NICHOLAS FINANCIAL, INC. Overview
Nicholas Financial-Canada is a Canadian holding company incorporated under the
laws of
Nicholas Financial-Canada,
Introduction
The Company's consolidated revenues decreased from
The Company's consolidated net income decreased from
The gross portfolio yield of the portfolio for the fiscal years ended
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yield) on new purchases was consistent in fiscal 2022 and fiscal 2021, which was primarily driven by the Company's continuing commitment to its core principles of disciplined underwriting and risk-based pricing.
Fiscal Year ended March 31,
Portfolio Summary (In thousands)
2022 2021
Average finance receivables (1) $ 178,686 $ 199,102
Average indebtedness (2) $ 67,684 $ 107,615
Interest and fee income on finance receivables 49,779 54,211
Interest expense 5,366 5,980
Net interest and fee income on finance receivables
27.86 % 27.23 %
Interest expense as a percentage of average finance
receivables 3.00 % 3.00 %
Provision for credit losses as a percentage of average
finance receivables 3.34 % 3.64 % Net portfolio yield (3) 21.52 % 20.59 %
Operating expenses as a percentage of average finance
receivables 19.25 % 15.99 %
Pre-tax yield as a percentage of average finance
receivables(4) 2.27 % 4.60 % Net charge-off percentage (5) 5.13 % 6.16 % Finance receivables$ 178,786 $ 184,237 Allowance percentage (6) 1.61 % 3.34 % Total reserves percentage (7) 5.62 % 7.49 %
(1)
Average finance receivables represent the average of finance receivables throughout the period. (2) Average indebtedness represents the average outstanding borrowings under the Credit Facility throughout the period. Average indebtedness does not include the PPP loan. (3) Gross portfolio yield represents interest and fee income on finance receivables as a percentage of average finance receivables. Net portfolio yield represents (a) interest and fee income on finance receivables minus (b) interest expense minus (c) the provision for credit losses, as a percentage of average finance receivables. (4) Pre-tax yield represents net portfolio yield minus operating expenses (marketing, salaries, employee benefits, depreciation, and administrative), as a percentage of average finance receivables. (5) Net charge-off percentage represents net charge-offs (charge-offs less recoveries) divided by average finance receivables, outstanding during the period, annualized for 12 months. (6) Allowance percentage represents the allowance for credit losses divided by finance receivables outstanding as of ending balance sheet date. (7) Total reserves percentage represents the allowance for credit losses, unearned purchase price discount, and unearned dealer discounts divided by finance receivables outstanding as of ending balance sheet date
COVID-19
The expansion of unemployment benefits by the CARES Act, the Coronavirus
Response and Relief Supplemental Appropriations Act of 2021 and the American
Rescue Plan Act of 2021 to eligible individuals collectively had a beneficial
effect on the Company. While pandemic unemployment assistance has been extended
through
In accordance with our policies and procedures, certain borrowers qualify for,
and the Company offers, one-month principal payment deferrals on Contracts and
Direct Loans. Due to COVID-19, the Company allowed an additional deferment
during fiscal year 2021, as a result the number of deferments increased at the
beginning of the pandemic. For the years ended
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Loans, as of
The Company believes the number of one-month principal payments deferrals is now largely consistent with pre-pandemic levels.
However, the extent to which the COVID-19 pandemic eventually impacts our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we are unable to accurately predict at this time. The length and scope of the restrictions imposed by various governments, success of vaccination efforts, and scope and duration of special government benefits to be unemployed, among other factors, will determine the ultimate severity of the COVID-19 impact on our business. It is likely that prolonged periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.
Critical Accounting Estimates
A critical accounting estimate is an estimate that: (i) is made in accordance with generally accepted accounting principles, (ii) involves a significant level of estimation uncertainty and (iii) has had or is reasonably likely to have a material impact on the Company's financial condition or results of operations.
