NICHOLAS FINANCIAL INC - Quarter Report: 2022 June (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 June 30, 2022


☐	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 July 26, 2022, approximately 12.6 million common shares, no par value, of the Registrant were outstanding (of which 5.3 million shares were held by the Registrant’s principal operating subsidiary and pursuant to applicable law, not entitled to vote and 7.3 million shares were entitled to vote).

NICHOLAS FINANCIAL, INC.

FORM 10-Q

TABLE OF CONTENTS


		Page

Part I .	Financial Information
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets as of June 30, 2022 and March 31, 2022	1
	Consolidated Statements of Income for the three months ended June 30, 2022 and 2021	2
	Consolidated Statements of Shareholders’ Equity for the three months ended June 30, 2022 and 2021	3
	Consolidated Statements of Cash Flows for the three months ended June 30, 2022 and 2021	4
	Notes to the Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.	Controls and Procedures	26

Part II .	Other Information
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 6.	Exhibits	28

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Nicholas Financial, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)


	June 30, 2022 (Unaudited)			March 31, 2022
Assets
Cash	$	3,551		$	4,775
Equity investments		6,449		$	—
Finance receivables, net		169,380			168,600
Repossessed assets		988			658
Operating lease right-of-use assets		4,084			4,277
Prepaid expenses and other assets		1,205			1,103
Income taxes receivable		1,288			989
Property and equipment, net		1,677			1,783
Deferred income taxes		1,726			1,385
Total assets	$	190,348		$	183,570
Liabilities and shareholders’ equity
Line of credit, net of debt issuance costs	$	69,831		$	54,813
Note payable		-			3,244
Net long-term debt		69,831			58,057
Operating lease liabilities		4,228			4,410
Accounts payable and accrued expenses		3,967			4,717
Total liabilities		78,026			67,184
Shareholders’ equity
Preferred stock, no par: 5,000 shares authorized; none issued		—			—
Common stock, no par: 50,000 shares authorized; 12,645 and 12,673 shares issued, respectively; and 7,313 and 7,546 shares outstanding, respectively		35,143			35,292
Treasury stock: 5,332 and 5,127 common shares, at cost, respectively		(76,543	)		(74,405	)
Retained earnings		153,722			155,499
Total shareholders’ equity		112,322			116,386
Total liabilities and shareholders’ equity	$	190,348		$	183,570

See Notes to the Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended June 30,
	2022			2021
Revenue:
Interest and fee income on finance receivables	$	12,064		$	12,594
Unrealized losses on equity investments		(787	)		—
Total revenue:		11,277			12,594
Expenses:
Marketing		584			577
Salaries and employee benefits		5,161			4,838
Administrative		3,599			2,860
Provision for credit losses		3,644			730
Depreciation		125			73
Interest expense		568			1,188
Total expenses		13,681			10,266
(Loss) income before income taxes		(2,404	)		2,328
Income tax (benefit) expense		(627	)		599
Net (loss) income	$	(1,777	)	$	1,729
(Loss) earnings per share:
Basic	$	(0.24	)	$	0.22
Diluted	$	(0.24	)	$	0.22

See Notes to the Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(Unaudited)

(In thousands)


	Three Months Ended June 30, 2022
	Common Stock												Total
	Shares			Amount			Treasury Stock			Retained Earnings			Shareholders' Equity
Balance at March 31, 2022		7,546		$	35,292		$	(74,405	)	$	155,499		$	116,386
Forfeitures		(28	)		(174	)		—			—			(174	)
Share-based compensation		—			25			—			—			25
Treasury stock		(205	)		—			(2,138	)		—			(2,138	)
Net loss		—			—			—			(1,777	)		(1,777	)
Balance at June 30, 2022		7,313		$	35,143		$	(76,543	)	$	153,722		$	112,322

	Three Months Ended June 30, 2021
	Common Stock												Total
	Shares			Amount			Treasury Stock			Retained Earnings			Shareholders' Equity
Balance at March 31, 2021		7,708		$	35,064		$	(72,343	)	$	152,501		$	115,222
Issuance of restricted stock awards		2			—			—			—			—
Share-based compensation		—			46			—			—			46
Treasury stock		(60	)		—			(665	)		—			(665	)
Net income		—			—			—			1,729			1,729
Balance at June 30, 2021		7,650		$	35,110		$	(73,008	)	$	154,230		$	116,332

See Notes to the Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Three Months Ended June 30,
	2022			2021
Cash flows from operating activities:
Net income	$	(1,777	)	$	1,729
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		125			73
Amortization of debt issuance costs		18			107
Amortization of operating of lease right-of-use assets		379			385
Gain on sale of property and equipment		(79	)		(2	)
Unrealized loss on equity investments		787			—
Provision for credit losses		3,644			730
Amortization of dealer discounts		(1,567	)		(1,612	)
Amortization of insurance and fee commissions		(511	)		(598	)
Accretion of purchase price discount		(41	)		(52	)
Deferred income taxes		(341	)		364
Principal reduction on operating lease liabilities		(445	)		(335	)
Share-based compensation		25			46
Changes in operating assets and liabilities:
Repossessed assets		(330	)		(120	)
Accrued interest receivable		(173	)		(174	)
Prepaid expenses and other assets		(102	)		25
Accounts payable and accrued expenses		(674	)		254
Income taxes receivable		(299	)		235
Net cash (used in) provided by operating activities		(1,361	)		1,055
Cash flows from investing activities:
Purchase and origination of finance receivables		(30,569	)		(26,042	)
Principal payments received		28,438			29,939
Purchases of equity investments		(7,236	)		—
Payments for property and equipment		(33	)		(403	)
Proceeds from the disposal property and equipment		93			2
Net cash (used in) provided by investing activities		(9,307	)		3,496
Cash flows from financing activities:
Repayments on line of credit		(2,500	)		(13,390	)
Proceeds from the line of credit		17,500		—
Repayment of PPP Loan		(3,244	)		—
Cancellations of restricted stock awards		(174	)		—
Repurchases of treasury stock		(2,138	)		(665	)
Net cash provided by (used in) financing activities		9,444			(14,055	)
Net (decrease) in cash		(1,224	)		(9,504	)
Cash at the beginning of period		4,775			32,977
Cash the end of period	$	3,551		$	23,473
Supplemental disclosure of cash flow information:
Interest paid		546			1,142
Income taxes paid		12			—
Leased assets obtained in exchange for new operating lease liabilities		59			412
Supplemental schedule of noncash financing activities:
Cancellations of restricted stock awards		(174	)		—

See Notes to the Consolidated Financial Statements.

