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
• continuing focus on disciplined underwriting and risk-based pricing;
• releasing $4.3 million of the qualitative reserve as a result of the
decrease in net charge-off percentage;
• expanding the local branch model into new states;
• identifying additional ancillary products to enhance profitability; and
• decreasing interest expense of $2.5 million for fiscal 2021 due to a
reduction in the outstanding balance and associated LIBOR.
The Company's consolidated net income increased from
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The gross portfolio yield of the portfolio for the fiscal years ended
Fiscal Year ended March 31,
Portfolio Summary (In thousands)
2021 2020
Average finance receivables (1) $ 199,102 $ 226,541
Average indebtedness (2) $ 107,615 $ 132,552
Interest and fee income on finance receivables 54,211 62,095
Interest expense 5,980 8,515
Net interest and fee income on finance receivables
27.23 % 27.41 %
Interest expense as a percentage of average finance receivables
3.00 % 3.76 %
Provision for credit losses as a percentage of average finance receivables
3.64 % 7.46 %
Net portfolio yield (3) 20.59 % 16.19 %
Operating expenses as a percentage of average finance receivables
15.99 % 15.20 %
Pre-tax yield as a percentage of average finance
receivables(4) 4.60 % 0.99 %
Net charge-off percentage (5) 6.16 % 10.01 %
Finance receivables $ 184,237 $ 219,366
Allowance percentage (6) 3.34 % 5.09 %
Total reserves percentage (7) 7.49 % 9.18 %
(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.
(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, 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
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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 number of deferments increased to 3,114 in
From May through
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 Policy
The Company's critical accounting policy 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 uses trailing six-month net charge-offs as a percentage of average finance receivables, annualized and applies this calculated percentage to ending finance receivables to calculate estimated future probable credit losses for purposes of determining the allowance for credit losses. The Company then takes into consideration the composition of its portfolio, current economic conditions, estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts and adjusts the above, if necessary, to determine management's total estimate of probable credit losses and its assessment of the overall 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.
In addition, 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. If the allowance for credit losses is determined to be inadequate, then an additional charge to the provision would be recorded to maintain adequate reserves based on management's evaluation of the risk inherent in the loan portfolio.
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 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
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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 2021 Compared to Fiscal 2020
Interest and Fee Income on Finance Receivables
Interest and fee income on finance receivables, predominantly finance charge
income, decreased to
Competition also continued to affect the Company's ability to acquire Contracts at desired yields. The average APR on new Contract purchases was constant at 23.4% for the fiscal years 2021 and 2020, respectively. Concurrently, the dealer discount on new Contract purchases decreased from 7.9% for fiscal year 2020 to 7.5% for fiscal year 2021, 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 decreased to 27.2% for the fiscal year ended
Operating Expenses
Operating expenses decreased to
Interest Expense
Interest expense decreased to
2021 2020
Variable interest under the line of credit and credit
facility 1.81 % 2.67 %
Credit spread under the line of credit and credit
facility 3.75 % 3.75 %
Average cost of borrowed funds 5.56 % 6.42 %
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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, 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 For the year ended March 31, 2020 (In thousands) Indirect Direct Total Balance at beginning of year$ 16,575 $ 357 $ 16,932 Provision for credit losses 16,096 805 16,901 Charge-offs (29,174 ) (663 ) (29,837 ) Recoveries 6,936 230 7,166 Balance at end of year$ 10,433 $ 729 $ 11,162
The Company uses a trailing six-month net charge-off percentage, annualized, to calculate the allowance for credit losses. Management believes that using the trailing six-month net charge-off percentage, annualized, will more quickly reflect changes in the portfolio as compared to a trailing twelve-month charge-off analysis.
In addition, the Company takes into consideration the composition of the portfolio, current economic conditions, 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 adequacy of the allowance for credit losses. 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. Conversely, the Company could identify abnormalities in the composition of the portfolio, which would indicate the calculation is overstated and management judgement may be required to determine the allowance of credit losses for both Contracts and Direct Loans. The Company's allowance for credit losses also incorporates recent trends such as delinquency, non-performing assets, and bankruptcy. The Company believes that this approach reflects the current trends of incurred losses within the portfolio and better aligns the allowance for credit losses with the portfolio's performance indicators.
Non-performing assets are defined as accounts that are contractually delinquent for 61 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"). Beginning on
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The provision for credit losses decreased to
Net charge-offs decreased to 6.2% 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
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Income Taxes
The Company recorded a tax benefit 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)
2021 2020
Cash provided by (used in):
Operating activities $ 14,623 $ 10,485
Investing activities 29,861 (3,676 )
Financing activities (36,191 ) (19,767 )
Net increase (decrease) in cash
The Company's primary use of working capital for the fiscal year ended
On
Pursuant to the Credit Agreement, the lenders agreed to extend to the Company a
line of credit of up to
The availability of funds under the Credit Facility is generally limited to 82.5% of the value of non-delinquent receivables, and outstanding advances under the Credit Facility will accrue interest at a rate of LIBOR plus a credit spread, which is currently 3.75%. The commitment period for advances under the Credit Facility is three years. At the end of the commitment period, the outstanding balance would be paid off over a four-year amortization period.
The Company will continue to depend on the availability the Credit Facility, together with cash from operations, to finance future operations. 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 receivables. See "Risk Factors - Risks Related to Our Business and Industry - Our Credit Facility is subject to certain defaults and negative covenants." If an event of default occurs under the Credit Facility, the Company's lenders could increase the Company's borrowing costs, restrict the Company's ability to obtain additional borrowings under the facility, accelerate all amounts outstanding under the facility, or enforce their interest against collateral pledged under the facility, or enforce their rights under guarantees. See also "Note 2 - Summary of Significant Accounting Policies - Variable Interest Entity" and "Note 13 - Variable Interest Entity", which disclosure is incorporated herein by reference.
On
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pending SBA decision. Therefore, per the Paycheck Protection Flexibility Act of 2020, P.L. 116-142, all loan payments are deferred while the Company awaits the SBA's decision on loan forgiveness. If the PPP Loan is not fully forgiven, the Company will remain liable for the full and punctual payment of the outstanding principal balance plus accrued and unpaid interest.
Unless forgiven, the outstanding principal balance plus accrued and unpaid
interest (accruing at the rate of 1.00% per annum) is due on
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.
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