F R O M T H E P R E S I D E N T
T he year ended March 31, 2017 marks our 32nd year in business and our 30th as a publicly traded company.
The past year proved to be one of the most difficult in the Company’s history. The market for subprime
vehicle finance remains highly competitive and as such, yields on new contract acquisitions continue to face
downward pressure. To combat this downward pressure on yields, we must continue to increase operational
efficiencies through better allocation of our human capital and greater utilization of technology. At the same
time, we must capitalize on our local community presence, to not only reduce losses, but also to benefit from
individual branch market relationships.
Throughout this past year, we continued to experience intense competition from existing market participants
and saw additional new entrants into the market, which included: credit unions; independent finance com-
panies; several large banking institutions; and, captive finance companies. We recently observed some large
lenders tighten their underwriting guidelines, only to see other lenders immediately pick up that additional
business through aggressive pricing. These ongoing market conditions require us to gain momentum regarding
our ability to adapt to a competitive cycle that, for the foreseeable future, gives no indication of subsiding. For us,
that involves further evaluation of our current business structure, as well as, our overall operating strategy. We will not expand the number of
contracts purchased by incurring risk that is not priced appropriately and not conducive to providing long-term sustainable value.
Ralph T. Finkenbrink
CEO & President
During this past year, we sought to decrease losses by dedicating corporate resources to identifying and eliminating fraud found throughout the
installment contract buying process. We recently implemented a more robust due diligence and evaluation process when assessing whether to
enter into a business relationship with new independent dealers. This due diligence and evaluation process aims to eliminate those independent
dealers who are simply looking to exploit the current irrational buying climate and recognize those dealers seeking lenders for viable contracts.
We have also seen an increase in fraudulent applications to varying degrees. The most prevalent instances of false information provided on
loan applications were related to income and job status. In response, we implemented additional field training to help employees identify and
circumvent these types of fraudulent activities. However, by the fourth quarter of this past year, we had determined that additional training
by itself was not proving effective. In April of 2017, we created a Centralized Funding Department (CFD) as an additional measure to identify
and eliminate fraud. The primary function of the CFD is to verify every customer’s proof of income and make sure the information meets our
requirements, and to ensure that every customer’s employment and residence verifications support the information that was used to evaluate the
contract purchase. We are pleased to report that in the first three months of a fully operational CFD department, we are experiencing immedi-
ate benefits. There have been expenses associated with establishing the CFD, primarily relating to compensation costs. However, based on our
preliminary results, the benefit derived from preventing the losses associated with fraud has materially outweighed the costs associated with
maintaining an on-going CFD department.
In March of 2017, we took the meaningful step of increasing our utilization of data mining and information analytics to identify the probability
of risk within the contracts we purchase. We engaged Clarity Services, a leading service provider in the field of alternative data. The value of
alternative data is based on a wealth of associated information typically not reported to the three dominant credit bureaus. This associated data
may better indicate the ability and willingness of an individual debtor, as well as the likelihood of repayment for any specific contract. There
are many different types of lenders who utilize the various services offered by alternative data providers such as Clarity Services. For our anal-
ysis, we commissioned a retro study performed by Clarity with respect to a material number of contracts we had acquired in the past. Through
our research with Clarity we introduced an alternative data score, which has been incorporated into our existing guidelines. The Clarity score
we are utilizing indicates two valuable pieces of information; it identifies applicants where the risk of fraud is higher than average and which
segments of analyzed historical contract acquisitions show the highest losses based on traditional credit scoring. Taking it one step further, the
Clarity scores were cross referenced against all accounts within the retro study. As a result of our analysis we can now better identify which
segments need additional risk based pricing. We believe by incorporating this strategic analysis into our operational model we will see positive
results that will manifest itself in reduced losses on contracts acquired.
As previously announced, I have elected to resign my position as President & Chief Executive Officer, effective September 30, 2017. This was a
difficult decision for me after spending the last 29 years helping to build Nicholas Financial’s auto loan portfolio. I leave behind many wonder-
ful people who will carry on and I’m confident they will be a big part in determining what best operating strategy to utilize going forward. I
want to personally thank the employees, shareholders and other affiliates who supported me over the years and wish nothing but the very best
for the Company. We remain committed to achieving long-term sustainable value for our shareholders.
Ralph T. Finkenbrink
President & Chief Executive Officer
July, 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the fiscal year ended March 31, 2017
☐ 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
(State or Other Jurisdiction of
Incorporation or Organization)
8736-3354
(I.R.S. Employer
Identification No.)
2454 McMullen Booth Road, Building C
Clearwater, Florida 33759
(Address of Principal Executive Offices, Including Zip Code)
(727) 726-0763
(Registrant’s Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class
Common shares, no par value
Name of Each Exchange on Which Registered
NASDAQ Global Select Market
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. ☐
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the preceding 12 months (or for such shorter period 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 and posted on its corporate Web site, if any, 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 and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Emerging growth company ☐
Accelerated filer
☒
Smaller reporting 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 check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At September 30, 2016, the aggregate market value of the Registrant’s common shares held by non-affiliates of the Registrant was
approximately $77.0 million.
As of June 6, 2017, approximately 12.5 million shares, no par value, of the Registrant were outstanding (of which approximately
4.7 million shares were held by the Registrant’s principal operating subsidiary and pursuant to applicable law, not entitled to vote and
approximately 7.8 million shares were entitled to vote).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement and Information Circular for the 2017 Annual General Meeting of
Shareholders are incorporated by reference in Part III, Items 10 through 14, of this Annual Report on Form 10-K.
NICHOLAS FINANCIAL, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Forward-Looking Information
Page No.
1
9
18
18
18
18
18
21
22
31
32
53
53
56
56
56
56
56
56
57
This Annual Report on Form 10-K (“Report”) 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”), believes that the
expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to
be correct. Such statements are subject to certain risks, uncertainties and assumptions, including but not limited to the risk factors
discussed herein under “Item 1A – Risk Factors.” 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. Among the key factors
that may cause actual results to differ materially from those projected in forward-looking statements include fluctuations in the
economy, the degree and nature of competition, fluctuations in interest rates, the availability of capital at acceptable rates and terms,
demand for consumer financing in the markets served by the Company, the Company’s products and services, increases in the default
rates experienced on retail installment sales contracts (“Contracts”), regulatory changes in the Company’s existing and future markets,
the Company’s intentions regarding strategic alternatives, and the Company’s ability to expand its business, including its ability to
identify and complete acquisitions and integrate the operations of acquired businesses, to recruit and retain qualified employees, to
expand into new markets and to maintain profit margins in the face of increased pricing competition. All forward-looking statements
included in this Report are based on information available to the Company as of the date of filing of this 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 US Securities and Exchange Commission (“SEC”),
including its reports on Forms 10-Q, 8-K and 10-K and annual reports to shareholders.
THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK
Item 1. Business
General
PART I
Nicholas Financial, Inc. (“Nicholas Financial-Canada”) is a Canadian holding company incorporated under the laws of British
Columbia in 1986. The business activities of Nicholas Financial-Canada are currently conducted exclusively through its wholly-
owned indirect subsidiary, Nicholas Financial, Inc., a Florida corporation (“Nicholas Financial”). Nicholas Financial is a specialized
consumer finance company engaged primarily in acquiring and servicing automobile finance installment contracts (“Contracts”) for
purchases of new and used automobiles and light trucks. To a lesser extent, Nicholas Financial also originates direct consumer loans
(“Direct Loans”) and sells consumer-finance related products. Nicholas Financial’s financing activities accounted for 100% of the
Company’s consolidated revenue for the fiscal years ended March 31, 2017 and 2016, and more than 99% of the Company’s
consolidated revenues for the fiscal year ended March 31, 2015.
A second Florida subsidiary, Nicholas Data Services, Inc. (“NDS”), historically was engaged in supporting and updating industry-
specific computer application software for small businesses located primarily in the Southeastern United States. NDS’s activities
accounted for less than 1% of the Company’s consolidated revenues for the fiscal year ended March 31, 2015. NDS ceased its
operations during the fiscal year ended March 31, 2015; however, it continues as the interim holding company for Nicholas Financial.
Nicholas Financial-Canada, Nicholas Financial and NDS are hereafter collectively referred to as the “Company”. All financial
information herein is designated in United States dollars. References to “fiscal 2017” are to our fiscal year ended March 31, 2017,
references to “fiscal 2016” are to our fiscal year ended March 31, 2016, and references to “fiscal 2015” are to our fiscal year ended
March 31, 2015.
The Company’s principal executive offices are located at 2454 McMullen Booth Road, Building C, Clearwater, Florida 33759, and its
telephone number is (727) 726-0763.
Available Information
The Company’s filings with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, definitive proxy
statements on Schedule 14A, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934, are made available free of charge through the Investor Center section of the Company’s
Internet website at http://www.nicholasfinancial.com as soon as reasonably practicable after the Company electronically files such
material with, or furnishes it to, the SEC. The Company is not including the information contained on or available through its web site
as a part of, or incorporating such information by reference into, this Report. Copies of any materials the Company files with the SEC
can also be obtained free of charge through the SEC’s website at http://www.sec.gov or at the SEC’s Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330.
Operating Strategy
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 the eighteen states — Alabama, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky,
Maryland, Michigan, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia and Wisconsin — in
which it currently operates by implementing a centralized funding process and supplementing consumer data obtained from traditional
credit bureaus with information obtained from alternative bureaus that is not available from traditional reporting agencies to better
inform its automobile financing underwriting. During fiscal 2016, the Company started buying Contracts in Wisconsin and
Pennsylvania. Dealers in Wisconsin are serviced in our Gurnee, Illinois branch. During fiscal 2017, the Company consolidated three
branch locations (Sarasota, FL; Toledo, OH; and, Troy, MI) into branches previously established within their market. The Company
will continue to evaluate any branch locations that do not meet its minimum profitability targets and may elect to close one or more of
these branches in the future. The Company is also evaluating its operational strategy and structure. The Company’s decisions on how
it plans to continue operating its business strategy will be influenced by the sustainability of some of its competitors’ underwriting and
risk-based pricing. Although the Company has not made any bulk purchases of Contracts in over two decades, if the opportunity
arises, the Company may consider possible acquisitions of portfolios of seasoned Contracts from dealers in bulk transactions as a
means of further penetrating its existing markets or expanding its presence in targeted geographic locations. The Company cannot
provide any assurances, however, that it will be able to further expand in either its current markets or any targeted new markets.
1
The Company is currently licensed to provide Direct Loans in Florida and North Carolina. The Company does not have any current
plans to expand its strategy of soliciting current customers and expects total Direct Loans to remain less than 5% of its total portfolio
for the foreseeable future.
Automobile Finance Business – Contracts
The Company is engaged in the business of providing financing programs, primarily to purchasers of used cars and light trucks who
meet the Company’s credit standards but who do not meet the credit standards of traditional lenders, such as banks and credit unions
because of the customer’s credit history or job instability or the age of the vehicle being financed. Unlike traditional lenders, which
look primarily to the credit history of the borrower in making lending decisions and typically finance new automobiles, the Company
is willing to purchase Contracts for purchases made by borrowers who do not have a good credit history and for older model and high-
mileage automobiles. In making decisions regarding the purchase of a particular Contract, the Company considers the following
factors related to the borrower: current income; credit history; history in making installment payments for automobiles; current and
prior job status; and place and length of residence. In addition, the Company examines its prior experience with Contracts purchased
from the dealer from which the Company is purchasing the Contract, and the value of the automobile in relation to the purchase price
and the term of the Contract.
As of the date of this annual report on Form 10-K, the Company’s automobile finance programs are conducted in eighteen states
through a total of 65 branch offices, consisting of nineteen in Florida, seven in Ohio, six in each of North Carolina and Georgia, three
in each of Illinois, Indiana, Kentucky, and Missouri, two in each of Alabama, South Carolina, Tennessee, Texas, Michigan and
Virginia, and one in each of Kansas, Pennsylvania and Maryland. The Company acquires Contracts in Wisconsin using the
underwriting staff of the Gurnee, Illinois branch location. At this time, the Company does not have any plans to open a branch in the
Wisconsin area. As of March 31, 2017, the Company had non-exclusive agreements with approximately 4,200 dealers, of which
approximately 2,300 were active, for the purchase of individual Contracts that meet the Company’s financing criteria. The Company
considers a dealer agreement to be active if the Company has purchased a Contract thereunder in the last six months. Each dealer
agreement requires the dealer to originate Contracts in accordance with the Company’s guidelines. Once a Contract is purchased by
the Company, the dealer is no longer involved in the relationship between the Company and the borrower, other than through the
existence of limited representations and warranties of the dealer in favor of the Company.
A customer under a Contract typically makes a down payment, in the form of cash or trade-in, ranging from 5% to 35% of the sale
price of the vehicle financed. The balance of the purchase price of the vehicle plus taxes, title fees and, if applicable, premiums for
extended service contracts, gap insurance, roadside assistance plans, credit disability insurance and/or credit life insurance are
generally financed over a period of 12 to 72 months.
At approximately the time of origination, the Company purchases a Contract from an automobile dealer at a negotiated price that is
less than the original principal amount being financed by the purchaser of the automobile. We refer to the difference between the
negotiated price and the original principal amount being financed as the dealer discount. The amount of the dealer discount depends
upon factors such as the age and value of the automobile, creditworthiness of the customer and competition in any given market.
Generally, the Company will pay more (i.e., purchase the Contract at a smaller discount from the original principal amount) for
Contracts as the credit risk of the customer improves. In certain markets, competition more significantly impacts the Company’s
dealer discount than in other markets. To date, the Contracts purchased by the Company have been purchased at discounts that range
from 1% to 15% of the original principal amount of each Contract. As of March 31, 2017, the Company’s loan portfolio consisted
exclusively of Contracts purchased without recourse to the dealer, however each dealer remains potentially liable to the Company for
breaches of certain representations and warranties made by the dealer with respect to compliance with applicable federal and state
laws and valid title to the vehicle.
The Company’s policy is to only purchase a Contract after the dealer has provided the Company with the requisite proof that the
Company has a first priority lien on the financed vehicle (or the Company has, in fact, perfected such first priority lien), that the
customer has obtained the required collision insurance naming the Company as loss payee and that the Contract has been fully and
accurately completed and validly executed. Once the Company has received and approved all required documents, it pays the dealer
for the Contract and commences servicing the Contract. The Company requires the owner of the vehicle to obtain and maintain
collision insurance, naming the Company as the loss payee, with a deductible of not more than $1,000.
2
Contract Procurement
The Company currently purchases Contracts in the states listed in the table below. The Contracts purchased by the Company are
predominately for used vehicles; for the periods shown below, less than 1% were for new vehicles. The average model year
collateralizing the portfolio as of March 31, 2017 was a 2009 vehicle. The dollar amounts shown in the table below represent the
Company’s finance receivables, net of unearned interest on Contracts purchased:
State
Alabama
Florida
Georgia
Illinois
Indiana
Kansas
Kentucky
Maryland
Michigan
Missouri
North Carolina
Ohio
Pennsylvania
South Carolina
Tennessee
Texas
Virginia
Wisconsin
Total
Maximum
allowable
interest rate (1)
(2)
18-30%(3)
18-30%(3)
(2)
25%
(2)
18-25%(3)
24%
25%
(2)
18-29%(3)
25%
18-21%(3)
(2)
(2)
18-28%(3)
(2)
(2)
Fiscal year ended March 31,
(In thousands)
2017
$ 5,106
47,923
16,080
7,057
9,330
2,946
8,422
2,714
6,622
8,244
12,910
19,366
2,749
4,572
5,249
6,557
3,973
1,121
2016
$ 5,764
55,270
18,227
7,563
8,595
3,052
8,837
2,626
7,671
8,227
14,291
24,520
392
6,145
6,134
4,965
4,614
382
2015
$ 6,289
54,653
18,710
6,457
7,654
2,165
9,768
4,081
7,355
7,554
15,078
24,245
—
3,966
5,206
821
4,367
—
$ 170,941
$ 187,275
$ 178,369
(1) The maximum allowable interest rates by state are subject to change and are governed by the individual states the Company
conducts business in.
(2) None of these states currently imposes a maximum allowable interest rate with respect to the types and sizes of Contracts the
Company purchases. The maximum rate which the Company will typically charge any customer in each of these states is 30%
per annum.
(3) The maximum allowable interest rate in each of these states varies depending upon the model year of the vehicle being financed.
In addition, Georgia does not currently impose a maximum allowable interest rate with respect to Contracts over $5,000.
The following table presents selected information on Contracts purchased by the Company, net of unearned interest:
Contracts
Purchases
Weighted APR
Average dealer discount
Weighted average term (months)
Average loan
Number of Contracts purchased
Direct Loans
Fiscal year ended March 31,
(Purchases in thousands)
2017
$ 170,941
22.22%
7.08%
57
$ 11,693
14,619
2016
$ 187,275
22.66%
7.51%
56
$ 11,348
16,503
2015
$ 178,369
22.90%
8.08%
55
$ 10,967
16,264
The Company currently originates Direct Loans in Florida and North Carolina. Direct Loans are loans originated directly between the
Company and the consumer. These loans are typically for amounts ranging from $1,000 to 11,000 and are generally secured by a lien
on an automobile, watercraft or other permissible tangible personal property. The average loan made to date by the Company had an
initial principal balance of approximately $4,000. The Company does not expect the average loan size to increase significantly within
the foreseeable future. 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 our typical Contract due to the customer’s historical
3
payment history with the Company. The Company does not have a Direct Loan license in Alabama, Illinois, Indiana, Kansas,
Kentucky, Maryland, Michigan, Missouri, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia or Wisconsin, and none is
presently required in Georgia provided that the original principal balance of the loan is greater than $3,000. The Company does not
expect to pursue a Direct Loan license in any other state during the fiscal year ending March 31, 2018. The size of the loan and
maximum interest rate that can be charged vary from state to state. The Company considers the individual’s income, credit history, job
stability, and the value of the collateral offered by the borrower to secure the loan as the primary factors in determining whether an
applicant will receive an approval for such loan. Additionally, because most of the Direct Loans made by the Company to date have
been made to borrowers under Contracts previously purchased by the Company, the payment history of the borrower under the
Contract is a significant factor in making the loan decision. The Company’s Direct Loan program was implemented in April 1995 and
accounted for approximately 3% of the Company’s annual consolidated revenues during the year ended March 31, 2017.
In connection with its Direct Loan program, the Company also makes available credit disability, credit life insurance, and involuntary
unemployment insurance coverage to customers through unaffiliated third-party insurance carriers. Customers in approximately 83%
of the approximate 3,000 Direct Loan transactions outstanding as of March 31, 2017 elected to purchase third-party insurance
coverage made available by the Company. The cost of this insurance to the customer, which includes a commission for the Company,
is included in the amount financed by the customer.
The following table presents selected information on Direct Loans originated by the Company, net of unearned interest:
Direct Loans
Originations
Weighted APR
Weighted average term (months)
Average loan
Number of contracts originated
Underwriting Guidelines
Fiscal year ended March 31,
(Originations in thousands)
2017
$ 8,676
25.99%
30
$ 3,626
2,393
2016
$ 9,578
25.82%
30
$ 3,589
2,669
2015
$ 9,525
26.47%
29
$ 3,536
2,694
The Company’s typical customer has a credit history that fails to meet the lending standards of most traditional banks and credit
unions. Among the credit problems experienced by the Company’s customers that resulted in a poor credit history are: unpaid
revolving credit card obligations; unpaid medical bills; unpaid student loans; prior bankruptcy; and evictions for nonpayment of rent.
The Company believes that its customer profile is similar to that of its direct competitors.
Prior to its approval of the purchase of a Contract, the Company is provided with a standardized credit application completed by the
consumer which contains information relating to the consumer’s background, employment, and credit history. The Company also
obtains credit reports from Equifax and/or TransUnion, which are independent credit reporting services. The Company verifies the
consumer’s employment history, income and residence. As of March 1, 2017, the Company engaged a third-party provider of
alternative data (not available from the traditional reporting services) to assist in the evaluation process of an applicant’s credit history.
In most cases, consumers are interviewed via telephone by a Company application processor. The Company also considers the
customer’s prior payment history with the Company, if any, as well as the collateral value of the vehicle being financed.
The Company has established internal buying guidelines to be used by its Branch Managers and internal underwriters when
purchasing Contracts. Any Contract that does not meet these guidelines must be approved by the District Managers or senior
management of the Company. The Company currently has District Managers charged with managing the specific branches in a
defined geographic area. In addition to a variety of administrative duties, the District Managers are responsible for monitoring their
assigned branches’ compliance with the Company’s underwriting standards as well as approving underwriting exceptions.
