NICHOLAS FINANCIAL INC - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

Commission file number: 0-26680

NICHOLAS FINANCIAL, INC.

(Exact Name of Registrant as Specified in its Charter)

British Columbia, Canada

59-2506879

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

2454 McMullen Booth Road, Building C
Clearwater, Florida		33759
(Address of Principal Executive Offices)		(Zip Code)

(727) 726-0763

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

NICK

NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

As of November 6, 2020, approximately 12.4 million shares, no par value, of the Registrant were outstanding (of which 4.6 million shares were held by the Registrant’s principal operating subsidiary and pursuant to applicable law, not entitled to vote and 7.8 million shares were entitled to vote).

NICHOLAS FINANCIAL, INC.

Table of Contents

FORM 10-Q

TABLE OF CONTENTS


		Page

Part I .	Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2020 and March 31, 2020	1
	Consolidated Statements of Income for the three and six months ended September 30, 2020 and 2019	2
	Consolidated Statements of Shareholders’ Equity for the three and six months ended September 30, 2020 and 2019	3
	Consolidated Statements of Cash Flows for the six months ended September 30, 2020 and 2019	4
	Notes to the Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28

Part II .	Other Information
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 5.	Other Information	30
Item 6.	Exhibits	31

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PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Nicholas Financial, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)

	September 30, 2020 (Unaudited)			March 31, 2020
Assets
Cash	$	19,568		$	16,802
Restricted cash		13,601			7,882
Equity investments with readily determinable fair values		3,013			—
Finance receivables, net		179,035			199,781
Repossessed assets		856			1,340
Operating lease right-of-use assets		2,588			2,598
Prepaid expenses and other assets		959			1,126
Income taxes receivable		1,448			4,898
Property and equipment, net		674			482
Deferred income taxes		4,004			3,909
Total assets	$	225,746		$	238,818
Liabilities and shareholders’ equity
Credit facility, net of debt issuance costs	$	106,639		$	124,255
Note payable		3,244			-
Net long-term debt		109,883			124,255
Operating lease liabilities		2,590			2,652
Accounts payable and accrued expenses		3,129			4,332
Total liabilities		115,602			131,239
Shareholders’ equity
Preferred stock, no par: 5,000 shares authorized; none issued		—			—
Common stock, no par: 50,000 shares authorized; 12,650 and 12,639 shares issued, respectively; and 7,787 and 7,806 shares outstanding, respectively		34,964			34,867
Treasury stock: 4,863 and 4,833 common shares, at cost, respectively		(71,667	)		(71,438	)
Retained earnings		146,847			144,150
Total shareholders’ equity		110,144			107,579
Total liabilities and shareholders’ equity	$	225,746		$	238,818

The following table represents the assets and liabilities of our consolidated variable interest entity as follows:

	September 30, 2020 (Unaudited)			March 31, 2020
Assets
Restricted cash	$	13,601		$	7,882
Finance receivables, net		157,845			165,966
Repossessed assets		803			1,277
Total assets	$	172,249		$	175,125
Liabilities
Credit facility, net of debt issuance costs	$	106,639		$	124,255
Accounts payable and accrued expenses		460			597
Total liabilities	$	107,099		$	124,852

See Notes to the Consolidated Financial Statements.

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Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended September 30,				Six Months Ended September 30,
	2020		2019		2020		2019
Revenue:
Interest and fee income on finance receivables	$	14,064	$	15,585	$	28,215	$	32,226
Unrealized gain on equity investments		45		—		45		—
Total revenue		14,109		15,585		28,260		32,226
Expenses:
Marketing		358		427		577		838
Salaries and employee benefits		4,798		4,718		8,950		9,539
Administrative		2,923		3,699		5,826		7,351
Provision for credit losses		3,050		4,000		6,350		8,385
Depreciation		52		83		121		170
Interest expense		1,569		2,298		3,218		4,786
Total expenses		12,750		15,225		25,042		31,069
Income before income taxes		1,359		360		3,218		1,157
Income tax expense		92		92		521		298
Net income	$	1,267	$	268	$	2,697	$	859
Earnings per share:
Basic	$	0.16	$	0.03	$	0.34	$	0.11
Diluted	$	0.16	$	0.03	$	0.34	$	0.11

See Notes to the Consolidated Financial Statements.

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Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(Unaudited)

(In thousands)

	Three Months Ended September 30, 2020
	Common Stock										Total
	Shares			Amount		Treasury Stock			Retained Earnings		Shareholders' Equity
Balance at June 30, 2020		7,802		$	34,916	$	(71,466	)	$	145,580	$	109,030
Issuance of restricted stock awards		10			—		—			—		—
Share-based compensation		—			48		—			—		48
Common stock repurchases		(25	)		—		(201	)		—		(201	)
Net income		—			—		—			1,267		1,267
Balance at September 30, 2020		7,787		$	34,964	$	(71,667	)	$	146,847	$	110,144

	Three Months Ended September 30, 2019
	Common Stock										Total
	Shares			Amount		Treasury Stock			Retained Earnings		Shareholders' Equity
Balance at June 30, 2019		7,928		$	34,694	$	(70,459	)	$	141,275	$	105,510
Issuance of restricted stock awards		21			—		—			—		—
Share-based compensation					55							55
Cancellation of restricted stock awards		(24	)				—			—		—
Net income		—			—		—			268		268
Balance at September 30, 2019		7,925		$	34,749	$	(70,459	)	$	141,543	$	105,833

	Six Months Ended September 30, 2020
	Common Stock										Total
	Shares			Amount		Treasury Stock			Retained Earnings		Shareholders' Equity
Balance at March 31, 2020		7,806		$	34,867	$	(71,438	)	$	144,150	$	107,579
Issuance of restricted stock awards		11			—		—			—		—
Share-based compensation		—			97		—			—		97
Common stock repurchases		(30	)		—		(229	)		—		(229	)
Net income		—			—		—			2,697		2,697
Balance at September 30, 2020		7,787		$	34,964	$	(71,667	)	$	146,847	$	110,144

	Six Months Ended September 30, 2019
	Common Stock										Total
	Shares			Amount		Treasury Stock			Retained Earnings		Shareholders' Equity
Balance at March 31, 2019		7,910		$	34,660	$	(70,459	)	$	140,684	$	104,885
Issuance of restricted stock awards		40			—		—			—		—
Cancellation of restricted stock awards		(25	)		—		—			—		—
Share-based compensation		—			89		—			—		89
Net income		—			—		—			859		859
Balance at September 30, 2019		7,925		$	34,749	$	(70,459	)	$	141,543	$	105,833

See Notes to the Consolidated Financial Statements.

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Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Six Months Ended September 30,
	2020			2019
Cash flows from operating activities
Net income	$	2,697		$	859
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		121			170
Amortization of debt issuance costs		214			216
Amortization of operating lease right-of-use assets		818			928
Gain on sale of property and equipment		(2	)		(7	)
Unrealized gains on equity securities		(45	)		—
Provision for credit losses		6,350			8,385
Amortization of dealer discounts		(3,218	)		(4,178	)
Amortization of insurance and fee commissions		(1,207	)		(1,359	)
Accretion of purchase price discount		(305	)		(985	)
Principal reduction on operating lease liabilities		(738	)		(880	)
Share-based compensation		97			89
Changes in operating assets and liabilities:
Accrued interest receivable		347			(157	)
Repossessed assets		484			106
Prepaid expenses and other assets		35			(1,709	)
Accounts payable and accrued expenses		(1,203	)		376
Income taxes receivable		3,450			(15	)
Deferred income taxes		(95	)		299
Unearned insurance and fee commissions		(156	)		85
Net cash provided by operating activities		7,644			2,223
Cash flows from investing activities
Purchase and origination of finance receivables		(40,362	)		(44,202	)
Principal payments received		59,297			65,098
Net assets acquired from branch acquisitions, primarily loans		—			(20,483	)
Purchase of equity investments		(2,968	)		—
Purchase of property and equipment		(311	)		(32	)
Proceeds from sale of property and equipment		—			7
Net cash provided by investing activities		15,656			388
Cash flows from financing activities
Repayments on credit facility		(17,830	)		(37,500	)
Proceeds from the credit facility		—			12,000
Payment of loan origination fees		—			(729	)
Proceeds from note payable		3,244			—
Repurchases of common stock		(229	)		—
Net cash used in financing activities		(14,815	)		(26,229	)
Net increase (decrease) in cash and restricted cash		8,485			(23,618	)
Cash and restricted cash at the beginning of period		24,684			37,642
Cash and restricted cash at the end of period	$	33,169		$	14,024
Supplemental Disclosures:
Interest paid		3,129			4,007
Income taxes		727			15
Leased assets obtained in exchange for new operating lease liabilities		1,213			519

See Notes to the Consolidated Financial Statements.

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Notes to the Consolidated Financial Statements

1. Basis of Presentation

Nicholas Financial, Inc. (“Nicholas Financial – Canada”) is a Canadian holding company incorporated under the laws of British Columbia with several wholly-owned United States subsidiaries, including Nicholas Financial, Inc., a Florida corporation (“NFI”). The accompanying consolidated balance sheet as of March 31, 2020, which has been derived from audited financial statements, and the accompanying unaudited interim consolidated financial statements of Nicholas Financial – Canada, and its wholly-owned subsidiaries (collectively, the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information, with the instructions to Form 10-Q pursuant to the Securities and Exchange Act of 1934, as amended, and with Article 8 of Regulation S-X thereunder. Accordingly, they do not include all of the information and notes to the consolidated financial statements required by U.S. GAAP for complete consolidated financial statements, although the Company believes that the disclosures made are adequate to ensure the information is not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year ending March 31, 2021. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2020 as filed with the Securities and Exchange Commission on June 22, 2020. The March 31, 2020 consolidated balance sheet included herein has been derived from the March 31, 2020 audited consolidated balance sheet included in the aforementioned Form 10-K.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses on finance receivables and fair value of the assets and liabilities for business combination.

