Nicholas Fi NaNci a l , i N c.
Nicholas Financial, Inc.
2454 McMullen-Booth Road
Building C
Clearwater, Florida, 33759 USA
Telephone
Fax
-
-
(727) 726-0763
(727) 726-2140
www.NicholasFinancial.com
2018 aN N ua l R epoRt
A NASDAQ traded company
www.NicholasFinancial.com
S H A R E H O L D E R
I N F O R M A T I O N
Nicholas Financial, Inc. provides direct consumer loans and purchases installment sales con-
tracts from automobile dealers for used cars and light trucks. Nicholas Financial operates a network
of 60+ locations in Florida, Alabama, Georgia, Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri,
North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas and Virginia. The Company’s
stock has been publicly traded since 1987. The company is listed on the NASDAQ-GS Global Select
Market under the symbol, NICK. The NASDAQ Global Select Market includes companies which have
financial and liquidity requirements that are higher than those of any other market.
“As we recommit to our branch model, we also recommit to the niche market we serve.
We finance primary transportation to and from work for the subprime borrower.”
- Doug Marohn
From the President ...................................................1
Form 10-K Annual Report ................................... Insert
NFI Shareholder Information Inside Back Cover
F R O M T H E P R E S I D E N T
T he fiscal year ended March 31, 2018 concluded our 33rd year
in business and our 31st year as a public company. Over those 33
years, Nicholas Financial has celebrated many milestones, marked
countless accomplishments, experienced great success, and – most
importantly - produced consistent returns for our shareholders.
The last several years, though, have been a real challenge, and our
results have not been good. It is true that the last few years have
been some of the most competitive in the history of our industry
with more and more lenders entering the space offering lower rates
and higher advances on customers with weaker credit. As a result,
it has been more difficult to acquire new contracts on the terms we
desire and the customer parameters we want.
But this is the not first time our industry has experienced a peak
in the competitive cycle (and it won’t be the last). We had similar
situations in the mid to late 1990’s, again in the early 2000’s and
more recently in 2008 and 2009. The difference during those earlier cycles and this one is that Nicholas
managed to continue to produce exceptional results, whereas these last few years have been the worst earn-
ings periods in the history of the Company. So, what is different now as opposed to then?
Doug Marohn
President & CEO
To answer that, it is important to look at the core principles on which Nicholas Financial was originally
founded. These are the exact reasons why we were so successful for so long. First and foremost, we began
as a company that offered true “common sense” lending in the subprime space. We focused on financing
primary transportation to and from work for the subprime customer. We did not finance luxury vehicles,
second cars or weekend / recreational units. We only financed basic
transportation for our customers, and as such we focused on
modest amounts financed over shorter terms and with rea-
sonable payments.
We also remained extremely disciplined in our deci-
sion making and underwriting processes. We always
conducted upfront investigations and verifications
so that we were dealing with facts when making a
lending decision. We also interviewed most custom-
ers upfront prior to making a decision, allowing us
to better understand the overall credit and financial
aspects of that customer. This allowed us to structure
a deal that truly matched that customer’s situation and
also gave comfort to the dealer that they could count on
getting funded quickly, since everything was already veri-
fied and confirmed on our end.
1
F R O M T H E P R E S I D E N T
F R O M T H E P R E S I D E N T
We understood what a subprime deal was and -
more importantly what was not. We knew that a
true subprime deal did not warrant a larger dollar
amount financed and advance to the dealer, a lower
APR, a smaller discount, nor a longer term. We un-
derstood the need to offset the inherent risk of this
business with high enough yields to cover expenses
and losses. We also understood the benefit of short-
er-term deals that allow the customer to pay off or
trade out of their vehicles in a timely fashion.
We operated a branch-based business model that
empowered our employees to perform and rewarded
them for profitable operations. We did not just in-
centivize our offices based on new loan volume but
always included delinquency and charge-off param-
eters as a check and balance. The overarching in-
centive plan for our Branch Managers was a Quar-
terly ROA plan that rewarded the managers more
aggressively the higher the ROA they achieved.
We never lost sight of the importance of excellent
service to both our dealers and our borrowing cus-
tomers. Our branch-based model gave us a unique
advantage over our competition in this respect.
This advantage was evident in that we would rarely
be beat in terms of service. Our Branch Managers
were not just reps, but true professionals with full
lending authority. Our branches handled all as-
pects of the process from underwriting and fund-
ing through the servicing of the loan.
Our approach allowed us to be the most f lexible
in terms of approving deals that made sense. We
could fund new contracts for dealers more quickly
than anyone in the business (and would often
hand deliver proceeds to the dealer in person).
Our customers had a local branch that they could
visit to take care of business. In short, it was our
relationships with both our dealer partners and
borrowing customers that set us apart.
Finally, we never – never – chased competition.
When the cycles would turn and competition got
overly aggressive, we chose to sacrifice growth for
profit. We continued to buy deals under our terms.