The Company's critical accounting estimate relates to the allowance for credit losses. It is based on management's opinion of an amount that is adequate to absorb losses incurred in the existing portfolio. Because of the nature of the customers under the Company's Contracts and Direct Loan program, the Company considers the establishment of adequate reserves for credit losses to be imperative.
The Company takes into consideration 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 utilizes
significant judgment in determining probable incurred losses and in identifying
and evaluating qualitative factors. This approach aligns 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. During the fourth quarter of the fiscal
year ended
Contracts are purchased from many different dealers and are all purchased on an individual Contract-by-Contract basis. Individual Contract pricing is determined by the automobile dealerships and is generally the lesser of the applicable state maximum interest rate, if any, or the maximum interest rate which the customer will accept. In most markets, competitive forces will drive down Contract rates from the maximum rate to a level where an individual
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competitor is willing to buy an individual Contract. The Company generally purchases Contracts on an individual basis.
The Company utilizes the branch model, which allows for Contract purchasing to be done at the branch level. The Company has detailed underwriting guidelines it utilizes to determine which Contracts to purchase. These guidelines are specific and are designed to provide reasonable assurance that the Contracts that the Company purchases have common risk characteristics. The Company utilizes its District Managers to evaluate their respective branch locations for adherence to these underwriting guidelines, as well as approve underwriting exceptions. Any Contract that does not meet the Company's underwriting guidelines can be submitted by a branch manager for approval from the Company's District Managers or senior management.
Fiscal 2022 Compared to Fiscal 2021
Interest and Fee Income on Finance Receivables
Interest and fee income on finance receivables, predominantly finance charge
income, decreased to
Competition continued to affect the Company's ability to acquire Contracts at desired yields. The average APR on new Contract purchases was 23.1% for the fiscal year 2022 and 23.4% for the fiscal year 2021. Concurrently, the dealer discount on new Contract purchases decreased from 7.5% for fiscal year 2021 to 6.9% for fiscal year 2022, primarily as a result of competitive pressures. Overall, the Company maintains its strategy focused on risk-based pricing (rate, yield, advance, term, etc.) and a commitment to the underwriting discipline required for optimal portfolio performance.
The gross portfolio yield increased to 27.9% for the fiscal year ended
The net portfolio yield increased to 21.5% for the fiscal year ended
Operating Expenses
Operating expenses increased to
Interest Expense
Interest expense decreased to
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2021. The following table summarizes the Company's average cost of borrowed
funds for the fiscal years ended
2022 2021
Variable interest under the line of credit and credit
facility 0.63 % 1.81 %
Credit spread under the line of credit and credit
facility 3.15 % 3.75 % Average cost of borrowed funds 3.78 % 5.56 % Analysis of Credit Losses The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts and Direct Loans for the fiscal years endedMarch 31 : For the year ended March 31, 2022 (In thousands) Indirect Direct Total Balance at beginning of year$ 6,001 $ 153 $ 6,154 Provision for credit losses 4,210 1,755 5,965 Charge-offs (13,515 ) (980 ) (14,495 ) Recoveries 5,265 60 5,325 Balance at end of year$ 1,961 $ 988 $ 2,949 For the year ended March 31, 2021 (In thousands) Indirect Direct Total Balance at beginning of year$ 10,433 $ 729 $ 11,162 Provision for credit losses 7,250 - 7,250 Charge-offs (17,141 ) (682 ) (17,823 ) Recoveries 5,459 106 5,565 Balance at end of year$ 6,001 $ 153 $ 6,154
The Company takes into consideration 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 utilizes
significant judgment in determining probable incurred losses and in identifying
and evaluating qualitative factors. This approach aligns 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. During the fourth quarter of the fiscal
year ended
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year-over-year inflation, and changes in the value of underlying collateral and
as a result incorporated an additional
The Company defines non-performing assets as accounts that are contractually delinquent for 60 or more days past due or Chapter 13 bankruptcy accounts. For these accounts, the accrual of interest income is suspended, and any previously accrued interest is reversed. Upon notification of a bankruptcy, an account is monitored for collection with other Chapter 13 accounts. In the event the debtors' balance is reduced by the bankruptcy court, the Company will record a loss equal to the amount of principal balance reduction. The remaining balance will be reduced as payments are received by the bankruptcy court. In the event an account is dismissed from bankruptcy, the Company will decide based on several factors, whether to begin repossession proceedings or allow the customer to begin making regularly scheduled payments.
