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Note C - Finance Receivables, Net

12 Months Ended

Apr. 30, 2022

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 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 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 our financing receivables is managed as one homogeneous pool. The components of finance receivables as of April 30, 2022 and 2021 are as follows:

(In thousands)	April 30, 2022			April 30, 2021

Gross contract amount	$	1,378,803		$	980,757
Less unearned finance charges		(277,306	)		(171,220	)
Principal balance		1,101,497			809,537
Less allowance for credit losses		(247,207	)		(184,418	)

Finance receivables, net	$	854,290		$	625,119

As of April 30, 2022, auto finance receivables collateralizing the non-recourse notes payable related to the financing and securitization transaction completed during the fiscal year 2022, were $550.3 million.

Changes in the finance receivables, net for the years ended April 30, 2022, 2021 and 2020 are as follows:

	Years Ended April 30,
(In thousands)	2022			2021			2020

Balance at beginning of period	$	625,119		$	466,141		$	415,486
Finance receivable originations		1,009,859			762,716			604,497
Finance receivable collections		(417,796	)		(370,254	)		(322,180	)
Provision for credit losses		(257,101	)		(163,662	)		(162,246	)
Losses on claims for accident protection plan		(21,871	)		(18,954	)		(17,966	)
Inventory acquired in repossession and accident protection plan claims		(83,920	)		(50,868	)		(51,450	)

Balance at end of period	$	854,290		$	625,119		$	466,141

Changes in the finance receivables allowance for credit losses for the years ended April 30, 2022, 2021 and 2020 are as follows:

	Years Ended April 30,
(In thousands)	2022			2021			2020

Balance at beginning of period	$	184,418		$	155,041		$	127,842
Provision for credit losses		257,101			163,662			162,246
Charge-offs, net of recovered collateral		(194,312	)		(134,285	)		(135,047	)

Balance at end of period	$	247,207		$	184,418		$	155,041

Amounts recovered from previously written-off accounts were $2.4 million, $1.9 million, and $1.7 million for the years ended April 30, 2022, 2021 and 2020, respectively.

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 amount as a percentage of receivables (to 6.2% from 2.9%). As a result, the Company increased the allowance for credit losses from 24.5% to 26.5%. The net increase resulted in a $9.1 million pre-tax charge to the provision for credit losses ($7.0 million after tax effects, $1.02 per diluted share). As a result of improved credit losses during the fiscal year 2021, as well as the Company’s outlook for projected losses, the Company decreased the allowance for credit losses in the fourth quarter of fiscal 2021 from 26.5% to 24.5%, resulting in a $15.1 million pre-tax decrease in the provision for credit losses ($11.5 million after tax effects, $1.65 per diluted share). The allowance for credit losses remains at 24.5% at April 30, 2022.

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 were 20.2% for fiscal 2022 as compared to 19.3% for fiscal 2021. The frequency of losses increased compared to the prior year as credit losses began to normalize to pre-pandemic levels. The prior year credit losses were positively impacted by stimulus payments and lower default rates.

Collections and delinquency levels can have a significant effect on additions to the allowance and are reviewed frequently. Principal collections as a percentage of average finance receivables were 43.5% for the year ended April 30, 2022, compared to 53.2% for the year ended April 30, 2021. Principal collections decreased due to the term extensions coupled with fiscal year 2021 being positively impacted by stimulus payments. Delinquencies greater than 30 days increased slightly to 3.0% at April 30, 2022 compared to 2.6% at April 30, 2021.

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)	April 30, 2022					April 30, 2021

	Principal		Percent of			Principal		Percent of
	Balance		Portfolio			Balance		Portfolio
Current	$	958,808		87.05	%	$	717,520		88.64	%
3 - 29 days past due		109,873		9.97	%		71,269		8.80	%
30 - 60 days past due		22,477		2.04	%		13,058		1.61	%
61 - 90 days past due		7,360		0.67	%		5,551		0.69	%
> 90 days past due		2,979		0.27	%		2,139		0.26	%
Total	$	1,101,497		100.00	%	$	809,537		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.

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.

	Twelve Months Ended April 30,
	2022			2021

Average total collected per active customer per month	$	513		$	478
Principal collected as a percent of average finance receivables		43.5	%		53.2	%
Average down-payment percentage		6.4	%		7.1	%
Average originating contract term (in months)		40.2			34.6

	April 30, 2022			April 30, 2021
Portfolio weighted average contract term, including modifications (in months)		42.9			37.3

Collections remained strong with the reduction of principal collected in line with the expected change due to the average term increases. The prior year fiscal fourth 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 $3,028 or 22.2%, from fiscal year 2021.

When customers apply for financing, the Company’s proprietary scoring models rely 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 April 30, 2022 segregated by customer score.

	Customer Score by Fiscal Year of Origination
											Prior to
(Dollars in thousands)	2022		2021		2020		2019		2018		2018		Total		%

1-2	$	37,916	$	11,493	$	2,221	$	77	$	-	$	2	$	51,709		4.7	%
3-4		260,298		84,118		13,537		587		14		15		358,569		32.5	%
5-6		488,257		172,843		28,193		1,803		115		8		691,219		62.8	%
Total	$	786,471	$	268,454	$	43,951	$	2,467	$	129	$	25	$	1,101,497		100.0	%

The following table presents a summary of finance receivables by credit quality indicator, as of April 30, 2021 segregated by customer score.

	Customer Score by Fiscal Year of Origination
											Prior to
(Dollars in thousands)	2021		2020		2019		2018		2017		2017		Total		%

1-2	$	32,946	$	11,967	$	1,229	$	63	$	8	$	-	$	46,213		5.7	%
3-4		211,939		66,524		8,299		491		26		8		287,287		35.5	%
5-6		346,461		108,576		19,006		1,868		121		5		476,037		58.8	%
Total	$	591,346	$	187,067	$	28,534	$	2,422	$	155	$	13	$	809,537		100.0	%