Notes to the Consolidated Financial Statements

Note 1. Basis of Presentation

Nicholas Financial, Inc. (“Nicholas Financial – Canada” or the Company) 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, 2022, 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 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 adjustments) 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, 2023. 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, 2022 as filed with the Securities and Exchange Commission on June 24, 2022. The March 31, 2022 consolidated balance sheet included herein has been derived from the March 31, 2022 audited consolidated balance sheet included in 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.

Note 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 60 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.

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 ended June 30, 2022 and 2021 was 6.6% and 7.0%, respectively, in relation to the total amount financed.

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.

Note 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 June 30, (In thousands, except per share amounts)
	2022			2021
Numerator
Net (loss) income per consolidated statements of income	$	(1,777	)	$	1,729
Percentage allocated to shareholders *		99.9	%		99.5	%
Numerator for basic and diluted earnings per share	$	(1,775	)	$	1,720

Denominator
Denominator for Basic earnings per share - weighted-average shares outstanding		7,464			7,650
Dilutive effect of stock options		—			—
Denominator for diluted earnings per share		7,464			7,650

Per share (loss) income from continuing operations
Basic	$	(0.24	)	$	0.22
Diluted		(0.24	)		0.22

* Basic weighted-average shares outstanding		7,464			7,650
Basic weighted-average shares outstanding and unvested restricted stock units expected to vest		7,473			7,689
Percentage allocated to shareholders		99.9	%		99.5	%

Note 4. Finance Receivables

Finance Receivables Portfolio

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


	(In thousands)
	June 30, 2022			March 31, 2022			June 30, 2021
Finance receivables	$	180,053		$	178,786		$	180,823
Accrued interest receivable		2,488			2,315			2,459
Unearned dealer discounts		(6,854	)		(6,894	)		(7,110	)
Unearned insurance commissions and fees		(2,450	)		(2,446	)		(2,483	)
Purchase price discount		(171	)		(212	)		(311	)
Finance receivables, net of unearned		173,066			171,549			173,378
Allowance for credit losses		(3,686	)		(2,949	)		(5,250	)
Finance receivables, net	$	169,380		$	168,600		$	168,128

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


	As of June 30,
Contract Portfolio	2022			2021
Average APR		22.9	%		22.8	%
Average discount		7.3	%		7.5	%
Average term (months)		50			50
Number of active contracts		18,959			21,995


	As of June 30,
Direct Loan Portfolio	2022			2021
Average APR		29.9	%		28.8	%
Average term (months)		27			27
Number of active contracts		7,096			4,354

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 June 30, 2022, the average model year of vehicles collateralizing the portfolio was a 2012 vehicle.

Direct Loans are typically for amounts ranging from $500 to $15,000 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 June 30, 2022, loans made by the Company pursuant to its Direct Loan program constituted approximately 14.9% 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 of 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.

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 June 30, 2022 and 2021:


	Three months ended June 30, 2022
	Contracts			Direct Loans			Consolidated
Balance at beginning of period	$	1,961		$	988		$	2,949
Provision for credit losses		3,102			542			3,644
Charge-offs		(4,045	)		(349	)		(4,394	)
Recoveries		1,442			45			1,487
Balance at June 30, 2022	$	2,460		$	1,226		$	3,686

	Three months ended June 30, 2021
	Contracts			Direct Loans			Consolidated
Balance at beginning of period	$	6,001		$	153		$	6,154
Provision for credit losses		730			-			730
Charge-offs		(2,774	)		(191	)		(2,965	)
Recoveries		1,311			20			1,331
Balance at June 30, 2021	$	5,268		$	(18	)	$	5,250

The Company uses the trailing twelve-month charge-off percentage, and applies this calculated percentage to ending finance receivables to calculate estimated future probable credit losses for purposes of determining the allowance for credit losses. The Company then takes into consideration the composition of its portfolio, current economic conditions, estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts and adjusts the above, if necessary, to determine management’s total estimate of probable credit losses and its assessment of the overall adequacy of the allowance for credit losses. By including recent trends such as delinquency, non-performing assets, and bankruptcy in its determination, management believes that the allowance for credit losses reflects the current trends of incurred losses within the portfolio and is better aligned with the portfolio’s performance indicators.

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


	(In thousands)
	June 30, 2022						June 30, 2021
	Contracts		Direct Loans		Total		Contracts		Direct Loans		Total
Performing accounts	$	147,511	$	26,292	$	173,803	$	161,700	$	15,598	$	177,298
Non-performing accounts		5,518		487		6,005		3,229		123		3,352
Total		153,029		26,779		179,808		164,929		15,721		180,650
Chapter 13 bankruptcy accounts		236		9		245		162		11		173
Finance receivables	$	153,265	$	26,788	$	180,053	$	165,091	$	15,732	$	180,823

A performing account is defined as an account that is less than 60 days past due. The Company defines an automobile contract as delinquent when more than 10% of a payment contractually due by a certain date has not been paid immediately by the following due date, which date may have been extended within limits specified in the servicing agreements or as a result of a deferral. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable.

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

A non-performing account is defined as an account that is contractually delinquent for 60 days or more or is a Chapter 13 bankruptcy account for which the accrual interest income has been suspended. The Company’s charge-off policy is to charge off an account in the month the contract becomes 121 days contractually delinquent.