The Company uses essentially the same criteria in analyzing a Direct Loan as it does in analyzing the purchase of a Contract. Lending
decisions regarding Direct Loans are made based upon a review of the customer’s loan application, income, credit history, job
stability, and the value of the collateral offered by the borrower to secure the loan. To date, since the majority of the Company’s Direct
Loans have been made to individuals whose automobiles have been financed by the Company, the customer’s payment history under
his or her existing or past Contract is a significant factor in the lending decision.
4
After reviewing the information included in the Contract or Direct Loan application and taking the other factors into account, the
Company’s loan origination system categorizes the customer using internally developed credit classifications of “1,” indicating higher
creditworthiness, through “4,” indicating lower creditworthiness. Contracts are financed for individuals who fall within all four
acceptable rating categories utilized, “1” through “4”. Usually a customer who falls within the two highest categories (i.e., “1” or “2”)
is purchasing a two to four-year old, low mileage used automobile, while a customer in any of the two lowest categories (i.e., “3,” or
“4”) usually is purchasing an older, high mileage automobile from an independent used automobile dealer.
The Company utilizes internal audit (the “IA”) to perform on-site audits of its branches’ compliance with Company underwriting
guidelines. IA audits Company branches on a schedule that is variable depending on the size of the branch, length of time a branch has
been open, current tenure of the Branch Manager, previous branch audit score and current and historical branch profitability. IA
reports directly to the SVP of Branch Operations.
Monitoring and Enforcement of Contracts
The Company requires each customer under a Contract to obtain and maintain collision insurance covering damage to the vehicle.
Failure to maintain such insurance constitutes a default under the Contract, and the Company may, at its discretion, repossess the
vehicle. To reduce potential loss due to insurance lapse, the Company has the contractual right to obtain collateral protection insurance
through a third-party, which covers loss due to physical damage to a vehicle not covered by any insurance policy of the customer.
The Company’s Management Information Services personnel maintain a number of reports to monitor compliance by customers with
their obligations under Contracts and Direct Loans made by the Company. These reports may be accessed on a real-time basis
throughout the Company by management personnel, including Branch Managers and staff, at computer terminals located in the main
office and each branch office. These reports include delinquency aging reports, customer promises reports, vehicle information
reports, purchase reports, dealer analysis reports, static pool reports, and repossession reports.
A delinquency report is an aging report that provides basic information regarding each account and indicates accounts that are past
due. The report includes information such as the account number, address of the customer, phone numbers of the customer, original
term of the Contract, number of remaining payments, outstanding balance, due dates, date of last payment, number of days past due,
scheduled payment amount, amount of last payment, total past due, and special payment arrangements or agreements.
Any Contract acquired by the Company less than 180 days prior to the determinations date is included on the delinquency report on
the first day that the Contract is contractually past due. Contracts acquired by the Company 180 days or more days prior to the
determination date are not included on the delinquency report until they are more than 10 days past due. Determinations with respect
to repossession are based on many factors which include but are not limited to, delinquency status, payment history, number of
months since Contract acquisition, current value of the collateral, customer’s employment status, communication with the customer,
customer’s intent to pay, etc. At 180 days delinquent, if the vehicle has not yet been repossessed, the account is charged-off and
transferred to the Loss Prevention and Recovery Department. Once a vehicle has been repossessed, the related loan balance no longer
appears on the delinquency report, instead, the vehicle appears on the Company’s repossession report and is generally sold at auction.
When an account becomes delinquent, the Company immediately contacts the customer to determine the reason for the delinquency
and to determine if appropriate arrangements for payment can be made. If payment arrangements acceptable to the Company can be
made, the information is entered in its database and is used to generate a “Promises Report,” which is utilized by the Company’s
collection staff for account follow up.
The Company prepares a repossession report that provides information regarding repossessed vehicles and aids the Company in
disposing of repossessed vehicles. In addition to information regarding the customer, this report provides information regarding the
date of repossession, date the vehicle was sold, number of days it was held in inventory prior to sale, year, make and model of the
vehicle, mileage, payoff amount on the Contract, NADA book value, Black Book value, suggested sale price, location of the vehicle,
original dealer and condition of the vehicle, as well as notes other information that may be helpful to the Company.
The Company also prepares a dealer analysis report that provides information regarding each dealer from which it purchases
Contracts. This report allows the Company to analyze the volume of business done with each dealer and the terms on which it has
purchased Contracts from such dealer.
The Company is subject to seasonal variations within the subprime marketplace. While the APR, Discount, and term remain consistent
across quarters, write offs and delinquencies tend to be lower while purchases tend to be higher in the fourth and first quarter of the
fiscal year. The second and third quarter of the fiscal year tend to have higher write offs and delinquencies, and a lower level of
purchases.
5
Marketing and Advertising
The Company’s Contract marketing efforts currently are directed exclusively toward automobile dealers. The Company attempts to
meet dealers’ needs by offering highly-responsive, cost-competitive and service-oriented financing programs. The Company relies on
its District and Branch Managers to solicit agreements for the purchase of Contracts with automobile dealers located within a 60-mile
radius of each branch office. The Branch Manager provides dealers with information regarding the Company and the general terms
upon which the Company is willing to purchase Contracts. The Company presently has no plans to implement any other forms of
advertising, such as radio or newspaper advertisements, for the purchase of Contracts.
The Company solicits customers under its Direct Loan program primarily through direct mailings, followed by telephone calls to
individuals who have a good credit history with the Company in connection with Contracts purchased by the Company.
Computerized Information System
The Company uses a third-party loan origination system and an internally developed loan servicing system to assist in responding to
customer inquiries and to monitor the performance of its Contract and Direct Loan portfolio and the performance of individual
customers under Contracts. All Company personnel are provided with real-time access to information. The Company has created
specialized programs to automate the tracking of Contracts and Direct Loans from inception. The Company’s computer network
encompasses both its corporate headquarters and its branch office locations. See “Monitoring and Enforcement of Contracts” above
for a summary of the different reports prepared by the Company.
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. Many of these companies have significantly greater
resources than the Company. Increased competition for the purchase of Contracts has caused a reduction in the interest rates payable
by many individual purchasers of automobiles, and the Company believes that continued increased competition could materially
reduce such interest rates in the foreseeable future. In addition, increased competition for the purchase of Contracts has 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 is willing to purchase Contracts and higher advance rates. The Company’s average dealer discount on loans purchased
for the fiscal years ended March 31, 2017, 2016, and 2015 was 7.08%, 7.51% and 8.08%, respectively. Further, increased competition
has resulted in the purchase of lower credit quality Contracts.
The Company’s target market consists of persons who are generally unable to obtain traditional used car financing because of their
credit history or the vehicle’s mileage or age. Historically, the Company was able to expand its automobile finance business in the
non-prime credit market by offering to purchase Contracts on terms that are competitive with those of other companies. However, it
has become increasingly difficult for the Company to match or exceed pricing of its competitors, which has resulted in declining
Contract acquisition rates during the 2016 and 2017 fiscal years. Because of the daily contact that many of its employees have with
automobile dealers located throughout the market areas served by it, the Company is generally aware of the terms upon which its
competitors are offering to purchase Contracts.
The Company’s ability to compete effectively with other companies offering similar financing arrangements depends in part upon the
Company maintaining close business relationships with dealers of new and used vehicles. No single dealer out of the approximately
2,300 dealers with which the Company currently has active Contractual relationships represents a significant amount of the
Company’s business volume for any of the fiscal years ended March 31, 2017, 2016 or 2015.
6
Regulation
The Company’s financing operations are subject to regulation, supervision and licensing under many federal, state and local statutes,
regulations and ordinances. Additionally, the procedures that the Company must follow regarding the repossession of vehicles
securing Contracts are regulated by each of the states in which the Company does business. To date, the Company’s operations have
been conducted exclusively in the states of Alabama, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Maryland, Michigan,
Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia and Wisconsin. Accordingly, the laws of
such states, as well as applicable federal law, govern the Company’s operations. The following constitute certain of the existing
federal, state and local statutes, regulations and ordinances with which the Company must comply:
•
State consumer regulatory agency requirements. Pursuant to state regulations, on-site audits can be conducted for each of
the Company’s branches located within Alabama, Florida, Illinois, Indiana, Kansas, Michigan, Missouri and Texas to
monitor compliance with applicable regulations. These regulations include, but are not limited to: licensure requirements;
requirements for maintenance of proper records; payment of required fees; maximum interest rates that may be charged on
loans to finance used vehicles; and, proper disclosure to customers regarding financing terms. Pursuant to Florida and
North Carolina law, the Company’s Direct Loan activities in each state are subject to similar periodic on-site audits by the
Florida Financial Services Commission and the North Carolina Office of the Commissioner of Banks, respectively.
• State licensing requirements. The Company files a notification or obtains a license to acquire Contracts within the
following states: Alabama; Florida; Illinois; Indiana; Kansas; Maryland; Michigan; Missouri; Pennsylvania; South
Carolina; Texas; and, Wisconsin. In regards to its’ Direct Loan activities in Florida and North Carolina, the Company
maintains separate Consumer Finance Licenses with the Florida Department of Banking and Finance and the North
Carolina Office of the Commissioner of Banks. Furthermore, some states require dealers to maintain a Retail Installment
Seller’s License, and where applicable, the Company only conducts business with dealers who hold such a license.
• Fair Debt Collection Practices Act. The Fair Debt Collection Practices Act (“FDCPA”) and applicable state law
counterparts prohibit the Company from contacting customers during certain times and at certain places, from using
certain threatening practices and from making false implications when attempting to collect a debt.
•
•
Truth in Lending Act. The Truth in Lending Act (“TILA”) requires the Company and the dealers it does business with to
make certain disclosures to customers, including the terms of repayment, the total finance charge and the annual
percentage rate charged on each Contract or Direct Loan.
Equal Credit Opportunity Act. The Equal Credit Opportunity Act (“ECOA”) prohibits creditors from discriminating
against loan applicants on the basis of race, color, sex, age or marital status. Pursuant to Regulation B promulgated under
the ECOA, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose
credit applications are not approved of the reasons for the rejection.
• Electronic Signatures in Global and National Commerce Act. The Electronic Signatures in Global and National
Commerce Act (“ESIGN”) requires the Company to provide consumers with clear and conspicuous disclosures before the
consumer gives consent to authorize the use of electronic signatures, electronic contracts and electronic records.
•
Fair Credit Reporting Act. The Fair Credit Reporting Act (“FCRA”) requires the Company to provide certain information
to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting
agency, as well as, ensure the accuracy and integrity of consumer information reported to credit reporting agencies.
• Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (“GLBA”) requires the Company to maintain privacy with
respect to certain consumer data in its possession and to periodically communicate with consumers on privacy matters.
• Servicemembers Civil Relief Act. The Servicemembers Civil Relief Act (“SCRA”) requires the Company to reduce the
interest rate charged on each loan to customers who have subsequently joined, enlisted, been inducted or called to active
military duty and places limitations on collection and repossession activity.
• Military Lending Act. The Military Lending Act (“MLA”) requires the Company to limit the military annual percentage
rate (“MAPR”) that the Company may charge to a maximum of 36 percent, requires certain disclosures to military
consumers, and provides other substantive consumer protections on credit extended to Servicemembers and their families.
•
Electronic Funds Transfer Act. The Electronic Funds Transfer Act (“EFTA”) prohibits the Company from requiring its
customers to repay a loan or other credit by electronic funds transfer (“EFT”), except in limited situations which do not
apply to the Company. The Company is also required to provide certain documentation to its customers when an EFT is
initiated and to provide certain notifications to its customers with regard to preauthorized payments.
• Telephone Consumer Protection Act. The Telephone Consumer Protection Act (“TCPA”) governs the Company’s practice
of contacting customers by certain means i.e. auto dealers, pre-recorded or artificial voice calls on customers’ land lines,
fax machines and cell phones, including text messages.
7
•
Bankruptcy. Federal bankruptcy and related state laws may interfere with or affect the Company’s ability to recover
collateral or enforce a deficiency judgment.
• Dodd-Frank Wall Street Reform and Consumer Protection Act 0f 2010 (“Dodd-Frank Act”). Title X of the Dodd-Frank
Act created the Consumer Financial Protection Bureau (“CFPB”), which, effective as of July 21, 2011, has the authority to
issue and enforce regulations under the federal “enumerated consumer laws,” including (subject to certain statutory
limitations) FDCPA, TILA, ECOA, FCRA, GLBA and EFTA. The CFPB has rulemaking and enforcement authority over
certain non-depository institutions, including us. The CFPB is specifically authorized, among other things, to take actions
to prevent companies providing consumer financial products or services and their service providers from engaging in
unfair, deceptive or abusive acts or practices in connection with consumer financial products and services, and to issue
rules requiring enhanced disclosures for consumer financial products or services. Under the Dodd-Frank Act, the CFPB
also may restrict the use of pre-dispute mandatory arbitration clauses in contracts between covered persons and consumers
for a consumer financial product or service. The CFPB also has authority to interpret, enforce, and issue regulations
implementing enumerated consumer laws, including certain laws that apply to our business. The CFPB issued rules
regarding the supervision and examination of non-depository “larger participants” in the automobile finance business.
Since we are deemed a larger participant, we are subject to supervision and examination by the CFPB.
Failure to comply with these laws or regulations could have a material adverse effect on us by, among other things, limiting the
jurisdictions in which we may operate, restricting our ability to realize the value of the collateral securing the Contracts, making it
more costly or burdensome to do business or resulting in potential liability. The volume of new or modified laws and regulations and
the activity of agencies enforcing such law have increased in recent years in response to issues arising with respect to consumer
lending. From time to time, legislation and regulations are enacted which increase the cost of doing business, limit or expand
permissible activities or affect the competitive balance among financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of financial institutions and financial services providers are frequently made in the
U.S. Congress, in the state legislatures and by various regulatory agencies. This legislation may change our operating environment in
substantial and unpredictable ways and may have a material adverse effect on our business.
In particular, the Dodd-Frank Act and regulations promulgated thereunder, including the rules regarding supervision and examination
issued by the CFPB, are likely to affect our cost of doing business, may limit or expand our permissible activities, may affect the
competitive balance within our industry and market areas and could have a material adverse effect on us. Our management continues
to assess the Dodd-Frank Act’s probable impact on our business, financial condition and results of operations, and to monitor
developments involving the entities charged with promulgating regulations thereunder. However, the ultimate effect of the Dodd-
Frank Act on the financial services industry in general, and on us in particular, is uncertain at this time.
In addition to the CFPB, other state and federal agencies have the ability to regulate aspects of our business. For example, the Dodd-
Frank Act provides a mechanism for state Attorneys General to investigate us. In addition, the Federal Trade Commission has
jurisdiction to investigate aspects of our business. We expect that regulatory investigation by both state and federal agencies will
continue and that the results of these investigations could have a material adverse impact on us.
Dealers with which we do business must also comply with credit and trade practice statutes and regulations. Failure of these dealers to
comply with such statutes and regulations could result in customers having rights of rescission and other remedies that could have a
material adverse effect on us.
The sale of vehicle service contracts and other ancillary products by dealers in connection with Contracts assigned to us from dealers
is also subject to state laws and regulations. As we are the holder of the Contracts that may, in part, finance these products, some of
these state laws and regulations may apply to our servicing and collection of the Contracts. Although these laws and regulations may
not significantly affect our business, there can be no assurance that insurance or other regulatory authorities in the jurisdictions in
which these products are offered by dealers will not seek to regulate or restrict the operation of our business in these jurisdictions. Any
regulation or restriction of our business in these jurisdictions could materially adversely affect the income received from these
products.
The Company’s management believes that the Company maintains all requisite licenses and permits and is in material compliance
with applicable local, state and federal laws and regulations. The Company periodically reviews its branch office practices in an effort
to ensure such compliance. Although compliance with existing laws and regulations has not had a material adverse effect on the
Company’s operations to date, given the increasingly complex regulatory environment, the increasing costs of complying with such
laws and regulations, and the increasing risk of penalties, fines or other liabilities associated therewith, no assurances can be given that
we are in material compliance with all of such laws or regulations or that the costs of such compliance, or the failure to be in such
compliance, will not have a material adverse effect on our business, financial condition or results of operations.
8
Employees
The Company’s management and various support functions are centralized at the Company’s Corporate Headquarters in Clearwater,
Florida. As of March 31, 2017, the Company employed a total of 306 persons, of which 58 persons were employed at the Company’s
Corporate Headquarters. None of the Company’s employees are subject to a collective bargaining agreement, and the Company
considers its relations with its employees generally to be good.
Item 1A. Risk Factors
The following factors, as well as other factors not set forth below, may adversely affect the business, operations, financial
condition or results of operations of the Company (sometimes referred to in this section as “we” “us” or “our”).
We may experience high delinquency and loss rates in our portfolios, which could reduce our profitability. In addition, our
inability to accurately forecast and estimate the amount and timing of future collections could have a material adverse effect
on our financial position, liquidity and results of operations.
Our profitability depends, to a material extent, on the performance of Contracts that we purchase. Historically, we have experienced
higher delinquency rates than traditional financial institutions because substantially all of our Contracts and Direct Loans are to non-
prime borrowers, who are unable to obtain financing from traditional sources due to their credit history. Contracts and Direct Loans
made to these individuals generally entail a higher risk of delinquency, default and repossession and higher losses than loans made to
consumers with better credit.
Our underwriting standards and collection procedures may not offer adequate protection against the risk of default, especially in
periods of economic uncertainty and wage stagnation such as have existed over much of the past few years. In the event of a default,
the collateral value of the financed vehicle usually does not cover the outstanding Contract or Direct Loan balance and costs of
recovery.
Our ability to accurately forecast performance, and determine an appropriate provision and allowance for credit losses, is critical to
our business and financial results. The allowance for credit losses is established through a provision for credit losses based on
management’s evaluation of the risk inherent in the portfolio, the composition of the portfolio, specific impaired Contracts and Direct
Loans and current economic conditions. Please see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policy” in Item 7 of this Form 10-K, which is incorporated herein by reference.
There can be no assurance that our performance forecasts will be accurate. In periods with changing economic conditions, such as is
the case currently, accurately forecasting the performance of Contract and Direct Loans is more difficult. Our allowance for losses is
an estimate, and if actual Contract and Direct Loan losses are materially greater than our allowance for losses, or more generally, if
our forecasts are not accurate, our financial position, liquidity and results of operations could be materially adversely affected.
Other than limited representations and warranties made by dealers in favor of the Company, Contracts are purchased from the dealers
without recourse, and we are therefore only able to look to the borrowers for repayment.
In June 2016, the Financial Accounting Standards Board (“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, 2019. Early application will be permitted for
all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. 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, we believe
the adoption of this ASU will have likely have a material adverse effect on our consolidated financial statements.
We operate in an increasingly competitive market.
The non-prime consumer-finance industry is highly competitive, and the competitiveness of the market continues to increase as new
competitors continue to enter the market and certain existing competitors continue to expand their operations and become more
aggressive in offering competitive terms. There are numerous financial service companies that provide consumer credit in the markets
served by us, including banks, credit unions, other consumer finance companies and captive finance companies owned by automobile
manufacturers and retailers. Many of these competitors have substantially greater financial resources than us. In addition, our
competitors often provide financing on terms more favorable to automobile purchasers or dealers than we offer. Many of these
9
competitors also have long-standing relationships with automobile dealerships and may offer dealerships or their customers other
forms of financing, including dealer floor-plan financing and leasing, which are not provided by us. Providers of non-prime consumer
financing have traditionally competed primarily on the basis of:
•
interest rates charged;
the quality of credit accepted;
•
• dealer discount;
•
•
•
amount paid to dealers relative to the wholesale book value;
the flexibility of Contract and Direct Loan terms offered; and
the quality of service provided.
Our ability to compete effectively with other companies offering similar financing arrangements depends in part on our ability to
maintain close relationships with dealers of new and used vehicles. We may not be able to compete successfully in this market or
against these competitors. In recent years, it has become increasingly difficult for the Company to match or exceed pricing of its
competitors, which has resulted in declining Contract acquisition rates during the 2016 and 2017 fiscal years.
We have focused on a segment of the market composed of consumers who typically do not meet the more stringent credit
requirements of traditional consumer financing sources and whose needs, as a result, have not been addressed consistently by such
financing sources. As new and existing providers of consumer financing have undertaken to penetrate our targeted market segment,
we have experienced increasing pressure to reduce our interest rates, fees and dealer discounts in order to maintain our market share.