If that meant we got a lesser share of the business
for the short term, then that was okay, because we
knew it would pay off in the long term. We took
the straight shots, but we left the bank shot for the
other lenders.
And that worked for an extremely long time.
But somehow, shortly thereafter, we lost our way.
After a few years of leveling off in 2013 through
2015, we began to feel the pressure of increasing
competition and a more difficult environment.
During this cycle we did not stay true to our roots
and we began to chase competition. We allowed
ourselves to stretch on advance, yield, term and
credit quality, all for the sake of maintaining vol-
ume and holding on to market share.
The inadvertent result was that we became more
focused on volume and growth, and we were not
as focused on maintaining our discipline. We
produced larger deals with lower yields and longer
exposure. The unintended consequence was ris-
ing delinquency and mounting losses, which drove
down our earnings. The Company and prior man-
agement tried several things to mitigate what had
become an avalanche of losses and provision ex-
pense.
Nicholas’ “Core Principles” worked for an extremely long time . . . But somehow “We Lost Our Way”
Record Annual Profits - $22 Million in ‘12
Chased the Competition
Reputation as a Disicplined Lender
Became more Focused on Growth
Slow & Steady Branch Expansion
Positive Earnings Every Year
Net Income
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
13 14 15 16 17 18
Lost some of our Discipline
Became Volume Driven
Semi-Centralization -
Worst of Both Worlds
2
F R O M T H E P R E S I D E N T
F R O M T H E P R E S I D E N T
The Company created additional lending tiers,
brought in the use of alternative data, tried to cre-
ate a more scorecard-driven underwriting model,
attempted to centralize funding, and brief ly took
servicing out of the field only to return it
to the branches a few months later.
Unfortunately, these new ef-
forts and initiatives did not
have the desired impact as
we increased expenses by
adding additional layers,
decreased efficiency by
adding additional pro-
cesses and drastically
lowered business pro-
duction. The result was a
loss of the brand identity
Nicholas had established
in the field over the long
history of the Company. We
also continued to see margins
deteriorate by way of lowered
APR’s and discounts, larger deals and
longer monthly terms.
Since my return to the Company on December
12, 2017, however, we at Nicholas Financial have
recommitted ourselves to the core principles that
made us so successful for all of those years.
We are indeed a branch-based company and are
committed to remaining so. We understand and
accept the increased overhead that goes with that
model, but we are also committed to structuring
and pricing deals sufficiently to mitigate that in-
creased overhead.
We are also hyper focused on providing that best-
in-class service to dealers and customers that the
branch model allows us to offer. This service will
help us not only regain our share of the market but
will also help us control our delinquency and losses
better.
As we recommit to our branch model, we also re-
commit to the niche market we serve. Anyone who
works at Nicholas hears me say this maybe 10 to 15 (or
more) times a day. We finance primary transporta-
tion to and from work for the subprime borrower.
3
This means lower dollar deals with appropriate
yield on shorter terms. This allows us to mitigate
the risks inherent with true subprime loans by
way of covering the losses with enough margin to
produce a solid return. It also allows the
customer to re-establish their credit
and payoff or trade-out of their
loan more quickly.
In order to focus on the ve-
hicles and customer credit
profiles that support
this niche, we are also
recommitted to servic-
ing primarily the local
independent automobile
dealer. We can and will
still offer our product to
the franchise dealership,
but our core dealer is the
local independently owned
used car store. This approach
also positions us well from a com-
petitive perspective.
The other lenders that typically service inde-
pendent dealerships for subprime customers also
tend to have pricing more in line with Nicholas’
program. That means we are no longer competing
against lenders with materially lower rates, smaller
acquisition fees, and longer terms. This helps to
level the pricing playing field, and when the pricing
playing field is level, we can then compete on all
those things that our branch-based model gives us
the upper hand.
We have a branch office in every market we serve,
with a Branch Manager empowered to make deci-
sions and who is compensated for the entirety of
the operations. In short, the competition becomes
about service and relationships, and when it does
we rarely get beat.
This is more than just a theory. It is also more
than a look back at years gone by that are not rel-
evant to the here and now. In the short time since
I rejoined the Company, we have not only been able
to focus on these items – we have executed these
strategies.
F R O M T H E P R E S I D E N T
Fiscal Year
/ Quarter
Number of Contracts
Purchased
Principal Amount
Purchased
Average
Financed
Average
APR
Average
Discount %
Average
Term
2018
4
3
2
1
2017
4
3
2
1
9,767
2,814
2,365
2,239
2,349
14,619
3,677
3,846
3,592
3,504
109,575,099
29,253,725
27,378,449
25,782,056
27,160,869
170,941,206
42,629,274
45,941,459
41,540,401
40,830,072
11,219
10,396
11,577
11,515
11,563
11,693
11,593
11,945
11,565
11,609
22.4%
23.3%
21.7%
22.0%
22.3%
22.2%
22.3%
22.0%
22.3%
22.4%
7.4%
7.9%
6.9%
7.3%
7.6%
7.1%
7.3%
6.9%
7.0%
7.2%
54
50
54
55
55
57
56
57
57
57
In the 4th Quarter ended March 31, 2018, we were
able to reduce the average amount financed by as
much as $1,500. We also increased the average in-
terest rate by over 150 basis points and the average
discount by 100 basis points. We did this without
materially changing the average age or mileage on
the vehicles securing our accounts and without
materially changing the core credit profile of the
customers we financed.