2. Revenue Recognition

Interest income on finance receivables is recognized using the interest method. Accrual of interest income on finance receivables is suspended when a loan is contractually delinquent for 61 days or more, or the collateral is repossessed, whichever is earlier. The Company reverses the accrual of interest income when the loan is contractually delinquent 61 days or more.

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 (BK13), 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.

A dealer discount represents the difference between the finance receivable of a Contract, and the amount of money the Company actually pays for the Contract. The discount negotiated by the Company is a function of the lender, the wholesale value of the vehicle and competition in any given market. In making decisions regarding the purchase of a particular Contract the Company considers the following factors related to the borrower: place and length of residence; current and prior job status; history in making installment payments for automobiles; current income; and credit history. In addition, the Company examines its prior experience with Contracts purchased from the dealer, and the value of the automobile in relation to the purchase price and the term of the Contract dealer discount.

The dealer discount is amortized as an adjustment to yield using the interest method over the life of the loan. The average dealer discount associated with new volume for the three months and six months ended September 30, 2020 and 2019 was 6.8% and 7.9% and 7.4% and 8.1%, in relation to the total amount financed, respectively.

Unearned insurance and fee commissions consist primarily of commissions received from the sale of ancillary products. These products include automobile warranties, roadside assistance programs, accident and health insurance, credit life insurance, involuntary unemployment insurance coverage, and forced placed automobile insurance. These commissions are amortized over the life of the contract using the effective interest method.

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3. Earnings Per Share

The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. Earnings per share is calculated using the two-class method, as such awards are more dilutive under this method than the treasury stock method. Basic earnings per share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities. Diluted earnings per share includes the dilutive effect of additional potential common shares from stock compensation awards. Earnings per share have been computed based on the following weighted average number of common shares outstanding:

	Three months ended September 30, (In thousands, except per share amounts)						Six months ended September 30, (In thousands, except per share amounts)
	2020			2019			2020			2019
Numerator:
Net income	$	1,267		$	268		$	2,697		$	859
Less: Allocation of earnings to participating securities		(7	)		(1	)		(15	)		(6	)
Net income allocated to common stock	$	1,260		$	267		$	2,682		$	853
Basic earnings per share computation:
Net income allocated to common stock	$	1,260		$	267		$	2,682		$	853
Weighted average common shares outstanding, including shares considered participating securities		7,777			7,859			7,766			7,881
Less: Weighted average participating securities outstanding		(46	)		(70	)		(44	)		(61	)
Weighted average shares of common stock		7,731			7,789			7,722			7,820
Basic earnings per share	$	0.16		$	0.03		$	0.34		$	0.11
Diluted earnings per share computation:
Net income allocated to common stock	$	1,260		$	267		$	2,682		$	853
Undistributed earnings re-allocated to participating securities		7			—			15			—
Numerator for diluted earnings per share	$	1,267		$	267		$	2,697		$	853
Weighted average common shares outstanding for basic earnings per share		7,731			7,789			7,722			7,820
Incremental shares from stock options		—			1			—			1
Weighted average shares and dilutive potential common shares		7,731			7,790			7,722			7,821
Diluted earnings per share	$	0.16		$	0.03		$	0.34		$	0.11

4. Finance Receivables

Finance Receivables Portfolio

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

	(In thousands)
	September 30, 2020			March 31, 2020			September 30, 2019
Finance receivables	$	198,168		$	219,366		$	222,320
Accrued interest receivable		2,817			3,164			3,046
Unearned dealer discounts		(7,411	)		(8,056	)		(8,995	)
Unearned insurance and fee commissions		(2,460	)		(2,616	)		(2,741	)
Purchase price discount		(610	)		(915	)		(676	)
Finance receivables, net of unearned		190,504			210,943			212,954
Allowance for credit losses		(11,469	)		(11,162	)		(13,502	)
Finance receivables, net	$	179,035		$	199,781		$	199,452

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Contracts and Direct Loans each comprise a portfolio segment. The following tables present selected information on the entire portfolio of the Company:

	As of September 30,
Contract Portfolio	2020			2019
Average APR		22.7	%		22.7	%
Average discount		7.6	%		7.7	%
Average term (months)		51			52
Number of active contracts		24,656			27,294

	As of September 30,
Direct Loan Portfolio	2020			2019
Average APR		27.7	%		26.5	%
Average term (months)		27			27
Number of active contracts		3,673			2,921

The Company purchases Contracts from automobile dealers at a negotiated price that is less than the original principal amount being financed by the purchaser of the automobile. The Contracts are predominantly for used vehicles. As of September 30, 2020, the average model year of vehicles collateralizing the portfolio was a 2011 vehicle.

Direct Loans are typically for amounts ranging from $500 to $11,000 and are generally secured by a lien on an automobile, watercraft or other permissible tangible personal property. The majority of Direct Loans are originated with current or former customers under the Company’s automobile financing program. The typical Direct Loan represents a better credit risk than the typical Contract due to the customer’s prior payment history with the Company; however, the underlying collateral is “typically” less valuable. In deciding whether to make a loan, the Company considers the individual’s credit history, job stability, income, and impressions created during a personal interview with a Company loan officer. Additionally, because most of the Direct Loans made by the Company to date have been made to current or former customers, the payment history of the borrower is a significant factor in making the loan decision. As of September 30, 2020, loans made by the Company pursuant to its Direct Loan program constituted approximately 6.4% of the aggregate principal amount of the Company’s loan portfolio. Changes in the allowance for credit losses for both Contracts and Direct Loans were driven primarily by 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 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. Additionally, credit loss trends over several reporting periods are utilized in estimating future losses and overall portfolio performance. 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.

Each portfolio segment consists of smaller balance homogeneous loans which are collectively evaluated for impairment.

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Allowance for 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 three months ended September 30, 2020 and 2019:

	Three months ended September 30, 2020									Six months ended September 30, 2020
	Contracts			Direct Loans			Consolidated			Contracts			Direct Loans			Consolidated
Balance at beginning of period	$	10,651		$	597		$	11,248		$	10,433		$	729		$	11,162
Provision for credit losses		3,050			0			3,050			6,350			0			6,350
Charge-offs		(4,073	)		(142	)		(4,215	)		(8,407	)		(298	)		(8,705	)
Recoveries		1,349			37			1,386			2,601			61			2,662
Balance at September 30, 2020	$	10,977		$	492		$	11,469		$	10,977		$	492		$	11,469

	Three months ended September 30, 2019									Six months ended September 30, 2019
	Contracts			Direct Loans			Consolidated			Contracts			Direct Loans			Consolidated
Balance at beginning of period	$	15,494		$	618		$	16,112		$	16,575		$	357		$	16,932
Provision for credit losses		3,600			400			4,000			7,580			805			8,385
Charge-offs		(8,140	)		(182	)		(8,322	)		(14,675	)		(339	)		(15,014	)
Recoveries		1,698			14			1,712			3,172			27			3,199
Balance at September 30, 2019	$	12,652		$	850		$	13,502		$	12,652		$	850		$	13,502

The Company uses the trailing six-month charge-offs, annualized, to calculate the allowance for credit losses. 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 aligns the allowance for credit losses with the portfolio’s performance indicators.

The following table is an assessment of the credit quality by creditworthiness:

	(In thousands)
	September 30, 2020						September 30, 2019
	Contracts		Direct Loans		Total		Contracts		Direct Loans		Total
Performing accounts	$	179,723	$	12,509	$	192,232	$	205,458	$	9,309	$	214,767
Non-performing accounts		5,564		211		5,775		6,938		171		7,109
Total		185,287		12,720		198,007		212,396		9,480		221,876
Chapter 13 bankruptcy accounts		161		0		161		436		8		444
Finance receivables	$	185,448	$	12,720	$	198,168	$	212,832	$	9,488	$	222,320

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 25% of a payment contractually due by a certain date has not been paid by the immediately 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 rather than troubled debt restructurings.

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, based on several factors, to begin repossession proceedings or to allow the customer to resume making regularly scheduled payments.

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The Company does consider Chapter 13 bankruptcy accounts, for which the corresponding bankruptcy plan has not been confirmed as of the period end, to be troubled debt restructurings and included in the Company’s allowance for credit losses is a specific reserve of approximately $86,000 and $232,000 for these accounts as of September 30, 2020 and September 30, 2019, respectively.

