Finance Receivables

9 Months Ended

Dec. 31, 2023

Note 4. Finance Receivables

Finance receivables held for investment, net consist of Contracts and Direct Loans and are detailed as follows:


	(In thousands)
	December 31, 2023		March 31, 2023
Finance receivables held for investment	$	—	$	128,170
Accrued interest receivable		—		1,932
Unearned dealer discounts		—		(4,286	)
Unearned insurance commissions and fees		—		(1,419	)
Unearned purchase price discount		—		(82	)
Finance receivables held for investment, net of unearned discounts and fees and accrued interest receivable		—		124,315
Allowance for credit losses		—		(17,396	)
Finance receivables held for investment, net	$	—	$	106,919

Finance receivables held for sale consist of Contracts and Direct Loans and are detailed as follows:


	(In thousands)
	December 31,			March 31,
	2023			2023
Finance receivables held for sale at amortized cost	$	69,763			-
Held for sale allowance		(19,457	)		-
Finance receivables held for sale at fair value	$	50,306		$	-

Contracts and Direct Loans each comprise a portfolio segment which consists of groups of loans sharing common risk factors. The following tables present selected information on the entire portfolio of the Company:


	As of December 31,			As of March 31,
Contract Portfolio	2023			2023
Average APR		22.7	%		22.8	%
Average discount		6.4	%		6.8	%
Average term (months)		49			49
Number of active contracts		9,088			14,081


	As of December 31,			As of March 31,
Direct Loan Portfolio	2023			2023
Average APR		27.3	%		29.1	%
Average term (months)		33			28
Number of active contracts		2,485			5,322

Allowance for Credit Losses (ACL) and Held for Sale Allowance

The Company adopted ASU 2016-13 on April 1, 2023, and consequently utilized the current expected credit losses model through October 31, 2023, by applying a Discounted Cash Flow (DCF) methodology to its financial assets, measured at amortized cost, over the life of those financial assets. Beginning on November 1, 2023, the Company is carrying its loan portfolio at the lower of amortized cost or fair value.

For the period from April 1, 2023 through October 31, 2023, the ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows of finance receivables. Provisions for credit losses were recorded in amounts sufficient to maintain an ACL at an adequate level to provide for estimated losses over the lives of the finance receivables. Portfolio segments are comprised of homogeneous loans sharing common risk factors. Accordingly, loans are not individually evaluated for collectability. Consistent with the application during prior reporting years, the Company continued charging credit losses against the allowance when the account reached 120 days contractually delinquent and any recoveries on finance receivables previously charged to the ACL were credited to the ACL when collected.

The Company used a DCF model to forecast expected credit losses. Historical information about losses generally provided a basis for the estimate of expected credit losses. The Company has utilized its own historical data as well as its peer group companies' data from FFIEC Call Report filings. This data was used to produce regression analyses designed to quantify the impact of reasonable and supportable forecasts in projective models.

The Company also considered the need to adjust historical information to reflect the extent to which conditions differed from the conditions that existed for the period over which historical information was evaluated. These adjustments to historical loss information may be qualitative or quantitative in nature. The Company considered changes in international, national, regional and local conditions, changes in the volume and severity of past due loans, portfolio bankruptcy trends, maturity terms extensions, changes in the value of underlying collateral for collateral dependent loans, the effect of other external factors, such as competition, legal and regulatory requirements on the level of estimated credit losses, the existence and effect of any concentrations of credit and changes in the levels of such concentrations, changes in the nature and volume of the portfolio and terms of loans, changes in the quality of the loan review system, changes in the experience, depth, and ability of lending management, and reasonable and supportable economic forecasts, which covered the lives of the finance receivables.

The Company discounted expected cash flows at the financial asset’s effective interest rate. The effective interest rate is defined in ASC 326 as the contractual interest rate adjusted for any net deferred fees or costs, premium, or discount existing at the origination or

acquisition of the financial assets. For the Company, this was calculated using adjusted contractual cash flows relative to the amortized cost. The Company also considered prepayment and curtailment effects in calculation of its effective interest rate.

According to ASC 326-20-30-9, estimating expected credit losses is highly judgmental and requires management to produce reasonable and supportable forecasts of expected credit losses. The Company elected to forecast the first four quarters of the credit loss estimate and revert to a long-run average of each considered economic factor as permitted in ASC 326-20-30-9. Based on the final values in the forecast and the uncertainty of a post-pandemic recovery, management elected to revert over four quarters. The Company also used information provided by the Federal Open Market Committee (FOMC) to obtain various forecasts for unemployment rate and gross domestic product, as well as other economic factors that were considered as part of its ACL calculations.

The Company elected not to measure an allowance on accrued interest which is included as a component of amortized cost and limited to performing accounts, defined as an account that is less than 61 days past due. Accrual of interest income on finance receivables is suspended when a loan was contractually delinquent for 61 days or more, or the collateral is repossessed, whichever is earlier. Consistent with the application in the prior reporting periods, the Company continued timely reversing of the accrual of interest income when the loan was contractually delinquent 61 days or more. All of these accounts were accounted for in the calculation for allowance for credit losses.

