Note C - Finance Receivables, Net

9 Months Ended

Jan. 31, 2022

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 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 54 months. The weighted average interest rate for the portfolio was approximately 16.5% at January 31, 2022. 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, 2022			April 30, 2021
Gross contract amount	$	1,268,390		$	980,757
Less unearned finance charges		(239,187	)		(171,220	)
Principal balance		1,029,203			809,537
Less allowance for credit losses		(231,966	)		(184,418	)
Finance receivables, net	$	797,237		$	625,119

Changes in the finance receivables, net are as follows:

	Nine Months Ended January 31,
(In thousands)	2022			2021
Balance at beginning of period	$	625,119		$	466,141
Finance receivable originations		718,275			524,820
Finance receivable collections		(293,458	)		(254,845	)
Provision for credit losses		(181,796	)		(127,585	)
Losses on claims for accident protection plan		(14,748	)		(13,898	)
Inventory acquired in repossession and accident protection plan claims		(56,155	)		(35,692	)
Balance at end of period	$	797,237		$	558,941

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

	Nine Months Ended January 31,
(In thousands)	2022			2021
Balance at beginning of period	$	184,418		$	155,041
Provision for credit losses		181,796			127,585
Charge-offs, net of recovered collateral		(134,248	)		(97,046	)
Balance at end of period	$	231,966		$	185,580

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 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 were 14.5% for the nine months ended January 31, 2022 and 2021, respectively. The frequency of losses were up slightly compared to the prior year’s quarter and severity of losses improved on a relative basis.

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 31.7% for the nine months ended January 31, 2022 compared to 38.0% for the same period in the prior year. Collections remained strong with the reduction in line with the expected change due to the average term increases. The first nine months of the prior year included the impact of the pandemic related stimulus payments which contributed to a higher collection percentage. Delinquencies greater than 30 days were 4.0% at January 31, 2022, and 2.6% at April 30, 2021. The Omicron variant negatively impacted delinquencies during the third quarter of fiscal year 2022 due to the combination of lost work hours and decreased wages for customers and a loss of hours worked for the Company.

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.

Credit quality information for finance receivables is as follows:

(Dollars in thousands)	January 31, 2022					April 30, 2021					January 31, 2021
	Principal		Percent of			Principal		Percent of			Principal		Percent of
	Balance		Portfolio			Balance		Portfolio			Balance		Portfolio
Current	$	841,635		81.78	%	$	717,520		88.64	%	$	655,445		88.04	%
3 - 29 days past due		146,609		14.24	%		71,269		8.80	%		68,414		9.19	%
30 - 60 days past due		29,062		2.82	%		13,058		1.61	%		14,147		1.90	%
61 - 90 days past due		6,682		0.65	%		5,551		0.69	%		4,163		0.56	%
> 90 days past due		5,215		0.51	%		2,139		0.26	%		2,352		0.32	%
Total	$	1,029,203		100.00	%	$	809,537		100.00	%	$	744,521		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; 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,
	2022			2021
Average total collected per active customer per month	$	487		$	449
Principal collected as a percent of average finance receivables		31.7	%		38.0	%
Average down-payment percentage		6.1	%		6.4	%
Average originating contract term (in months)		39.6			33.7

	January 31, 2022		January 31, 2021
Portfolio weighted average contract term, including modifications (in months)		41.2		35.7

Collections remained strong with the reduction of principal collected in line with the expected change due to the average term increases. The prior year quarter included the impact of the pandemic related stimulus payments which contributed to a higher collection percentage. The portfolio weighted average contract term increased primarily due to the increased average selling price, up $2,892 or 21.7% from the prior year period. The Company may further increase term lengths in order to maintain manageable payments for its customers if the average selling price continues to increase.

	As of January 31, 2022
(Dollars in thousands)	Fiscal Year of Origination										Prior to
Customer Rating	2022		2021		2020		2019		2018		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	%

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.