The Company’s average dealer discount for the fiscal years ended March 31, 2017, 2016, and 2015 was 7.08%, 7.51%, and 8.08%,
respectively. The Company’s weighted average APR for the fiscal years ended March 31, 2017, 2016, and 2015 was 22.44%, 22.73%,
and 22.93%, respectively. Further reductions in our interest rates, fees or dealer discount rates will continue to impact our profitability
and financial condition.
In addition, the number of Contracts and Direct Loans under which customers decided to discontinue contractually required payments
to us after they were approved by other lenders for new vehicle financing has recently increased. We are particularly vulnerable to the
effects of these practices because of our focus on providing financing with respect to used vehicles.
Our business depends on our continued access to bank financing on acceptable terms.
We continue to depend on the availability of our line of credit, together with cash from operations, to finance our operations. Our
business is particularly dependent on our ability to access bank financing at competitive rates. We currently use a $225.0 million line
of credit facility with a consortium of lenders to finance a large portion of our purchases of Contracts and fund our Direct Loans. This
line of credit, which is secured by substantially all our assets, has a maturity date of January 30, 2018. Our average indebtedness under
the line of credit increased to $211.0 million in fiscal 2017 from $208.2 million in fiscal 2016 and $133.4 million in fiscal 2015.
The availability of funds under our credit facility generally depends on availability calculations as defined in the corresponding credit
agreement. In addition, our credit facility requires us to comply with certain financial ratios and covenants and to satisfy specified
financial tests, including maintenance of asset quality and portfolio performance tests. See “The terms of our indebtedness impose
significant restrictions on us.”
The quality of the Company’s loan portfolio has been deteriorating, which has resulted in an increase in non-performing loans,
increased delinquencies and other factors, which in turn has resulted in increased net charge-offs and an increase in the provision for
credit losses. These conditions have resulted in a reduction in net earnings and have affected our borrowing capacity under the line of
credit facility.
The Company’s operating results over recent quarters provided indicators that the Company may not be able to continue to comply
with certain of the required financial ratios, covenants and financial tests prior to the maturity date of the line of credit facility in the
absence of an amendment to the corresponding credit agreement. Failure to meet any financial ratios, covenants or financial tests
could result in an event of default under our line of credit facility. If an event of default occurs under the credit facility, our lenders
could increase our borrowing costs, restrict our ability to obtain additional borrowings under the facility, accelerate all amounts
outstanding under the facility, or enforce their interest against collateral pledged under the facility.
While management believes that it will be able to obtain a renewal or extension of the credit facility, there are no assurances that the
lenders will approve the renewal or extension, or, assuming that they will approve it, that the facility will not be on terms less
favorable than the current agreement. In the event that the Company obtains information that the existing lenders do not intend to
extend the relationship, the Company will seek alternative financing. The Company believes it is probable that it will be able to obtain
10
financing from either its existing lenders or from other sources; however, it can provide no assurances that it will be successful in
replacing the line of credit facility on reasonable terms or at all. If the Company is unable to renew or replace the facility or find
alternative financing, it may be forced to liquidate.
The terms of our indebtedness impose significant restrictions on us.
Our existing outstanding indebtedness restricts our ability to, among other things:
•
•
•
sell or transfer assets;
incur additional debt;
repay other debt;
• make certain investments or acquisitions;
•
•
•
repurchase or redeem capital stock;
engage in mergers or consolidations; and
engage in certain transactions with subsidiaries and affiliates.
In addition, our line of credit facility requires us to comply with certain financial ratios and covenants and to satisfy specified financial
tests, including maintenance of asset quality and portfolio performance tests. The need to comply with such covenants and other
provisions could impact our ability to pay dividends to our shareholders. Moreover, our ability to continue to meet those financial
ratios and tests could be affected by events beyond our control. Failure to meet any of these covenants, financial ratios or financial
tests could result in an event of default under our line of credit facility. If an event of default occurs under this credit facility, our
lenders may take one or more of the following actions:
•
•
•
•
increase our borrowing costs;
restrict our ability to obtain additional borrowings under the facility;
accelerate all amounts outstanding under the facility; or
enforce their interest against collateral pledged under the facility.
If our lender accelerates our debt payments, our assets may not be sufficient to fully repay the debt.
Potential events of default under our current line of credit facility, include, but are not limited to:
• Any one person owning more than twenty percent (20%) of our voting stock without the prior written approval of the majority
lenders of the credit facility;
•
Failure to maintain the appropriate Interest Coverage Ratio of at least 1.50:1 calculated as of the last day of each four-quarter
period then ended (defined as (a) the sum of (i) adjusted net earnings from operations for the applicable period (reduced by any
increase in charge off shortfall and loss reserve shortfall), (ii) interest expense and (iii) any provision for income taxes for such
period, divided by (b) aggregate interest expense for such period, as further set forth in the Second Amended and Restated Loan
and Security Agreement, as subsequently amended),
• Failure to maintain appropriate ratios as it pertains to the Collateral Adjustment Percent (as defined in the Second Amended and
Restated Loan and Security Agreement, as subsequently amended).
We require a significant amount of cash to service our indebtedness and meet our other liquidity needs.
Our ability to make payments on or to refinance our indebtedness and to fund our operations and planned capital expenditures depends
on our future operating performance. Our primary cash requirements include the funding of:
• Contract purchases and Direct Loans;
•
•
interest payments under our line of credit facility and other indebtedness;
capital expenditures for technology and facilities;
ongoing operating expenses;
•
• planned expansions by opening additional branch offices; and
•
any required income tax payments.
11
In addition, because we expect to continue to require substantial amounts of cash for the foreseeable future, we may seek additional
debt or equity financing. Any equity financings may cause substantial dilution to our stockholders and could involve the issuance of
securities with rights senior to the common shares. Any additional debt financings we undertake may require us to comply with
onerous financial covenants and restrict our business operations. Our ability to complete additional financings is dependent on, among
other things, the state of the capital markets at the time of any proposed offering, market reception of the Company and the likelihood
of the success of its business model, of the offering terms, etc. We may not be able to obtain any such additional capital as we need to
finance our efforts, through asset sales, equity or debt financing, or any combination thereof, on satisfactory terms or at all.
Additionally, any such financing, if at all obtained, may not be adequate to meet our capital needs and to support our operations.
If adequate capital cannot be obtained on a timely basis and on satisfactory terms, it would have a material adverse effect on our
ability to implement our business plan, and our revenues and operations and the value of our common stock and common stock
equivalents would be materially negatively impacted and we may be forced to curtail or cease our operations.
Our high level of indebtedness could have important consequences for our business.
Our high level of indebtedness could have important consequences for our business. For example,
• we may be unable to satisfy our obligations under our outstanding indebtedness;
• we may find it more difficult to fund future working capital, capital expenditures, acquisitions, and general corporate needs;
• we may have to dedicate a substantial portion of our cash resources to the payments on our outstanding indebtedness, thereby
reducing the funds available for operations and future business opportunities; and
• we may be more vulnerable to adverse general economic and industry conditions.
Our ability to make payments on, or to refinance, our indebtedness will depend on our future operating performance, including our
ability to access additional debt and equity financing, which to a certain extent, is subject to economic, financial, competitive and
other factors beyond our control, including in light of the current volatility affecting the global economic system and uncertainty
surrounding regulatory reforms. If new debt is added to our current levels, the risks described above could intensify.
The Dodd-Frank Act authorizes the CFPB to adopt rules that could potentially have a material adverse effect on our
operations and financial performance.
Title X of the Dodd-Frank Act established the 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
Direct Loans that we offer, including explicit supervisory authority to examine and require registration of installment lenders such as
ourselves. Included among the powers afforded to the CFPB is the authority to adopt rules describing specified acts and practices as
being “unfair,” “deceptive” or “abusive,” and hence unlawful. The CFPB has outlined several proposals under consideration for the
purpose of requiring lenders to take steps to ensure consumers have the financial ability to repay their loans. The proposals under
consideration would require lenders to determine at the outset of each loan whether a consumer can afford to borrow from the lender
and would require that lenders comply with various restrictions designed to ensure that consumers can affordably repay their debt to
the lender. To date, the proposals under consideration by the CFPB have not been adopted. If adopted, the proposals outlined by the
CFPB may require the Company to make significant changes to its lending practices to develop compliant procedures.
Although the Dodd-Frank Act expressly provides that the CFPB has no authority to establish usury limits, 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 operation 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.
In addition to the Dodd-Frank Act’s grant of regulatory powers to the CFPB, the Dodd-Frank Act gives the CFPB authority to pursue
administrative proceedings or litigation for violations of federal consumer financial laws. In these proceedings, the CFPB can 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
12
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 such as us 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 issued rules regarding the supervision and examination of non-depository “larger participants” in the automobile finance
business, including us. Since we are deemed a larger participant, we are subject to supervision and examination by the CFPB. 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. Thus, 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.
In February 2016, the CFPB published a list of nine policy priorities on which it intends to focus its resources over the next two years.
These priorities include, among other things, initiation of the rulemaking process regarding debt collection practices that would apply
to third-party collectors and first-party collectors and continued examination and investigation of, and potential rulemaking regarding,
consumer credit reporting practices. The timing and impact of these anticipated rules on our business remain uncertain.
We have evaluated our existing compliance management systems and are in the process of updating, improving and/or replacing such
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 would 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.
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 new and used 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.
•
•
•
13
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.
We are subject to risks associated with litigation.
As a consumer finance company, we are subject to various consumer claims and litigation seeking damages and statutory penalties,
based upon, among other things:
• usury laws;
disclosure inaccuracies;
•
• wrongful repossession;
•
•
violations of bankruptcy stay provisions;
certificate of title disputes;
fraud;
•
• breach of contract; and
•
discriminatory treatment of credit applicants.
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.
We depend upon our relationships with our dealers.
Our business depends in large part upon our ability to establish and maintain relationships with reputable dealers who originate the
Contracts we purchase. Although we believe we have been successful in developing and maintaining such relationships, such
relationships are not exclusive, and many of them are not longstanding. There can be no assurances that we will be successful in
maintaining such relationships or increasing the number of dealers with whom we do business, or that our existing dealer base will
continue to generate a volume of Contracts comparable to the volume of such Contracts historically generated by such dealers.
Our success depends upon our ability to implement our business strategy.
Our financial position depends on management’s ability to execute our business strategy. Key factors involved in the execution of our
business strategy include achievement of the desired Contract purchase volume, the use of effective risk management techniques and
collection methods, continued investment in technology to support operating efficiency, and continued access to significant funding
and liquidity sources. Our failure or inability to execute any element of our business strategy could have a material adverse effect on
our business and financial condition.
Our business is highly dependent upon general economic conditions.
We are subject to changes in general economic conditions that are beyond our control. During periods of economic uncertainty, such
as has existed for much of the past few years, delinquencies, defaults, repossessions and losses generally increase, absent offsetting
factors. These periods also may be accompanied by decreased consumer demand for automobiles and declining values of automobiles
securing outstanding loans, which weakens collateral coverage on our loans and increases the amount of a loss we would experience
in the event of default. Because we focus on non-prime borrowers, the actual rates of delinquencies, defaults, repossessions and losses
on these loans are higher than those experienced in the general automobile finance industry and could be more dramatically affected
by a general economic downturn. In addition, during an economic slowdown or recession, our servicing costs may increase without a
corresponding increase in our servicing income. No assurances can be given that our underwriting criteria and collection methods to
manage the higher risk inherent in loans made to non-prime borrowers will afford adequate protection against these risks. Any
sustained period of increased delinquencies, defaults, repossessions or losses or increased servicing costs could have a material
adverse effect on our business and financial condition.
14
Furthermore, in a low interest-rate environment such as has existed in the United States in recent years, the level of competition
increases in the non-prime consumer-finance industry as new competitors enter the market and many existing competitors expand
their operations. Such increased competition, in turn, exerts increasing pressure on us to reduce our interest rates, fees and dealer
discount rates in order to maintain our market share. Reductions in our interest rates, fees or dealer discount rates could have a
material adverse impact on our profitability or financial condition. For example, the weighted average APR of our portfolio decreased
from 22.73% to 22.44% for the fiscal years ended March 31, 2016 and 2017, respectively. Our average dealer discount decreased from
7.51% to 7.08% for the fiscal years ended March 31, 2016 and 2017, respectively.
Recent economic developments may adversely affect our business and financial condition.
Over the past several years, the United States has experienced a period of uncertainty in the subprime auto market that has adversely
affected our business and financial condition. Stagnant wages and intense competition have contributed to higher delinquencies and
losses than we would otherwise experience.
Additionally, stagnant wages, fluctuating gasoline prices, unstable real estate values, food inflation, resets of adjustable rate mortgages
and other factors have adversely impacted consumer confidence and disposable income. These conditions have increased loss
frequency, decreased consumer demand for automobiles and weakened collateral values on certain types of vehicles. Because we
focus predominately on non-prime borrowers, the actual rates of delinquencies, defaults, repossessions and losses on Contracts are
higher than those experienced in the general automobile finance industry and have been materially affected by recent economic
conditions. According to data published by the Federal Reserve Bank of New York, in the quarter ended December 31, 2016, auto
loan delinquencies of at least 30 days were at their highest levels since 2008. If economic and credit conditions, including wage
conditions, do not continue to improve, our business and financial condition could be further adversely affected.
The auction proceeds we receive from the sale of repossessed vehicles and other recoveries are subject to fluctuation due to
economic and other factors beyond our control.
If we repossess a vehicle securing a Contract, we typically have it transported to an automobile auction for sale. Auction proceeds
from the sale of repossessed vehicles and other recoveries are usually not sufficient to cover the outstanding balance of the Contract,
and the resulting deficiency is charged off. In addition, there is, on average, approximately a 30-day lapse between the time we
repossess a vehicle and the time it is sold. The proceeds we receive from such sales depend upon various factors, including the supply
of, and demand for, used vehicles at the time of sale. Such supply and demand are dependent on many factors. For example, during
periods of economic uncertainty, the demand for used cars may soften, resulting in decreased auction proceeds to us from the sale of
repossessed automobiles. Furthermore, depressed wholesale prices for used automobiles may result from significant liquidations of
rental or fleet inventories, and from increased volume of trade-ins due to promotional financing programs offered by new vehicle
manufacturers. We have experienced declining auction proceeds for approximately the past 5 years and we expect this trend to
continue for the foreseeable future. Decreased auction proceeds to us resulting from sales of used automobiles at depressed prices will
result in losses and, in turn, reduced profitability.
An increase in market interest rates may reduce our profitability.
Our long-term profitability may be directly affected by the level of and fluctuations in interest rates. Sustained, significant increases in
interest rates may adversely affect our liquidity and profitability by reducing the interest rate spread between the rate of interest we
receive on our Contracts and interest rates that we pay under our outstanding line of credit facility. As interest rates increase, our gross
interest rate spread on new originations will generally decline since the rates charged on the Contracts originated or purchased from
dealers generally are limited by statutory maximums, restricting our opportunity to pass on increased interest costs. We monitor the
interest rate environment and, on occasion, enter into interest rate swap agreements relating to a portion of our outstanding debt. Such
agreements effectively convert a portion of our floating-rate debt to a fixed-rate, thus reducing the impact of interest rate changes on
our interest expense. On June 4, 2012 and July 30, 2012, the Company entered into interest rate swap agreements to convert a portion
of its floating rate debt to a fixed rate, more closely matching the interest rate characteristics of finance receivables. The June 4, 2012
agreement provides for a five-year interest rate swap in which the Company pays a fixed rate of 1% and receives payments from the
counterparty on the 1-month LIBOR rate. This swap has an effective date of June 13, 2012 and a notional amount of $25 million. The
July 30, 2012 agreement provides for a five-year interest rate swap in which the Company pays a fixed rate of 0.87% and receives
payments from the counterparty on the 1-month LIBOR rate. This swap has an effective date of August 13, 2012 and a notional
amount of $25 million. Both of the swaps will mature during the second quarter of fiscal year ended 2018. The changes in the fair
value of the interest rate swap agreements (unrealized gains and losses) are recorded in earnings. We will continue to evaluate interest
rate swap pricing and we may or may not enter into additional interest rate swap agreements in the future.
15
We may experience problems with our integrated computer systems or be unable to keep pace with developments in
technology.
We use various technologies in our business, including telecommunication, data processing, and integrated computer systems.
Technology changes rapidly. Our ability to compete successfully with other financing companies may depend on our ability to
efficiently and cost-effectively implement technological changes. Moreover, to keep pace with our competitors, we may be required to
invest in technological changes that do not necessarily improve our profitability.
We utilize our integrated computer systems to respond to customer inquiries and to monitor the performance of our Contract and
Direct Loan portfolios and the performance of individual customers under our Contracts and Direct Loans. Problems with our
systems’ operations could adversely impact our ability to monitor our portfolios or collect amounts due under our Contracts and Direct
Loans, which could have a material adverse effect on our financial condition and results of operations.
Failure to properly safeguard confidential customer information could subject us to liability, decrease our profitability and
damage our reputation.
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and
personally identifiable information of our customers, on our computer networks, and share such data with third parties. The secure
processing, maintenance and transmission of this information is critical to our operations and business strategy.
Any failure, interruption, or breach in our cyber security, including through employee misconduct or any failure of our back-up
systems or failure to maintain adequate security surrounding customer information, could result in reputational harm, disruption in the
management of our customer relationships, or the inability to originate, process and service our products. Further, any of these cyber
security and operational risks could result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to
lawsuits by customers for identity theft or other damages resulting from the misuse of their personal information and possible financial
liability, any of which could have a material adverse effect on our results of operations, financial condition and liquidity. In addition,
regulators may impose penalties or require remedial action if they identify weaknesses in our security systems, and we may be
required to incur significant costs to increase our cyber security to address any vulnerabilities that may be discovered or to remediate
the harm caused by any security breaches. As part of our business, we may share confidential customer information and proprietary
information with clients, vendors, service providers, and business partners. The information systems of these third parties may be
vulnerable to security breaches and we may not be able to ensure that these third parties have appropriate security controls in place to
protect the information we share with them. If our confidential information is intercepted, stolen, misused, or mishandled while in
possession of a third party, it could result in reputational harm to us, loss of customer business, and additional regulatory scrutiny, and
it could expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our results of
operations, financial condition and liquidity.
We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary
to secure online transmission of confidential customer information. Advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive
customer data. A party who is able to circumvent our security measures could misappropriate proprietary information or cause
interruptions in our operations. We may be required to expend capital and other resources to protect against, or alleviate problems
caused by, security breaches or other cybersecurity incidents. Although we have not experienced any material cybersecurity incidents
to dates, there can be no assurance that a cyber-attack, security breach or other cybersecurity incident will not have a material adverse
effect on our business, financial condition or results of operations in the future. Our security measures are designed to protect against
security breaches, but our failure to prevent security breaches could subject us to liability, decrease our profitability and damage our
reputation.
We partially rely on third parties to deliver services, and failure by those parties to provide these services or meet contractual
requirements could have a material adverse effect on our business, financial condition and results of operations.
We depend on third-party service providers for many aspects of our business operations, including loan origination, title processing
and online payments, which increases our operational complexity and decreases our control. We rely on these service providers to
provide a high level of service and support, which subjects us to risks associated with inadequate or untimely service. If a service
provider fails to provide the services that we require or expect, or fails to meet contractual requirements, such as service levels or
compliance with applicable laws, a failure could negatively impact our business by adversely affecting our ability to process
customers’ transactions in a timely and accurate manner, otherwise hampering our ability to service our customers, or subjecting us to
litigation or regulatory risk for poor vendor oversight. We may be unable to replace, or be delayed in replacing these sources and there
is a risk that we would be unable to enter into a similar agreement with an alternate provider on terms that we consider favorable or in
a timely manner. Such a failure could have a material and adverse effect on our business, financial condition and results of operations.
16
Our growth depends upon our ability to retain and attract a sufficient number of qualified employees.
To a large extent, our growth strategy depends on the opening of new offices that focus primarily on purchasing Contracts and making
Direct Loans in markets we have not previously served. Future expansion of our branch office network depends, in part, upon our
ability to attract and retain qualified and experienced office managers and the ability of such managers to develop relationships with
dealers that serve those markets. We generally do not open a new office until we have located and hired a qualified and experienced
individual to manage the office. Typically, this individual will be familiar with local market conditions and have existing relationships
with dealers in the area to be served. Although we believe that we can attract and retain qualified and experienced personnel as we
proceed with planned expansion into new markets, no assurance can be given that we will be successful in doing so. Competition to
hire personnel possessing the skills and experience required by us could contribute to an increase in our employee turnover rate. High
turnover or an inability to attract and retain qualified personnel could have an adverse effect on our origination, delinquency, default
and net loss rates and, ultimately, our business and financial condition.
