Years Ended April 30,
(In thousands)	2021			2020			2019

Balance at beginning of period	$	466,141		$	415,486		$	383,617
Finance receivable originations		762,716			604,497			540,505
Finance receivable collections		(370,254	)		(322,180	)		(293,739	)
Provision for credit losses		(163,662	)		(162,246	)		(146,363	)
Losses on claims for payment protection plan		(18,954	)		(17,966	)		(17,020	)
Inventory acquired in repossession and payment protection plan claims		(50,868	)		(51,450	)		(51,514	)

Balance at end of period	$	625,119		$	466,141		$	415,486

Changes in the finance receivables allowance for credit losses for the years ended April 30, 2021, 2020 and 2019 are as follows:

	Years Ended April 30,
(In thousands)	2021			2020			2019

Balance at beginning of period	$	155,041		$	127,842		$	117,821
Provision for credit losses		163,662			162,246			146,363
Charge-offs, net of recovered collateral		(134,285	)		(135,047	)		(136,342	)

Balance at end of period	$	184,418		$	155,041		$	127,842

The factors which influenced management’s judgment in determining the amount of the additions to the allowance charged to provision for credit losses are described below.

The historical level of actual charge-offs, net of recovered collateral, is the most important factor in determining the charges to the provision for credit losses. This is due to the fact that once a contract becomes delinquent the account is either made current by the customer, the vehicle is repossessed, or the account is written off if the collateral cannot be recovered. Net charge-offs as a percentage of average finance receivables were 19.3% for fiscal 2021 as compared to 23.1% for fiscal 2020. The decrease in net charge-offs for fiscal 2021 primarily resulted from a lower frequency of losses combined with a lower severity of losses relative to the principal balance. Although the loss severity per unit has increased with the increasing sales prices, the percentage of principal being charged off has decreased. This is primarily due to improvements in the collections processes including the positive impact of stimulus money and higher recovery rates on repossessions.

Collections and delinquency levels can have a significant effect on additions to the allowance and are reviewed frequently. Collections as a percentage of average finance receivables were 53.2% for the year ended April 30, 2021, compared to 55.1% for the year ended April 30, 2020. Collection percentages declined because of the longer terms, partially offset by improved collections as a result of stimulus money and enhanced unemployment payments to many of our customers. Delinquencies greater than 30 days decreased to 2.6% at April 30, 2021 compared to 6.2% at April 30, 2020.

In addition to the objective factors discussed above, the Company also considers macro-economic factors such as changes in unemployment levels, gasoline prices and prices for staple items to develop reasonable and supportable forecasts about the future. These economic forecasts are utilized alongside historical loss information in order to estimate expected losses in the portfolio over the following twelve-month period, at which point the Company will immediately revert to the point estimate produced by the Company’s analysis of historical loss information to estimate expected losses from the portfolio for the remaining contractual lives of its finance receivables. See “Finance Receivables, Repossessions and Charge-offs and Allowance for Credit Losses” in Note B for a description of the historical data included in this analysis.

As a result of the improved credit loss results, lower delinquencies, as well as changes in the Company’s outlook for projected losses, the allowance for credit losses was lowered from 26.5% to 24.5% as a percentage of finance receivables, net of deferred revenue as of April 30, 2021. This decrease in the allowance resulted in a $15.1 million pretax decrease in the provision for credit losses for fiscal year 2021.

Credit quality information for finance receivables is as follows:

(Dollars in thousands)	April 30, 2021					April 30, 2020

	Principal		Percent of			Principal		Percent of
	Balance		Portfolio			Balance		Portfolio
Current	$	717,520		88.64	%	$	515,390		82.97	%
3 - 29 days past due		71,269		8.80	%		67,259		10.83	%
30 - 60 days past due		13,058		1.61	%		25,311		4.07	%
61 - 90 days past due		5,551		0.69	%		10,140		1.63	%
> 90 days past due		2,139		0.26	%		3,082		0.50	%
Total	$	809,537		100.00	%	$	621,182		100.00	%

Accounts one and two days past due are considered current for this analysis, due to the varying payment dates and variation in the day of the week at each period end. Delinquencies may vary from period to period based on the average age of the portfolio, seasonality within the calendar year, the day of the week and overall economic factors. The above categories are consistent with internal operational measures used by the Company to monitor credit results. The amounts past due have improved due to the impact of stimulus payments combined with the Company’s continued improvements in collections practices.

Substantially all of the Company’s automobile contracts involve contracts made to individuals with impaired or limited credit histories, or higher debt-to-income ratios than permitted by traditional lenders. Contracts made with buyers who are restricted in their ability to obtain financing from traditional lenders generally entail a higher risk of delinquency, default and repossession, and higher losses than contracts made with buyers with better credit. The Company monitors customer scores, contract term length, down payment percentages, and collections for credit quality indicators.

	Twelve Months Ended April 30,
	2021			2020

Principal collected as a percent of average finance receivables		53.2	%		55.1	%
Average down-payment percentage		7.1	%		6.4	%

	April 30, 2021		April 30, 2020
Average originating contract term (in months)		34.6		30.7
Portfolio weighted average contract term, including modifications (in months)		37.3		33.3

The weighted average contract term increases have been made to maintain affordability for our customers as the average selling price has increased from $11,793 for fiscal 2020 to $13,621 for fiscal 2021.

	Customer Score by Fiscal Year of Origination
											Prior to
(Dollars in thousands)	2021		2020		2019		2018		2017		2017		Total		%

1-2	$	32,946	$	11,967	$	1,229	$	63	$	8	$	-	$	46,213		5.7	%
3-4		211,939		66,524		8,299		491		26		8		287,287		35.5	%
5-6		346,461		108,576		19,006		1,868		121		5		476,037		58.8	%
Total	$	591,346	$	187,067	$	28,534	$	2,422	$	155	$	13	$	809,537		100.0	%

When customers apply for financing, the Company’s proprietary scoring models rely on the customers’ credit history and certain application information to evaluate and rank their risk. We obtain credit histories and other credit data that includes information such as number of different addresses, age of oldest record, high risk credit activity, job time, time at residence and other factors. The application information that is used includes income, collateral value and down payment. The scoring models yield credit grades that represent the credit quality. Customers with the highest credit quality are 6 rated customers. Customers assigned a lower grade are determined to have a lower credit quality. For loans that are approved, the credit grade influences the terms of the agreement, such as the maximum amount financed, term length and minimum down payment. After origination, credit grades are generally not updated.

The Company uses a combination of the initial credit grades and historical performance to monitor the credit quality of the finance receivables on an ongoing basis, and the accuracy of the scoring models are validated periodically. Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.