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%

16.5%

per annum (based on the Company’s contract interest rate as of the contract origination date), are collateralized by the vehicle sold and typically provide for payments over periods ranging from

months. The weighted average interest rate for the portfolio was approximately

16.4%

July 31, 2019.

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 financing receivables is managed as

one

homogeneous pool.

The components of finance receivables are as follows:

(In thousands)	July 31, 2019			April 30, 2019

Gross contract amount	$	651,677		$	631,681
Less unearned finance charges		(90,573	)		(88,353	)
Principal balance		561,104			543,328
Less allowance for credit losses		(129,494	)		(127,842	)

Finance receivables, net	$	431,610		$	415,486

Changes in the finance receivables, net are as follows:

	Three Months Ended July 31,
(In thousands)	2019			2018

Balance at beginning of period	$	415,486		$	383,617
Finance receivable originations		137,855			134,261
Finance receivable collections		(74,355	)		(66,740	)
Provision for credit losses		(31,475	)		(37,543	)
Losses on claims for payment protection plan		(4,230	)		(4,069	)
Inventory acquired in repossession and payment protection plan claims		(11,671	)		(11,153	)

Balance at end of period	$	431,610		$	398,373

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

	Three Months Ended July 31,
(In thousands)	2019			2018

Balance at beginning of period	$	127,842		$	117,821
Provision for credit losses		31,475			37,543
Charge-offs, net of recovered collateral		(29,823	)		(32,917	)

Balance at end of period	$	129,494		$	122,447

The factors which influenced management’s judgment in determining the amount of the current period provision for credit losses are described below.

The 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 decreased to

5.4%

for the

three

months ended

July 31, 2019,

compared to

6.4%

for the prior year period. Both the frequency and severity of losses improved as a result of a higher quality vehicle, improved deal structures and improved collections practices.

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

13.5%

for the

three

months ended

July 31, 2019

compared to

13.1%

for the same period in the prior year. The increase in collections as a percentage of average finance receivables resulted primarily from improved and consistent efforts in the collections process. Delinquencies greater than

days were

3.8%

for

July 31, 2019

and

3.5%

July 31, 2018.

As a result of the improvements in our net charge-offs as a percentage of average receivables, the quality of the portfolio and our allowance analysis, a decrease to the allowance for credit losses from

25%

24.5%

was made in the

first

quarter of fiscal

2020,

which resulted in a

$2.6

million credit to the provision for credit losses, a

$2.0

million after tax increase to net income, or

$0.29

per diluted share.

Macro-economic factors, the competitive environment on the funding side, 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. The Company continues to focus on operational improvements within the collections area.

Credit quality information for finance receivables is as follows:

(Dollars in thousands)	July 31, 2019					April 30, 2019					July 31, 2018
	Principal		Percent of			Principal		Percent of			Principal		Percent of
	Balance		Portfolio			Balance		Portfolio			Balance		Portfolio
Current	$	445,461		79.39	%	$	435,603		80.17	%	$	408,354		78.40	%
3 - 29 days past due		94,254		16.80	%		91,747		16.89	%		94,042		18.06	%
30 - 60 days past due		15,891		2.83	%		11,362		2.09	%		14,377		2.76	%
61 - 90 days past due		3,533		0.63	%		3,429		0.63	%		2,493		0.48	%
> 90 days past due		1,965		0.35	%		1,187		0.22	%		1,554		0.30	%
Total	$	561,104		100.00	%	$	543,328		100.00	%	$	520,820		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. The Company monitors contract term length, down payment percentages, and collections as credit quality indicators.

	Three Months Ended July 31,
	2019			2018

Principal collected as a percent of average finance receivables		13.5	%		13.1	%
Average down-payment percentage		6.5	%		6.1	%
Average originating contract term (in months )		29.9			29.7

		July 31, 2019				July 31, 2018
Portfolio weighted average contract term, including modifications (in months )			32.1				32.4

The increase in collections as a percentage of average finance receivables resulted primarily from improved and consistent efforts in the collections process. The portfolio weighted average contract term decreased slightly in spite of the increased average selling price, as we work to improve our underwriting and at the same time keep payments affordable, for competitive reasons. As the average selling price increases and in order to remain competitive, term lengths

may

increase.