The loss of one of our key executives could have a material adverse effect on our business.
On June 12, 2017, Ralph T. Finkenbrink informed us that he would be retiring as our President and Chief Executive Officer effective
September 30, 2017. Mr. Finkenbrink has been employed by the Company for 29 years, including 25 years in senior executive
positions. While our Board of Directors intends to commence a search for a replacement shortly, there can be no assurances that we
will be successful in finding and hiring a suitable replacement. Our future growth and development is significantly dependent upon the
skills and experience of our senior management team, including Mr. Finkenbrink’s successor as President and Chief Executive
Officer, as well Kevin D. Bates, our Senior Vice President of Branch Operations, and Katie L. MacGillivary, our Chief Financial
Officer and Vice President of Finance. We do not maintain key-man life insurance policies on these executives. The loss of Mr,
Finkenbrink, and the loss of services of one or more of the other executives, could have a material adverse effect on our business,
results of operations and financial condition.
Our stock is thinly traded, which may limit your ability to resell your shares.
The average daily trading volume of our common shares on the NASDAQ Global Select Market for the fiscal year ended March 31,
2017 was approximately 18,000 shares. Moreover, on March 19, 2015, our Nicholas Financial subsidiary purchased an aggregate of
approximately 4.7 million of our common shares pursuant to a modified “Dutch auction” tender offer, thereby reducing the number of
shares potentially available in the public market. Thus, our common shares are thinly traded. Thinly traded stock can be more volatile
than stock trading in an active public market. Factors such as our financial results, the introduction of new products and services by us
or our competitors, and various factors affecting the consumer-finance industry generally may have a significant impact on the market
price of our common shares. In recent years, the stock market has experienced a high level of price and volume volatility, and market
prices for the stocks of many companies, including ours, have experienced wide price fluctuations that have not necessarily been
related to their operating performance. Therefore, our shareholders may not be able to sell their shares at the volumes, prices, or times
that they desire.
Natural disasters, acts of war, terrorist attacks and threats or the escalation of military activity in response to these attacks or
otherwise may negatively affect our business, financial condition and results of operations.
Natural disasters (such as hurricanes), acts of war, terrorist attacks and the escalation of military activity in response to these attacks or
otherwise may have negative and significant effects, such as disruptions in our operations, imposition of increased security measures,
changes in applicable laws, market disruptions and job losses. These events may have an adverse effect on the economy in general.
Moreover, the potential for future terrorist attacks and the national and international responses to these threats could affect the
business in ways that cannot be predicted. The effect of any of these events or threats could have a material adverse effect on our
business, financial condition and results of operations.
17
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company leases its Corporate Headquarters and branch office facilities. The Company’s Headquarters, located at 2454 McMullen
Booth Road, Building C, in Clearwater, Florida, consist of approximately 15,000 square feet of office space leased at an annual rate of
approximately $18.00 per square foot. The current lease relating to this space was entered into effective April 1, 2015 and expires on
March 31, 2020.
Each of the Company’s 65 branch offices located in Alabama, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Maryland,
Michigan, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, and Virginia consists of approximately
1,400 square feet of office space. These offices are located in office parks, shopping centers or strip malls and are occupied pursuant
to leases with an initial term of one to five years at annual rates ranging from approximately $12.00 to $37.00 per square foot. The
Company believes that these facilities and additional or alternate space available to it are adequate to meet its needs for the foreseeable
future.
Item 3. Legal Proceedings
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.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common shares are traded on the NASDAQ Global Select Market under the symbol “NICK.”
The following table sets forth the high and low sales prices of the Company’s common shares for the fiscal years ended March 31,
2017 and 2016, respectively.
Fiscal year ended March 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal year ended March 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 11.03
$ 10.95
$ 12.50
$ 12.50
High
$ 14.49
$ 14.08
$ 13.80
$ 11.88
Low
$ 10.03
$ 10.01
$ 8.56
$ 10.01
Low
$ 12.25
$ 12.25
$ 11.45
$ 9.92
As of June 8 2017, there were approximately 1,150 holders of record of the Company’s common shares.
The Company has not declared and paid cash dividends on its common shares in the recent past and has no current plans to declare or
pay any cash dividends in the foreseeable future. The payment of future dividends, if any, is reviewed periodically by the Company’s
directors and management and will depend upon, among other things, existing conditions, including earnings, financial condition and
capital requirements, restrictions in financing agreements, business opportunities, tax considerations and other conditions and factors.
18
There are no Canadian foreign exchange controls or laws that would affect the remittance of dividends or other payments to the
Company’s non-Canadian resident shareholders. There are no Canadian laws that restrict the export or import of capital, other than the
Investment Canada Act (Canada), which requires the notification or review of certain investments by non-Canadians to establish or
acquire control of a Canadian business. The Company is not a Canadian business as defined under the Investment Canada Act because
it has no place of business in Canada, has no individuals employed in Canada in connection with its business, and has no assets in
Canada used in carrying on its business.
Canada and the United States of America are signatories to the Convention Between the United States of America and Canada With
Respect to Taxes on Income and on Capital (the “Tax Treaty”). The Tax Treaty contains provisions governing the tax treatment of
interest, dividends, gains and royalties paid to or received by a person residing in the United States. The Tax Treaty also contains
provisions to prevent the occurrence of double taxation, essentially by permitting the taxpayer to claim a tax credit for taxes paid in
the foreign jurisdiction.
Dividends paid to the Company from its U.S. subsidiaries’ current and accumulated earnings and profits will be subject to a U.S.
withholding tax of 5%. The gross dividends (i.e., before payment of the withholding tax) must be included in the Company’s net
income. However, under certain circumstances, the Company may be allowed to deduct the dividends in the calculation of its
Canadian taxable income. If the Company has no other foreign (i.e., non-Canadian) non-business income, no relief is available in that
case to recover the withholding taxes previously paid.
A 15% Canadian withholding tax applies to dividends paid by the Company to a U.S. shareholder (including those that own less than
10% of the Company’s voting shares) that is an individual. The U.S. shareholder must include the gross amount of the dividends in his
net income to be taxed at the regular rates. In general, a U.S. shareholder can obtain a foreign tax credit for U.S. federal income tax
purposes with respect to the Canadian withholding tax on such dividends, but the amount of such credit is subject to a limitation that
depends, in part, on the amount of the shareholder’s income and losses from other sources. A U.S. shareholder that is an individual
also can elect to claim a deduction (rather than a foreign tax credit) for all non-U.S. income taxes paid by the shareholder during the
particular year. U.S. shareholders are urged to consult their own tax advisors regarding the U.S. federal income tax treatment of any
Canadian withholding tax imposed on dividends from the Company.
19
Performance Graph
Set forth below is a graph comparing the cumulative total return on the Company’s common shares for the five-year period ended
March 31, 2017, with that of an overall stock market (NASDAQ Composite) and the Company’s peer group index (Dow Jones US
General Financial Index). The stock performance graph assumes that the value of the investment in each of the Company’s common
shares, the NASDAQ Composite Index and the Dow Jones US General Financial Index was $100 on April 1, 2012 and that all
dividends were reinvested.
The graph displayed below is presented in accordance with SEC requirements. Shareholders are cautioned against drawing any
conclusions from the data contained therein, as past results are not necessarily indicative of future performance. This graph in no way
reflects the Company’s forecast of future financial performance.
Total Return Performance
Nicholas Financial, Inc.
NASDAQ Composite
Dow Jones US General Financial
Index
e
u
l
a
V
x
e
d
n
I
200
175
150
125
100
75
4/01/2012
3/31/2013
3/31/2014
3/31/2015
3/31/2016
3/31/2017
Nicholas Financial, Inc.
NASDAQ Composite
Dow Jones US General Financial Index
04/01/2012
$ 100.00
100.00
100.00
03/31/2013
$ 111.45
105.69
121.56
03/31/2014
$ 119.26
135.82
155.73
03/31/2015
$ 106.22 $
158.52
172.20
03/31/2016
81.80
157.52
157.56
03/31/2017
80.59
$
191.22
197.75
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Unregistered Sales of Equity Securities
None.
20
Item 6. Selected Financial Data
The following tables present selected consolidated financial data of the Company as of and for the fiscal years ended March 31, 2017,
2016, 2015, 2014, and 2013. The selected consolidated financial data have been derived from our consolidated financial statements.
You should read the selected consolidated financial data below in conjunction with “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our audited consolidated financial statements and notes thereto that are
included elsewhere in this Report and, for the fiscal years ended March 31, 2014 and 2013 and as of March 31, 2015, 2014 and 2013,
that are included in our annual reports for such fiscal years. Quarterly results of operations are incorporated herein by reference to
Note 12 – Quarterly Results of Operations (Unaudited) in the notes to the consolidated financial statements included elsewhere in this
Report.
Statement of Operations Data
Interest income on finance receivables
Interest expense
Provision for credit losses
Salaries and employee benefits
Change in fair value of interest rate swaps
Other expenses
Operating income before income taxes
Income tax expense
Net income
Earnings per share – basic:
Fiscal Year ended March 31,
(In thousands, except earnings per share numbers)
2017
2016
2015
2014
2013
$ 90,466
$ 90,707
$ 86,790
$ 82,629
$ 82,110
9,222
37,177
21,437
(222)
14,112
9,007
26,278
22,313
24
12,980
5,970
20,371
20,835
364
13,154
5,678
14,979
19,634
(688)
14,509
5,121
13,392
18,326
505
12,280
81,726
70,602
60,694
54,112
49,624
8,740
3,331
20,105
7,726
26,096
9,240
28,517
11,814
32,486
12,545
$ 5,409
$ 12,379
$ 16,856
$ 16,703
$ 19,941
$
.70
$ 1.60
$ 1.40
$ 1.38
$ 1.66
Weighted average shares outstanding
7,664
7,622
12,013
12,096
11,977
Earnings per share – diluted:
$
.69
$ 1.59
$ 1.38
$ 1.36
$ 1.63
Weighted average shares outstanding
7,726
7,692
12,192
12,325
12,218
Balance Sheet Data
Total assets
Finance receivables, net
Line of credit
Shareholders’ equity
Operating Data
Return on average assets
Return on average equity
Gross portfolio yield (1)
Pre-tax yield (1)
Total delinquencies over 30 days, excluding Chapter 13
bankruptcy accounts
Write-off to liquidation (1)
Net charge-off percentage (1)
Automobile Finance Data & Direct Loan
Origination
Contracts purchased/Direct Loans originated
Average dealer discount on Contracts purchased
Weighted average contractual rate on Contracts &
Direct Loans purchased
Number of branch locations
As of and for the Fiscal Year ended March 31,
(In thousands, except number of branch locations)
2017
2016
2015
2014
2013
$ 333,612
317,205
213,000
108,860
$ 325,309
311,837
211,000
102,849
$ 302,529
288,904
199,000
89,888
$ 283,430
269,344
127,900
141,938
$ 263,835
249,826
125,500
126,965
1.64%
5.11%
26.04%
2.46%
3.94%
12.85%
27.10%
6.02%
5.75%
14.54%
28.00%
8.54%
6.10%
12.42%
28.44%
9.65%
7.66%
15.21%
29.22%
11.82%
9.92%
11.81%
9.37%
5.50%
9.10%
7.56%
4.11%
8.13%
7.04%
4.00%
7.17%
6.22%
3.68%
6.81%
5.88%
$ 179,617
$ 196,853
$ 187,893
$ 179,031
7.08%
7.51%
8.08%
8.44%
$ 160,078
8.54%
22.40%
22.81%
23.08%
23.20%
65
67
66
65
23.43%
64
(1) See the definitions set forth in the notes to the Portfolio Summary table under “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Overview.”
21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Nicholas Financial-Canada is a Canadian holding company incorporated under the laws of British Columbia in 1986. Nicholas
Financial-Canada currently conducts its business activities exclusively through a wholly-owned indirect Florida subsidiary, Nicholas
Financial, which purchases and services Contracts, makes Direct Loans and sells consumer-finance related products. Nicholas
Financial accounted for more than 99% of the Company’s consolidated revenue for the fiscal year ended March 31, 2015, and 100%
of the Company’s consolidated revenue for the fiscal years ended March 31, 2017 and 2016. A second Florida subsidiary, NDS, which
historically provided limited computer software support and updated services to small businesses, has ceased such operations;
however, it continues as an intermediate holding company for Nicholas Financial. Nicholas Financial-Canada, Nicholas Financial and
NDS are collectively referred to herein as the “Company”.
Introduction
The Company’s consolidated revenues decreased from $90.7 million for the fiscal year ended March 31, 2016 to $90.5 million for the
fiscal year ended March 31, 2017. Consolidated revenues for the fiscal year ended March 31, 2015 were $86.8 million. The
Company’s diluted earnings per share decreased for the fiscal year ended March 31, 2017 to $0.69 as compared to $1.59 for the fiscal
year ended March 31, 2016. Diluted earnings per share for the fiscal year ended March 31, 2015 were $1.38. The per share diluted net
earnings for the fiscal year ended March 31, 2017 and 2016, were positively impacted when compared to fiscal 2015 by the purchase
of 4.7 million of the Company’s common shares by its principal operating subsidiary on March 19, 2015. The Company’s operating
income before taxes for the fiscal year ended March 31, 2017 decreased to $8.7 million as compared to $20.1 million and
$26.1 million for the fiscal years ended March 31, 2016 and 2015, respectively. The decrease from $20.1 million to $8.7 million was a
result of an increase in the provision for credit losses due to higher charge-offs and past-due accounts along with a reduction in the
gross portfolio yield. The Company’s consolidated net income for the fiscal years ended March 31, 2017, 2016, and 2015 were
$5.4 million, $12.4 million and $16.9 million, respectively.
The Company believes that an extremely competitive market has been the primary driver for weaker results during the past two fiscal
years, eventually leading to a net loss of $(1.1) million during the final quarter in the 2017 fiscal year. The Company’s operating
results have deteriorated as a result of several factors, including, but not limited to, lower auction proceeds, the acquisition of
Contracts that contained some degree of fraudulent information that at the time of Contract acquisition was not identified, and an
increase in the number of Contracts and Direct Loans under which customers decided to discontinue payments to us after they were
approved by other lenders for new vehicle financing.
In addition, aggressive competition has forced the Company to purchase lower credit quality Contracts. Historically, the Company was
able to expand its automobile finance business in the non-prime credit market by offering to purchase Contracts on terms that are
competitive with those of other companies. However, it has become increasingly difficult for the Company to match or exceed pricing
of its competitors, which has resulted in declining Contract acquisition rates during the 2016 and 2017 fiscal years. The Company
expects this trend to continue in the foreseeable future.
22
The Company continues to experience decreasing yields associated with Contract acquisition, which is directly correlated to the level
of competition. If competing companies continue to reduce their contract acquisition yields as part of their operating strategy, the
market, and the Company, will continue to experience reduced yields. While it is difficult to predict the level of competition long-
term, the Company believes that the current highly competitive environment will prevail for the foreseeable future, which will
continue to put pressure on its margins. The weighted average APR of the portfolio for the fiscal years ended March 31, 2017, 2016,
and 2015 were 22.44%, 22.73%, and 22.93%, respectively. The average dealer discounts as a percent of gross finance receivables
associated with new volume for the fiscal years ended March 31, 2017, 2016, and 2015 were 7.08%, 7.51%, and 8.08%, respectively.
Furthermore, the Company expects the trend of declining auction proceeds to continue for the foreseeable future. Decreased auction
proceeds resulting from sales of used automobiles at depressed prices can put downward pressure on its margins.
Portfolio Summary
Average finance receivables, net of unearned interest (1)
Average indebtedness (2)
Interest and fee income on finance receivables
Interest expense
Net interest and fee income on finance receivables
Gross portfolio yield (3)
Interest expense as a percentage of average finance
receivables, net of unearned interest
Provision for credit losses as a percentage of average finance
receivables, net of unearned interest
Net portfolio yield (3)
Marketing, salaries, employee benefits, depreciation, and
administrative expenses as a percentage of average finance
receivables, net of unearned interest
Pre-tax yield as a percentage of average finance receivables,
net of unearned interest (4)
Write-off to liquidation (5)
Net charge-off percentage (6)
Fiscal Year ended March 31,
(In thousands)
2017
$ 347,367
2016
$ 334,754
2015
$ 309,995
$ 210,987
$ 208,214
$ 133,434
$ 90,466
9,222
$
$ 90,707
9,007
$
$ 86,785
5,970
$
$ 81,244
$ 81,700
$ 80,815
26.04%
27.10%
28.00%
2.65%
2.69%
1.93%
10.70%
7.85%
12.69%
16.56%
6.57%
19.50%
10.23%
10.54%
10.96%
2.46%
11.81%
9.37%
6.02%
9.10%
7.56%
8.54%
8.13%
7.04%
(1) Average finance receivables, net of unearned interest, represents the average of gross finance receivables, less unearned interest
throughout the period.
(2) Average indebtedness represents the average outstanding borrowings under the Line.
(3) Gross portfolio yield represents interest and fee income on finance receivables as a percentage of average finance receivables,
net of unearned interest. 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, net of unearned interest.
(4) Pre-tax yield represents net portfolio yield minus administrative expenses (marketing, salaries, employee benefits, depreciation,
and administrative), as a percentage of average finance receivables, net of unearned interest.
(5) Write-off to liquidation percentage is defined as net charge-offs divided by liquidation. Liquidation is defined as beginning
receivable balance plus current period purchases and originations minus ending receivable balance.
(6) Net charge-off percentage represents net charge-offs divided by average finance receivables, net of unearned interest,
outstanding during the period.
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.
The allowance for credit losses is established through a provision for credit losses based on management’s evaluation of the risk
inherent in the loan portfolio which includes the competitive environment that existed when the loan was acquired, the composition of
the portfolio, and current economic conditions. Such evaluation considers, among other matters, the estimated net realizable value or
the fair value of the underlying collateral, economic conditions, historical loan loss experience, management’s estimate of probable
credit losses and other factors that warrant recognition in providing for an adequate credit loss allowance.
23
Because of the nature of the customers under the Company’s Contracts and its Direct Loan program, the Company considers the
establishment of adequate reserves for credit losses to be imperative. The Company segregates its Contracts into static pools for
purposes of establishing reserves for losses. All Contracts purchased by a branch during a fiscal quarter comprise a static pool. The
Company pools Contracts according to branch location because the branches purchase Contracts in different geographic markets. This
method of pooling by branch and quarter allows the Company to evaluate the different markets where the branches operate. The pools
also allow the Company to evaluate the different levels of customer income, stability and credit history, and the types of vehicles
purchased, in each market. The Company analyzes each consolidated static pool at specific points in time. A consolidated static pool
consists of all branches for the same fiscal quarter. In analyzing a static pool, the Company considers the performance of prior static
pools originated by the same branch office, the competition at time of acquisition, and current market and economic conditions. Each
static pool is analyzed monthly to determine if the loss reserves are adequate, and adjustments are made if they are determined to be
necessary.
The Company has been maintaining historical write-off information for over 10 years with respect to every consolidated static pool,
segregating each static pool by liquidation and in effect creating snapshots of a pool’s write-off-to liquidation ratio at five different
points in such pool’s liquidation cycle. These snapshots help the Company in determining the appropriate provision for credit losses
and subsequent allowance for credit losses. The five snapshots are taken when the liquidation levels are at 20%, 40%, 60%, 80%
and 100%.
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
purchases Contracts on an individual basis. The Company does not anticipate any portfolio acquisitions in the near-term.
The Company utilizes the branch model, which allows for Contract purchasing to be done on 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 IA to assure adherence to its underwriting guidelines. Any Contract that does not
meet our underwriting guidelines can be submitted by a branch manager for approval from the Company’s District Managers or senior
management.
As of March 31, 2016, the Company refined the allowance for loan losses by changing it to a loan by loan analysis, which more
closely depicts the amount of the provision expense needed to maintain an adequate reserve. As of March 31, 2017, the Company
further refined the reserve for losses by increasing the allowance for loan losses by 50% of the principal balance, with respect to
accounts whose contractual delinquency falls into the range of 120-180 days past due. Currently, management evaluates each Contract
on an independent basis each quarter and accounts for such Contract’s term, how far along the corresponding loan is in its liquidation
cycle, late charges, the number of deferments, and delinquency.