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
September 30, 2020	$	185,287	$	10,232		$	3,962		$	1,560		$	42		$	15,796
				5.52	%		2.14	%		0.84	%		0.02	%		8.53	%

March 31, 2020		207,247		14,977			4,290			1,893			19			21,179
				7.23	%		2.07	%		0.91	%		0.01	%		10.22	%

September 30, 2019	$	212,396	$	13,981		$	4,950		$	1,946		$	42		$	20,919
				6.58	%		2.33	%		0.92	%		0.02	%		9.85	%

	Direct Loans
	Balance Outstanding		30 – 59 days			60 – 89 days			90 – 119 days			120+		Total
September 30, 2020	$	12,720	$	349		$	159		$	52		$	—	$	560
				2.74	%		1.25	%		0.41	%		—		4.40	%

March 31, 2020		11,844		344			136			59			—		539
				2.90	%		1.15	%		0.50	%		—		4.55	%

September 30, 2019	$	9,480	$	219		$	115		$	56		$	—	$	390
				2.31	%		1.21	%		0.59	%		—		4.11	%

5. Investments

Equity Securities

Effective July 1, 2020, we adopted ASU 2016-01 which requires us to measure all equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in earnings. We use quoted market prices to determine the fair value of equity securities with readily determinable fair values. For equity securities without readily determinable fair values, we have elected the measurement alternative under which we measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management assesses each of these investments on an individual basis. Additionally, on a quarterly basis, management is required to make a qualitative assessment of whether the investment is impaired. During the three months ended September 30, 2020, the Company did not recognize any fair value adjustments for equity securities without readily determinable fair values.

The Company adopted the standard on July 1, 2020 on equity securities purchased them in second quarter of 2021, so no prospective basis existed for these equity investments. The purchase of these equity investments was recorded in the Consolidated Balance Sheets in the second quarter of 2021. See Note 10 for further information.

As of September 30, 2020, the carrying values of our equity securities were included in the following line items in our consolidated balance sheet:

	(In thousands)
	Fair Value with Changes Recognized in Income		Measurement Alternative - No Readily Determinable Fair Value
Marketable securities	$	3,013	$	-
Total equity securities	$	3,013	$	-

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The calculation of net unrealized gains and losses for the period that relate to equity securities still held at September 30, 2020 is as follows (in thousand):

	Six Months Ended
	September 30, 2020
Net gains recognized during the period related to equity securities	$	(45	)
Unrealized gains recognized during the period related to equity securities still held at the end of the period	$	(45	)

6. Acquisition

On April 30, 2019, the Company completed an acquisition of three branches, representing substantially all of the assets of ML Credit Group, LLC (d/b/a Metrolina Credit Company) (“Metrolina”). Two acquired branches are located in the state of North Carolina and one branch is located in South Carolina. Based on its evaluation of the agreement, the Company accounted for the acquisition as a business combination. The Company allocated the purchase price to acquired assets and liabilities on their fair values. The Company acquired finance receivables, net of $20.1 million, other assets of $0.1 million, assumed liabilities of $0.2 million and incurred approximately $0.3 million in related expenses. The purchase price allocation resulted in goodwill of $0.3 million which the Company determined to be impaired as of March 31, 2020. Finance receivables from the Metrolina acquisition as of September 30, 2020 and March 31, 2020 were $7.3 million and $10.9 million, respectively.

7. Credit Facility

Senior Secured Credit Facility

On March 29, 2019, NF Funding I, wholly-owned, special purpose financing subsidiary of NFI entered into a senior secured credit facility (the “Credit Facility”) pursuant to a credit agreement with Ares Agent Services, L.P., as administrative agent and collateral agent, and the lenders that are party thereto (the “Credit Agreement”). The Company’s prior credit facility was paid off in connection with this Credit Facility.

Pursuant to the Credit Agreement, the lenders have agreed to extend to NF Funding I a line of credit of up to $175,000,000, which will be used to purchase motor vehicle retail installment sale contracts from NFI on a revolving basis pursuant to a related receivables purchase agreement between NF Funding I and NFI (the “Receivables Purchase Agreement”). Under the terms of the Receivables Purchase Agreement, NFI will sell to NF Funding I the receivables under the installment sale contracts. NFI will continue to service the motor vehicle retail installment sale contracts transferred to NF Funding I pursuant to a related servicing agreement (the “Servicing Agreement”).

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 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.

In connection with the Credit Facility, NFI has guaranteed NF Funding I ’s obligations under the Credit Agreement up to 10% of the highest aggregate principal amount outstanding under the Credit Agreement at any time pursuant to a limited guaranty. The Company is also obligated to cover any losses of the lender parties resulting from certain “bad acts” of the Company or its subsidiaries, such as fraud, misappropriation of funds or unpermitted disposition of the assets.

Pursuant to a related security agreement, NF Funding I granted a security interest in substantially all of its assets as collateral for its obligations under the Credit Facility. In addition, NFI pledged the equity interests of NF Funding I 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 receivables. If an event of default occurs, the lenders could increase borrowing costs, restrict NF Funding I ’s 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 their rights under the Company’s guarantees.

Once sold to NF Funding I, the assets described above are separate and distinct from the Company’s own assets and will not be available to the Company’s creditors should the Company become insolvent, although they will be presented on a consolidated basis on the Company’s balance sheet.

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Future maturities of debt as of September 30, 2020 are as follows:

(in thousands)
Quarter Ended September 30,
FY2021	$	721
FY2022		2,163
FY2023		27,610
FY2024		27,250
FY2025		27,250
Thereafter		27,250
	$	112,244

Note 8. Income Taxes

The Company recorded an income tax expense of approximately $92,000 for the three months ended September 30, 2020 compared to income tax expense of approximately $92,000 for the three months ended September 30, 2019. The Company’s effective tax rate decreased to 6.8% for the three months ended September 30, 2020 from 25.6% for the three months ended September 30, 2019. The Company recorded an income tax expense of approximately $521,000 for the six months ended September 30, 2020 compared to income tax expense of approximately $298,000 for the six months ended September 30, 2019. The Company’s effective tax rate decreased to 16.2% for the six months ended September 30, 2020 from 25.8% for the six months ended September 30, 2019.

Note 9. Leases

The Company maintains lease agreements related to its branch network and for its corporate headquarters. The branch lease agreements range from one to five years and generally contain options to extend from one to three years. The corporate headquarters lease agreement renewed in April 2020 and expires in March 2023. All of the Company’s lease agreements are considered operating leases. None of the Company’s lease payments are dependent on a rate or index that may change after the commencement date, other than the passage of time.

The Company’s lease liability was $2.6 million as of September 30, 2020. This liability is based on the present value of the remaining minimum rental payments using a discount rate that is determined based on the Company’s incremental borrowing rate on its senior revolving credit facility. The lease asset was $2.6 million as of September 30, 2020. This asset includes right-of-use assets equaling the lease liability, net of prepaid rent and deferred rents that existed as of the adoption of the new lease standard.

The Company has made several policy elections related to lease assets and liabilities. The Company elected to utilize the package of transition practical expedients, which includes not reassessing the following at adoption: (i) whether existing contracts contained leases, (ii) the existing classification of leases as operating or financing, or (iii) the initial direct costs of leases. In addition, the Company did not use hindsight to determine the lease term or include options to extend for leases existing at the transition date.

The Company had elected the practical expedient of combining lease and non-lease components for its real estate leases in calculating the present value of the fixed payments without having to perform an allocation between the types of lease components. Future minimum lease payments under non-cancellable operating leases in effect as of September 30, 2020, are as follows:

in thousands
FY2021	$	697
FY2022		1,059
FY2023		689
FY2024		220
FY2025		153
Thereafter	$	64
Total future minimum lease payments		2,882
Present value adjustment		(292	)
Operating lease liability	$	2,590

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The following table reports information about the Company’s lease cost for the three months ended September 30, 2020 (in thousands):

Lease cost:
Operating lease cost	$	372
Variable lease cost		85
Total lease cost	$	457

The following table reports information about the Company’s lease cost for the six months ended September 30, 2020 (in thousands):

Lease cost:
Operating lease cost	$	783
Variable lease cost		182
Total lease cost	$	965

The following table reports other information about the Company’s leases for the three months ended September 30, 2020 (dollar amounts in thousands):

Other Lease Information
Operating Lease - Operating Cash Flows (Fixed Payments)	$	390
Operating Lease - Operating Cash Flows (Liability Reduction)	$	352
Weighted Average Lease Term - Operating Leases		2.4 years
Weighted Average Discount Rate - Operating Leases		6.5%

The following table reports other information about the Company’s leases for the six months ended September 30, 2020 (dollar amounts in thousands):

Other Lease Information
Operating Lease - Operating Cash Flows (Fixed Payments)	$	818
Operating Lease - Operating Cash Flows (Liability Reduction)	$	738
Weighted Average Lease Term - Operating Leases		2.7 years
Weighted Average Discount Rate - Operating Leases		6.5%

10. Fair Value Disclosures

The Company’s financial instruments consist of cash, finance receivables, repossessed assets, and the Credit Facility. For each of these financial instruments, the carrying value approximates fair value.

Finance receivables, net, approximates fair value based on the price paid to acquire Contracts. The price paid reflects competitive market interest rates and purchase discounts for the Company’s chosen credit grade in the economic environment. This market is highly liquid as the Company acquires individual loans on a daily basis from dealers.

The initial terms of the Contracts generally range from 12 to 72 months. Beginning in December 2017, the maximum initial term of a Contract was reduced to 60 months. The initial terms of the Direct Loans generally range from 12 to 60 months. If liquidated outside of the normal course of business, the amount received may not be the carrying value.

Repossessed assets are valued at the lower of the finance receivable balance prior to repossession or the estimated net realizable value of the repossessed asset. The Company estimates the net realizable value using the projected cash value upon liquidation plus insurance claims outstanding, if any.

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Based on current market conditions, any new or renewed credit facility would be expected to contain pricing that approximates the Company’s current Credit Facility. Based on these market conditions, the fair value of the Credit Facility as of September 30, 2020 was estimated to be equal to the book value. The interest rate for the Credit Facility is a variable rate based on LIBOR pricing options.