The Company defines a non-performing asset as one that is 61 or more days past due, a Chapter 7 bankruptcy account, or a Chapter 13 bankruptcy account that has not been confirmed by the courts, for which the accrual of interest income is suspended. Upon confirmation of a Chapter 13 bankruptcy account, the account is immediately charged-off. Upon notification of a Chapter 7 bankruptcy, an account is monitored for collectability. In the event the debtors’ balance is reduced by the bankruptcy court, the Company records a loss equal to the amount of principal balance reduction. The remaining balance is reduced as payments are received. In the event an account is dismissed from bankruptcy, the Company will decide whether to begin repossession proceedings or to allow the customer to make regularly scheduled payments.

Prior to adoption of ASU 2016-13 the Company was periodically evaluating the composition of the portfolio, current economic conditions, the estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts when determining management’s estimate of probable credit losses and the adequacy of the allowance for credit losses. Management utilized significant judgment in determining probable incurred losses and in identifying and evaluating qualitative factors. This approach aligned with the Company’s lending policies and underwriting standards. If the allowance for credit losses is determined to be inadequate, then an additional charge to the provision is recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolio.

The Company used a trailing twelve-month net charge-off as a percentage of average finance receivables, and applied this percentage to ending finance receivables to estimate probable credit losses. This approach reflected the current trends of incurred losses within the portfolio and closely aligns the allowance for credit losses with the portfolio’s performance indicators. Estimating the allowance for credit losses using the trailing twelve-month charge-off analysis reflected portfolio performance adjusted for seasonality. Management evaluated qualitative factors to support its allowance for credit losses. The Company examined the impact of macro-economic factors, such as year-over-year inflation, as well as portfolio performance characteristics, such as changes in the value of underlying collateral, level of nonperforming accounts, delinquency trends, and accounts with extended terms.

As of November 1, 2023, concurrent with the decision to sell the portfolio, the Company reclassified its finance receivables to held for sale, which are carried at the lower of amortized cost or fair value. As a result of this reclassification, the Company eliminated the allowance for credit losses established under ASC 326 which resulted in a reversal of previously recorded provisions for credit losses for the period from April 1, 2023 through October 31, 2023. The Company compared the fair value and amortized cost of finance receivables held for sale and recorded a held for sale valuation allowance of $19.5 million through earnings to reduce the amortized cost basis to fair value as of December 31, 2023.

The following table sets forth a reconciliation of the changes in the allowance for credit losses under ASC 326 on Contracts and Direct Loans for the three and nine months ended December 31, 2023 and 2022 (in thousands):


	Three months ended December 31, 2023									Nine months ended December 31, 2023
	Contracts			Direct Loans			Total			Contracts			Direct Loans			Consolidated
Balance at beginning of period, prior to adoption of ASU 2016-13	$	12,189		$	1,068		$	13,257		$	16,265		$	1,131		$	17,396
Impact of adoption of ASU 2016-13		—			—			—			(562	)		772			210
Provision for credit losses (1)		1,588			183			1,771			12,713			2,110			14,823
Charge-offs		(3,041	)		(369	)		(3,410	)		(21,337	)		(3,495	)		(24,832	)
Recoveries		553			82			635			4,210			446			4,656
Reversal of allowance for credit losses (2)		(11,289	)		(964	)		(12,253	)		(11,289	)		(964	)		(12,253	)
Balance at December 31, 2023	$	—		$	—		$	—		$	—		$	—		$	—

	Three months ended December 31, 2022									Nine months ended December 31, 2022
	Contracts			Direct Loans			Total			Contracts			Direct Loans			Consolidated
Balance at beginning of period	$	5,088		$	2,003		$	7,091		$	1,960		$	989		$	2,949
Provision for credit losses		9,132			1,598			10,730			19,747			3,533			23,280
Charge-offs		(7,077	)		(1,056	)		(8,133	)		(17,266	)		(2,050	)		(19,316	)
Recoveries		1,240			24			1,264			3,942			97			4,039
Balance at December 31, 2022	$	8,383		$	2,569		$	10,952		$	8,383		$	2,569		$	10,952

(1)

Provision for credit losses and reversal of allowance for credit losses is presented net as "Provision for credit losses" in the Condensed Consolidated Statements of Income (Loss).

(2)

Amounts shown represents charge-off through October 31, 2023. Since November 1, 2023 charge-offs are included in "Fair value and other adjustment, net" in the Condensed Consolidated Statements of Income (Loss).

