Note C - Finance Receivables

9 Months Ended

Jan. 31, 2014

C – Finance Receivables

The Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts typically include interest rates ranging from 11% to 19% per annum, are collateralized by the vehicle sold and typically provide for payments over periods ranging from 18 to 36 months. The weighted average interest rate for the portfolio was approximately 14.9% at January 31, 2014. The Company’s finance receivables are aggregated as one class of loans, which is sub-prime consumer automobile contracts. The level of risks inherent in the Company’s financing receivables is managed as one homogeneous pool. The components of finance receivables are as follows:

(In thousands)	January 31, 2014			April 30, 2013

Gross contract amount	$	454,093		$	414,614
Less unearned finance charges		(53,442	)		(51,220	)
Principal balance		400,651			363,394
Less allowance for credit losses		(90,942	)		(75,345	)

Finance receivables, net	$	309,709		$	288,049

Changes in the finance receivables, net are as follows:

	Nine Months Ended January 31,
(In thousands)	2014			2013

Balance at beginning of period	$	288,049		$	251,103
Finance receivable originations		308,330			284,931
Finance receivable collections		(155,481	)		(144,025	)
Provision for credit losses		(91,602	)		(70,499	)
Losses on claims for payment protection plan		(6,745	)		(5,249	)
Inventory acquired in repossession and payment protection plan claims		(32,842	)		(27,909	)

Balance at end of period	$	309,709		$	288,352

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

	Nine Months Ended January 31,
(In thousands)	2014			2013

Balance at beginning of period	$	75,345		$	65,831
Provision for credit losses		91,602			70,499
Charge-offs, net of recovered collateral		(76,005	)		(60,764	)

Balance at end of period	$	90,942		$	75,566

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 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 increased to 19.8% for the nine months ended January 31, 2014 compared to 18.1% for the same period in the prior year. The increase in net charge-offs for the first nine months of fiscal 2014 resulted primarily from the increased frequency of losses due largely to competitive pressures, although the severity of losses increased slightly as well. Higher sales volumes, lower collections and the shift in the relative age of the dealerships also had the effect of higher additions to the allowance charged to the provision for the first nine months of fiscal 2014.

As a result of the more recent increased charge-off levels and with the expectation that charge-offs related to a significant extent to increased competition on the lending side will remain elevated, management decided to increase the allowance for credit losses at January 31, 2014 to 23.5% from 21.5%. This increase to the allowance for credit losses resulted in a $7.7 million ($4.9 million after tax effects) charge to the provision for credit losses.

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 40.5% for the nine months ended January 31, 2014 compared to 42.8% for the prior year period. The decrease in collections as a percentage of average finance receivables was primarily due to the increase in the average term, higher contract modifications and more delinquent accounts for the first nine months of fiscal 2014 as compared to the first nine months of the prior year. Delinquencies greater than 30 days were 5.8% for January 31, 2014 and 6.0% at January 31, 2013.

Macro-economic factors, and more importantly, proper execution of operational policies and procedures have a significant effect on additions to the allowance charged to the provision. Higher unemployment levels, higher gasoline prices and higher prices for staple items can potentially have a significant effect. We believe our customers continue to be under significant pressure due to the persistent negative macro-economic environment during the first nine months of fiscal 2014. We expect these conditions to continue in the near to mid-term future. The Company continues to focus on operational improvements within the collections area such as credit reporting for customers and implementation of GPS units on vehicles sold.

Credit quality information for finance receivables is as follows:

(Dollars in thousands)	January 31, 2014					April 30, 2013					January 31, 2013

	Principal Balance		Percent of Portfolio			Principal Balance		Percent of Portfolio			Principal Balance		Percent of Portfolio
Current	$	321,511		80.24	%	$	284,441		78.27	%	$	287,553		79.01	%
3 - 29 days past due		55,873		13.95	%		60,477		16.64	%		54,358		14.94	%
30 - 60 days past due		14,620		3.65	%		10,232		2.82	%		14,112		3.88	%
61 - 90 days past due		6,221		1.55	%		6,280		1.73	%		5,494		1.51	%
> 90 days past due		2,426		0.61	%		1,964		0.54	%		2,401		0.66	%
Total	$	400,651		100.00	%	$	363,394		100.00	%	$	363,918		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 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 contract term length, down payment percentages, and collections for credit quality indicators.

	Nine Months Ended January 31,
	2014			2013

Principal collected as a percent of average finance receivables		40.5	%		42.8	%
Average down-payment percentage		5.6	%		5.8	%

	January 31, 2014		January 31, 2013
Average originating contract term (in months)		27.7		28.3
Portfolio weighted average contract term, including modifications (in months)		29.5		28.7

The decrease in the principal collected as a percent of average finance receivables is primarily attributed to the longer average contract term and the increase in contract modifications when compared to this time last year. The increases in contract term are primarily related to efforts to keep payments affordable, for competitive reasons and to continue to work more with our customers when they experience financial difficulties. In order to remain competitive term lengths may continue to increase.