	(In thousands)
	Fair Value Measurement Using
Description	Level 1		Level 2		Level 3		Fair Value		Carrying Value
Cash and restricted cash:
September 30, 2020	$	33,169	$	-	$	-	$	33,169	$	33,169
March 31, 2020	$	24,684	$	-	$	-	$	24,684	$	24,684
Equity investments with readily determinable fair values
September 30, 2020	$	3,013	$	-	$	-	$	3,013	$	3,013
March 31, 2020	$	-	$	-	$	-	$	-	$	-
Finance receivables:
September 30, 2020	$	-	$	-	$	179,035	$	179,035	$	179,035
March 31, 2020	$	-	$	-	$	199,781	$	199,781	$	199,781
Repossessed assets:
September 30, 2020	$	-	$	-	$	856	$	856	$	856
March 31, 2020	$	-	$	-	$	1,340	$	1,340	$	1,340
Credit facility:
September 30, 2020	$	-	$	109,000	$	-	$	109,000	$	109,000
March 31, 2020	$	-	$	126,830	$	-	$	126,830	$	126,830
Note payable:
September 30, 2020	$	-	$	3,244	$	-	$	3,244	$	3,244
March 31, 2020	$	-	$	-	$	-	$	-	$	-

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

Level 2 assets are financial assets and liabilities that do not have regular market pricing, but whose fair value can be determined based on other data values or market pricing. Management has determined that this level to be most appropriate for the credit facility and note payable shown in the table above.

Level 1 assets are financial assets that have a regular mark to market mechanism for setting a fair market value. These assets are considered to have readily observable, transparent prices and therefore a reliable, fair market value. Management has determined that this level to be most appropriate for cash, restricted cash, and equity investments.

11. Commitments and Contingencies

The Company currently is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business, none of which, if decided adversely to the Company, would, in the opinion of management, have a material adverse effect on the Company’s financial condition or results of operations.

The extent to which the COVID-19 pandemic will impact 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 and success of efforts to find a suitable vaccine, 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. The Company has discussed COVID-19 throughout the 10-Q, including but not limited, to forward-looking information and Item 2. Management’s Discussions and Analysis of Financial Condition and Results of Operations.

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12. Summary of Significant Accounting Policies

Reclassifications

Certain prior-period amounts have been reclassified to conform to the current presentation. Such reclassifications had no impact on previously reported net income or shareholders’ equity.

The significant accounting policies used in preparation of our Consolidated Financial Statements are disclosed in our 2020 Annual Report on Form 10-K. Those significant accounting policies remain unchanged at September 30, 2020, except as described below:

Equity Securities

Following our adoption of ASU 2016-01 on July 1, 2020, as described in "Recent Adopted Accounting Pronouncements", we account for our investments in equity securities in accordance with ASC 321-10 Investments - Equity Securities. Our equity securities may be classified into two categories and accounted for as follows:

•

Equity securities with a readily determinable fair value are reported at fair value, with unrealized gains and losses included in earnings. Any dividends received are recorded in interest income.

•

Equity securities without a readily determinable fair value are reported at their cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer and their impact on fair value. Any dividends received are recorded in interest income.

Equity investments include our investment in common shares with readily determinable fair values. The fair value of equity investments with readily determinable fair values is primarily obtained from third-party pricing services. For equity investments without readily determinable fair values, when an orderly transaction for the identical or similar investment of the same issuer is identified, we use the valuation techniques permitted under ASC 820 Fair Value Measurement to evaluate the observed transaction(s) and adjust the fair value of the equity investment. ASC 321-10 also provides guidance related to accounting for impairment of equity securities without readily determinable fair values. The qualitative assessment to determine whether impairment exists requires the use of our judgment in certain circumstances. If, after completing the qualitative assessment, we conclude an equity investment without a readily determinable fair value is impaired, a loss for the difference between the equity investment’s carrying value and its fair value may be recognized as a reduction to noninterest income in the Consolidated Statements of Income.

Recent Adopted Accounting Pronouncements

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. This amendment requires that equity investments be measured at fair value with changes in fair value recognized in net income. When fair value is not readily determinable, an entity may elect to measure the equity investment at cost, less impairment, plus or minus any change in the investment’s observable price. For financial liabilities that are measured at fair value, the amendment requires an entity to present separately, in other comprehensive income, any change in fair value resulting from a change in instrument specific credit risk. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard requires retrospective application for equity investments with readily determinable fair values and prospective application for equity investments without readily determinable fair values. The Company adopted the standard on July 1, 2020 on equity securities purchased them in second quarter of 2021, so no prospective basis existed for these equity investments. The purchase of these equity investments was recorded in the Consolidated Balance Sheets in the second quarter of 2021. See Note 10 for further information.

Recent Accounting Pronouncements

In June 2016, the FASB issued the ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The ASU also requires additional disclosures related to estimates and judgments used to measure all expected credit losses. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Recently, the FASB voted to delay the implementation date for this accounting standard, for smaller reporting companies, the new effective date is beginning after December 15, 2022, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements and is collecting and analyzing data that will be needed to produce historical inputs into any models created as a result of adopting this ASU. At this time, the Company believes the adoption of this ASU will likely have a material effect and is expected to increase the overall allowance for credit losses.

The Company does not believe there are any other recently issued accounting standards that have not yet been adopted that will have a material impact on the Company’s consolidated financial statements.

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13. Variable Interest Entity

In March 2019, the Company entered into a new senior secured credit facility collateralized by customer financed receivables by transferring the receivables into a bankruptcy-remote variable interest entity (VIE). Under the terms of the transaction, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of the asset-backed notes, and then to the residual equity holder. The Company retains the servicing of the portfolio and receives a monthly fee of 2.5% (annualized) based on the outstanding balance of the financed receivables, and the Company currently holds all of the residual equity. In addition, the Company, rather than the VIE, retains certain credit insurance income together with certain recoveries related to credit insurance and on charge-offs of the financed receivables, which will continue to be reflected as a reduction of net charge-offs on a consolidated basis for as long as the Company consolidates the VIE.

The Company consolidates the VIE when the Company determines that it is the primary beneficiary, the Company has the power to direct the activities that most significantly impact the performance of the VIE and it has the obligation to absorb losses and the right to receive significant residual returns.

The assets of the VIE serve as collateral for the obligations of the VIE. The lender has no recourse to assets outside of the VIE.

The following table presents the assets and liabilities held by the VIE (for legal purposes, the assets and the liabilities of the VIE remain distinct from the Company):

	September 30, 2020 (Unaudited)		March 31, 2020
Assets
Restricted cash	$	13,601	$	7,882
Finance receivables, net		157,845		165,966
Repossessed assets		803		1,277
Total assets	$	172,249	$	175,125
Liabilities
Credit facility, net of debt issuance costs	$	106,639	$	124,255
Accounts payable and accrued expenses		460		597
Total liabilities	$	107,099	$	124,852

Note 14. Stock Plans

In May 2019 and August 2019, the Company’s Board of Directors (“Board”) authorized a new stock repurchase program allowing for the repurchase of up to $8.0 million and $1.0 million, respectively, of the Company’s outstanding shares of common stock in open market purchases, privately negotiated transactions, or through other structures in accordance with applicable federal securities laws. The authorization was effective immediately with a total repurchase authorization of $9.0 million.

The timing and actual number of repurchases will depend on a variety of factors, including stock price, corporate and regulatory requirements and other market and economic conditions. The Company’s stock repurchase program may be suspended or discontinued at any time.

The table shown below summarizes treasury share transactions under the Company’s stock repurchase program.

	Three months ended September 30, (In thousands)
	2020					2019
	Number of Shares		Amount			Number of Shares		Amount
Common shares at the beginning of period		4,838	$	(71,466	)		4,714	$	(70,459	)
Common shares purchased		25		(201	)		-		-
Common shares at the end of period		4,863	$	(71,667	)		4,714	$	(70,459	)

	Six months ended September 30, (In thousands)
	2020					2019
	Number of Shares		Amount			Number of Shares		Amount
Common shares at the beginning of period		4,833	$	(71,438	)		4,714	$	(70,459	)
Common shares purchased		30		(229	)		-		-
Common shares at the end of period		4,863	$	(71,667	)		4,714	$	(70,459	)

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For the three months and six months ended September 30, 2020, the Company repurchased a total of approximately 25,000 shares of common stock at an aggregate cost of approximately $201 thousand and average cost per share of $8.05; a total of approximately 30,000 shares of common stock at an aggregate cost of approximately $229 thousand and average cost per share of $7.70, respectively. The total shares repurchased through November 6, 2020 under the plan in aggregate is approximately 149,000 shares of common stock for approximately $1.203 million at an average price of $8.05 in accordance with Rule 10b5-1 and Rule 10b-18 under the Exchange Act of 1934. The remaining aggregate amount available for repurchases of shares of common stock would be approximately $7.797 million.

Note 15. Note Payable

On May 27, 2020, the Company obtained a loan in the amount of $3,243,900 from a bank in connection with the U.S. Small Business Administration’s Paycheck Protection Program (the “PPP Loan”). Pursuant to the Paycheck Protection Program, all or a portion of the PPP Loan may be forgiven if the Company uses the proceeds of the PPP Loan for its payroll costs and other expenses in accordance with the requirements of the Paycheck Protection Program. The Company intends to use the proceeds of the PPP Loan for payroll costs and other covered expenses and intends to seek full forgiveness of the PPP Loan as soon as permitted under the Paycheck Protection Program, but there can be no assurance that the Company will obtain any forgiveness of the PPP Loan.