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

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


	Contracts
	(In thousands, except percentages)
	Balance Outstanding		30 – 59 days			60 – 89 days			90 – 119 days			120+			Total
June 30, 2022	$	153,029	$	8,958		$	4,041		$	1,448		$	29		$	14,476
				5.85	%		2.64	%		0.95	%		0.02	%		9.46	%

March 31, 2021	$	154,143	$	7,097		$	2,936		$	1,183		$	48		$	11,264
				4.60	%		1.90	%		0.77	%		0.03	%		7.31	%

June 30, 2021	$	164,929	$	7,087		$	2,575		$	644		$	10		$	10,316
				4.30	%		1.56	%		0.39	%		0.01	%		6.26	%


	Direct Loans
	Balance Outstanding		30 – 59 days			60 – 89 days			90 – 119 days			120+		Total
June 30, 2022	$	26,779	$	889		$	300		$	187		$	—	$	1,376
				3.32	%		1.12	%		0.70	%		—		5.14	%

March 31, 2021	$	24,376	$	607		$	197		$	77		$	—	$	881
				2.49	%		0.81	%		0.32	%		—		3.61	%

June 30, 2021	$	15,721	$	285		$	70		$	53		$	—	$	408
				1.81	%		0.45	%		0.34	%		—		2.60	%

Note 5. Investments

Equity Securities

As of June 30, 2022, 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	$	6,449	$	-
Total equity securities	$	6,449	$	-

The calculation of net unrealized gains and losses for the period that relate to equity securities still held at June 30, 2022 is as follows (in thousands):


	Three Months Ended
	June 30, 2022
Unrealized losses on equity securities for the three months ended June 30, 2022		787
Unrealized losses on equity securities as of June 30, 2022	$	787

For the three months ended June 30, 2022, the Company recorded unrealized losses on equity securities of $0.8 million and was reflected within the Consolidated statements of income.

Note 6. Line of Credit

Wells Fargo Line of Credit

On November 5, 2021, NFI and Nicholas Data Services, Inc., a Florida corporation (“NDS” and collectively with NFI, the “Borrowers”), two wholly-owned subsidiaries of Nicholas Financial, Inc. (the “Company”) entered into a senior secured line of credit (the “Line of Credit”) pursuant to a loan and security agreement by and among the Borrowers, Wells Fargo Bank, N.A., as agent, and the lenders that are party thereto (the “Credit Agreement”). The prior line of credit (the "Ares Line of Credit") pursuant to a credit agreement among the Company’s subsidiary NF Funding I, LLC, Ares Agent Services, L.P. and the lenders party thereto was paid off in connection with entering into the Line of Credit.

Pursuant to the Credit Agreement, the lenders agreed to extend to the Borrowers a line of credit of up to $175,000,000. The availability of funds under the Line of Credit is generally limited to an advance rate of between 80% and 85% of the value of eligible receivables, and outstanding advances under the Line of Credit will accrue interest at a rate equal to the Secured Overnight Financing Rate (SOFR) plus 2.25%. The commitment period for advances under the Line of Credit is three years (the expiration of that time period, the “Maturity Date”).

Pursuant to the Credit Agreement, the Borrowers granted a security interest in substantially all of their assets as collateral for their obligations under the Line of Credit. Furthermore, pursuant to a separate collateral pledge agreement, NDS pledged its equity interest in NFI as additional collateral.

The Credit Agreement and the other loan documents contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and sales of assets. If an event of default occurs, the lenders could increase borrowing costs, restrict the Borrowers’ ability to obtain additional advances under the Line of Credit, accelerate all amounts outstanding under the Line of Credit, enforce their interest against collateral pledged under the Line of Credit or enforce such other rights and remedies as they have under the loan documents or applicable law as secured lenders.

If the lenders terminate the Line of Credit following the occurrence of an event of default under the loan documents, or the Borrowers prepay the loan and terminate the Line of Credit prior to the Maturity Date, then the Borrowers are obligated to pay a termination or prepayment fee in an amount equal to a percentage of $175,000,000, calculated as 2% if the termination or prepayment occurs during year one, 1% if the termination or repayment occurs during year two, and 0.5% if the termination or prepayment occurs thereafter.

As of June 30, 2022, the Company had aggregate outstanding indebtedness under the Line of Credit of $70.0 million, compared to $55.0 million outstanding as of March 31, 2022.

Future maturities of principal outstanding for the line of credit as of June 30, 2022 is as follows:


(in thousands)
FY2023		—
FY2024		—
FY2025		70,000
FY2026		—
	$	70,000

Note 7. Income Taxes

The Company recorded an income tax benefit of approximately $627,000 for the three months ended June 30, 2022 compared to income tax expense of approximately $599,000 for the three months ended June 30, 2021. The Company’s effective tax rate increased to 26.1% for the three months ended June 30, 2022 from 25.7% for the three months ended June 30, 2021. The higher effective tax rate for the three months ended June 30, 2022 is attributed to discrete and other non-recurring items.

Note 8. 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 was renewed with a lease maturity date of 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 $4.2 million and $4.4 million as of June 30, 2022 and March 31, 2022, respectively. This liability is calculated using the present value of the remaining minimum rental payments and a discount rate of 6.5 percent, which is based on the Company's incremental borrowing rate. Despite the fact that the Company's incremental borrowing rate has improved to 3.30 percent as of June 30, 2022, the Company has determined that keeping the discount rate at 6.5 percent for the foreseeable future is reasonable. While the Company's new Line of Credit was established at a lower rate, due to the current state of the economy, SOFR rates have been increasing. Financial experts predict that the forward curve of the interest rate forecast will rise in the near future. The lease asset was $4.1 million and $4.3 million as of June 30, 2022 and March 31, 2022, respectively.