Fiscal 2017 Compared to Fiscal 2016
Interest and Fee Income on Finance Receivables
Interest income on finance receivables, predominantly finance charge income, decreased slightly to $90.5 million in fiscal 2017 as
compared to $90.7 million in fiscal 2016. The average finance receivables, net of unearned interest, totaled $347.4 million for the
fiscal year ended March 31, 2017, an increase of 4% from $334.8 million for the fiscal year ended March 31, 2016. While our
purchasing volume has slowed, mainly as a result of a highly competitive market place, our finance receivables continued growing in
our more recently entered markets, including our three newer states (see “Item 1. Business—Contract Procurement”). Increases in our
average term and average loan amount have contributed to the increase in finance receivables.
The gross portfolio yield decreased to 26.04% for the fiscal year ended March 31, 2017 as compared to 27.10% for the fiscal year
ended March 31,2016. The gross portfolio yield decreased primarily due to the decrease in the average dealer discount and in the
average weighted APR, intensified by the increase in average finance receivables, net of unearned interest, particularly as a result of
an increase in past-due accounts. The net portfolio yield decreased to 12.69% for the fiscal year ended March 31, 2017 from 16.56%
for the fiscal year ended March 31,2016. The net portfolio yield decreased due to a decrease in the gross portfolio yield and an
increase in the provision for credit losses, as described under “Analysis of Credit Losses”.
24
Marketing, Salaries and Employee Benefits, Depreciation, and Administrative Expenses
Marketing, salaries and employee benefits, depreciation, and administrative expenses remained relatively flat at $35.5 million for the
fiscal year ended March 31, 2017 compared to $35.3 million for the fiscal year ended March 31, 2016. The Company opened one new
branch location during the fiscal year ended March 31, 2017, and consolidated three branch locations into branches previously
established within their market. Marketing, salaries, employee benefits, depreciation, and administrative expenses as a percentage of
average finance receivables, net of unearned interest, decreased to 10.23% for the fiscal year ended March 31, 2017 from 10.54% for
the fiscal year ended March 31, 2016.
Interest Expense
Interest expense increased to $9.2 million for the fiscal year ended March 31, 2017 as compared to $9.0 million for the fiscal year
ended March 31, 2016. The average outstanding debt as of March 31, 2017 and March 31, 2016 was $211.0 million and
$208.2 million, respectively. The following table summarizes the Company’s average cost of borrowed funds for the fiscal years
ended March 31:
Variable interest under the line of credit facility
Settlements under interest rate swap agreements
Credit spread under the line of credit facility
Average cost of borrowed funds
2017
0.70%
0.09%
3.58%
4.37%
2016
0.37%
0.16%
3.80%
4.33%
LIBOR rates have increased (.98% as of March 31, 2017 compared to .44% as of March 31, 2016) which caused a decrease in expense
related to our interest rate swap agreements. The increase in LIBOR rates has also caused the credit spread to decrease and the
variable interest to increase, but has no net effect on total cost because there is a 1.0% floor on the line of credit. In addition, the
Company entered into a temporary agreement on December 30, 2016 that increased the effective interest rate by 50 basis points
through June 30, 2017. For further discussions regarding interest rates see “Note 5 – Line of Credit”.
Analysis of Credit Losses
As of March 31, 2017, the Company had approximately 1,400 active static pools. The average pool upon inception consisted of 62
Contracts with aggregate finance receivables, net of unearned interest, of approximately $708,000.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts for the fiscal years ended
March 31:
Balance at beginning of year
Current year provision
Losses absorbed
Recoveries
Balance at end of year
2017
$ 12,265
36,843
(34,419)
2,196
$ 16,885
(In thousands)
2016
$ 11,325
25,926
(27,963)
2,977
$ 12,265
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Direct Loans for the fiscal years
ended March 31:
Balance at beginning of year
Current year provision
Losses absorbed
Recoveries
Balance at end of year
(In thousands)
2017
$ 748
334
(338)
29
$ 773
2016
$ 703
352
(328)
21
$ 748
25
The provision for credit losses increased to $37.2 million for the fiscal year ended March 31, 2017 from $26.3 million for the fiscal
year ended March 31, 2016, largely due to net charge-offs increasing to 9.37% for the fiscal year ended March 31, 2017 from 7.56%
for the fiscal year ended March 31, 2016. During the fourth quarter of the fiscal year ended March 31, 2016, the Company refined its
allowance for credit loss model to incorporate recent trends that include the acquisition of longer term contracts and increased
delinquencies by changing it to a loan by loan analysis, which more closely depicts the amount of the allowance for credit losses
needed to maintain an adequate reserve. During the fourth quarter of the fiscal year ended March 31, 2017, the Company further
refined the reserve for losses by increasing the allowance by 50% of the principal balance, with respect to accounts whose contractual
delinquency falls into the range of 120-180 days past due. The Company believes that these improvements better reflect the current
trends of incurred losses within the portfolio and better align the allowance for credit losses with the portfolio’s performance
indicators.
The Company’s losses as a percentage of liquidation (see note 5 in the Portfolio Summary table in the “Introduction” above for the
definition of write-off to liquidation) increased to 11.81% for the fiscal year ended March 31, 2017 as compared to 9.10% for the
fiscal year ended March 31, 2016. This increase was the result of several factors, including, but not limited to, lower auction proceeds,
the acquisition of Contracts that contained some degree of fraudulent information, that at the time of Contract acquisition was not
identified, and an increase in the number of Contracts and Direct Loans under which customers decided to discontinue payments to us
after they were approved by other lenders for new vehicle financing.
In addition, aggressive competition has forced the Company to purchase lower credit quality Contracts. The Company also
experienced a decrease in auction prices from fiscal year 2017 to fiscal year 2016. Decreased auction proceeds from repossessed
vehicles increased the amount of write-offs which, in turn, increased the write-off to liquidation percentage. During the fiscal years
ended March 31, 2017 and 2016, auction proceeds from the sale of repossessed vehicles averaged approximately 37% and 42%,
respectively, of the related principal balance.
Recoveries as a percentage of charge-offs were approximately 6.40% and 10.59% for the fiscal years ended March 31, 2017 and 2016,
respectively. The Company attributes a large portion of this decrease simply to the increase in charge-offs; historically, there is a six to
twelve-month cooling off period prior to receiving any benefits from post charge-off collection activity. We currently remain in a
cycle in which credit is more easily available credit to our typical customer, which leads many of our customers to be less disciplined
about their credit record, including the payment schedule on their Contracts and Direct Loans. Periodically, the Company will
aggregate charge-off accounts it deems uncollectible, and sell them to a third-party.
The delinquency percentage for Contracts more than thirty days past due, excluding Chapter 13 bankruptcy accounts, as of
March 31, 2017 was 10.05%, an increase from 5.57% as of March 31, 2016. The delinquency percentage for Direct Loans more than
thirty days past due, excluding Chapter 13 bankruptcy accounts, as of March 31, 2017 was 3.89%, an increase from 2.19% as of
March 31, 2016. The increase in delinquency percentage for both Contracts and Direct Loans was driven by the Company’s continued
portfolio weakness, exacerbated by greater than anticipated difficulties in implementing the centralized collection model, after the
Company moved all loan-servicing operations from branch locations to a centralized location within its corporate headquarters in
Clearwater.
During the month of November 2016, the Company began soliciting collection assistance from selective branches within its branch
network. The Company experienced modest improvement in collections and lower delinquencies and as such broadened its assistance
requests to additional branches during the quarter ended December 31, 2016. As of the date of this report, the Company has moved a
majority of its servicing and collection activity back to its branch network for all but six branches. The remaining few branches
serviced at the corporate office maintain low delinquencies and write offs.
In addition to the challenges experienced with respect to the changes to its collection model, the Company has continued to see a
significant number of competitors with aggressive underwriting in its operating market. See “Note 3—Finance Receivables” for
changes in allowance for credit losses, credit quality and delinquencies.
The Company considers the following factors to assist in determining the appropriate loss reserve levels: competition; the number of
bankruptcy filings; the results of internal branch audits; consumer sentiment; consumer spending; economic growth (i.e., changes in
GDP); the condition of the housing sector; and other leading economic indicators. The Company continues to evaluate reserve levels
on a pool-by-pool basis during each reporting period. The longer-term outlook for portfolio performance will depend on overall
economic conditions, the rational or irrational behavior of the Company’s competitors, and the Company’s ability to monitor, manage
and implement its underwriting and collections philosophy in additional geographic areas as it strives to continue its expansion.
26
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 fiscal years ended March 31, 2017 and March 31, 2016 the Company granted
deferrals to approximately 34.77% and 22.65%, respectively, of total Contracts and Direct Loans. The increase in the number of
deferrals for the fiscal year ended 2017 is a result of portfolio weakness which was exacerbated by the effect of the Company’s
unsuccessful attempt at centralizing collections described above. The Company is reasonably certain that its delinquency rates would
be higher without the increase in deferrals. The number of deferrals is 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.
Income Taxes
The provision for income taxes decreased to approximately $3.3 million in fiscal 2017 from approximately $7.7 million in fiscal 2016.
The Company’s effective tax rate decreased to 38.11% in fiscal 2017 from 38.43% in fiscal 2016.
Fiscal 2016 Compared to Fiscal 2015
Interest and Fee Income on Finance Receivables
Interest income on finance receivables, predominantly finance charge income, increased 4.5% to $90.7 million in fiscal 2016 from
$86.8 million in fiscal 2015. The average finance receivables, net of unearned interest, totaled $334.8 million for the fiscal year ended
March 31, 2016, an increase of 8% from $310.0 million for the fiscal year ended March 31, 2015. The primary reason average finance
receivables, net of unearned interest, increased was an increase of the receivable base of several existing branches in younger markets
in fiscal 2016. See “Item 1. Business—Contract Procurement”. The gross finance receivable balance increased 9% to $498.1 million
for the fiscal year ended March 31, 2016 from $458.0 million for the fiscal year ended March 31, 2015. The primary reasons gross
finance receivables increased were an increase in Contracts purchased and an increase in the weighted-average term of Contracts
purchased. The primary reason interest income increased was the increase in the volume of the outstanding loan portfolio, which was
partially offset by a lower weighted APR earned on our portfolio for the fiscal year ended March 31, 2016 compared to the fiscal year
ended March 31, 2015. The gross portfolio yield decreased to 27.10% for the fiscal year ended March 31, 2016 from 28.00% for the
fiscal year ended March 31, 2015. The net portfolio yield decreased to 16.56% for the fiscal year ended March 31, 2016 from 19.50%
for the fiscal year ended March 31, 2015. The gross portfolio yield decreased primarily due to the decrease in the average dealer
discount and a decrease in the average weighted APR, both of which is primarily the result of increased competition. The net portfolio
yield decreased due to a decrease in the gross portfolio yield, an increase in the provision for credit losses, and an increase in interest
expense (see “Analysis of Credit Losses” and “Interest Expense” below).
Marketing, Salaries and Employee Benefits, Depreciation, and Administrative Expenses
Marketing, salaries and employee benefits, depreciation, and administrative expenses increased to $35.3 million for the fiscal year
ended March 31, 2016 compared to $34.0 million for the fiscal year ended March 31, 2015, primarily because of an increase in cost
associated with maintaining the finance receivables portfolio. The Company opened three new branch locations during the fiscal year
ended March 31, 2016, and consolidated two branch locations into branches previously established within their market. However, the
Company increased the average headcount to 338 for the fiscal year ended March 31, 2016 from 330 for the fiscal year ended
March 31, 2015. Marketing, salaries and employee benefits, depreciation, and administrative expenses as a percentage of average
finance receivables, net of unearned interest, decreased to 10.54% for the fiscal year ended March 31, 2016 from 10.96% for the fiscal
year ended March 31, 2015. Absent the professional expenses associated with the abandoned sale of the Company the percentage
would have been 10.85% for the fiscal year ended March 31, 2015.
27
Interest Expense
Interest expense increased to $9.0 million for the fiscal year ended March 31, 2016 as compared to $6.0 million for the fiscal year
ended March 31, 2015. The average outstanding debt as of March 31, 2016 and March 31, 2015 was $208.2 million and
$133.4 million, respectively. The total average debt outstanding increased due to the tender offer executed on March 19, 2015. The
following table summarizes the Company’s average cost of borrowed funds for the fiscal years ended March 31:
Variable interest under the line of credit facility
Settlements under interest rate swap agreements
Credit spread under the line of credit facility
Average cost of borrowed funds
2016
0.37%
0.16%
3.80%
4.33%
2015
0.34%
0.29%
3.84%
4.47%
The Company’s average cost of borrowed funds decreased mostly due to the fixed notional amount interest rate swap agreements
representing a lower percentage of average debt. During fiscal 2016 LIBOR rates have increased, which has caused the credit spread
to decrease and the variable interest expense to increase. The variable interest rate also includes a decrease in the unused line fees
offset with an increase in amortized loan origination fees.
For a further discussion regarding the Company’s line of credit, see “— Liquidity and Capital Resources” below and “Note 5—Line
of Credit” to our audited consolidated financial statements included elsewhere in this Report.
The weighted average notional amount of interest rate swaps was $50.0 million at a weighted average fixed rate of 0.94% for each of
the fiscal years ended March 31, 2016 and 2015. For a further discussion regarding the effect of our interest rate swap agreements, see
“Note 6—Interest Rate Swap Agreements” to our audited consolidated financial statements included elsewhere in this Report.
Analysis of Credit Losses
As of March 31, 2016, the Company had approximately 1,400 active static pools. The average pool upon inception consisted of 61
Contracts with aggregate finance receivables, net of unearned interest, of approximately $683,000.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts for the fiscal years ended
March 31:
Balance at beginning of year
Current year provision
Losses absorbed
Recoveries
Balance at end of year
(In thousands)
2016
$ 11,325
25,926
(27,963)
2,977
2015
$ 12,889
20,008
(25,042)
3,470
$ 12,265
$ 11,325
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Direct Loans for the fiscal years
ended March 31:
Balance at beginning of year
Current year provision
Losses absorbed
Recoveries
Balance at end of year
(In thousands)
2016
$ 703
352
(328)
21
2015
$ 590
362
(277)
28
$ 748
$ 703
28
The provision for credit losses increased to $26.3 million for the fiscal year ended March 31, 2016 from $20.4 million for the fiscal
year ended March 31, 2015, largely due to the fact that net charge-offs increased to 7.56% for the fiscal year ended March 31, 2016
from 7.04% for the fiscal year ended March 31, 2015, as well as the portfolio growing. During the fourth quarter of the fiscal year
ended March 31, 2016, the Company refined its allowance for credit loss model to incorporate recent trends that include the
acquisition of longer term contracts and increased delinquencies. The Company feels that these improvements to the current model
better reflect the current trends of incurred losses within the portfolio and better align the allowance for credit losses with the
portfolio’s performance indicators.
The Company’s losses as a percentage of liquidation increased to 9.10% for the fiscal year ended March 31, 2016 as compared to
8.13% for the fiscal year ended March 31, 2015. This increase was primarily the result of increased competition in all markets in
which the Company presently operates. Increased competition has led to a higher percentage of loans acquired that are categorized in
the lower tiers of the Company’s guidelines. The Company also experienced a decrease in auction prices from fiscal year 2015 to
fiscal year 2016. Decreased auction proceeds from repossessed vehicles increased the amount of write-offs which, in turn, increased
the write-off to liquidation percentage. During the fiscal years ended March 31, 2016 and 2015, auction proceeds from the sale of
repossessed vehicles averaged approximately 42% and 46%, respectively, of the related principal balance.
Recoveries as a percentage of charge-offs were approximately 10.59% and 13.82% for the fiscal years ended March 31, 2016 and
2015, respectively. Historically, recoveries as a percentage of charge-offs have fluctuated from period to period, and the Company
does not attribute this decrease to any particular change in operational strategy or economic events however, we have generally
experienced declining auction proceeds for approximately the past five years.
The delinquency percentage for Contracts more than thirty days past due, excluding Chapter 13 bankruptcy accounts, as of
March 31, 2016 increased to 5.57% from 4.17% as of March 31, 2015. The delinquency percentage for Direct Loans more than thirty
days past-due as of March 31, 2016 increased to 2.19% from 1.64% as of March 31, 2015. The delinquency percentage increase for
Contracts reflects portfolio weakness that generally manifests itself in increased future losses mainly due to competition. The
Company utilizes a static pool approach to analyzing portfolio performance and looks at specific static pool performance and recent
trends as leading indicators of the future performance of its portfolio.
The Company also considers the following factors to assist in determining the appropriate loss reserve levels: unemployment rates;
competition; the number of bankruptcy filings; the results of internal branch audits; consumer sentiment; consumer spending;
economic growth (i.e., changes in GDP); the condition of the housing sector; and other leading economic indicators. The Company
continues to evaluate reserve levels on a pool-by-pool basis during each reporting period. The longer-term outlook for portfolio
performance will depend on overall economic conditions, the unemployment rate, the rational or irrational behavior of the Company’s
competitors, and the Company’s ability to monitor, manage and implement its underwriting philosophy in additional geographic areas
as it strives to continue its expansion.
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 fiscal years ended March 31, 2016 and March 31, 2015 the Company granted
deferrals to approximately 22.65% and 23.28%, respectively, of total Contracts and Direct Loans. The number of deferrals is
influenced by portfolio performance, general economic conditions and the unemployment rate.
Income Taxes
The provision for income taxes decreased to approximately $7.7 million in fiscal 2016 from approximately $9.2 million in fiscal 2015.
The Company’s effective tax rate increased to 38.43% in fiscal 2016 from 35.41% in fiscal 2015. The Company had approximately
$2.1 million of non-deductible expenses associated with the potential sale of the Company in 2014. Since the sale of the Company was
not consummated, the $2.1 million became deductible in 2015 creating a favorable effective tax rate.
29
Liquidity and Capital Resources
The Company’s cash flows are summarized as follows:
Cash provided by (used in):
Operations
Investing activities – (primarily purchases of
Contracts)
Financing activities
Net increase (decrease) in cash
Fiscal Year ended March 31,
(In thousands)
2017
2016
2015
$ 27,321
$ 22,408
$ 24,492
(28,703)
2,388
$ 1,006
(34,991)
11,044
$ (1,539)
(25,238)
1,499
$
753
The Company made certain reclassifications to the 2016 and 2015 statements of cash flows. The amortization of deferred revenues
decreased cash flows from operating activities by $1.7 million and $1.3 million for 2016 and 2015 respectively, and correspondingly
increased cash flows from investing activities. Net income and shareholders’ equity was not changed.
The Company’s primary use of working capital for the fiscal year ended March 31, 2017 was funding the purchase of Contracts,
which are financed substantially through cash from principal payments received, cash from operations and our line of credit (the
“Line”). The Line is secured by all of the assets of the Company and has a maturity date of January 30, 2018. The Company may
borrow up to $225.0 million under the Line. Prior to December 30, 2016, borrowings under the Line were under various LIBOR
pricing options plus 300 basis points with a 1% floor on LIBOR. Effective December 30, 2016 the Company entered into an
amendment to adjust its availability calculation which temporarily increased pricing of the Line to 350 basis points above 30 day
LIBOR with a 1% floor on LIBOR through June 30, 2017. As of March 31, 2017, the amount outstanding under the Line was
$213.0 million. The exact amount that the Company may borrow under the Line at any given time is determined in accordance with
the Second Amended and Restated Loan and Security Agreement, as subsequently amended.
The Company will continue to depend on the availability of the Line, together with cash from operations, to finance future operations.
The availability of funds under the Line generally depends on availability calculations as defined in the corresponding credit
agreement. In addition, our credit facility requires us to comply with certain financial ratios and covenants and to satisfy specified
financial tests, including maintenance of asset quality and portfolio performance tests. See “Risk Factors—The terms of our
indebtedness impose significant restrictions on us.”
The Company believes that borrowings available under the Line as well as cash flow from operations will be sufficient to meet its
funding needs for at least the next twelve months. However, since the borrowings available under the Line are calculated every month
based on individual loan criteria as defined in the credit agreement, no assurances can be given that the Company will maintain
sufficient availability in the long term. The Line requires compliance with certain debt covenants including financial ratios, asset
quality and other performance tests. The Company is in compliance with all of its debt covenants as of March 31, 2017.
As disclosed in Note 3 to the financial statements, the quality of the Company’s loan portfolio has been deteriorating, which has
resulted in an increase in non-performing loans, increased delinquencies and other factors, which in turn has resulted in increased net
charge-offs and an increase in the provision for credit losses. These conditions have resulted in a reduction in net earnings and have
affected our borrowing capacity under the line of credit facility.