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. The PPP Loan accrues interest at a rate per annum equal to 1.00% and an initial payment of accrued and unpaid interest is due on December 27, 2020. The outstanding principal balance plus accrued and unpaid interest is due on May 27, 2022. The PPP Loan is unsecured. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The Promissory Note contains events of default and other provisions customary for a loan of this type.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Quarterly Report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on management’s current beliefs and assumptions, as well as information currently available to management. When used in this document, the words “anticipate”, “estimate”, “expect”, “will”, “may”, “plan,” “believe”, “intend” and similar expressions are intended to identify forward-looking statements. Although Nicholas Financial, Inc., including its subsidiaries (collectively, the “Company,” “we,” “us,” or “our”) believes that the expectations reflected or implied in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. As a result, actual results could differ materially from those indicated in these forward-looking statements. Forward-looking statements in this Annual Report may include, without limitation: (1) the projected impact of the novel coronavirus disease (“COVID-19”) outbreak on our customers and our business, (2) projections of revenue, income, and other items relating to our financial position and results of operations, (3) statements of our plans, objectives, strategies, goals and intentions, (4) statements regarding the capabilities, capacities, market position and expected development of our business operations, and (5) statements of expected industry and general economic trends; such statements are subject to certain risks, uncertainties and assumptions that may cause results to differ materially from those expressed or implied in forward-looking statements, including without limitation:

•

future impacts of the COVID-19 outbreak and measures taken in response thereto, for which future developments are highly uncertain and difficult to predict;

•

availability of capital (including the ability to access bank financing);

•

recently enacted, proposed or future legislation and the manner in which it is implemented, including tax legislation initiatives or challenges to our tax positions and/or interpretations, and state sales tax rules and regulations;

•

fluctuations in the economy;

•

the degree and nature of competition and its effects on the Company’s financial results;

•

fluctuations in interest rates;

•

effectiveness of our risk management processes and procedures, including the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures;

•

demand for consumer financing in the markets served by the Company;

•

our ability to successfully develop and commercialize new or enhanced products and services;

•

the sufficiency of our allowance for credit losses and the accuracy of the assumptions or estimates used in preparing our financial statements;

•

increases in the default rates experienced on automobile finance installment contracts (“Contracts”);

•

higher borrowing costs and adverse financial market conditions impacting our funding and liquidity;

•

our ability to securitize our loan receivables, occurrence of an early amortization of our securitization facilities, loss of the right to service or subservice our securitized loan receivables, and lower payment rates on our securitized loan receivables;

•

regulation, supervision, examination and enforcement of our business by governmental authorities, and adverse regulatory changes in the Company’s existing and future markets, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and other legislative and regulatory developments, including regulations relating to privacy, information security and data protection and the impact of the Consumer Financial Protection Bureau's (the “CFPB”) regulation of our business;

•

fraudulent activity;

•

failure of third parties to provide various services that are important to our operations;

•

alleged infringement of intellectual property rights of others and our ability to protect our intellectual property

•

litigation and regulatory actions;

•

our ability to attract, retain and motivate key officers and employees; use of third-party vendors and ongoing third-party business relationships; cyber-attacks or other security breaches;

•

disruptions in the operations of our computer systems and data centers;

•

our ability to realize our intentions regarding strategic alternatives;

•

our ability to expand our business, including our ability to complete acquisitions and integrate the operations of acquired businesses and to expand into new markets; and

•

the risk factors discussed under “Item 1A – Risk Factors” in our Annual Report on Form 10-K, and our other filings made with the U.S. Securities and Exchange Commission (“SEC”).

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or expected. All forward-looking statements included in this Quarterly Report are based on information available to the Company as the date of filing of this Quarterly Report, and the Company assumes no obligation to update any such forward-looking statement. Prospective investors should also consult the risk factors described from time to time in the Company’s other filings made with the SEC, including its reports on Forms 10-K, 10-Q, 8-K and annual reports to shareholders.

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Litigation and Legal Matters

See “Item 1. Legal Proceedings” in Part II of this quarterly report below.

COVID-19

While the magnitude and duration of the impact from COVID-19 on our business remains uncertain, it may negatively affect our business and financial condition.

The extension of the expansion of unemployment benefits by the CARES Act to allowed individuals to receive their weekly unemployment benefit and the fact that unemployed customers received Pandemic Unemployment Compensation (“PUC”) equal to an additional $600 per week through July 31, 2020, collectively had a beneficial effect on the Company. As of the Company’s filing, Congress has not extend PUC after July 31, 2020, it could have an adverse effect on our business. The Company continued to experience strong cash collections and experienced positive trending on gross charge-off balances for the six months ended September 30, 2020.

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. For the three months ended September 30, 2020 and September 30, 2019 the Company granted deferrals to approximately 4.3% and 3.4%, respectively, of total Contracts and Direct Loans. For the six months ended September 30, 2020 and September 30, 2019 the Company granted deferrals to approximately 23.4% and 5.6%, respectively. The number of deferrals is also influenced by portfolio performance, including but not limited to, inflation, credit quality of loans purchased, competition at the time of Contract acquisition, and general economic conditions.

For the first two quarters of Fiscal Year 2021, the Company has granted a lower number of one-month principal payment deferrals each subsequent month. Due to COVID-19, the number of deferments increased to 3,125 in April 2020 from 724 in March 2020. For the six months ended September the Company has experienced an average monthly number of deferments of 1,103, which would represent approximately 3.9%, as of September 30, 2020. The Company anticipates the number of one-month principal payments deferrals to remain at normal levels during the rest of the Fiscal Year 2021.

However, the extent to which the COVID-19 pandemic will impact 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 and success of efforts to find a suitable vaccine, 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.

Regulatory Developments

As previously reported, Title X of the Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), which became operational on July 21, 2011. Under the Dodd-Frank Act, the CFPB has regulatory, supervisory and enforcement powers over providers of consumer financial products, such as the Contracts and the Direct Loans that we offer, including explicit supervisory authority to examine, audit, and investigate companies offering a consumer financial product such as ourselves. Although the Dodd-Frank Act expressly provides that the CFPB has no authority to establish usury limits, efforts to create a federal usury cap, applicable to all consumer credit transactions and substantially below rates at which the Company could continue to operate profitably, are still ongoing. Any federal legislative or regulatory action that severely restricts or prohibits the provision of consumer credit and similar services on terms substantially similar to those we currently provide could if enacted have a material, adverse impact on our business, prospects, results of operations and financial condition. Some consumer advocacy groups have suggested that certain forms of alternative consumer finance products, such as installment loans, should be a regulatory priority and it is possible that at some time in the future the CFPB could propose and adopt rules making such lending or other products that we may offer materially less profitable or impractical. Further, the CFPB may target specific features of loans by rulemaking that could cause us to cease offering certain products. Any such rules could have a material adverse effect on our business, results of operations and financial condition. The CFPB could also adopt rules imposing new and potentially burdensome requirements and limitations with respect to any of our current or future lines of business, which could have a material adverse effect on our operations and financial performance.

On October 5, 2017, the CFPB issued a final rule (the “Rule”) imposing limitations on (i) short-term consumer loans, (ii) longer-term consumer installment loans with balloon payments, and (iii) higher-rate consumer installment loans repayable by a payment authorization. The Rule requires lenders originating short-term loans and longer-term balloon payment loans to evaluate whether each consumer has the ability to repay the loan along with current obligations and expenses (“ability to repay requirements”). The Rule also curtails repeated unsuccessful attempts to debit consumers’ accounts for short-term loans, balloon payment loans, and installment loans that involve a payment authorization and an Annual Percentage Rate over 36% (“payment requirements”). The Rule has significant differences from the CFPB’s proposed rules announced on June 2, 2016, relating to payday, vehicle title, and similar loans.

On February 6, 2019, the CFPB issued two notices of proposed rulemaking regarding potential amendments to the Rule. First, the CFPB is proposing to rescind provisions of the Rule, including the ability to repay requirements. Second, the CFPB is proposing to delay the August 19, 2019 compliance date for part of the Rule, including the ability to repay requirements. These proposed amendments are not yet final and are subject to possible change before any final amendments would be issued and implemented. We cannot predict what the

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ultimate rulemaking will provide. The Company does not believe that these changes, as currently described by the CFPB, would have a material impact on the Company’s existing lending procedures, because the Company currently underwrites all its loans (including those secured by a vehicle title that would fall within the scope of these proposals) by reviewing the customer’s ability to repay based on the Company’s standards. Any regulatory changes could have effects beyond those currently contemplated that could further materially and adversely impact our business and operations. The Company will have to comply with the final rule’s payment requirements since it allows consumers to set up future recurring payments online for certain covered loans such that it meets the definition of having a “leveraged payment mechanism” under the final rule. The payment provisions of the final rule are expected to go into effect on August 19, 2019. If the payment provisions of the final rule apply, the Company will have to modify its loan payment procedures to comply with the required notices within the mandated timeframes set forth in the final rule.

The CFPB defines a “larger participant” of automobile financing if it has at least 10,000 aggregate annual originations. The Company does not meet the threshold of at least 10,000 aggregate annual direct loan originations, and therefore would not fall under the CFPB’s supervisory authority. The CFPB issued rules regarding the supervision and examination of non-depository “larger participants” in the automobile finance business. The CFPB’s stated objectives of such examinations are: to assess the quality of a larger participant’s compliance management systems for preventing violations of federal consumer financial laws; to identify acts or practices that materially increase the risk of violations of federal consumer finance laws and associated harm to consumers; and to gather facts that help determine whether the larger participant engages in acts or practices that are likely to violate federal consumer financial laws in connection with its automobile finance business. At such time, if we become or the CFPB defines us as a larger participant, we will be subject to examination by the CFPB for, among other things, ECOA compliance; unfair, deceptive or abusive acts or practices (“UDAAP”) compliance; and the adequacy of our compliance management systems.