Future minimum lease payments under non-cancellable operating leases in effect as of June 30, 2022, are as follows:


in thousands
FY2023 (remaining nine months)	$	1,251
FY2024		1,215
FY2025		972
FY2026		581
FY2027		298
Thereafter	$	482
Total future minimum lease payments		4,799
Present value adjustment		(571	)
Operating lease liability	$	4,228

The following table reports information about the Company’s lease cost for the three months ended June 30, 2022 (in thousands):


Lease cost:
Operating lease cost	$	458
Variable lease cost		95
Total lease cost	$	553

The following table reports information about the Company’s lease cost for the three months ended June 30, 2021 (in thousands):


Lease cost:
Operating lease cost	$	390
Variable lease cost		86
Total lease cost	$	476

The following table reports other information about the Company’s leases for the three months ended June 30, 2022 (dollar amounts in thousands):


Other Lease Information
Operating Lease - Operating Cash Flows (Fixed Payments)	$	445
Operating Lease - Operating Cash Flows (Liability Reduction)	$	379
Weighted Average Lease Term - Operating Leases		4.0 years
Weighted Average Discount Rate - Operating Leases		6.5%

The following table reports other information about the Company’s leases for the three months ended June 30, 2021 (dollar amounts in thousands):


Other Lease Information
Operating Lease - Operating Cash Flows (Fixed Payments)	$	385
Operating Lease - Operating Cash Flows (Liability Reduction)	$	335
Weighted Average Lease Term - Operating Leases		3.0 years
Weighted Average Discount Rate - Operating Leases		6.5%

Note 9. Fair Value Disclosures

Financial Instruments Measured at Fair Value

In fiscal year 2023 the Company initiated certain equity investments. The Company defined these equity investments as trading securities for which the changes in fair value were immediately recognized through net income in each quarter, respectively. The Company recorded unrealized loss on equity investment of $0.8 million for the quarter ended June 30, 2022.

Financial Instruments Not Measured at Fair Value

The Company’s financial instruments consist of cash and restricted cash, finance receivables, repossessed assets, and the Line of Credit. For the cash, finance receivables, the line of credit, and note payable, the carrying value approximates fair value.

Based on current market conditions, any new or renewed line of credit would contain pricing that approximates the Company’s current Line of Credit. Based on these market conditions, the fair value of the Line of Credit as of June 30, 2022 was estimated to be equal to the book value. The interest rate for the Line of Credit is a variable rate based on SOFR pricing options. Similarly, the fair value for the note payable as of March 31, 2022 was equal to the book value. The interest rate for the note payable was 1%.


	(In thousands)
	Fair Value Measurement Using
Description	Level 1		Level 2		Level 3		Fair Value		Carrying Value
Cash:
June 30, 2022	$	3,551	$	-	$	-	$	3,551	$	3,551
March 31, 2022	$	4,775	$	-	$	-	$	4,775	$	4,775
Equity investments:
June 30, 2022	$	6,449	$	-	$	-	$	6,449	$	6,449
March 31, 2022	$	-	$	-	$	-	$	-	$	-
Finance receivables:
June 30, 2022	$	-	$	-	$	169,380	$	169,380	$	169,380
March 31, 2022	$	-	$	-	$	168,600	$	168,600	$	168,600
Repossessed assets:
June 30, 2022	$	-	$	-	$	988	$	988	$	988
March 31, 2022	$	-	$	-	$	658	$	658	$	658
Line of credit:
June 30, 2022	$	-	$	-	$	70,000	$	70,000	$	70,000
March 31, 2022	$	-	$	-	$	55,000	$	55,000	$	55,000
Note Payable:
June 30, 2022	$	-	$	-	$	-	$	-	$	-
March 31, 2022	$	3,244	$	-	$	-	$	3,244	$	3,244

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. Management has determined that this level to be most appropriate for finance receivables, repossessed assets, and the Line of Credit shown in the table above.

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 line of credit 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 and liabilities 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, note payable, and equity investments.

Note 10. 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.

Note 11. Summary of Significant Accounting Policies

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 was originally 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 for fiscal years 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.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitating of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions in which the reference LIBOR or another reference rate is expected to be discontinued as a result of the Reference Rate Reform. This ASU is intended to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The new guidance was effective immediately and through December 31, 2022. At this time, the Company believes that the adoption of this ASU is immaterial.

In March 2022, the FASB issued ASU 2022-02, Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures as an update to Financial Instruments—Credit Losses (Topic 326). The amendments in this ASU eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. In addition, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. The amendments in ASU 2022-02 will be effective for the Company with its adoption of ASU 2016-13.

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.

Note 12. Stock Plans

In May 2019, the Company’s Board of Directors (“Board”) authorized a new stock repurchase program allowing for the repurchase of up to $8.0 million 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.

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.

In August 2019, the Company’s Board authorized additional repurchases of up to $1.0 million of the Company’s outstanding shares.

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


	Three months ended June 30, (In thousands)
	2022					2021
	Number of Shares		Amount			Number of Shares		Amount
Treasury shares at the beginning of period		5,127	$	(74,405	)		4,945	$	(72,343	)
Treasury shares purchased		205		(2,138	)		60		(665	)
Treasury shares at the end of period		5,332	$	(76,543	)		5,005	$	(73,008	)

Note 13. 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 (“SBA”) 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 used the proceeds of the PPP Loan for payroll costs and other covered expenses and sought full forgiveness of the PPP Loan. The Company submitted a forgiveness application to Fifth Third Bank, the lender, on December 7, 2020 and submitted supplemental documentation on January 16, 2021. On December 27, 2021 SBA informed the Company that no forgiveness was granted. The Company filed an appeal with SBA on January 5, 2022. On May 6, 2022 the Office of Hearing and Appeals SBA (OHA) rendered a decision to deny the appeal. The Company subsequently repaid the outstanding principal of $3,243,900 plus accrued and unpaid interest of $64,518 on May 23, 2022.

Note 14. Subsequent Events

On July 18, 2022, the Company announced the closure of eleven branches, which represented approximately 23% of its network, as of June 30, 2022. Consolidation of workforce associated with these activities impacted approximately 44 employees and represented 17% of Company workforce, as of June 30, 2022.

