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Note C - Finance Receivables, Net

9 Months Ended

Jan. 31, 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 an 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 48 months. The weighted average interest rate for the portfolio was approximately 16.5% at January 31, 2021. The Company’s finance receivables are defined as one segment and one class of loans in sub-prime consumer automobile contracts. The level of risks inherent in the Company’s finance receivables is managed as one homogeneous pool.

The components of finance receivables are as follows:

(In thousands)	January 31, 2021			April 30, 2020

Gross contract amount	$	886,019		$	728,841
Less unearned finance charges		(141,498	)		(107,659	)
Principal balance		744,521			621,182
Less allowance for credit losses		(185,580	)		(155,041	)

Finance receivables, net	$	558,941		$	466,141

Changes in the finance receivables, net are as follows:

	Nine Months Ended January 31,
(In thousands)	2021			2020

Balance at beginning of period	$	466,141		$	415,486
Finance receivable originations		524,820			446,093
Finance receivable collections		(254,845	)		(229,973	)
Provision for credit losses		(127,585	)		(112,885	)
Losses on claims for payment protection plan		(13,898	)		(13,141	)
Inventory acquired in repossession and payment protection plan claims		(35,692	)		(38,325	)

Balance at end of period	$	558,941		$	467,255

Changes in the finance receivables allowance for credit losses are as follows:

	Nine Months Ended January 31,
(In thousands)	2021			2020

Balance at beginning of period	$	155,041		$	127,842
Provision for credit losses		127,585			112,885
Charge-offs, net of recovered collateral		(97,046	)		(100,445	)

Balance at end of period	$	185,580		$	140,282

The factors which influenced management’s judgment in determining the amount of the current period provision for credit losses are described below.

The level of charge-offs, net of recovered collateral, is the most important factor in determining 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 decreased to 14.5% for the nine months ended January 31, 2021, compared to 17.5% for the prior year period. The frequency of losses improved as a result of the sale of higher quality vehicles, improved deal structures and improved collections practices.

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 38.0% for the nine months ended January 31, 2021 compared to 40.0% for the same period in the prior year. The increase in the average contract term was the primary driver of the lower collection percentage, partially offset by improved collections on delinquent accounts. Delinquencies greater than 30 days were 2.8% for January 31, 2021 and 3.6% at January 31, 2020.

In addition to the objective factors discussed above, the Company also considers macro-economic factors such as higher unemployment levels, higher gasoline prices and higher 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 losses inherent in the portfolio over the following twelve-month period, at which point the Company will revert to historical loss information to estimate losses inherent in the portfolio for the remaining contractual lives of its finance receivables.

In the first quarter of fiscal 2020, the Company reduced its allowance for credit losses from 25.0% to 24.5% as a result of improvements in net charge-offs as a percentage of average receivables, the quality of the portfolio and the allowance analysis. However, in the fourth quarter of fiscal 2020, COVID-19 impacted our customers, resulting in an increased past-due amounts as a percentage of receivables. As a result, the Company increased the allowance for credit losses from 24.5% to 26.5%. Although delinquencies have improved since yearend, the uncertainty of the COVID-19 impact on the economy and unemployment could affect our collections and past due receivables going forward.

Macro-economic factors, the competitive environment on the funding side, and more importantly, proper execution of operational policies and procedures have a significant effect on additions to the allowance charged to the provision. The Company continues to focus on operational improvements within the collections area.

Credit quality information for finance receivables is as follows:

(Dollars in thousands)	January 31, 2021					April 30, 2020					January 31, 2020

	Principal		Percent of			Principal		Percent of			Principal		Percent of
	Balance		Portfolio			Balance		Portfolio			Balance		Portfolio
Current	$	655,445		88.04	%	$	515,390		82.97	%	$	513,053		84.44	%
3 - 29 days past due		68,414		9.19	%		67,259		10.83	%		72,971		12.01	%
30 - 60 days past due		14,147		1.90	%		25,311		4.07	%		14,504		2.39	%
61 - 90 days past due		4,163		0.56	%		10,140		1.63	%		4,413		0.73	%
> 90 days past due		2,352		0.32	%		3,082		0.50	%		2,596		0.43	%
Total	$	744,521		100.00	%	$	621,182		100.00	%	$	607,537		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 Company believes that the enhanced unemployment benefits and stimulus payments made under the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, contributed to the improvement in delinquencies.

Finance receivables outstanding at January 31, 2021 summarized by fiscal year of origination is as follows:

(In thousands)
Fiscal Year of Origination										Prior to
2021		2020		2019		2018		2017		2017		Total
$	440,211		246,202		50,425		6,036		1,064		583	$	744,521

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; such contracts generally entail a higher risk of delinquency, default, repossession, and losses than contracts made with buyers with better credit. Therefore, the Company manages the level of risks inherent in the Company’s financing receivables as one homogenous pool. The Company monitors contract term length, down payment percentages, and collections as credit quality indicators.

	Nine Months Ended January 31,
	2021			2020

Principal collected as a percent of average finance receivables		38.0	%		40.0	%
Average down-payment percentage		6.4	%		5.9	%
Average originating contract term (in months)		33.7			30.8

	January 31, 2021			January 31, 2020
Portfolio weighted average contract term, including modifications (in months)		35.7			32.5

The decrease in collections as a percentage of average finance receivables resulted primarily from an extension in the average contract term, partially offset by improved collections on delinquent accounts. The portfolio weighted average contract term increased primarily due to the increased average selling price, up $1,720 or 14.8% from the prior year period. If the average selling price increases and in order to remain competitive, term lengths may continue to increase in order to maintain manageable payments for our customers.