The Company’s operating results over recent quarters provided indicators that the Company may not be able to continue to comply
with certain of the required financial ratios, covenants and financials tests prior to the maturity date of the line of credit facility in the
absence of an amendment to the corresponding credit agreement. Failure to meet any financial ratios, covenants or financial tests
could result in an event of default under our line of credit facility. If an event of default occurs under the credit facility, our lenders
could increase our borrowing costs, restrict our ability to obtain additional borrowings under the facility, accelerate all amounts
outstanding under the facility, or enforce their interest against collateral pledged under the facility.
The Company is in the process of providing information to the agent bank in the loan consortium, in the ordinary course of business as
well as making changes in our policies and procedures which we believe will be successful in addressing some of the issues related to
loan quality. We are also developing information pertaining to our expected borrowing needs, including proposed covenants,
determination of lending levels and availability and other considerations to be submitted to the agent bank to assist in addressing the
renewal of credit upon expiration of the Line in January 2018. The Company has a longstanding relationship with its lenders. While
management believes that it will be able to obtain a renewal or extension of the credit facility, there are no assurances that the lenders
30
will approve the renewal or extension, or, assuming that they will approve it, that the facility will not be on terms less favorable than
the current agreement. In the event that the Company obtains information that the existing lenders do not intend to extend the
relationship, the Company will seek alternative financing. The Company believes it is probable that it will be able to obtain financing
from either its existing lenders or from other sources; however, it can provide no assurances that it will be successful in replacing the
line of credit facility on reasonable terms or at all.
Impact of Inflation
The Company is affected by inflation primarily through increased operating costs and expenses including increases in interest rates.
Inflationary pressures on operating costs and expenses historically have been largely offset by the Company’s continued emphasis on
stringent operating and cost controls, although no assurances can be given regarding the Company’s ability to offset the effects of
inflation in the future.
Contractual Obligations
The following table summarizes the Company’s material obligations as of March 31, 2017.
Payments Due by Period
(In thousands)
Total
$ 4,411
213,000
7,899
Less
than
1 year
$ 2,023
213,000
7,899
1 to 3
years
$ 2,313
—
—
3 to 5
years
$ 75
—
—
More than
5 years
$ —
—
—
$ 225,310
$ 222,922
$ 2,313
$ 75
$ —
Operating leases
Line of credit1
Interest on line of credit1
Total
1.
The Company’s Line matures on January 30, 2018. Effective December 30, 2016, the Company entered into a temporary
amendment that increases the effective interest rate by 50 basis points through June 30, 2017. Interest on outstanding
borrowings under the Line as of March 31, 2017, is based on an effective interest rate of 4.45% which includes the estimated
effect of the interest rate swap agreements settlements and the temporary amendment 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.
Item 7A. 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
Management’s objective is to minimize the cost of borrowing through an appropriate mix of fixed and floating rate debt. Derivative
financial instruments, such as interest rate swap agreements, may be used for the purpose of managing fluctuating interest rate
exposures that exist from ongoing business operations. The Company does not use interest rate swap agreements for speculative
purposes.
As of March 31, 2017, $163.0 million, or approximately 76.5% of our total debt, was subject to floating interest rates; however, due to
a 1% floor on such interest rates, these rates are effectively fixed until the variable rates exceed this threshold. As a result, a
hypothetical increase in the variable interest rates of 1% or 100 basis points (which would result in the variable rates being 1.98% as
of March 31, 2017) applicable to this floating rate debt would result in an annual after-tax increase of interest expense of
approximately $979,000.
31
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed as part of this Report (see pages 35-53)
Report of Independent Registered Public Accounting Firm
Audited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
33
34
35
36
37
38
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Nicholas Financial, Inc.
We have audited the accompanying consolidated balance sheets of Nicholas Financial, Inc. and Subsidiaries (the “Company”) as of
March 31, 2017 and 2016 and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years
in the three-year period ended March 31, 2017. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of March 31, 2017 and 2016 and the results of its operations and its cash flows for each of the years in the three-year
period ended March 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of March 31, 2017, based on criteria established in the Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated June 14, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Dixon Hughes Goodman LLP
Atlanta, Georgia
June 14, 2017
33
Nicholas Financial, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
Assets
Cash
Finance receivables, net
Assets held for resale
Prepaid expenses and other assets
Income taxes receivable
Property and equipment, net
Interest rate swap agreements
Deferred income taxes
Total assets
Liabilities and shareholders’ equity
Line of credit
Drafts payable
Accounts payable and accrued expenses
Deferred revenues
Interest rate swap agreements
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par: 5,000 shares authorized; none issued
Common stock, no par: 50,000 shares authorized; 12,524 and 12,466 shares issued respectively;
7,810 and 7,753 shares outstanding, respectively
Treasury stock: 4,714 common shares, at cost
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
March 31,
2017
2016
$ 2,855
317,205
2,453
674
719
1,184
17
8,505
$ 1,849
311,837
2,148
977
593
1,290
—
6,615
$ 333,612
$ 325,309
$ 213,000
1,851
5,932
3,969
—
$ 211,000
1,499
5,839
3,917
205
224,752
222,460
33,889
(70,459)
145,430
33,287
(70,459)
140,021
108,860
102,849
$ 333,612
$ 325,309
See accompanying notes.
34
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
Interest and fee income on finance receivables
Expenses:
Marketing
Salaries and employee benefits
Administrative
Provision for credit losses
Depreciation
Interest expense
Change in fair value of interest rate swap agreements
Operating income before income taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
Fiscal Year ended March 31,
2017
$ 90,466
2016
$ 90,707
2015
$ 86,790
1,440
21,437
12,180
37,177
492
9,222
(222)
1,497
22,313
11,025
26,278
458
9,007
24
1,562
20,835
11,226
20,371
366
5,970
364
81,726
70,602
60,694
8,740
3,331
20,105
7,726
26,096
9,240
$ 5,409
$ 12,379
$ 16,856
$
$
.70
.69
$ 1.60
$ 1.40
$ 1.59
$ 1.38
See accompanying notes.
35
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(In thousands)
Balance at March 31, 2014 ..........................................................
Net income ...................................................................................
Issuance of common stock under stock options ...........................
Grants of restricted share awards, net of forfeitures ....................
Excess tax benefit on share awards ..............................................
Share-based compensation ...........................................................
Common shares purchased ..........................................................
Common Stock
Shares
12,221
—
151
44
—
—
(4,714)
Amount
$ 31,152
—
389
—
600
514
—
Treasury
Stock
$ —
—
—
—
—
—
(70,409)
Retained
Earnings
$110,786
16,856
—
—
—
—
—
Total
Shareholders’
Equity
$
141,938
16,856
389
—
600
514
(70,409)
Balance at March 31, 2015 ..........................................................
7,702
$ 32,655
$ (70,409)
$127,642
$
89,888
Net income ...................................................................................
Issuance of common stock under stock options ...........................
Grants of restricted share awards, net of forfeitures ....................
Tax deficiency on share awards ...................................................
Excess tax benefit on share awards ..............................................
Share-based compensation ...........................................................
Additional tender offer cost .........................................................
—
13
38
—
—
—
—
—
85
—
(38)
11
574
—
—
—
—
—
—
—
(50)
12,379
—
—
—
—
—
—
12,379
85
—
(38)
11
574
(50)
Balance at March 31, 2016 ..........................................................
7,753
$ 33,287
$ (70,459)
$140,021
$
102,849
Net income ...................................................................................
Issuance of common stock under stock options ...........................
Grants of restricted share awards .................................................
Tax deficiency on share awards ...................................................
Excess tax benefit on share awards ..............................................
Share-based compensation ...........................................................
—
9
48
—
—
—
—
50
—
(66)
11
607
—
—
—
—
—
—
5,409
—
—
—
—
—
5,409
50
—
(66)
11
607
Balance at March 31, 2017 ..........................................................
7,810
$ 33,889
$ (70,459)
$145,430
$
108,860
See accompanying notes.
36
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
(Gain) loss on sale of property and equipment
Impairment loss on property and equipment Impairment loss on property and
equipment
Provision for credit losses
Amortization of dealer discounts
Amortization of commission for products
Deferred income taxes
Share-based compensation
Change in fair value of interest rate swap agreements
Changes in operating assets and liabilities:
Prepaid expenses and other assets
Accounts payable and accrued expenses
Income taxes receivable/payable
Deferred revenues
Net cash provided by operating activities
Cash flows from investing activities:
Purchase and origination of finance contracts
Principal payments received including recoveries
Increase in assets held for resale
Purchase of property and equipment
Proceeds from sale of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from line of credit
Increase (decrease) in drafts payable
Payment of debt origination costs
Proceeds from exercise of share awards
Excess tax benefits of stock options
Purchase of common shares
Net cash provided by financing activities
Net increase (decrease) in cash
Cash, beginning of year
Cash, end of year
Supplemental disclosure of noncash investing and financing activities:
Tax deficiency from share awards
See accompanying notes.
Fiscal Year ended March 31,
2017
2016
2015
$ 5,409
$ 12,379
$ 16,856
492
(17)
458
(24)
366
6
350
37,177
(13,112)
(1,754)
(1,956)
607
(222)
328
93
(126)
52
—
26,278
(13,811)
(1,662)
(292)
574
24
192
(2,002)
(480)
774
—
20,371
(13,852)
(1,266)
356
514
364
66
(1,085)
981
815
27,321
22,408
24,492
(157,708)
130,029
(305)
(772)
53
(173,027)
139,289
(401)
(913)
61
(164,830)
140,018
(51)
(443)
68
(28,703)
(34,991)
(25,238)
2,000
352
(25)
50
11
—
2,388
1,006
1,849
12,000
(977)
(25)
85
11
(50)
11,044
(1,539)
3,388
71,100
137
(318)
389
600
(70,409)
1,499
753
2,635
$ 2,855
$ 1,849
$ 3,388
$
(66)
$
(38)
$ —
37
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
Nicholas Financial, Inc. (“Nicholas Financial – Canada”) is a Canadian holding company incorporated under the laws of British
Columbia with two wholly owned United States subsidiaries, Nicholas Data Services, Inc. (“NDS”) and Nicholas Financial, Inc.
(“NFI”). NDS historically was engaged in supporting and updating industry-specific computer application software for small
businesses located primarily in the Southeastern United States. NDS has ceased its operations; however, it continues as the interim
holding company for Nicholas Financial. NFI is a specialized consumer finance company engaged primarily in acquiring and
servicing automobile finance installment contracts (“Contracts”) for purchases of new and used automobiles and light trucks. To a
lesser extent, NFI also offers direct consumer loans (“Direct Loans”) and sells consumer-finance related products. Both NDS and NFI
are based in Florida, U.S.A. The accompanying consolidated financial statements are stated in U.S. dollars and are presented in
accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The Company has one reportable segment, which is the consumer finance company.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Nicholas Financial – Canada and its wholly owned subsidiaries, NDS
and NFI, collectively referred to as the “Company”. All intercompany transactions and balances have been eliminated.
Tender Offer
On March 19, 2015, the Company announced the final results of the modified “Dutch auction” tender offer for the purchase of
approximately 4.7 million shares of the Company’s common shares by its principal operating subsidiary. The tender offer expired on
March 13, 2015. Total payments for common shares, including costs were approximately $70.5 million. Such costs were recorded as
an increase to treasury stock, reducing shareholders’ equity.
The aggregate number of common shares purchased in the tender offer by NFI represented approximately 38.0% of the Company’s
outstanding common shares as of March 17, 2015. Following settlement of the tender offer, the Company had approximately
7.7 million common shares outstanding.
Use of Estimates
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.
Finance Receivables
Finance receivables are recorded at cost, net of unearned interest, unearned dealer discounts (see “Revenue Recognition”) and the
allowance for credit losses. The amount of unearned interest, dealer discounts and allowance for credit losses as of March 31, 2017
and March 31, 2016 are approximately $195.5 and $186.3 million, respectively (See Note 3).
Allowance for Credit Losses
The allowance for credit losses is increased by charges against earnings and decreased by charge-offs (net of recoveries). The
Company aggregates Contracts into static pools consisting of Contracts purchased during a three-month period for each branch
location as management considers these pools to have similar risk characteristics and are considered smaller-balance homogenous
loans. The Company analyzes each consolidated static pool at specific points in time to estimate losses that are probable of being
incurred as of the reporting date. It has maintained historical write-off information for over 10 years with respect to every consolidated
static pool and segregates each static pool by liquidation which creates snapshots or buckets of each pool’s historical write-off-to
liquidation ratio at five different points in each vintage pool’s liquidation cycle. These snapshots are then used to assist in determining
the allowance for credit losses. The five snapshots are tracked at liquidation levels of 20%, 40%, 60%, 80% and 100%. These
snapshots help us in determining the appropriate allowance for credit losses.
38
2. Summary of Significant Accounting Policies (continued)
As of March 31, 2016, the Company refined the allowance for credit losses by changing it to a loan by loan analysis, which more
closely depicts the amount of the allowance for credit losses needed to maintain an adequate reserve. As of March 31, 2017, the
Company further refined the reserve for losses by increasing the allowance by 50% of the principal balance, with respect to accounts
whose contractual delinquency falls into the range of 120-180 days past due as a result of further delinquencies that occurred
subsequent to altering our charge-off policy (see Note 3).
Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan experience, known and
inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying
collateral, and current economic conditions. As conditions change, the Company’s level of provisioning and allowance may change as
well.
Assets Held for Resale
Assets held for resale are stated at net realizable value and consist primarily of automobiles that have been repossessed by the
Company and are awaiting final disposition. Most costs associated with repossession, transport and auction preparation expenses are
reported under operating expenses in the period in which they are incurred.
Property and Equipment
Property and equipment are recorded at cost, net of accumulated depreciation. Expenditures for repairs and maintenance are charged
to expense as incurred. Depreciation of property and equipment is computed using the straight-line method over the estimated useful
lives of the assets as follows:
Automobiles
Equipment
Furniture and fixtures
Leasehold improvements
3 years
5 years
7 years
Lesser of lease term or useful life (generally 6 - 7 years)
Drafts Payable
Drafts payable represent checks disbursed for loan purchases which have not yet been funded. Amounts generally clear within two
business days of period end and then increase the line of credit or reduce cash.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and
liabilities and their respective tax bases along with operating loss and tax credit carryforwards, if any. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income
in the period that includes the enactment date.
The Company recognizes tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the
consolidated financial statements from any such position would be measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement. It is the Company’s policy to recognize interest and penalties accrued on
any uncertain tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties
associated with any unrecognized tax benefits, nor has the Company recognized any related interest or penalties during the three years
ended March 31, 2017.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer
subject to U.S. federal and state tax examinations for fiscal years before 2014. The Company does not believe there will be any
material changes in its unrecognized tax positions over the next 12 months. There were no unrecognized tax positions as of March 31,
2017.
39
2. Summary of Significant Accounting Policies (continued)
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, or when
the account is in Chapter 13 bankruptcy. Chapter 13 bankruptcy accounts are accounted for under the cost-recovery method. Interest
income on Chapter 13 bankruptcy accounts does not resume until all principal amounts are recovered (see Note 3).
A dealer discount represents the difference between the finance receivable, net of unearned interest, 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 from which the Company is purchasing the Contract, 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, as a percent of the amount financed, associated with
new volume for the fiscal years ended March 31, 2017, 2016, and 2015 was 7.08%, 7.51% and 8.08%, respectively.
The amount of future unearned income is computed as the product of the Contract rate, the Contract term and the Contract amount.
Deferred revenues 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,
and forced placed automobile insurance. These commissions are amortized over the life of the contract using the interest method.
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:
Numerator:
Net income per consolidated statements of income
Less: Allocation of earnings to participating securities
Net income allocated to common stock
Basic earnings per share computation:
Net income allocated to common stock
Weighted average common shares outstanding, including shares considered participating
securities
Less: Weighted average participating securities outstanding
Weighted average shares of common stock
Basic earnings per share
Diluted earnings per share computation:
Net income allocated to common stock
Undistributed earnings re-allocated to participating securities
Numerator for diluted earnings per share
Weighted average common shares outstanding for basic earnings per share
Incremental shares from stock options
Weighted average shares and dilutive potential common shares
Diluted earnings per share
40
Fiscal Year ended March 31,
(In thousands, except earnings per
share numbers)
2017
2016
2015
$ 5,409
(70)
5,339
$ 12,379
(170)
12,209
$ 16,856
—
$ 16,856
$ 5,339
$ 12,209
$ 16,856
7,766
(102)
7,664
.70
$
7,727
(105)
7,622
$ 1.60
$ 5,339
—
$ 5,339
7,664
62
7,726
$ 12,209
2
$ 12,211
7,622
70
7,692
12,013
—
12,013
1.40
$ 16,856
—
$ 16,856
12,013
179
12,192
$
.69
$ 1.59
$ 1.38
2. Summary of Significant Accounting Policies (continued)
Diluted earnings per share do not include the effect of certain stock options as their impact would be anti-dilutive. Approximately
161,000, 161,000, and 155,000 stock options were not included in the computation of diluted earnings per share for the years ended
March 31, 2017, 2016 and 2015 respectively, because their effect would have been anti-dilutive.
Share-Based Payments
The grant date fair value of share awards is recognized in earnings over the requisite service period (presumptively, the vesting
period), net of estimated forfeitures. The Company estimates the fair value of option awards using the Black-Scholes option pricing
model. The risk-free interest rate is based upon a U.S. Treasury instrument with a life that is similar to the expected term of the
options. Expected volatility is based upon the historical volatility for the previous period equal to the expected term of the options.
The expected term is based upon the average life of previously issued options. The expected dividend yield is based upon the yield
expected on date of grant to occur over the term of the option.
The fair value of non-vested restricted shares and performance units are measured at the market price of a share on a grant date.
Restricted shares have a three-year service period. Performance units include a performance period (generally ending at the end of the
fiscal year in which the units were granted) followed by a two-year service period. At the end of the performance period, these units
effectively become restricted shares for the remaining two-year service period at which time they become vested.
The pool of excess tax benefits available to absorb future tax deficiencies is based on increases to shareholders’ equity related to tax
benefits from share-based compensation, combined with the tax on the cumulative incremental compensation costs previously
included in pro forma net income disclosures as if the Company had applied the fair-value method to all awards.
Fair Value Measurements
The Company measures specific assets and liabilities at fair value, which is an exit price, representing the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When
applicable, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability under a
three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as
observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are
either directly or indirectly observable; and Level 3, defined as unobservable inputs about which little or no market data exists,
therefore requiring an entity to develop its own assumptions (see Note 7).
Financial Instruments and Concentrations
The Company’s financial instruments consist of cash, finance receivables (accrued interest is a part of finance receivables), a line of
credit, and interest rate swap agreements. Financial instruments that are exposed to concentrations of credit risk are primarily finance
receivables and cash.
As of March 31, 2017, the Company operated in eighteen states through sixty-five branch locations. Florida represented 28% of the
finance receivables total as of March 31, 2017. Ohio represented 13%, Georgia represented 10% and North Carolina represented 8%
of the finance receivables total as of March 31, 2017. Of the remaining fourteen states, no one state represented more than 5% of the
total finance receivables. The Company provides credit during the normal course of business and performs ongoing credit evaluations
of its customers.
The Company maintains reserves for potential credit losses which, when realized, have been within the range of management’s
expectations. The Company perfects a primary security interest in all vehicles financed as a form of collateral.
The combined account balances the Company maintains at financial institutions typically exceed federally insured limits, and there is
a concentration of credit risk related to accounts on deposit in excess of federally insured limits. The Company has not experienced
any losses in such accounts and believes this risk of loss is not significant.
Interest Rate Swap Agreements
Interest rate swap agreements are reported as either assets or liabilities in the consolidated balance sheet at fair value. Interest rate
swap agreements are not designated as cash-flow hedges, and accordingly, the changes in the fair value are recorded in earnings. The
Company does not use interest rate swap agreements for speculative purposes (see Note 6).
41
2. Summary of Significant Accounting Policies (continued)
Statements of Cash Flows
Cash paid for income taxes for the years ended March 31, 2017, 2016 and 2015 was approximately $5.4 million, $8.5 million and
$7.3 million respectively. Cash paid for interest, including debt origination costs for the years ended March 31, 2017, 2016 and 2015
was approximately $9.1 million, $8.8 million and $6.1 million respectively.