These consolidation activities were part of the senior management contemplated initiatives for the Fiscal Year 2023. The expected total charges are between $0.9 million and $1.0 million of cash expenditures and under $0.1 million of non-cash impairment charges associated with lease obligations. Specifically, the Company estimated approximately $42,000 for employee related costs and approximately $898,000 for lease obligations. The Company expects the majority of these charges will be recorded in the second quarter of Fiscal Year 2023. The estimates of charges could change as the Company plans evolve and become finalized.

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 Quarterly 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. These 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:

•

the ongoing impact on us, our employees, our customers and the overall economy of the COVID-19 pandemic and measures taken in response thereto, including without limitation the successful delivery of vaccines effective against the different variants of the virus, 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, employee misconduct or misconduct by third parties;

•

media and public characterization of consumer installment loans;

•

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;

•

the impact of changes in accounting rules and regulations, or their interpretation or application, which could materially and adversely affect the Company’s reported consolidated financial statements or necessitate material delays or changes in the issuance of the Company’s audited consolidated financial statements;

•

uncertainties associated with management turnover and the effective succession of senior management;

•

our ability to realize our intentions regarding strategic alternatives, including the failure to achieve anticipated synergies;

•

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.

Litigation and Legal Matters

See “Item 1. Legal Proceedings” in Part II of this Quarterly Report below.

COVID-19

The expansion of unemployment benefits by the CARES Act, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 and the American Rescue Plan Act of 2021 to eligible individuals collectively had a beneficial effect on the Company. While pandemic unemployment assistance had been extended through September 6, 2021, the beneficial impact these benefits have had on the Company largely disappeared once its customers no longer qualified for such benefits. The Company continued to experience normal cash collections and experienced positive trending on net charge-off balances for the three months ended June 30, 2022.

In accordance with our policies and procedures, certain borrowers qualify for, and the Company offers, one-month principal payment deferrals on Contracts and Direct Loans. Due to COVID-19, the Company allowed an additional deferment during fiscal year 2021, as a result the number of deferments increased at the beginning of the pandemic. For the three months ended June 30, 2022 and 2021 the Company experienced an average monthly number of deferments of 324 and 153, respectively, which would represent approximately 1.2% and 0.6% of total Contracts and Direct Loans, as of June 30, 2022 and 2021, 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.

The Company believes the number of one-month principal payments deferrals is now largely consistent with pre-pandemic levels.

However, the extent to which the COVID-19 pandemic eventually impacts our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we are unable to accurately predict at this time. The length and scope of the restrictions imposed by various governments, success of vaccination efforts, and scope and duration of special government benefits to be unemployed, among other factors, will determine the ultimate severity of the COVID-19 impact on our business. It is likely that prolonged periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.

Risks Related to Regulation

In 2017, the CFPB adopted rules applicable to payday, title and certain high cost installment loans. The rules address the underwriting of covered short-term loans and longer-term balloon-payment loans, including payday and vehicle title loans, as well as related reporting and recordkeeping provisions. These provisions have become known as the “mandatory underwriting provisions” and include rules for lenders to follow to determine whether or not consumers have the ability to repay the loans according to their

terms. Implementation of the rule’s payment requirements may require changes to the Company’s practices and procedures for such loans, which could materially and adversely affect the Company’s ability to make such loans, the cost of making such loans, the Company’s ability to, or frequency with which it could, refinance any such loans, and the profitability of such loans. Additionally, the CFPB may target specific features of loans by rulemaking that could cause us to cease offering certain products, or 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. The CFPB could also implement rules that limit our ability to continue servicing our financial products and services.

The CFPB has broad authority to pursue administrative proceedings and litigation for violations of federal consumer financing laws.

The CFPB has the authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for minor violations of federal consumer financial laws (including the CFPB’s own rules) to $25,000 per day for reckless violations and $1 million per day for knowing violations. If we are subject to such administrative proceedings, litigation, orders or monetary penalties in the future, this could have a material adverse effect on our operations and financial performance. Also, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations under Title X, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties). If the CFPB or one or more state officials believe we have violated the foregoing laws, they could exercise their enforcement powers in ways that would have a material adverse effect on us. See “Item 1. Business – Regulation” for additional information.

Pursuant to the authority granted to it under the Dodd-Frank Act, the CFPB adopted rules that subject larger nonbank automobile finance companies to supervision and examination by the CFPB. Any such examination by the CFPB likely would have a material adverse effect on our operations and financial performance.

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, as 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.

In July 2020, the CFPB rescinded provisions of the Rule governing the ability to repay requirements. Currently, the payment requirements are scheduled to take effect in June 2022. Any regulatory changes could have effects beyond those currently contemplated that could further materially and adversely impact our business and operations. Unless rescinded or otherwise amended, the Company will have to comply with the Rule’s payment requirements if it continues to allow 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 Rule. If the payment provisions of the Rule apply, the Company will have to modify its loan payment procedures to comply with the required notices and mandated timeframes set forth in the final rule.

We are subject to many other laws and governmental regulations, and any material violations of or changes in these laws or regulations could have a material adverse effect on our financial condition and business operations.

Our financing operations are subject to regulation, supervision, and licensing under various other federal, state and local statutes and ordinances. Additionally, the procedures that we must follow in connection with the repossession of vehicles securing Contracts are regulated by each of the states in which we do business. The various federal, state and local statutes, regulations, and ordinances applicable to our business govern, among other things:

•

licensing requirements;

•

requirements for maintenance of proper records;

•

payment of required fees to certain states;

•

maximum interest rates that may be charged on loans to finance used and new vehicles;

•

debt collection practices;

•

proper disclosure to customers regarding financing terms;

•

privacy regarding certain customer data;

•

interest rates on loans to customers;

•

late fees and insufficient fees charged;

•

telephone solicitation of Direct Loan customers; and

•

collection of debts from loan customers who have filed bankruptcy.

We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all applicable local, state and federal regulations. Our failure, or the failure by dealers who originate the Contracts we purchase, to maintain all requisite licenses and permits, and to comply with other regulatory requirements, could result in consumers having rights of rescission and other remedies that could have a material adverse effect on our financial condition. Furthermore, any changes in applicable laws, rules and regulations, such as the passage of the Dodd-Frank Act and the creation of the CFPB, may make our compliance therewith more difficult or expensive or otherwise materially adversely affect our business and financial condition.