We have continued to evaluate our existing compliance management systems. We expect this process to continue as the CFPB promulgates new and evolving rules and interpretations. Given the time and effort needed to establish, implement and maintain adequate compliance management systems and the resources and costs associated with being examined by the CFPB, such an examination could likely have a material adverse effect on our business, financial condition and profitability. Moreover, any such examination by the CFPB could result in the assessment of penalties, including fines, and other remedies which could, in turn, have a material effect on our business, financial condition, and profitability.

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.

During the first quarter of fiscal 2019, the Company began using the trailing six-month net charge-off percentage, annualized, and applied to ending finance receivables to calculate the allowance for credit losses. This change was made to reflect changes in the Company’s lending policies and underwriting standards. The change in the Company’s method for calculating the allowance for credit losses was accounted for as a change in estimate. A trailing six-month net charge-off percentage, annualized, applied to ending finance receivables is also more in line with the industry practice.

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 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. The Company also utilizes field auditors to assure adherence to its underwriting guidelines. 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.

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Introduction

For the three months ended September 30, 2020, the net dilutive earnings per share increased to $0.16 as compared to net dilutive earnings per share of $0.03 for the three months ended September 30, 2019. Net income was $1.3 million for the three months ended September 30, 2020 and $0.3 million for the three months ended September 30, 2019. Revenue decreased 9.8% to $14.1 million for the three months ended September 30, 2020 as compared to $15.6 million for the three months ended September 30, 2019, due to a 12.3% decrease in average finance receivables, compared to the prior year quarter.

For the six months ended September 30, 2020, per share diluted earnings increased to $0.34 as comparted to $0.11 for the six months ended September 30, 2019. Net income was $2.7 million and $0.9 million for the six months ended September 30, 2020 and 2019, respectively. Revenue decrease 12.4% to $28.3 million for the six months ended September 30, 2020 as compared to $32.2 million for the six months ended September 30, 2019, due to a 11.6% decrease in average finance receivables compared to the prior year period.

In December 2017, the Board appointed our current President and Chief Executive Officer. As he said since the first day he returned to the Company, we finance primary transportation to and from work for the subprime borrower. We do not finance luxury cars, second units or recreational vehicles, which are the first payments customers tend to skip in time of economic insecurity. We finance the main and often only vehicle in the household that is needed to get our customers to and from work. The amounts we finance are much lower than most of our competitors, and therefore the payments are materially lower, too. The combination of financing a need over a want and having that loan by very affordable comparatively, creates a situation in which our customer is able and willing to better maintain their account with us. The Company believes that now it can begin to focus on growing the portfolio, as reflected in the Company’s current expansion plans into new states.

	Three months ended September 30, (In thousands)						Six months ended September 30, (In thousands)
	2020			2019			2020			2019
Portfolio Summary
Average finance receivables (1)	$	203,407		$	232,021		$	208,608		$	236,024
Average indebtedness (2)	$	113,233		$	139,929		$	117,983		$	144,486
Interest and fee income on finance receivables	$	14,064		$	15,585		$	28,215		$	32,226
Interest expense		1,569			2,298			3,218			4,786
Net interest and fee income on finance receivables	$	12,495		$	13,287		$	24,997		$	27,440
Gross portfolio yield (3)		27.66	%		26.87	%		27.05	%		27.31	%
Interest expense as a percentage of average finance receivables		3.09	%		3.96	%		3.09	%		4.06	%
Provision for credit losses as a percentage of average finance receivables		6.00	%		6.90	%		6.09	%		7.11	%
Net portfolio yield (3)		18.57	%		16.01	%		17.87	%		16.15	%
Operating expenses as a percentage of average finance receivables		15.99	%		15.39	%		14.84	%		15.17	%
Pre-tax yield as a percentage of average finance receivables (4)		2.58	%		0.62	%		3.03	%		0.98	%
Net charge-off percentage (5)		5.56	%		11.40	%		5.79	%		10.01	%
Finance receivables							$	198,168		$	222,320
Allowance percentage (6)								5.79	%		6.07	%
Total reserves percentage (7)								9.84	%		10.42	%

Note: All three-month and six-month statement of income performance indicators expressed as percentages have been annualized.

(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 (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.

(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, purchase price discount, and unearned dealer discounts divided by finance receivables outstanding as of ending balance sheet date.

Operating Strategy

Beginning in December 2017, the Company elected to remain committed to its branch-based model and its core product of financing primary transportation to and from work for the subprime borrower. The Company strategically employs the use of centralized servicing

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departments to supplement the branch operations and improve operational efficiencies, but its focus is on its core business model of decentralized operations. The Company’s strategy also includes pricing based on risk (rate, yield, advance, etc.) and a commitment to the underwriting discipline required for optimal portfolio performance.

The Company’s principal goals are to increase its profitability and its long-term shareholder value through the measured acquisition of Contracts in existing markets and broadening the geographic area in which its current branches operate. The Company seeks to strengthen its automobile financing program in 18 states—Alabama, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, Nevada, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee. Idaho, Wisconsin, and Utah are expansion states with no local branch office, in which it currently operates by employing its core branch-based business model in each market it services, while supporting its branch network with targeted centralized servicing departments. The Company is exploring expansion of automobile financing programs in 3 states—Arizona, New Mexico, and Texas.

Being cognizant of the Company’s increasing operating expenses as a percent of income, as a result of its shrinking portfolio due to the increased focus on deal structure and pricing over volume, the Company decided to exit the states of Texas and Virginia resulting in the closure of four branches, during the fourth quarter of fiscal 2019. The Company left the state of Texas due to primarily operational concerns at the time.

Additionally, the Company merged the Raleigh and Charlotte, NC markets and merged some of the Atlanta, GA branches. The Company also continues to look for expansion opportunities both in states in which it currently operates and in new states. Recently, the Company has expanded operations into Columbia, South Carolina; Milwaukee, Wisconsin; Las Vegas, Nevada and Wichita, Kansas; while continuing to evaluate new states, including Iowa, Nevada, Arizona, Utah, and Texas. Although the Company cannot assert how many new markets it will enter (if any) in the foreseeable future, it does remain focused on growing the branch network where conditions are favorable.

On April 30, 2019 the Company acquired substantially all of the assets of ML Credit Group, LLC (d/b/a Metrolina Credit Company) (“Metrolina”). Metrolina provides automobile financing to consumers through direct loans and through purchases of retail installment sales contracts originated by automobile dealers in the states of North Carolina and South Carolina. If other opportunities arise, the Company may consider possible acquisitions of portfolios of seasoned Contracts from dealers or lenders in bulk transactions as a means of further penetrating its existing markets or expanding its presence in targeted geographic locations, although it can provide no assurances as to whether or when it will make any such acquisitions.

The Company is currently licensed to provide Direct Loans in 17 states— Alabama, Florida, Georgia (over $3,000), Idaho. Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Utah, and Wisconsin. The Company solicits current and former customers in these states for the purpose of selling Direct Loans to such customers, and the expansion of its Direct Loan capabilities to the other states in which it acquires Contracts. Even with this targeted expansion, the Company expects its total Direct Loans portfolio to remain between 5% and 10% of its total portfolio for the foreseeable future. The Company cannot provide any assurances that it will be able to expand in either its current markets or any targeted new markets.

Competition

The consumer finance industry is highly fragmented and highly competitive. Due to various factors, including the existing low interest rate environment, the competitiveness of the industry continues to increase as new competitors continue to enter the market and certain existing competitors continue to expand their operations. There are numerous financial service companies that provide consumer credit in the markets served by the Company, including banks, credit unions, other consumer finance companies, and captive finance companies owned by automobile manufacturers and retailers. Increased competition for the purchase of Contracts enabled automobile dealers to shop for the best price, resulting in an erosion in the dealer discounts from the initial principal amounts at which the Company was willing to purchase Contracts and higher advance rates. Further, increased competition resulted in the purchase of lower credit quality Contracts. However, with the Company’s change in management during the end of fiscal 2018 and beginning of fiscal 2019, it has placed less emphasis on competition when pricing the dealer discount. The Company instead focuses on purchasing Contracts that are priced to reflect the inherent risk level of the contract, and intends to sacrifice loan volume, if necessary, to maintain that pricing discipline. The table on the next page shows number and principal amount of Contracts purchased, average amount financed, average term, and average APR and discount for the periods presented:

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Key Performance Indicators on Contracts Purchased
(Purchases in thousands)
		Number of				Average
Fiscal Year		Contracts		Principal Amount		Amount		Average			Average			Average
/Quarter		Purchased		Purchased#		Financed*^		APR*			Discount%*			Term*
2021			3,395	$	34,103	$	10,045		23.5	%		7.4	%		46
	2		1,709		17,307		10,127		23.5	%		6.8	%		46
	1		1,686		16,796		9,962		23.5	%		8.0	%		46
2020			7,647	$	76,696	$	10,035		23.4	%		7.9	%		47
4			1,991		19,658		9,873		23.5	%	7.9		%		46
3			1,753		17,880		10,200		23.3	%	7.6		%		47
2			2,011		20,104		9,997		23.5	%	7.9		%		46
1			1,892		19,054		10,071		23.4	%	8.3		%		47
2019			7,684	$	77,499	$	10,086		23.5	%		8.2	%		47
4			2,151		21,233		9,871		23.5	%		8.0	%		46
3			1,625		16,476		10,139		23.5	%		8.1	%		47
2			1,761		17,845		10,133		23.5	%		8.4	%		47
1			2,147		21,945		10,221		23.7	%		8.3	%		48

Key Performance Indicators on Direct Loans Originated (Originations in thousands)
	Number of		Principal
Fiscal Year	Loans		Amount		Average Amount		Average			Average
/Quarter	Originated		Originated		Financed*^		APR*			Term*
2021		1,479	$	6,259	$	4,260		29.0	%		26
2		924		3,832		4,147		29.2	%		25
1		555		2,427		4,373	28.7		%		26
2020		3,142	$	12,638	$	4,017	28.2		%		25
4		720		3,104		4,310	28.6		%		25
3		1,137		4,490		3,949	28.4		%		24
2		739		2,988		4,043	27.4		%		25
1		546		2,056		3,765	28.2		%		24
2019		1,918	$	7,741	$	4,036	26.4		%		25
4		236		1,240		4,654	27.3		%		24
3		738		2,999		4,063	25.9		%		25
2		495		1,805		3,646	26.5		%		25
1		449		1,697		3,779	25.7		%		28

*Each average included in the tables is calculated as a simple average.

