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Note C - Finance Receivables, Net

9 Months Ended

Jan. 31, 2023

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 18% per annum (16.5% in Arkansas, 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 in the Company’s finance receivables is managed as one homogeneous pool.

The components of finance receivables are as follows:

(In thousands)	January 31, 2023			April 30, 2022
Gross contract amount	$	1,643,982		$	1,378,803
Less unearned finance charges		(338,026	)		(277,306	)
Principal balance		1,305,956			1,101,497
Less allowance for credit losses		(282,775	)		(237,823	)

Finance receivables, net	$	1,023,181		$	863,674

Changes in the finance receivables, net are as follows:

	Nine Months Ended January 31,
(In thousands)	2023			2022
Balance at beginning of period	$	863,674		$	632,270
Finance receivable originations		841,445			718,275
Finance receivable collections		(308,671	)		(293,458	)
Provision for credit losses		(250,719	)		(167,987	)
Losses on claims for accident protection plan		(17,717	)		(14,748	)
Inventory acquired in repossession and accident protection plan claims		(104,831	)		(67,363	)

Balance at end of period	$	1,023,181		$	806,989

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

	Nine Months Ended January 31,
(In thousands)	2023			2022
Balance at beginning of period	$	237,823		$	177,267
Provision for credit losses		250,719			167,987
Charge-offs, net of recovered collateral and deferred ancillary product revenue		(205,769	)		(123,042	)
Recoveries of amounts previously written off		2			2

Balance at end of period	$	282,775		$	222,214

The factors which influenced management’s judgment in determining the amount of the current period 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 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 increased to 16.9% for the nine months ended January 31, 2023, compared to 13.3% for the prior year period. The primary driver of the increase in net charge-offs compared to the same quarter in the prior year was an increased frequency of losses coupled with a slight increase in the relative severity of losses.

Collections and delinquency levels can have a significant effect on additions to the allowance and are reviewed frequently. Principle collections as a percentage of average finance receivables were 25.4% for the nine months ended January 31, 2023 compared to 31.7% for the same period in the prior year. Principal collections decreased primarily due to the term extensions coupled with the fewer early payoffs. Delinquencies greater than 30 days were 3.7% and 4.0% at January 31, 2023 and 2022, respectively.

In addition to the objective factors discussed above, the Company also considers macro-economic factors that would affect its customers’ non-discretionary income, such as changes in unemployment levels, gasoline prices, and prices for staple items to develop reasonable and supportable forecasts for the lifetime expected losses. 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.

Credit quality information for finance receivables is as follows:

(Dollars in thousands)	January 31, 2023					April 30, 2022					January 31, 2022
	Principal		Percent of			Principal		Percent of			Principal		Percent of
	Balance		Portfolio			Balance		Portfolio			Balance		Portfolio
Current	$	1,011,877		77.48	%	$	958,808		87.05	%	$	841,635		81.78	%
3 - 29 days past due		245,939		18.83	%		109,873		9.97	%		146,609		14.24	%
30 - 60 days past due		36,447		2.79	%		22,477		2.04	%		29,062		2.81	%
61 - 90 days past due		7,700		0.59	%		7,360		0.67	%		6,682		0.65	%
> 90 days past due		3,993		0.31	%		2,979		0.27	%		5,215		0.51	%
Total	$	1,305,956		100.00	%	$	1,101,497		100.00	%	$	1,029,203		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 current quarter ended on the highest delinquency day on average, Tuesday, compared to the prior year quarter which ended on the lowest delinquency date on average, Saturday. Delinquencies were also impacted by severe weather during January 2023, which caused multiple locations to close operations for several days. The above categories are consistent with internal operational measures used by the Company to monitor credit results.

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.

	Nine Months Ended January 31,
	2023			2022
Average total collected per active customer per month	$	516		$	487
Principal collected as a percent of average finance receivables		25.4	%		31.7	%
Average down-payment percentage		5.4	%		6.1	%
Average originating contract term (in months)		42.5			39.6

		January 31, 2023				January 31, 2022
Portfolio weighted average contract term, including modifications (in months)			45.4				41.2

The reduction of principal collected was in line with the expected change due to the average term increases and the absence of stimulus payments in the economy in the current year. The portfolio weighted average contract term increased primarily due to the increased average selling price, up $2,114 or 13.3% from the prior year period.

When customers apply for financing, the Company’s proprietary scoring model relies on the customers’ credit histories and certain application information to evaluate and rank their risk. The Company obtains 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 relative likelihood of repayment. Customers with the highest probability of repayment are 6 rated customers. Customers assigned a lower grade are determined to have a lower probability of repayment. 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 model is validated periodically. Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.

The following table presents a summary of finance receivables by credit quality indicator, as of January 31, 2023, segregated by customer score.

(Dollars in	As of January 31, 2023
thousands)	Fiscal Year of Origination
Customer Rating	2023		2022		2021		2020		2019		Prior to 2019		Total		%
1-2	$	31,580	$	17,295	$	4,212	$	545	$	35	$	12	$	53,679		4.1	%
3-4	$	232,273	$	135,531	$	36,562	$	2,974	$	332	$	192	$	407,864		31.2	%
5-6	$	437,566	$	307,513	$	89,582	$	8,389	$	910	$	453	$	844,413		64.7	%
Total	$	701,419	$	460,339	$	130,356	$	11,908	$	1,277	$	657	$	1,305,956		100.0	%

The following table presents a summary of finance receivables by credit quality indicator, as of January 31, 2022, segregated by customer score.

(Dollars in	As of January 31, 2022
thousands)	Fiscal Year of Origination
Customer Rating	2022		2021		2020		2019		2018		Prior to 2018		Total		%
1-2	$	31,704	$	16,129	$	3,921	$	170	$	3	$	-	$	51,927		5.0	%
3-4	$	207,084	$	112,330	$	23,042	$	1,205	$	36	$	17	$	343,714		33.4	%
5-6	$	372,508	$	214,120	$	43,186	$	3,498	$	230	$	20	$	633,562		61.6	%
Total	$	611,296	$	342,579	$	70,149	$	4,873	$	269	$	37	$	1,029,203		100.0	%