Some litigation against us could take the form of class action complaints by consumers. As the assignee of contracts originated by dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against dealers. The damages and penalties claimed by consumers in these types of actions can be substantial. The relief requested by the plaintiffs varies but may include requests for compensatory, statutory, and punitive damages. We also are periodically subject to other kinds of litigation typically experienced by businesses such as ours, including employment disputes and breach of contract claims. No assurances can be given that we will not experience material financial losses in the future as a result of litigation or other legal proceedings.

Critical Accounting Estimates

A critical accounting estimate is an estimate that: (i) is made in accordance with generally accepted accounting principles, (ii) involves a significant level of estimation uncertainty and (iii) has had or is reasonably likely to have a material impact on the Company’s financial condition or results of operations.

The Company’s critical accounting estimate relates to the allowance for credit losses. It is based on management’s opinion of an amount that is adequate to absorb losses incurred in the existing portfolio. Because of the nature of the customers under the Company’s Contracts and Direct Loan program, the Company considers the establishment of adequate reserves for credit losses to be imperative.

approach aligns with the Company’s lending policies and underwriting standards. If the allowance for credit losses is determined to be inadequate, then an additional charge to the provision is recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolio. During the fourth quarter of the fiscal year ended March 31, 2022, the Company made a change in the accounting estimate and began using a trailing twelve-month net charge-offs as a percentage of average finance receivables, and applying this percentage to ending finance receivables to estimate future probable credit losses. This approach better reflects the current trends of incurred losses within the portfolio and more closely aligns the allowance for credit losses with the portfolio’s performance indicators. Prior to the fourth quarter of the fiscal year ended March 31, 2022, the Company used a trailing six-month net charge-offs as a percentage of average finance receivables, annualized, and applied this percentage to ending finance receivables to estimate future probable losses for purposes of determining the allowance for credit losses. Management believes that estimating the allowance for credit losses using the trailing twelve-month charge-off analysis more accurately reflects portfolio performance adjusted for seasonality and encompasses historical collection practices. Under the current methodology management continues to evaluate qualitative factors to support its allowance for credit losses. The Company examines the impact of macro-economic factors, such as inflation, and changes in the value of underlying collateral and as a result incorporated an additional $0.2 million as a qualitative component amount to its current estimate of adequate reserves.

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. 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.

Introduction

For the three months ended June 30, 2022, the net dilutive loss per share decreased to $0.24 as compared to net dilutive earnings per share of $0.22 for the three months ended June 30, 2021. Net loss was $1.8 million for the three months ended June 30, 2022 as compared to a net income of $1.7 million for the three months ended June 30, 2021. Revenue decreased 10.5% to $11.3 million for the three months ended June 30, 2022, as compared to $12.6 million for the three months ended June 30, 2021, mainly due to an unrealized loss of $0.8 million on equity investments in the current year quarter.

The Company finances primary transportation to and from work for the subprime borrower. The Company does not finance luxury cars, second units or recreational vehicles, which are the first payments customers tend to skip in time of economic insecurity. The Company finances 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 significantly lower, too. The combination of financing a “need” over a “want” and making that loan on comparatively affordable terms incentivizes our customers to prioritize their account with us.


	Three months ended June 30, (In thousands)
	2022			2021
Portfolio Summary
Average finance receivables (1)	$	179,455		$	181,970
Average indebtedness (2)	$	60,829		$	79,217
Interest and fee income on finance receivables	$	12,064		$	12,594
Interest expense		568			1,188
Net interest and fee income on finance receivables	$	11,496		$	11,406
Gross portfolio yield (3)		26.89	%		27.68	%
Interest expense as a percentage of average finance receivables		1.27	%		2.61	%
Provision for credit losses as a percentage of average finance receivables		8.12	%		1.60	%
Net portfolio yield (3)		17.50	%		23.47	%
Operating expenses as a percentage of average finance receivables		21.11	%		18.35	%
Pre-tax yield as a percentage of average finance receivables (4)		(3.61	)%		5.12	%
Net charge-off percentage (5)		6.48	%		3.59	%
Finance receivables	$	180,053		$	180,823
Allowance percentage (6)		2.05	%		2.90	%
Total reserves percentage (7)		5.95	%		7.01	%

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

(1)

Average finance receivables represent the average of the month-end finance receivables throughout the period.

(2)

Average indebtedness represents the average outstanding borrowings at day-end under the Line of Credit throughout the period. Average indebtedness does not include the PPP loan.

(3)

Gross portfolio yield represents interest and fee income on finance receivables as a percentage of average finance receivables. Net portfolio yield represents (a) interest and fee income on finance receivables minus (b) interest expense minus (c) the provision for credit losses, as a percentage of average finance receivables.

(4)

Pre-tax yield represents net portfolio yield minus operating expenses (marketing, salaries, employee benefits, depreciation, and administrative), as a percentage of average finance receivables.

(5)

Net charge-off percentage represents net charge-offs (charge-offs less recoveries) divided by average finance receivables outstanding during the period.

(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

The Company remains committed to its branch-based model and its core product of financing primary transportation to and from work for the subprime borrower through the local independent automobile dealership. The Company strategically employs the use of centralized servicing 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 risk-based pricing (rate, yield, advance, term, collateral value) and a commitment to the underwriting discipline required for optimal portfolio performance as opposed to chasing

competition for the sake of simply generating volume. The Company’s principal goals are to increase its profitability and its long-term shareholder value. During fiscal 2023, the Company is focusing on the following items:

•

maintaining our commitment to the local branch model;

•

identifying additional ancillary products to enhance profitability and asset performance;

•

continuing to focus on strategic acquisitions or bulk portfolio purchases to accelerate total revenue;

•

reducing operating expenses;

•

executing a branch consolidation plan along with right-sizing the remaining branch network;

•

growing our receivable base;

•

identify strategic investments in technology to enhance growth;

•

leadership/management training to develop skills at all levels;

•

increasing shareholder equity;

•

recruiting and retaining top talent.