^Average amount financed is calculated as a single loan amount.

#Bulk portfolio purchase excluded for period-over-period comparability.

Analysis of Credit Losses

The Company uses a trailing six-month charge-off analysis, annualized, to calculate the allowance for credit losses. Management believes that using the trailing six-month charge-off analysis, 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.

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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 March 31, 2018, the Company allocated a specific reserve using a look back method to calculate the estimated losses. Based on this look back, management calculated a specific reserve of approximately $86,000 and $232,000 for these accounts as of September 30, 2020 and September 30, 2019, respectively. Based on declining balances of the bankruptcy accounts and the overall portfolio, the Company determine that no additional reserves for bankruptcy accounts were warranted as of September 30, 2020.

The provision for credit losses decreased for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The decreases were largely due to decreases in the average finance receivables balance and by a decrease in the net charge-off percentage (see note 6 in the Portfolio Summary table in the “Introduction” above for the definition of net charge-off percentage). 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.

The delinquency percentage for Contracts more than twenty-nine days past due, excluding Chapter 13 bankruptcy accounts, as of September 30, 2020 was 8.53%, a decrease from 9.85% as of September 30, 2019. The delinquency percentage for Direct Loans more than twenty-nine days past due, excluding Chapter 13 bankruptcy accounts, as of September 30, 2020 was 4.40%, an increase from 4.11% as of September 30, 2019. The changes in delinquency percentage for both Contracts and Direct Loans was driven primarily by the Company’s renewed focus on local branch-based servicing. Based on these actions, improving servicing, and stricter underwriting policies, management has generally seen improvements in the delinquency rates for the first two quarters of Fiscal Year 2021.

The Company has continued to see a significant number of competitors with aggressive underwriting in its operating market. See “Note 4—Finance Receivables” for changes in allowance for credit losses, credit quality and delinquencies.

For the first two quarters of Fiscal Year 2021, the Company has granted a lower number of one-month principal payment deferrals each subsequent month. Due to COVID-19, the number of deferments increased to 3,125 in April 2020 from 724 in March 2020. For the six months ended September 30, 2020, the Company has experienced an average monthly number of deferments of 1,103, which would represent approximately 3.9%. The Company anticipates the number of one-month principal payments deferrals to remain at normal levels during the rest of the Fiscal Year 2021.

Three months ended September 30, 2020 compared to three months ended September 30, 2019

Interest Income and Loan Portfolio

Interest and fee income on finance receivables, which consist predominantly of finance charge income, decreased 9.8% to $14.1 million for the three months ended September 30, 2020 from $15.6 million for the three months ended September 30, 2019. The decrease was primarily due to a 12.3 % decrease in average finance receivables to $203.4 million for the three months ended September 30, 2020 when compared to $232.0 million for the corresponding period ended September 30, 2019. The decrease in average finance receivables was primarily the result of a reduction in the aggregate dollar amount and volume of Contracts purchased, as the Company continued implementing its renewed strategic focus of financing primary transportation to and from work for the subprime borrower. This continued shift in focus also allowed us to acquire Contracts at the same yields with lower discounts during the three months ended September 30, 2020 compared to acquisitions during the corresponding period ended September 30, 2019, although combination of the same average yield and lower discounts could not entirely offset the reduction in the aggregate dollar amount of Contracts purchased.

The gross portfolio yield increased to 27.7% for the three months ended September 30, 2020 compared to 26.9% for the three months ended September 30, 2019. The net portfolio yield increased to 18.6% for the three months ended September 30, 2020 compared to 16.0% for the three months ended September 30, 2019. The net portfolio yield increase was primarily due to the decrease in the provision for credit losses, as described under “Analysis of Credit Losses”.

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Operating Expenses

Operating expenses decreased to $8.1 million for the three months ended September 30, 2020 compared to $8.9 million for the three months ended September 30, 2019. Operating expenses as a percentage of average finance receivables increased to 15.99% for the three months ended September 30, 2020 from 15.39% for the three months ended September 30, 2019. This increased percentage was primarily attributed to dealers’ spiffs expenses, professional fees, and repossessions/collections expenses.

Provision Expense

The provision for credit losses decreased to $3.1 million for the three months ended September 30, 2020 from $4.0 million for the three months ended September 30, 2019, largely due to a 12.3 % decrease in the average finance receivables and decrease in the net charge-off percentage to 5.56% for the three months ended September 30, 2020 from 11.40% for the three months ended September 30, 2019. 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.

Interest Expense

Interest expense was $1.6 million for the three months ended September 30, 2020 and $2.3 million for the three months ended September 30, 2019. The following table summarizes the Company’s average cost of borrowed funds:

	Three months ended September 30,
	2020			2019
Variable interest under the Line of Credit facility		1.79	%		2.82	%
Credit spread under the Line of Credit facility		3.75	%		3.75	%
Average cost of borrowed funds		5.54	%		6.57	%

Income Taxes

Six months ended September 30, 2020 compared to six months ended September 30, 2019

Interest Income and Loan Portfolio

Interest and fee income on finance receivables, decreased 12.4% to $28.2 million for the six months ended September 30, 2020 from $32.2 million for the six months ended September 30, 2019. The decrease was primarily due to 11.6% decrease in average finance receivables to $208.6 million for the six months ended September 30, 2020 when compared to $236.0 million for the corresponding period ended September 30, 2019. The decrease in average finance receivables was primarily the result of a reduction in the aggregate dollar amount and volume of Contracts purchased, as the Company continued implementing its renewed strategic focus of financing primary transportation to and from work for the subprime borrower. This continued shift in focus also allowed us to acquire Contracts at higher yields during the six months ended September 30, 2020 compared to acquisitions during the corresponding period ended September 30, 2019, although the increase in average yield could not entirely offset the reduction in the aggregate dollar amount of Contracts purchased.

The gross portfolio yield decreased to 27.1 for the six months ended September 30, 2020 compared to 27.3% for the six months ended September 30, 2019. The net portfolio yield increased to 17.87% for the six months ended September 30, 2020 compared to 16.15% for the six months ended September 30, 2019, respectively. The net portfolio yield increased, primarily due to a decrease in the provision for credit losses, as described under “Analysis of Credit Losses”.

Operating Expenses

Operating expenses decreased to approximately $15.5 million for the six months ended September 30, 2020 from approximately $17.9 million for the six months ended September 30, 2019. This decreased was primarily attributed to dealers’ spiffs expenses, professional fees, and repossessions/collections expenses. Operating expenses as a percentage of average finance receivables decreased to 14.84% for the six months ended September 30, 2020 from 15.17% for the six months ended September 30, 2019. These decreased percentages were attributed to the decrease in the average finance receivables balance.

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Provision Expense

The provision for credit losses decreased to $6.4 for the six months ended September 30, 2020 from $8.4 million for the six months ended September 30, 2019, largely due to 11.6% decrease in the average finance receivables and decrease in the net charge-off percentage to 5.79% for the six months ended September 30, 2020 from 10.01% for the six months ended September 30, 2019. 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.

Interest Expense

Interest expense was $3.2 million for the six months ended September 30, 2020 and $4.8 million for the six months ended September 30, 2019. The following table summarizes the Company’s average cost of borrowed funds:

	Six months ended September 30,
	2020			2019
Variable interest under the Line of Credit facility		1.71	%		2.87	%
Credit spread under the Line of Credit facility		3.75	%		3.75	%
Average cost of borrowed funds		5.46	%		6.62	%

Income Taxes

The Company recorded an income tax expense of approximately $521,000 for the six months ended September 30, 2020 compared to income tax expense of approximately $298,000 for the six months ended September 30, 2019. The Company’s effective tax rate decreased to 16.2% for the six months ended September 30, 2020 from 25.8% for the six months ended September 30, 2019.

Contract Procurement

The Company purchases Contracts in the 18 states for fiscal year 2021 listed in the table on the next page. The Contracts purchased by the Company are predominantly for used vehicles; for the three and six-month periods ended September 30, 2020 and 2019, less than 1% were for new vehicles.

The following tables present selected information on Contracts purchased by the Company.