Reclassifications
The Company made certain reclassifications to the 2016 and 2015 statements of cash flows. The amortization of deferred revenues
decreased cash flows from operating activities by $1.7 million and $1.3 million for 2016 and 2015 respectively and correspondingly
increased cash flows from investing activities. Net income and shareholders’ equity was not changed.
Recent Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Update (“ASU”) 2016-15
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payment. The new guidance focuses on
making the Statement of Cash Flows more uniform for companies. The amendments in this Update are effective for public business
entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. The Company is currently evaluating the impact of the adoption of this ASU on the
consolidated financial statements, and is in the process of analyzing its current presentation of the Consolidated Statements of Cash
Flows. At this time, the Company does not believe ASU 2016-15 will have a material impact.
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, 2019. Early application will be permitted for all organizations for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2018. 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, we believe the adoption of this ASU will likely have a
material adverse effect on our consolidated Financial statements.
In March 2016, the FASB issued the ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting,” which is intended to simplify several aspects of the accounting for share- based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the
statement of cash flows. For public entities, ASU 2016-09 is effective for annual periods beginning after December 15, 2016,
including interim periods within those fiscal years. Early application is permitted. The Company continues to evaluate the impact of
the adoption of this ASU on the consolidated financial statements and at this time does not believe there will be a material impact on
the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”, intended to improve financial reporting about leasing transactions.
The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment.
“The ASU will require organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and
liabilities for the rights and obligations created by those leases. The accounting by organizations that own the assets leased by the
lessee—also known as lessor accounting— will remain largely unchanged from current U.S. GAAP. ASU 2016-02 is effective for
annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted.
Upon adoption, the Company will add the impact of the full operating lease terms, using the present value of future minimum lease
payments to the balance sheet. The Company will continue to evaluate the impact of the adoption of this ASU on the consolidated
financial statements.
42
2. Summary of Significant Accounting Policies (continued)
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Recognition and Measurement of Financial Assets and
Liabilities,” which is intended to improve the recognition and measurement of financial instruments by requiring: equity investments
(other than equity method or consolidation) to be measured at fair value with changes in fair value recognized in net income; public
business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; separate
presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans
and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement to disclose
the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; eliminating
the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is
required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requiring a reporting
organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to
measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU is effective for public
companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU permits
early adoption of the instrument-specific credit risk provision. While the Company is currently evaluating the impact of the pending
adoption of this ASU on the Company’s consolidated financial statements, the Company does not believe it will have a material
impact on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The ASU requires an
entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
The ASU, and all subsequently issued clarifying ASUs, will replace most existing revenue recognition guidance in U.S. GAAP when
it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. On July 9, 2015,
the FASB approved the deferral of the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 will be effective for
annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The ASU would
permit public entities to adopt the ASU early, but not before the original effective date (i.e., annual periods beginning after
December 15, 2016). Because ASU 2014-09 does not apply to revenue associated with financial instruments, the Company does not
expect the new guidance to have a material impact on the consolidated financial statements. The Company has begun to scope its
general ledger revenue items to identify potential performance obligations and will continue to evaluate the impact of adoption on its
consolidated financial statements and disclosures.
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.
3. Finance Receivables
Finance receivables consist of Contracts and Direct Loans, each of which comprise a portfolio segment. Each portfolio segment
consists of smaller balance homogeneous loans which are collectively evaluated for impairment.
The Company purchases individual Contracts from new and used automobile dealers in its markets. There is no relationship between
the Company and the dealer with respect to a given Contract once the assignment of that Contract is complete. The dealer has no
vested interest in the performance of any Contract the Company purchases. The Company charges-off receivables when an individual
account has become more than 180 days contractually delinquent. In the event of repossession, the charge-off will occur in the month
in which the vehicle was repossessed.
Contracts included in finance receivables are detailed as follows as of fiscal years ended March 31:
Indirect finance receivables, gross contract
Unearned interest
Indirect finance receivables, net of unearned interest
Unearned dealer discounts
Indirect finance receivables, net of unearned interest and
unearned dealer discounts
Allowance for credit losses
Indirect finance receivables, net
2017
$ 502,050
(158,541)
343,509
(17,004)
(In thousands)
2016
$ 487,118
(152,911)
334,207
(18,023)
2015
$ 447,043
(136,896)
310,147
(17,780)
326,505
(16,885)
316,184
(12,265)
292,367
(11,325)
$ 309,620
$ 303,919
$ 281,042
43
3. Finance Receivables (continued)
The terms of the Contracts range from 12 to 72 months and bear a weighted average contractual interest rate of 22.37% and 22.67% as
of March 31, 2017 and 2016, respectively.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts for the fiscal years ended
March 31:
Balance at beginning of year
Provision for credit losses
Losses absorbed
Recoveries
Balance at end of year
2017
$ 12,265
36,843
(34,419)
2,196
$ 16,885
(In thousands)
2016
$ 11,325
25,926
(27,963)
2,977
2015
$ 12,889
20,008
(25,042)
3,470
$ 12,265
$ 11,325
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 predominately for used vehicles. As of March 31, 2017, the average
model year of vehicles collateralizing the portfolio was a 2009 vehicle. The Company utilizes a static pool approach to track portfolio
performance. If the allowance for credit losses is determined to be inadequate for a static pool, then an additional charge to income
through the provision is used to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan
portfolio, the composition of the portfolio, and current economic conditions. Such evaluation, considers among other matters, the
estimated net realizable value of the underlying collateral, economic conditions, historical loan loss experience, competition,
management’s estimate of probable credit losses and other factors that warrant recognition in providing for an adequate allowance for
credit losses.
Direct Loans are loans originated directly between the Company and the consumer. Direct Loans are also included in finance
receivables and are detailed as follows as of fiscal years ended March 31:
Direct finance receivables, gross contract
Unearned interest
Direct finance receivables, net of unearned interest
Allowance for credit losses
Direct finance receivables, net
2017
$ 10,670
(2,312)
8,358
(773)
$ 7,585
(In thousands)
2016
$ 11,012
(2,346)
8,666
(748)
$ 7,918
2015
$ 10,932
(2,367)
8,565
(703)
$ 7,862
The terms of the Direct Loans range from 12 to 72 months and bear a weighted average contractual interest rate of 25.62% and
25.72% as of March 31, 2017 and 2016, respectively.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Direct Loans for the fiscal years
ended March 31:
Balance at beginning of year
Provision for credit losses
Losses absorbed
Recoveries
Balance at end of year
2017
$ 748
334
(338)
29
$ 773
(In thousands)
2016
$ 703
352
(328)
21
$ 748
2015
$ 590
362
(277)
28
$ 703
44
3. Finance Receivables (continued)
Direct Loans are typically for amounts ranging from $1,000 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 Contracts
due to the customer’s historical payment history with the Company; however, the underlying collateral is less valuable. In deciding
whether or not 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 borrowers under Contracts previously purchased by the Company, the payment history of the borrower under
the Contract is a significant factor in making the loan decision. As of March 31, 2017, loans made by the Company pursuant to its
Direct Loan program constituted approximately 2% 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 by current economic conditions and credit loss trends
over several reporting periods which are utilized in estimating future losses and overall portfolio performance.
A performing account is defined as an account that is less than 61 days past due. We define 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, we 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, forgiveness of principal or of accrued interest. Accordingly, we consider 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, and the accrual of interest income is suspended. As of September 1, 2016, when an account is 180 days contractually
delinquent, the account is written off. This change aligns the Company’s charge-off policy with practices within the subprime auto
financing segment. Prior to September 2016, accounts that were 120 days contractually delinquent were written off. See “Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more details. Upon notification of a
bankruptcy, an account is monitored for collection with other Chapter 13 bankruptcy accounts. In the event the debtors’ balance has
been 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, to begin repossession
proceedings or to allow the customer to begin making regularly scheduled payments.
The following table is an assessment of the credit quality by creditworthiness as of March 31:
Performing accounts
Non-performing accounts
Total
Chapter 13 bankruptcy accounts, net of unearned interest
Finance receivables, gross contract
(In thousands)
2017
2016
Contracts
$ 473,446
24,585
$ 498,031
4,019
$ 502,050
Direct
Loans
$ 10,406
222
$ 10,628
42
Contracts
$ 473,429
9,435
$ 482,864
4,254
$ 10,670
$ 487,118
Direct
Loans
$10,899
79
$ 10,978
34
$ 11,012
45
3. Finance Receivables (continued)
The following tables present certain information regarding the delinquency rates experienced by the Company with respect to
Contracts and Direct Loans on a gross basis which includes unearned interest, excluding any Chapter 13 bankruptcy accounts:
Contracts
March 31, 2017
March 31, 2016
March 31, 2015
Direct Loans
March 31, 2017
March 31, 2016
March 31, 2015
Gross Balance
Outstanding
498,031
$
31 –
60 days
$ 25,450
(In thousands)
61 –
90 days
$ 12,388
Over
90 days
$ 12,197
Total
$50,035
$
$
482,864
443,083
Gross Balance
Outstanding
10,628
$
$
$
10,978
10,912
5.11%
2.49%
2.45% 10.05%
$ 17,466
3.61%
$ 13,694
3.09%
$ 6,069
1.26%
$ 3,435
0.78%
$ 3,366
0.70%
$ 1,330
0.30%
$26,901
5.57%
$18,459
4.17%
Over
90 days
155
$
1.46%
0.63%
$
61 –
31 –
90 days
60 days
191
67
$
$
1.80%
161
$
1.47%
122
1.12%
41
0.37%
42
0.38%
$
$
$
38
0.35%
15
0.14%
$
Total
$ 413
3.89%
$ 240
2.19%
$ 179
1.64%
4. Property and Equipment
Property and equipment as of March 31, 2017 and 2016 is summarized as follows:
2017
Automobiles
Equipment
Furniture and fixtures
Leasehold improvements
2016
Automobiles
Equipment
Furniture and fixtures
Leasehold improvements
Cost
$ 712
1,476
546
1,194
$ 3,928
$ 623
1,473
512
1,144
$ 3,752
(In thousands)
Accumulated
Depreciation
$
$
$
459
851
427
1,007
2,744
413
664
408
977
Net Book
Value
$
253
625
119
187
$ 1,184
$
210
809
104
167
$
2,462
$ 1,290
During the first quarter of fiscal year 2017 the Company began the process of implementing a new loan operating system and
capitalized approximately $350,000 related to the project. During the fiscal year, the Company concluded that the asset was not
recoverable due to the project not progressing and the expectation that the costs incurred will not be recovered. As a result, during the
fourth quarter, the Company recorded an impairment charge of $350,000 which is classified as administrative expenses in the
consolidated statement of income.
46
5. Line of Credit
The Company has a line of credit facility (the “Line”) up to $225.0 million, which matures on January 30, 2018. Prior to
December 30, 2016 the pricing on the Line was 300 basis points above 30 day LIBOR with a 1% floor on LIBOR. Effective
December 30, 2016, the Company executed an amendment to this existing Line which provided temporary adjustments to the
calculation of availability and increased the pricing of the Line to 350 basis points above 30 day LIBOR while maintaining the 1%
floor on LIBOR (4.50% at March 31, 2017 and 4.00% at March 31, 2016). The amendment provides for a temporary adjustment to the
calculation of the availability under the credit facility effective as of December 30, 2016 and will be in place through June 30, 2017. In
connection with such adjustment, an additional event of default was added to the credit facility that would be triggered if the sum of
the percentages of accounts that were more than thirty days past due, accounts that were charged off, and the value of repossessed
vehicles held as assets exceeds a specified monthly threshold.
Pledged as collateral for this Line are all the assets of the Company. The facility requires compliance with certain financial ratios and
covenants and satisfaction of specified financial tests, including maintenance of asset quality and performance tests. As of March 31,
2017, the Company was in compliance with all debt covenants.
As disclosed in Note 3, the quality of the Company’s loan portfolio has been deteriorating, which has resulted in an increase in non-
performing loans, increased delinquencies and other factors, which in turn has resulted in increased net charge-offs and an increase in
the provision for credit losses. These conditions have resulted in a reduction in net earnings and have affected our borrowing capacity
under the line of credit facility.
The Company’s operating results over recent quarters provided indicators that the Company may not be able to continue to comply
with certain of the required financial ratios, covenants and financial tests prior to the maturity date of the line of credit facility in the
absence of an amendment to the corresponding credit agreement. Failure to meet any financial ratios, covenants or financial tests
could result in an event of default under our line of credit facility. If an event of default occurs under the credit facility, our lenders
could increase our borrowing costs, restrict our ability to obtain additional borrowings under the facility, accelerate all amounts
outstanding under the facility, or enforce their interest against collateral pledged under the facility.
The Company is in the process of providing information to the agent bank in the loan consortium, in the ordinary course of business as
well as making changes in our policies and procedures which we believe will be successful in addressing some of the issues related to
loan quality. We are also developing information pertaining to our expected borrowing needs, including proposed covenants,
determination of lending levels and availability and other considerations to be submitted to the agent bank to assist in addressing the
renewal of credit upon expiration of the Line in January 2018. The Company has a longstanding relationship with its lenders. While
management believes that it will be able to obtain a renewal or extension of the credit facility, there are no assurances that the lenders
will approve the renewal or extension, or, assuming that they will approve it, that the facility will not be on terms less favorable than
the current agreement. In the event that the Company obtains information that the existing lenders do not intend to extend the
relationship, the Company will seek alternative financing. The Company believes it is probable that it will be able to obtain financing
from either its existing lenders or from other sources; however, it can provide no assurances that it will be successful in replacing the
line of credit facility on reasonable terms or at all.
6. Interest Rate Swap Agreements
The Company utilizes interest rate swap agreements to manage exposure to variability in expected cash flows attributable to interest
rate risk. The interest rate swap agreements convert a portion of the Company’s floating rate debt to a fixed rate, more closely
matching the interest rate characteristics of the Company’s finance receivables. As of the twelve months ended March 31, 2017 and
2016, no new contracts were initiated and no contracts matured.
The Company currently has two interest rate swap agreements. A June 4, 2012 interest rate swap agreement provides for a five-year
term in which the Company pays a fixed rate of 1% and receives payments from the counterparty on the 1-month LIBOR rate. This
interest rate swap agreement has an effective date of June 13, 2012 and a notional amount of $25.0 million. A July 30, 2012 agreement
provides for a five-year term in which the Company pays a fixed rate of 0.87% and receives payments from the counterparty on the 1-
month LIBOR rate. This interest rate swap agreement has an effective date of August 13, 2012 and a notional amount of
$25.0 million.
47
6. Interest Rate Swap Agreements (continued)
The locations and amounts of gains (losses) recognized in income are detailed as follows for the fiscal years ended March 31:
Periodic change in fair value of interest rate swap agreements
Periodic settlement differentials included in interest expense
Gain (loss) recognized in income
(In thousands)
2017
$ 222
(179)
$ 43
2016
$ (24)
(343)
$(367)
Net realized gains (losses) from the interest rate swap agreements were recorded in the interest expense line item of the consolidated
statements of income.
The following table summarizes the average variable rates received and average fixed rates paid under the interest rate swap
agreements as of March 31:
Average variable rate received
Average fixed rate paid
7. Fair Value Disclosures
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
2017
0.58%
0.94%
2016
0.26%
0.94%
The Company estimates the fair value of interest rate swap agreements based on the estimated net present value of the future cash
flows using a forward interest rate yield curve in effect as of the measurement period, adjusted for nonperformance risk, if any,
including a quantitative and qualitative evaluation of both the Company’s credit risk and the counterparty’s credit risk. Accordingly,
the Company classifies interest rate swap agreements as Level 2.
Description
Interest rate swap agreements:
March 31, 2017 – asset:
March 31, 2016 – liability:
Financial Instruments Not Measured at Fair Value
Fair Value Measurement Using
(In thousands)
Level 1
Level 2
Level 3
Fair
Value
$ —
$ —
$
17
$ (205)
$ —
$ —
$ 17
$ (205)
The Company’s financial instruments consist of cash, finance receivables and the Line. 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 range from 12 to 72 months. The initial terms of the Direct Loans range from 12 to 72 months. If
liquidated outside of the normal course of business, the amount received may not be the carrying value.
48
7. Fair Value Disclosures (continued)
Based on current market conditions, any new or renewed credit facility would contain pricing that approximates the Company’s
current Line. Based on these market conditions, the fair value of the Line as of March 31, 2017 was estimated to be equal to the book
value. The interest rate for the Line is a variable rate based on LIBOR pricing options.
Description
Cash:
March 31, 2017
March 31, 2016
Finance receivables:
March 31, 2017
March 31, 2016
Line of credit:
March 31, 2017
March 31, 2016
Fair Value Measurement Using
(In thousands)
Level 1
Level 2
Level 3
Fair
Value
Carrying
Value
$ 2,855
$ 1,849
$ —
$ —
$ —
$ —
$
$
2,855
1,849
$
$
2,855
1,849
$ —
$ —
$ —
$ —
$ 317,205
$ 311,837
$ 317,205
$ 311,837
$ 317,205
$ 311,837
$ —
$ —
$ 213,000
$ 211,000
$ —
$ —
$ 213,000
$ 211,000
$ 213,000
$ 211,000
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis. The
Company did not have any assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2017 and 2016.
8. Income Taxes
The provision for income taxes consists of the following for the years ended March 31:
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Income tax expense
$ 4,563
724
5,287
(1,688)
(268)
(1,956)
$ 3,331
2017
(In thousands)
2016
2015
$ 7,688
1,196
8,884
308
48
356
$ 6,964
1,054
8,018
(254)
(38)
(292)
$ 7,726
$ 9,240
The net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes are reflected in deferred income taxes. Significant components of the Company’s deferred
tax assets consist of the following as of March 31:
Allowance for credit losses not currently deductible for tax
purposes
Share-based compensation
Interest rate swap agreements
Other items
Deferred income taxes
(In thousands)
2017
2016
$7,742
487
(6 )
282
$8,505
$5,918
491
78
128
$6,615
49
8. Income Taxes (continued)
The provision for income taxes reflects an effective U.S tax rate, which differs from the corporate tax rate for the following reasons:
Provision for income taxes at Federal statutory rate
Increase (decrease) resulting from:
State income taxes, net of Federal benefit
Transaction costs
Other
Income tax expense
2017
$3,059
297
—
(25)
$3,331
(In thousands)
2016
$ 7,037
660
—
29
$ 7,726
2015
$9,134
809
(734)
31
$9,240
The Company’s effective tax rate decreased to 38.11% in fiscal 2017 from 38.43% in fiscal 2016. The effective rate was 35.41% in
fiscal 2015. The Company had approximately $2.1 million of previously non-deductible expenses associated with the potential sale of
the Company in 2014. Since the sale of the Company was not consummated, the $2.1 million became deductible in 2015 creating a
favorable effective tax rate.
9. Share-Based Payments
The Company has share awards outstanding under two share-based compensation plans (the “Equity Plans”). The Company believes
that such awards generally align the interests of its employees with those of its shareholders. Under the shareholder-approved 2006
Equity Incentive Plan (the “2006 Plan”) the Board of Directors was authorized to grant option awards for up to approximately
1.1 million common shares. On August 13, 2015, the Company’s shareholders approved the Nicholas Financial, Inc. Omnibus
Incentive Plan (the “2015 Plan”) for employees and non-employee directors. Under the 2015 Plan, the Board of Directors is
authorized to grant total share awards for up to 750,000 common shares. Awards under the 2006 Plan will continue to be governed by
the terms of that plan. The 2015 Plan replaced the 2006 Plan; accordingly, no additional option awards may be granted under the 2006
Plan. In addition to option awards, the 2015 Plan provides for restricted stock, restricted stock units, performance shares, performance
units, and other equity-based compensation.
Option awards previously granted to employees and directors under the 2006 Plan generally vest ratably based on service over a five-
and three-year period, respectively, and generally have a contractual term of ten years. Vesting and contractual terms for option
awards under the 2015 Plan are essentially the same as those of the 2006 Plan. Restricted stock awards generally cliff vest over a
three-year period based on service conditions. Vesting of performance units generally does not commence until the attainment of
Company-wide performance goals including annual revenue growth and operating income targets. There are no post-vesting
restrictions for share awards.
The Company funds share awards from authorized but unissued shares and does not purchase shares to fulfill its obligations under the
Equity Plans. Cash dividends, if any, are not paid on unvested performance units or unexercised options, but are paid on unvested
restricted stock awards.