The Company continues to focus on selecting the right markets to have branch locations. As of June 30, 2022, the Company operated brick and mortar branch locations in 18 states — Alabama, Florida, Georgia, Idaho, Illinois, Indiana, Kentucky, Michigan, Missouri, North Carolina, Nevada, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah and Wisconsin. The Company also originated business in its expansion states of Kansas without a physical branch in such markets.

The Company is currently licensed to provide Direct Loans in 14 states— Alabama, Florida, Georgia (over $3,000), Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, and Tennessee. The Company solicits current and former customers in these states for the purpose of providing Direct Loans to such customers, and intends to continue 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 8% and 16% of its total portfolio for the foreseeable future.

Analysis of Credit Losses

The Company takes into consideration the composition of the portfolio, current economic conditions, the estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts when determining management’s estimate of probable credit losses and the adequacy of the allowance for credit losses. Management utilizes significant judgment in determining probable incurred losses and in identifying and evaluating qualitative factors. This approach aligns with the Company’s lending policies and underwriting standards. If the allowance for credit losses is determined to be inadequate, then an additional charge to the provision is recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolio. During the fourth quarter of the fiscal year ended March 31, 2022, the Company made a change in the accounting estimate and began using a trailing twelve-month net charge-offs as a percentage of average finance receivables, and applying this percentage to ending finance receivables to estimate future probable credit losses. This approach better reflects the current trends of incurred losses within the portfolio and more closely aligns the allowance for credit losses with the portfolio’s performance indicators. Prior to the fourth quarter of the fiscal year ended March 31, 2022, the Company used a trailing six-month net charge-offs as a percentage of average finance receivables, annualized, and applied this percentage to ending finance receivables to estimate future probable losses for purposes of determining the allowance for credit losses. Using the prior methodology for estimating the allowance for credit losses would have resulted in higher provision expense of approximately $1.7 million. Management believes that estimating the allowance for credit losses using the trailing twelve-month charge-off analysis more accurately reflects portfolio performance adjusted for seasonality and encompasses historical collection practices. Under the current methodology the management continues to evaluate qualitative factors to support its allowance for credit losses. The Company examines the impact of macro-economic factors, such as inflation, and changes in the value of underlying collateral and as a result incorporated an additional $0.2 million as a qualitative component amount to its current estimate of adequate reserves.

The Company defines non-performing assets as accounts that are contractually delinquent for 60 or more days past due or Chapter 13 bankruptcy accounts. For these accounts, the accrual of interest income is suspended, and any previously accrued interest is reversed. Upon notification of a bankruptcy, an account is monitored for collection with other Chapter 13 accounts. In the event the debtors’ balance is reduced by the bankruptcy court, the Company will record a loss equal to the amount of principal balance reduction. The remaining balance will be reduced as payments are received by the bankruptcy court. In the event an account is dismissed from bankruptcy, the Company will decide based on several factors, whether to begin repossession proceedings or allow the customer to begin making regularly scheduled payments.

The Company defines a Chapter 13 bankruptcy account as a Troubled Debt Restructuring (“TDR”). The Company records a specific reserve for Chapter 13 bankruptcy accounts which is considered a qualitative reserve to the allowance for credit losses. The Company records the reserve based on the expected collectability of the principal balance of the Chapter 13 Bankruptcy and the specific reserve recorded as of June 30, 2022 and June 30, 2021 was $127,000 and $90,000, respectively.

The provision for credit losses increased to $3.6 million for the three months ended June 30, 2022 from $0.7 million for the three months ended June 30, 2021, due to increase in net charge-off percentage experienced. 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 thirty days past due, excluding Chapter 13 bankruptcy accounts, as of June 30, 2022 was 9.5%, an increase from 6.3% as of June 30, 2021. The delinquency percentage for Direct Loans more than thirty days past due, excluding Chapter 13 bankruptcy accounts, as of June 30, 2022 was 5.1%, an increase from 2.6% as of June 30, 2021. The delinquency percentage for both Contracts and Direct Loans increased as general economic factors such began to worsen.

In accordance with Company policies and procedures, certain borrowers qualify for, and the Company offers, one-month principal payment deferrals on Contracts and Direct Loans. For the three months ended June 30, 2022 and June 30, 2021 the Company granted deferrals to approximately 5.1% and 1.7%, respectively, of total Contracts and Direct Loans. The increase in the total number of deferrals in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 was primarily the result of declining general economic factors. 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 further information on deferrals, please see the disclosure under “COVID-19” above.

Three months ended June 30, 2022 compared to three months ended June 30, 2021

Interest and Fee Income on Finance Receivables

Interest and fee income on finance receivables, which consist predominantly of finance charge income, decreased 4.2% to $12.1 million for the three months ended June 30, 2022, from $12.6 million for the three months ended June 30, 2021. The decrease was primarily due to a 1.4% decrease in average finance receivables to $179.5 million for the three months ended June 30, 2022, when compared to $182.0 million for the corresponding period ended June 30, 2021.

The gross portfolio yield decreased to 26.89% for the three months ended June 30, 2022, compared to 27.68% for the three months ended June 30, 2021. The net portfolio yield decreased to 17.50% for the three months ended June 30, 2022, compared to 23.47% for the three months ended June 30, 2021. The net portfolio yield decreased primarily due to the increase in the provision for credit losses, as described under “Analysis of Credit Losses”.

Operating Expenses

Operating expenses increased to $9.5 million for the three months ended June 30, 2022 compared to $8.3 million for the three months ended June 30, 2021. The increase in operating expenses was primarily attributed to administrative, salaries and employee benefits expenses. Operating expenses as a percentage of average finance receivables, increased to 21.10% for the three months ended June 30, 2022 from 18.35% for the three months ended June 30, 2021 due to a proportionally greater decline in finance receivables.