The following table presents gross charge-offs and recoveries by receivable origination year for total portfolio:


	(In thousands)
	Three months ended December 31, 2023
	Gross Charge-offs		Gross Recoveries		Net Charge-offs
2024	$	88	$	—	$	88
2023		1,256		138		1,118
2022		1,294		216		1,078
2021		363		109		254
2020		215		42		173
Prior		194		130		64
Total	$	3,410	$	635	$	2,775


	(In thousands)
	Nine months ended December 31, 2023
	Gross Charge-offs		Gross Recoveries		Net Charge-offs
2024	$	113	$	—	$	113
2023		10,061		1,122		8,939
2022		9,448		1,496		7,952
2021		2,776		547		2,229
2020		1,209		506		703
Prior		1,225		985		240
Total	$	24,832	$	4,656	$	20,176

The following table presents gross charge-offs and recoveries by receivable origination year for Contract segment of portfolio:


	(In thousands)
	Three months ended December 31, 2023
	Gross Charge-offs		Gross Recoveries		Net Charge-offs
2024	$	88	$	—	$	88
2023		1,072		100		972
2022		1,124		185		939
2021		350		102		248
2020		214		38		176
Prior		193		128		65
Total	$	3,041	$	553	$	2,488


	(In thousands)
	Nine months ended December 31, 2023
	Gross Charge-offs		Gross Recoveries		Net Charge-offs
2024	$	113	$	—	$	113
2023		7,950		907		7,043
2022		8,127		1,320		6,807
2021		2,722		521		2,201
2020		1,201		489		712
Prior		1,224		973		251
Total	$	21,337	$	4,210	$	17,127

The following table presents gross charge-offs and recoveries by receivable origination year for Direct segment of portfolio:


	(In thousands)
	Three months ended December 31, 2023
	Gross Charge-offs		Gross Recoveries		Net Charge-offs
2024	$	—	$	—	$	—
2023		184		38		146
2022		170		31		139
2021		13		7		6
2020		1		4		(3	)
Prior		1		2		(1	)
Total	$	369	$	82	$	287


	(In thousands)
	Nine months ended December 31, 2023
	Gross Charge-offs		Gross Recoveries		Net Charge-offs
2024	$	—	$	—	$	—
2023		2,111		215		1,896
2022		1,321		176		1,145
2021		54		26		28
2020		8		17		(9	)
Prior		1		12		(11	)
Total	$	3,495	$	446	$	3,049

The following table is an assessment of the credit quality by creditworthiness for finance receivables held for investment:


	(In thousands)
	December 31, 2023						March 31, 2023
	Contracts		Direct Loans		Total		Contracts		Direct Loans		Total
Performing accounts	$	—	$	—	$	—	$	101,856	$	16,926	$	118,782
Non-performing accounts		—		—		—		6,972		1,728		8,700
Total		—		—		—		108,828		18,654		127,482
Chapter 13 bankruptcy accounts		—		—		—		590		98		688
Finance receivables	$	—	$	—	$	—	$	109,418	$	18,752	$	128,170

A performing account is defined as an account that is less than 61 days past due. The Company defines an automobile contract as delinquent when more than 10% of a payment contractually due by a certain date has not been paid immediately by the following due date, which date may have been extended within limits specified in the servicing agreements or as a result of a deferral. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable.

In certain circumstances, the Company will grant obligors one-month payment extensions. The only modification of terms in those circumstances is to advance the obligor’s next due date by one month and extend the maturity date of the receivable. There are no other concessions, such as a reduction in interest rate, or forgiveness of principal or of accrued interest. Accordingly, the Company considers such extensions to be insignificant delays in payments.

A non-performing account is defined as an account that is contractually delinquent for 61 days or more or is a Chapter 13 bankruptcy account for which the accrual interest income has been suspended. The Company’s charge-off policy is to charge off an account in the month the contract becomes 121 days contractually delinquent.

In the event an account is dismissed from bankruptcy, the Company will decide whether to begin repossession proceedings or to allow the customer to make regularly scheduled payments.

The following tables present certain information regarding the delinquency rates experienced by the Company with respect to Contracts and Direct Loans, excluding Chapter 13 bankruptcy accounts:


	Contracts
	(In thousands, except percentages)
	Balance Outstanding		30 – 59 days			60 – 89 days			90 – 119 days			120+		Total
December 31, 2023	$	62,664	$	7,741		$	2,390		$	1,353		$	—	$	11,484
				12.35	%		3.81	%		2.16	%	0.00%			18.33	%

March 31, 2023	$	108,828	$	10,083		$	3,274		$	3,698		$	—	$	17,055
				9.27	%		3.01	%		3.40	%	0.00%			15.67	%


	Direct Loans
	(In thousands, except percentages)
	Balance Outstanding		30 – 59 days			60 – 89 days			90 – 119 days			120+		Total
December 31, 2023	$	8,319	$	1,050		$	310		$	201		$	—	$	1,561
				12.62	%		3.73	%		2.42	%	0.00%			18.76	%

March 31, 2023	$	18,654	$	1,448		$	654		$	1,074		$	—	$	3,176
				7.76	%		3.51	%		5.76	%	0.00%			17.03	%