The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
Risk-free interest rate
Weighted average expected original term
Expected volatility
Expected dividend yield
2016
1.58%
5 years
23%
0.00%
2015
1.68%
5 years
23%
3.65%
The Company did not grant any options during the year ended March 31, 2017.
50
9. Share-Based Payments (continued)
A summary of option activity under the Equity Plans as of March 31, 2017, and changes during the year are presented below.
Options
Outstanding at March 31, 2016
Granted
Exercised
Forfeited
Outstanding at March 31, 2017
Exercisable at March 31, 2017
(Shares and Aggregate Intrinsic Value in thousands)
Weighted
Average
Exercise
Price
$ 10.07
$ —
$
5.76
$ 12.36
$ 10.08
Shares
357
—
(9)
(15)
333
244
$
8.78
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
4.75
3.79
$
$
663
663
The Company did not grant options during the year ended March 31, 2017. The total intrinsic value of options exercised during the
years ended March 31, 2017, 2016 and 2015 was approximately $46,500, $82,000, and $1,829,000 respectively.
During the fiscal year ended March 31, 2017, approximately 9,000 options were exercised at exercise prices ranging from $1.20 to
$8.21 per share. During the same period, approximately 15,000 options were forfeited at exercise prices ranging from $11.44 to
$12.97 per share.
Cash received from options exercised during the fiscal years ended March 31, 2017, 2016 and 2015 totaled approximately $50,000,
$85,000, and $389,000, respectively. As of March 31, 2017, there was approximately $137,500 of total unrecognized compensation
cost related to options granted. That cost is expected to be recognized over a weighted-average period of approximately 2.6 years.
A summary of the status of the Company’s non-vested restricted shares under the Equity Plan as of March 31, 2017, and changes
during the year then ended is presented below.
Restricted Share Awards
Non-vested at March 31, 2016
Granted
Vested
Forfeited
Non-vested at March 31, 2017
(Shares and Aggregate Intrinsic Value in thousands)
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Weighted
Average
Grant Date
Fair Value
13.78
$
10.78
$
$
14.37
$ —
Shares
82
48
(40)
—
90
$
11.95
1.83
$
952
The Company awarded approximately 48,000 restricted shares during the fiscal year ended March 31, 2017. The Company granted
performance units which, if the employees had reached the maximum performance level, would have awarded approximately 18,000
restricted share awards. Included within the 48,000 restricted shares granted are approximately 10,000 shares that resulted from the
Company meeting a performance threshold, which is noted in the Executive Compensation Plan. During the same period, no restricted
shares were forfeited.
As of March 31, 2017, there was approximately $645,000 of total unrecognized compensation cost related to non-vested restricted
share awards granted under the Equity Plans. That cost is expected to be recognized over a weighted-average period of approximately
1.80 years.
51
10. Employee Benefit Plan
The Company has a 401(k)-retirement plan under which all employees are eligible to participate. Employee contributions are
voluntary and subject to Internal Revenue Service limitations. The Company did not make a discretionary matching employee
contribution. The Board will re-evaluate the Company’s matching policy for plan year 2018 later in 2017. For the fiscal years ended
March 31, 2017, 2016 and 2015, the Company recorded expenses of approximately $7,000 each year related to this plan.
11. Commitments and Contingencies
The Company leases corporate and branch offices under operating lease agreements which provide for annual minimum rental
payments as follows:
Fiscal Year Ending March 31
2018
2019
2020
2021
(In thousands)
2,023
$
1,557
756
75
$
4,411
Rent expense for the fiscal years ended March 31, 2017, 2016, and 2015 was approximately $2.4, $2.3, and $2.1 million respectively.
The Company recognizes rent expense on a straight-line basis over the term of the lease, taking into account, when applicable, lessor
incentives for tenant improvements, periods where no rent payment is required and escalations in rent payments over the term of the
lease.
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.
52
12. Quarterly Results of Operations (Unaudited)
Total revenue
Interest expense
Provision for credit losses
Non-interest expense
Operating income before income taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
Total revenue
Interest expense
Provision for credit losses
Non-interest expense
Operating income before income taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
Fiscal Year ended March 31, 2017
(In thousands, except earnings per share amounts)
First
Quarter
$ 22,915
2,244
7,026
8,939
4,706
1,803
Second
Quarter
$ 22,647
2,243
8,144
9,102
3,158
1,188
Third
Quarter
$ 22,044
2,258
8,796
8,403
Fourth
Quarter
$ 22,860
2,477
13,211
8,883
2,587
981
(1,711)
(641)
$ 2,903
$ 1,970
$ 1,606
$ (1,070)
$
$
0.37
0.37
$
$
0.25
0.25
$
$
0.21
0.21
$
$
(0.14)
(0.14)
Fiscal Year ended March 31, 2016
(In thousands, except earnings per share amounts)
First
Quarter
$ 22,025
2,166
4,989
8,915
Second
Quarter
$ 22,687
2,273
6,177
8,940
Third
Quarter
$ 22,757
2,311
7,599
8,422
5,955
2,285
5,297
2,041
4,425
1,698
Fourth
Quarter
$ 23,238
2,257
7,513
9,040
4,428
1,702
$ 3,670
$ 3,256
$ 2,727
$ 2,726
$
$
0.48
0.47
$
$
0.43
0.42
$
$
0.36
0.35
$
$
0.35
0.35
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure information required to be disclosed in its reports filed
pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Such information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required
disclosure. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the
Company’s disclosure controls and procedures or internal controls will prevent all possible error and fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
The Company’s management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of
March 31, 2017. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the
Company’s disclosure controls and procedures were effective as of March 31, 2017.
53
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of
financial statements in accordance with generally accepted accounting principles. The Company’s management, including our Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial
reporting as of March 31, 2017, the end of the fiscal year covered by this Report, based on the criteria set forth in Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
management’s evaluation under the framework in Internal Control-Integrated Framework, management has concluded that the
Company’s internal control over financial reporting was effective as of March 31, 2017.
Dixon Hughes Goodman LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control
over financial reporting as of March 31, 2017, as stated in their report, which is included below.
June 14, 2017
Ralph T. Finkenbrink
President and Chief Executive Officer
Katie L. MacGillivary
Vice President-Finance and Chief Financial Officer
Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the Company’s last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Nicholas Financial, Inc.
We have audited Nicholas Financial, Inc. and Subsidiaries (the “Company”) internal control over financial reporting as of March 31,
2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“the COSO criteria”). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31,
2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements of Nicholas Financial, Inc. as of and for the year ended March 31, 2017, and our report dated
June 14, 2017, expressed an unqualified opinion.
/s/ Dixon Hughes Goodman LLP
Atlanta, Georgia
June 14, 2017
55
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information to be set forth under the captions “Proposal 1: Election of Directors,” “Board of Directors,” “Executive Officers and
Compensation” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement and Information
Circular for the 2017 Annual General Meeting of Shareholders of the Company (the “Proxy Statement”), is incorporated herein by
reference.
The Company has adopted a written code of ethics applicable to its chief executive officer, chief financial officer, principal accounting
officer and persons performing similar functions. A copy of the code of ethics is posted on the Company’s web site at
www.nicholasfinancial.com. The Company intends to satisfy the disclosure requirements under Item 5.05 of the SEC’s Current Report
on Form 8-K regarding amendments to, or waivers from, the code of ethics by posting such information on the Company’s web site at
www.nicholasfinancial.com. The Company is not including the information contained on or available through its web site as a part of,
or incorporating such information by reference into, this Report.
Item 11. Executive Compensation, Compensation Interlocks and Insider Participation
The information to be set forth under the captions “Executive Officers and Compensation” and “Board of Directors” in the Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth certain information, as of March 31, 2017, with respect to compensation plans under which equity
securities of the Company were authorized for issuance:
EQUITY COMPENSATION PLAN INFORMATION
(In thousands, except exercise price)
Plan Category
Equity Compensation Plans Approved
by Security Holders
Equity Compensation Plans Not
Approved by Security Holders
TOTAL
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
Weighted – Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
(a)
(b)
(c)
333
$
10.08
None
Not Applicable
333
$
10.08
654
None
654
The information to be set forth under the caption “Voting Shares and Ownership of Management and Principal Holders” in the Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, Director Independence and Board of Directors
The information to be set forth under the captions “Board of Directors” and “Certain Relationships and Related Transactions” in the
Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information to be set forth under the caption “Ratification of Appointment of Independent Auditors” in the Proxy Statement is
incorporated herein by reference.
56
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Report:
PART IV
(1) Financial Statements
See Part II, Item 8, of this Report.
(2) Financial Statement Schedules
All financial schedules are omitted as the required information is not applicable or the information is presented in
the consolidated financial statements or related notes.
(3) Exhibits
Description
Articles of Nicholas Financial, Inc. (1)
Notice of Articles of Nicholas Financial, Inc. (2)
Form of Common Stock Certificate (3)
Second Amended and Restated Loan and Security Agreement, dated as of January 12, 2010, by and among Nicholas
Financial Inc., a Florida corporation, Bank of America, N.A., as agent, and each of the Lenders parties thereto (4)
Amendment No. 1, dated as of September 1, 2011, to Second Amended and Restated Loan and Security Agreement,
dated as of January 12, 2010, by and among Nicholas Financial Inc., a Florida corporation, Bank of America, N.A., as
agent, and each of the Lenders parties thereto (5)
Amendment No. 2, dated as of December 21, 2012, to Second Amended and Restated Loan and Security Agreement,
dated as of January 12, 2010, by and among Nicholas Financial Inc., a Florida corporation, Bank of America, N.A., as
agent, and each of the Lenders parties thereto (6)
Amendment No. 3, dated as of November 14, 2014, to Second Amended and Restated Loan and Security Agreement,
dated as of January 12, 2010, by and among Nicholas Financial, Inc., a Florida corporation, Bank of America, N.A., as
agent, and each of the Lenders parties thereto (7)
Amendment No. 4, dated as of January 30, 2015, to Second Amended and Restated Loan and Security Agreement,
dated as of January 12, 2010, by and among Nicholas Financial, Inc., a Florida corporation, Bank of America, N.A., as
agent, and each of the Lenders parties thereto (8)
Amendment No. 5, dated as of December 30, 2016, to Second Amended and Restated Loan and Security Agreement,
dated as of January 12, 2010, by and among Nicholas Financial, Inc., a Florida corporation, Bank of America, N.A., as
agent, and each of the Lenders parties thereto (9)
Nicholas Financial, Inc. Employee Stock Option Plan (10)*
Nicholas Financial, Inc. Non-Employee Director Stock Option Plan (11)*
Employment Agreement (as Amended and Restated), dated July 2, 2015, between Nicholas Financial, Inc. and Ralph
T. Finkenbrink, President and Chief Executive Officer (12) *
Employment Agreement (as Amended and Restated), dated July 2, 2015, between Nicholas Financial, Inc. and Kevin
D. Bates, Senior Vice President-Branch Operations (13)*
Employment Agreement dated July 2, 2015, between Nicholas Financial, Inc. and Katie L. MacGillivary, Chief
Financial Officer and Vice President of Finance (14)*
Summary of Fiscal 2016/2017/2018 Annual Incentive Programs*
Nicholas Financial, Inc. 2015 Omnibus Incentive Plan (15)*
Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Stock Option Award (16)*
Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Restricted Stock Award (17)*
Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Performance Share Award (18)*
Exhibit
No.
3.1
3.2
4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
57
10.17
10.18
10.19
ISDA Master Agreement, dated as of March 30, 1999, between Bank of America, N.A. and Nicholas Financial,
Inc. (19)
Letter Agreement, dated June 4, 2012, and effective June 13, 2012, by and between Nicholas Financial, Inc. and Bank
of America, N.A. relating to interest-rate swap transaction (20)
Letter Agreement, dated June 30, 2012, and effective August 13, 2012, by and between Nicholas Financial, Inc. and
Bank of America, N.A. relating to interest-rate swap transaction (21)
10.20
Form of Dealer Agreement and Schedule thereto listing dealers that are parties to such agreements
14
21
23
24
31.1
31.2
32.1
32.2
Code of Ethics for Chief Executive Officer and Senior Financial Officers
Subsidiaries of Nicholas Financial, Inc. (22)
Consent of Dixon Hughes Goodman LLP
Powers of Attorney (included on signature page hereto)
Certification of President and Chief Executive Officer
Certification of Vice President and Chief Financial Officer
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. § 1350
Certification of the Chief 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)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive
officer of the Company participated.
Incorporated by reference to Appendix B to the Company’s Proxy Statement and Information Circular for the 2006 Annual
General Meeting of Shareholders filed with the SEC on June 30, 2006 (File No. 0-26680).
Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 filed with the SEC on May 24,
2007 (SEC File No. 0-26680).
Incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended March 31,
2004, as filed with the SEC on June 29, 2004.
Incorporated by reference to Exhibit 10.1 to the Company’s Amendment No. 1 to Quarterly Report on Form 10-Q/A for the
fiscal quarter ended December 31, 2009, as filed with the SEC on March 23, 2010.
Incorporated by reference to Exhibit 10.1.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2011, as filed with the SEC on November 9, 2011.
Incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,
2013, as filed with the SEC on June 14, 2013.
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated November 14, 2014, as filed
with the SEC on November 18, 2014.
Incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 2014, as filed with the SEC on February 9, 2015.
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated January 11, 2017, as filed with
the SEC on January 11, 2017.
Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 filed with the SEC on June 30,
1999 (SEC File No. 333-81967).
Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 filed with the SEC on June 30,
1999 (SEC File No. 333-81961).
Incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,
2016, as filed with the SEC on June 14, 2016.
Incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,
2016, as filed with the SEC on June 14, 2016.
Incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,
2016, as filed with the SEC on June 14, 2016.
58
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
Incorporated by reference to Appendix A to the Company’s Proxy Statement and Information Circular for the 2015 Annual
General Meeting of Shareholders, as filed with the SEC on July 6, 2015.
Incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,
2016, as filed with the SEC on June 14, 2016.
Incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,
2016, as filed with the SEC on June 14, 2016.
Incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,
2016, as filed with the SEC on June 14, 2016.
Incorporated by reference to Exhibit 10.10 to Amendment No. 2 to the Company’s Registration Statement on Form S-2 (Reg.
No. 333-113215), as filed with the SEC on April 7, 2004
Incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,
2013, as filed with the SEC on June 14, 2013.
Incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,
2013, as filed with the SEC on June 14, 2013.
Incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended March 31,
2004, as filed with the SEC on June 29, 2004.
59
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Dated: June 14, 2017
By: /s/ Ralph T. Finkenbrink
NICHOLAS FINANCIAL, INC.
Ralph T. Finkenbrink
Chief Executive Officer and President
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Ralph T.
Finkenbrink and Katie L. MacGillivary, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all exhibits thereto, and any other documents in connection therewith, with the
U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority
to perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents or either of
them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Ralph T. Finkenbrink
Ralph T. Finkenbrink
/s/ Katie L. MacGillivary
Katie L. MacGillivary
/s/ Kevin D. Bates
Kevin D. Bates
/s/ Todd Pfister
Todd Pfister
/s/ Robin Hastings
Robin Hastings
/s/ Scott Fink
Scott Fink
Chief Executive Officer, President and Director
June 14, 2017
Chief Financial Officer, Vice President – Finance
June 14, 2017
Sr. Vice President-Branch Operations and Director
June 14, 2017
June 14, 2017
June 14, 2017
June 14, 2017
Director
Director
Director
60
Exhibit
No.
3.1
3.2
4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
EXHIBIT INDEX
Description
Articles of Nicholas Financial, Inc.*
Notice of Articles of Nicholas Financial, Inc.*
Form of Common Stock Certificate*
Second Amended and Restated Loan and Security Agreement, dated as of January 12, 2010, by and among Nicholas
Financial Inc., a Florida corporation, Bank of America, N.A., as agent, and each of the Lenders parties thereto*
Amendment No. 1, dated as of September 1, 2011, to Second Amended and Restated Loan and Security Agreement, dated
as of January 12, 2010, by and among Nicholas Financial Inc., a Florida corporation, Bank of America, N.A., as agent,
and each of the Lenders parties thereto*
Amendment No. 2, dated as of December 21, 2012, to Second Amended and Restated Loan and Security Agreement,
dated as of January 12, 2010, by and among Nicholas Financial Inc., a Florida corporation, Bank of America, N.A., as
agent, and each of the Lenders parties thereto*
Amendment No. 3, dated as of November 14, 2014, to Second Amended and Restated Loan and Security Agreement,
dated as of January 12, 2010, by and among Nicholas Financial, Inc., a Florida corporation, Bank of America, N.A., as
agent, and each of the Lenders parties thereto*
Amendment No. 4, dated as of January 30, 2015, to Second Amended and Restated Loan and Security Agreement, dated
as of January 12, 2010, by and among Nicholas Financial, Inc., a Florida corporation, Bank of America, N.A., as agent,
and each of the Lenders parties thereto*
Amendment No. 5, dated as of December 30, 2016, to Second Amended and Restated Loan and Security Agreement,
dated as of January 12, 2010, by and among Nicholas Financial, Inc., a Florida corporation, Bank of America, N.A., as
agent, and each of the Lenders parties thereto*
Nicholas Financial, Inc. Employee Stock Option Plan*
Nicholas Financial, Inc. Non-Employee Director Stock Option Plan*
Employment Agreement (as Amended and Restated), dated July 2, 2015, between Nicholas Financial, Inc. and Ralph
T. Finkenbrink, President and Chief Executive Officer*
Employment Agreement, (as Amended and Restated), dated July 2, 2015, between Nicholas Financial, Inc. and Kevin D.
Bates, Senior Vice President-Branch Operations*
Employment Agreement, dated July 2, 2015, between Nicholas Financial, Inc. and Katie L. MacGillivary, Chief Financial
Officer and Vice President of Finance*
Summary of Fiscal 2016/2017/2018 Annual Incentive Bonus Programs
Nicholas Financial, Inc. 2015 Omnibus Incentive Plan*
Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Stock Option Award*
Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Restricted Stock Award*
Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Performance Share Award*
ISDA Master Agreement, dated as of March 30, 1999, between Bank of America, N.A. and Nicholas Financial, Inc.*
Letter Agreement, dated June 4, 2012, and effective June 13, 2012, by and between Nicholas Financial, Inc. and Bank of
America, N.A. relating to interest-rate swap transaction*
Letter Agreement, dated July 30, 2012, and effective August 13, 2012, by and between Nicholas Financial, Inc. and Bank
of America, N.A. relating to interest-rate swap transaction*
10.20
Form of Dealer Agreement and Schedule thereto listing dealers that are parties to such agreements
14
21
23
Code of Ethics for Chief Executive Officer and Senior Financial Officers
Subsidiaries of Nicholas Financial, Inc.*
Consent of Dixon Hughes Goodman LLP
24
31.1
31.2
32.1
32.2
Powers of Attorney (included on signature page hereto)
Certification of President and Chief Executive Officer
Certification of Senior Vice President and Chief Financial Officer
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. § 1350
Certification of the Chief 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
* Incorporated by reference
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F R O M T H E P R E S I D E N T
S H A R E H O L D E R
I N F O R M A T I O N
Corporate Offices:
Stock Information:
Nicholas Financial, Inc.
2454 McMullen Booth Road
Clearwater, Florida 33759
Listed on the NASDAQ National
Market System
Trading Symbol: NICK
Directors:
Ralph T. Finkenbrink
Chairman, CEO & President
Kevin Bates
Senior Vice President - Operations
Scott Fink
Compensation Committee Chairman
Owner,
Multiple Franchise Auto Dealerships
Robin Hastings
Audit Committee Chairman
Former COO
United Maritime Group
Todd Pfister
Nominating & Corporate Governance
Committee Chairman
Former Partner
Foley & Lardner LLP
Independent Auditors:
Dixon Hughes Goodman
Atlanta, Georgia
Transfer Agent & Registrar:
Computershare Investor Services
Vancouver, BC, Canada V6C 3B9
Corporate Officers:
Ralph T. Finkenbrink
CEO & President
Kevin Bates
Senior Vice President
Katie MacGillivary
Vice President - Finance & CFO
Corporate Secretary
Notice To Shareholders:
The Company will supply to any owner
of Common Stock, upon written request
to the Company at the above address
and without charge, a copy of the An-
nual Report on Form 10-K for the year
ended March 31, 2017, which has been
filed with the Securities and Exchange
Commission.
The Annual Report and 10-K are also avail-
able on the Company's internet website
at:
www.nicholasfinancial.com
Nicholas Financial, Inc.
2454 McMullen-Booth Road N.
Building C
Clearwater, FL 33759
(727) 726-0763