Provision Expense

The provision for credit losses increased to $3.6 million for the three months ended June 30, 2022 from $0.7 million for the three months ended June 30, 2021. An increase in provision for credit losses taken during the three months ended June 30, 2022 was attributable to increase in net charge-off percentage experienced.

Interest Expense

Interest expense was $0.6 million for the three months ended June 30, 2022, and $1.2 million for the three months ended June 30, 2021. The following table summarizes the Company’s average cost of borrowed funds, exclusive of debt origination costs:


	Three months ended June 30,
	2022			2021
Variable interest under the Line of Credit		0.68	%		1.00	%
Credit spread under the Line of Credit		2.25	%		3.75	%
Average cost of borrowed funds		2.93	%		4.75	%

SOFR rates have increased to 1.50%, which represents the one-month SOFR rate as required under our Wells Fargo Line of Credit, as of June 30, 2022 compared to 0.1%, which represents the one-month LIBOR rate as required under our Line of Credit, as of June 30, 2021. For further discussions regarding interest rates see “Note 6—Line of Credit”.

Income Taxes

Contract Procurement

As of June 30, 2022, the Company purchases Contracts in the states listed in the table below. The Contracts purchased by the Company are predominantly for used vehicles; for the three-month periods ended June 30, 2022 and 2021, less than 1% were for new vehicles.

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


	As of June 30,		Three months ended June 30,
	2022		2022		2021
State	Number of branches		Net Purchases (In thousands)
FL		11	$	4,749	$	3,434
OH		6		2,982		3,253
GA		5		2,758		3,014
KY		3		1,501		1,663
MO		2		1,391		1,453
NC		3		1,840		1,130
IN		2		1,112		1,008
SC		3		1,341		970
AL		2		1,066		819
MI		2		450		791
NV		1		568		538
TN		1		296		478
IL		1		489		439
PA		1		614		360
TX		1		526		335
WI		1		264		286
ID		1		294		171
UT		1		71		145
AZ		-		24		18
KS	-			18		-
Total		47	$	22,354	$	20,305


	Three months ended June 30, (Purchases in thousands)
Contracts	2022			2021
Purchases	$	22,354		$	20,305
Average APR		22.9	%		23.2	%
Average discount		6.6	%		7.0	%
Average term (months)		48			46
Average amount financed	$	11,552		$	10,429
Number of Contracts		1,935			1,947

Direct Loan Origination

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


Direct Loans	Three months ended June 30, (Originations in thousands)
Originated	2022			2021
Purchases/Originations	$	8,215		$	5,737
Average APR		31.2	%		30.1	%
Average term (months)		25			25
Average amount financed	$	4,128		$	4,359
Number of loans		1,990			1,316

Liquidity and Capital Resources

The Company’s cash flows are summarized as follows:


	Three months ended June 30, (In thousands)
	2022			2021
Cash provided by (used in):
Operating activities	$	(1,361	)	$	1,055
Investing activities		(9,307	)		3,496
Financing activities		9,444			(14,055	)
Net (decrease) in cash	$	(1,224	)	$	(9,504	)

The Company’s primary use of working capital for the quarter ended June 30, 2022 was, and for the foreseeable future will continue to be, funding the purchase of Contracts, which are financed substantially through cash from principal and interest payments received, and the Company’s line of credit.

On November 5, 2021, NFI and its direct parent, Nicholas Data Services, Inc. (“NDS” and collectively with NFI, the “Borrowers”), entered into a senior secured line of credit (the “Line of Credit”) pursuant to a loan and security agreement by and among the Borrowers, Wells Fargo Bank, N.A., as agent, and the lenders that are party thereto (the “Credit Agreement”). The Ares Line of Credit was paid off in connection with entering into the Line of Credit.

Pursuant to the Credit Agreement, the lenders have agreed to extend to the Borrowers a line of credit of up to $175,000,000. The availability of funds under the Line of Credit is generally limited to an advance rate of between 80% and 85% of the value of eligible receivables, and outstanding advances under the Line of Credit will accrue interest at a rate equal to the Secured Overnight Financing Rate (SOFR) plus 2.25%. The commitment period for advances under the Line of Credit is three years (the expiration of that time period, the “Maturity Date”).

The Company will continue to depend on the availability the Line of Credit, together with cash from operations, to finance future operations. The availability of funds under the Line of Credit generally depends on availability calculations as defined in the Credit Agreement. See also the disclosure in Note 6. Line of Credit in this Form 10-Q, which is incorporated herein by reference.

Off-Balance Sheet Arrangements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

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 Interim 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 Interim Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in internal control over financial reporting.

No change in the Company’s internal control over financial reporting occurred during the Company’s fiscal quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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, 2022, 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 of 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 June 30, 2022.


	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)
April 1, 2022 to April 30, 2022		9	$	10.48		9	$	4,962
May 1, 2022 to May 31, 2022		8		9.75		8		4,884
June 1, 2022 to June 30, 2022		188		10.48		188		2,913
Total		205	$	10.46		205

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.

In August 2019, the Company’s Board authorized additional repurchase of up to $1.0 million of the Company’s outstanding shares.

ITEM 6. EXHIBITS


Exhibit No.		Description

10.1*		Loan and Security Agreement, dated as of November 5, 2021, by and among Wells Fargo Bank, N.A., as agent, the lenders that are parties thereto, and Nicholas Financial, Inc. and Nicholas Data Services, Inc., as borrowers

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

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

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

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Incorporated herein by reference to Exhibit 10.1 to the Company’s 8-K, dated as of November 5, 2021, Loan and Security Agreement, by and among Wells Fargo Bank, N.A., as agent, the lenders that are parties thereto, and Nicholas Financial, Inc. and Nicholas Data Services, Inc., as borrowers.

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

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: August 10, 2022		/s/ Michael Rost
		Michael Rost
		Interim Chief Executive Officer
		(Principal Executive Officer)


Date: August 10, 2022		/s/ Irina Nashtatik
		Irina Nashtatik
		Chief Financial Officer
		(Principal Financial Officer)