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Note C - Finance Receivables, Net

9 Months Ended

Jan. 31, 2024

Notes to Financial Statements

Financing Receivables [Text Block]

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 18.25% for all states except Arkansas (originates at 16.75%), Illinois (originates at 19.5% – 21.5%) and Smart Auto dealerships in Tennessee (which originate at up to 23.0%), are collateralized by the vehicle sold and typically provide for payments over periods ranging from 18 to 69 months. The Company’s finance receivables are defined as one segment and one class of contracts, 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, 2024				April 30, 2023

Gross contract amount		$	1,821,447			$	1,752,149
Less: unearned finance charges			(392,539	)			(378,777	)
Principal balance			1,428,908				1,373,372
Less: estimated insurance receivables for APP claims			(4,303	)			(5,694	)
Less: allowance for APP claims			(4,507	)			(5,310	)
Less: allowance for credit losses			(334,987	)			(299,608	)
Finance receivables, net			1,085,111				1,062,760
Loan origination costs			661				700
Finance receivables, net, including loan origination costs			1,085,772				1,063,460

Changes in the finance receivables, net are as follows:

		Nine Months Ended January 31,
(In thousands)		2024				2023

Balance at beginning of period		$	1,062,760			$	855,424
Finance receivable originations			794,477				841,445
Finance receivable collections			(324,703	)			(308,671	)
Provision for credit losses			(321,300	)			(250,719	)
Losses on claims for accident protection plan			(24,480	)			(17,717	)
Inventory acquired in repossession and accident protection plan claims			(101,643	)			(107,882	)

Balance at end of period		$	1,085,111			$	1,011,880

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

		Nine Months Ended January 31,
(In thousands)		2024				2023

Balance at beginning of period		$	299,608			$	237,823
Provision for credit losses			321,300				250,719
Charge-offs			(386,349	)			(296,154	)
Recovered collateral			100,428				90,387

Balance at end of period		$	334,987			$	282,775

Amounts recovered from previously written-off accounts were approximately $2.0 million and $2.0 million for the nine months ended January 31, 2024 and 2023, respectively. These amounts are netted against recovered collateral in the table above.

Our allowance for credit losses increased during the first nine months of fiscal year 2024 by $35.4 million or 12%, the majority of the increase relates to the $28.0 million increase in second quarter, which resulted from an increase in the allowance for credit loss from 23.91 % to 26.04%. The Company reduced the allowance for credit loss in the third quarter to 25.74%, resulting in a benefit of $3.9 million to the provision. Structural changes to our portfolio, primarily related to the longer contract terms, continue to drive an increase in the provision for credit losses. The charge-offs, net of recovered collateral, were impacted by a higher frequency of losses compared to the prior year as well as a higher severity of losses driven by lower recovery values and longer contract terms.

Credit quality information for finance receivables is as follows:

(Dollars in thousands)		January 31, 2024								April 30, 2023								January 31, 2023
		Principal				Percent of				Principal				Percent of				Principal				Percent of
		Balance				Portfolio				Balance				Portfolio				Balance				Portfolio
Current		$	1,119,120				78.32	%		$	1,166,860				84.96	%		$	1,011,877				77.48	%
3 - 29 days past due			262,200				18.35	%			156,943				11.43	%			245,939				18.83	%
30 - 60 days past due			34,266				2.40	%			37,214				2.71	%			36,447				2.79	%
61 - 90 days past due			7,258				0.51	%			8,407				0.61	%			7,700				0.59	%
> 90 days past due			6,064				0.42	%			3,948				0.29	%			3,993				0.31	%
Total		$	1,428,908				100.00	%		$	1,373,372				100.00	%		$	1,305,956				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.

Substantially all of the Company’s installment sale 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, payment to income, down payment percentages, and collections for credit quality indicators.

		Nine Months Ended January 31,
		2024				2023

Average total collected per active customer per month		$	536			$	516
Principal collected as a percent of average finance receivables			22.7	%			25.4	%
Average down-payment percentage			5.0	%			5.4	%
Average originating contract term (in months)			44.0				42.5

		As of
		January 31, 2024				January 31, 2023
Portfolio weighted average contract term, including modifications (in months)			47.6				45.4

Although total dollars collected per active customer for the nine months increased 3.9% year over year, principal collections as a percentage of average finance receivables were lower in the nine months ended January 31, 2024 compared to the prior year, primarily due to the average term increases. Overall collections have also been negatively impacted by the current inflationary environment. The portfolio weighted average contract term increased primarily due to the increased average selling price, up $1,003 or 5.6%, 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 installment sales contracts 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. Installment sale contract 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, 2024, segregated by customer score.

As of January 31, 2024

(Dollars in thousands)			Fiscal Year of Origination																				Prior to
Customer Rating			2024				2023				2022				2021				2020				2020				Total				%
1-2			$	32,854			$	18,416			$	5,298			$	661			$	124			$	13			$	57,366				4.0	%
3-4			$	236,351			$	153,436			$	50,070			$	7,414			$	450			$	178			$	447,899				31.4	%
5-6			$	394,600			$	352,267			$	147,133			$	27,316			$	1,797			$	530			$	923,643				64.6	%
Total			$	663,805			$	524,119			$	202,501			$	35,391			$	2,371			$	721			$	1,428,908				100.0	%

Gross charge-offs			$	87,675			$	211,642			$	72,511			$	13,111			$	957			$	453			$	386,349

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

As of January 31, 2023

(Dollars in thousands)			Fiscal Year of Origination																				Prior to
Customer Rating			2023				2022				2021				2020				2019				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	%