The Company defines a Chapter 13 bankruptcy account as a Troubled Debt
Restructuring ("TDR"). The Company records a specific reserve for Chapter 13
bankruptcy accounts which is considered a qualitative reserve to the allowance
for credit losses. The Company records the reserve based on the expected
collectability of the principal balance of the Chapter 13 Bankruptcy and the
specific reserve recorded as of
The provision for credit losses decreased to
Net charge-offs decreased to 5.1% for the fiscal year ended
The delinquency percentage for Contracts more than thirty days past due,
excluding Chapter 13 bankruptcy accounts, as of
In accordance with Company policies and procedures, certain borrowers qualify
for, and the Company offers, one-month principal payment deferrals on Contracts
and Direct Loans. For the fiscal years ended
Income Taxes
The Company recorded a tax expense of approximately
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Liquidity and Capital Resources
The Company's cash flows are summarized as follows:
Fiscal Year ended March 31,
(In thousands)
2022 2021
Cash provided by (used in):
Operating activities $ 3,487 $ 14,623
Investing activities 3,862 29,861
Financing activities (35,551 ) (36,191 )
Net increase (decrease) in cash
Our major source of liquidity and capital is cash generated from our ongoing operations and our borrowing capacity under our Credit Facility.
We believe that our current cash balance, together with the future cash generated from operations and our borrowing capacity under our Credit Facility, will be sufficient to satisfy our requirements and plans for cash for the next 12 months. We also believe that future cash generated from operations and our borrowing capacity under our Credit Facility, will be sufficient to satisfy our requirements and plans for cash beyond the next 12 months. Our access to, and the availability of, financing on acceptable terms in the future will be affected by many factors including overall liquidity in the capital or credit markets, the state of the economy and our credit strength as viewed by potential lenders. We cannot provide assurances that we will have future access to the capital or credit markets on acceptable terms.
On
Pursuant to the Credit Agreement, the lenders agreed to extend to the Borrowers
a line of credit of up to
Pursuant to the Credit Agreement, the Borrowers granted a security interest in substantially all of their assets as collateral for their obligations under the Credit Facility. Furthermore, pursuant to a separate collateral pledge agreement, NDS pledged its equity interest in NFI as additional collateral.
The Credit Agreement and the other loan documents contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and sales of assets. Such documents also restrict the Company's ability to make distributions to its shareholders, enter into certain fundamental transactions or make bulk purchases of receivables. If an event of default occurs, the lenders could increase borrowing costs, restrict the Borrowers' ability to obtain additional advances under the Credit Facility, accelerate all amounts outstanding under the Credit Facility, enforce their interest against collateral pledged under the Credit Facility or enforce such other rights and remedies as they have under the loan documents or applicable law as secured lenders.
If the lenders terminate the Credit Facility following the occurrence of an
event of default under the loan documents, or the Borrowers prepay the loan and
terminate the Credit Facility prior to the Maturity Date of
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percentage of
On
The Company is currently evaluating its capital allocation goals and may in the
future decide to change its mix of capital resources in an effort to achieve a
higher dollar value of receivables for every dollar of equity capital invested.
To do so, the Company may, if so agreed with its lender, distribute future
excess profits generated at its
Impact of Inflation
The Company is affected by inflation primarily through increased operating costs and expenses including increases in interest rates. Inflationary pressures on operating costs and expenses historically have been largely offset by the Company's continued emphasis on stringent operating and cost controls, although no assurances can be given regarding the Company's ability to offset the effects of inflation in the future. Management believes the rise in inflation can impact the subprime borrower due to rising cost of housing, consumer goods, gas prices, etc. and believes it could have an impact on the performance and collectability of the portfolio.
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