	As of September 30,			Three months ended September 30,				Six months ended September 30,
	2020			2020		2019		2020		2019
State	Number of branches			Net Purchases (In thousands)				Net Purchases (In thousands)
FL		11		$	4,099	$	4,825	$	9,024	$	10,129
GA		5			2,571		2,606		5,886		4,981
NC		3			964		1,827		2,281		3,600
SC		2			1,077		1,158		2,145		2,300
OH		6			2,586		2,821		5,352		5,457
MI		2			513		798		1,208		1,542
ID		—			87		-		87		-
IN		2			865		1,124		1,520		2,199
KY		3			1,353		1,226		2,351		2,194
AL		2			479		554		1,232		1,052
TN		1			685		879		1,531		1,533
IL		1			267		249		390		448
MO		2			1,044		1,260		2,104		2,229
KS		—			-		265		226		563
UT		—			12		-		12		-
NV		—			270		-		604		-
PA		1			382		409		896		780
WI		—	a		53		103		116		151
Total		41		$	17,307	$	20,104	$	36,965	$	39,158

a.	Purchases in the state of Wisconsin are currently being acquired and serviced through an Illinois branch.

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b.	Purchases in the states of Idaho, Nevada, and Utah are being acquired and serviced through its virtual expansion officed operations based in the Charlotte, North Carolina branch location.

	Three months ended September 30, (Purchases in thousands)						Six months ended September 30, (Purchases in thousands)
Contracts	2020			2019			2020			2019
Purchases	$	17,307		$	20,104		$	36,965		$	39,158
Average APR		23.5	%		23.5	%		23.5	%		23.5	%
Average discount		6.8	%		7.9	%		7.4	%		8.1	%
Average term (months)		46			46			46			47
Average amount financed	$	10,127		$	9,997		$	10,045		$	10,034
Number of Contracts		1,709			2,011			3,395			3,903

Direct Loan Origination

The following table presents selected information on Direct Loans originated by the Company.

Direct Loans	Three months ended September 30, (Originations in thousands)						Six months ended September 30, (Originations in thousands)
Originated	2020			2019			2020			2019
Purchases/Originations	$	3,832		$	2,988		$	6,259		$	5,044
Average APR		29.2	%		27.4	%		29.0	%		27.8	%
Average term (months)		25			25			26			25
Average amount financed	$	4,147		$	4,043		$	4,260		$	3,904
Number of loans		924			739			1,479			1,285

Liquidity and Capital Resources

The Company’s cash flows are summarized as follows:

	Six months ended September 30, (In thousands)
	2020			2019
Cash provided by (used in):
Operating activities	$	7,644		$	2,223
Investing activities		15,656			388
Financing activities		(14,815	)		(26,229	)
Net increase (decrease) in cash	$	8,485		$	(23,618	)

The Company’s primary use of working capital for the quarter ended September 30, 2020 was funding the purchase of Contracts, which are financed substantially through cash from principal and interest payments received, and the Credit Facility (as defined below).

On March 29, 2019, NF Funding I, a special purpose financing subsidiary of Nicholas Financial, entered into a senior secured credit facility (the “Credit Facility”) pursuant to a credit agreement with Ares Agent Services, L.P., as administrative agent and collateral agent, and the lenders that are party thereto (the “Credit Agreement”). The Company’s prior line of credit was paid off in connection with this Credit Facility.

Pursuant to the Credit Agreement, the lenders agreed to extend to the NF Funding I a line of credit of up to $175,000,000, which will be used to purchase Contracts from Nicholas Financial on a revolving basis pursuant to a related receivables purchase agreement between NF Funding I and Nicholas Financial (the “Receivables Purchase Agreement”). Under the terms of the Receivables Purchase Agreement, Nicholas Financial sells to NF Funding I the receivables under Contracts. Nicholas Financial continues to service the Contracts transferred to NF Funding I pursuant to a related servicing agreement (the “Servicing Agreement”).

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As required under the Credit Facility, the Company is required to maintain at least $3.5 million of unrestricted cash. Collections are remitted to restricted cash collection accounts, which totaled $13.6 million as of September 30, 2020.

The Company will continue to depend on the availability the Credit Facility, together with cash from operations, to finance future operations. The availability of funds under the Credit Facility generally depends on availability calculations as defined in the Credit Agreement. In addition, 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 also “ Our Credit Facility is subject to certain defaults and negative covenants” in “1A. Risk Factors” in our Annual Report on Form 10-K, as well as the disclosure in Note 6. Credit Facility in this Form 10-Q, both of which are incorporated herein by reference.

Contractual Obligations

The following table summarizes the Company’s material obligations as of September 30, 2020.

	Payments Due by Period (In thousands)
	Total		FY2021		FY2022 & FY2023		FY2024 & FY2025		Thereafter
Operating leases	$	2,882	$	697	$	1,748	$	373		64
Credit facility		109,000		—		27,250		54,500		27,250
Interest on Credit facility		24,155		6,039		11,322		6,039		755
Note payable		3,244		721		2,523		—		—
Interest on Note Payable		31		29		3		—		—
Total	$	139,312	$	7,486	$	42,846	$	60,912	$	28,069

The Company’s Credit Facility matures on March 31, 2022. Interest on outstanding borrowings under the Credit Facility as of September 30, 2020, is based on an effective interest rate of 5.46%, which includes increased pricing through the maturity date. The effective interest rate used in the above table does not contemplate the possibility of entering into interest rate swap agreements in the future.

Off-Balance Sheet Arrangements

The Company does not engage in any off-balance sheet financing arrangements.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to the Company’s operations result primarily from changes in interest rates. The Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes.

Interest rate risk

As of September 30, 2020, $109.0 million, or 97.11% of our total debt, was subject to floating interest rates. As a result, a hypothetical increase in LIBOR of 1% or 100 basis points (based on LIBOR rate of 0.15%, which represents one-month LIBOR rate, as of September 30, 2020) would have resulted in an annual increase of interest expense of approximately $1.1 million.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in internal control over financial reporting.

As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020, the Company reported that its internal control over financial reporting was not effective as of March 31, 2020, as a result of two material weaknesses. A material weakness is a deficiency or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, the Company reported two material weaknesses for the year ended March 31, 2020:


	1)	Lack of Comprehensive SOX Compliance Program

Deficiencies were identified in key activities which prevented the Company from achieving full compliance with Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.


	2)	Test of Design Effectiveness

Starting in the fourth quarter of Fiscal 2020, the Company identified several design gaps and design control deficiencies across multiple business processes and information technology general controls, which impacted the testing of operating effectiveness.

Remedial Actions

The Company has taken or is taking the following remedial actions to address the material weaknesses:

•

The Company has identified key activities to establish a comprehensive SOX Compliance Program, including but not limited to planning and scoping activities, enterprise risk assessments, initial reporting, which were completed in the first half of Fiscal 2021.

•

The Company has started the test of design effectiveness in the second quarter of Fiscal 2021, which will provide adequate time for remediation activities before testing of operating effectiveness.

•

The Company has started the test of operating effectiveness in November 2020, including reporting and aggregation of all control deficiencies, including evaluation of them individually and in the aggregate.

The completion of activities to date and scheduled activities for the rest of Fiscal 2021 has allowed the Company to determine that the material weakness of the lack of a Comprehensive SOX Compliance Program has been remediated as of September 30, 2020. Since the Company has only begun testing operating effectiveness (which is linked with the testing of design effectiveness) in November 2020, management was not in a position to determine that the material weakness relating to test of design effectiveness was remediated as of September 30, 2020. However, the Company believes to have any open remediating activities completed in the third quarter of Fiscal 2021 and testing of the operating effectiveness completed in the fiscal year ended March 31, 2021.

Management believes the foregoing efforts will effectively remediate the remaining material weakness. As management continues to evaluate and work to improve internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify or supplement the remediation plan described above. Management cannot assure you, however, when the Company will remediate such weaknesses, nor can management be certain of whether additional actions will be required or the costs of any such actions.

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Except as identified above, no change in the Company’s internal control over financial reporting occurred during the Company’s fiscal quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Notwithstanding the remaining material weakness, which still exists as of September 30, 2020, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, have concluded that the consolidated financial statements included in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with accounting principles generally accepted in the United States.

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PART II—OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The Company currently is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business, that, if decided adversely to the Company, would, in the opinion of management, have a material adverse effect on the Company’s financial condition or results of operations.

ITEM 1A.

RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 31, 2020, which could materially affect our business, financial condition or future results. The risks described in the Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth the information with respect to purchase made by or on behalf fo the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our shares of common stock during the three months ended September 30, 2020.

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
Period	(In thousands, except for average price paid per share)
July 1, 2020 to July 31, 2020		-	$	-		-		7,998
August 1, 2020 to August 31, 2020		19		8.23		19		7,842
September 1, 2020 to September 30, 2020		6		7.48		6		7,797
Total		25	$	8.05		25

The timing and actual number of sharers will depend on a variety of factors, including stock price, corporate and regulatory requirements and other market and economic conditions. The Company’s stock repurchase program may be suspended or discontinued at any time.

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ITEM 6.

EXHIBITS

Exhibit No.		Description

31.1		Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Principal Executive Officer Pursuant to 18 U.S.C. § 1350

32.2		Certification of the Principal Financial Officer Pursuant to 18 U.S.C. § 1350

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

1	This certification accompanies the Quarterly Report on Form 10-Q and is not filed as part of it.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

NICHOLAS FINANCIAL, INC.

(Registrant)

Date: November 12, 2020		/s/ Douglas Marohn
		Douglas Marohn
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: November 12, 2020		/s/ Irina Nashtatik
		Irina Nashtatik
		Chief Financial Officer
		(Principal Financial Officer)