We will continue to evaluate our operations and
make changes where necessary to continue to
improve the servicing of our accounts while we
continue to improve the parameters of our new
purchases. We also still face the very real challenge
of continued competition that exists in the market
place. The main difference now is we are not allow-
ing that competition to dictate the way we do busi-
ness. It is no longer about them. It is about us.
Now that we have gotten back to our core product,
we can begin focusing on marketing our program,
our product and the Nicholas brand more consis-
tently. The intention is to not only buy the right
deals with the right structures, but to buy at the
quantity levels that help us grow when possible.
That said we will remain more focused on profits
than on growth. For example, we had over $325
MIL in net receivables at the end of this fiscal
year, but we had our worst year in terms of Net
Income/Loss in the history of Nicholas. The last
time Nicholas Financial made $22 MIL was when
our net portfolio was about $240 MIL (in Fiscal
Year 2012). We are perfectly content liquidating
our portfolio down in terms of dollar size if that is
all that market conditions will allow, as long as we
are able to convert that portfolio to higher yielding
deals that perform with fewer losses and produce
better returns.
We still have a long way to go and a lot of work to
do. Although we have materially reduced our de-
linquency and have gotten control of our losses in
the 4th Quarter of Fiscal Year 2018, both of those
metrics are nowhere near where we want them.
I cannot express how excited I am to be back on
the Nicholas Financial Team, and how humbled I
am to be this Company’s CEO and President. My
pledge to each and every shareholder, employee,
dealer partner, borrowing customer and vendor is
to help return Nicholas Financial to the consistent,
secure and reliable company we have been known
to be for so long. Now more than ever, we are fo-
cused on our model and we are committed to our
business plan.
To all of you who have invested in Nicholas, thank
you for your support and continued faith in our
Company. On behalf of our Board of Directors,
our management team and all our employees, we
thank you for the confidence with which you have
entrusted us.
Doug Marohn
President & Chief Executive Officer
June, 2018
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(cid:7) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the fiscal year ended March 31, 2018
(cid:6) 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 (cid:6) No (cid:7)
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. (cid:6)
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 (cid:7) No (cid:6)
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 (cid:7) No (cid:6)
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. (cid:6)
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
(cid:6)
(cid:6)
Emerging growth company (cid:6)
Accelerated filer
(cid:6)
Smaller reporting company (cid:7)
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. (cid:6)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:6) No (cid:7)
At September 30, 2017, the aggregate market value of the Registrant’s common shares held by non-affiliates of the Registrant was
approximately $48.8 million.
As of June 22, 2018, approximately 12.6 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 7.9 million shares were entitled to vote).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement and Information Circular for the 2018 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
30
31
52
52
55
55
55
55
55
55
56
This Annual Report on Form 10-K (this “Report” or “Annual 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. and its subsidiaries (collectively the “Company”)
believes that the expectations reflected or implied in such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. 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 the availability of capital (including the ability to access bank financing), recently enacted, proposed or future legislation and
the manner in which it is implemented, including the effect of changes in tax law, such as the effect of the Tax Cuts and Jobs Act
(“TCJA”) that was enacted on December 22, 2017, fluctuations in the economy, the degree and nature of competition and its effects
on the Company’s financial results, fluctuations in interest rates, the effectiveness of the Company’s internal control over financial
reporting and disclosure controls and procedures, demand for consumer financing in the markets served by the Company, the
Company’s products and services, increases in the default rates experienced on automobile finance installment contracts
(“Contracts”), adverse regulatory changes in the Company’s existing and future markets, the Company’s intentions regarding strategic
alternatives, the Company’s ability to expand its business, including its ability to complete acquisitions and integrate the operations of
acquired businesses and to expand into new markets, and the Company’s ability to recruit and retain qualified employees. 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 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 used and
new automobiles and light trucks. To a lesser extent, Nicholas Financial also originates direct consumer loans (“Direct Loans”) and sells
consumer-finance related products. A second Florida subsidiary, Nicholas Data Services, Inc. (“NDS”), serves as the intermediate
holding company for Nicholas Financial.
Nicholas Financial-Canada, Nicholas Financial and NDS are hereafter collectively referred to as the “Company”. Nicholas Financial’s
operations accounted for 100% of the Company’s consolidated revenue for the fiscal years ended March 31, 2018, 2017 and 2016.
All financial information herein is designated in United States dollars. References to “fiscal 2018” are to our fiscal year ended
March 31, 2018, references to “fiscal 2017” are to our fiscal year ended March 31, 2017, and references to “fiscal 2016” are to our fiscal
year ended March 31, 2016.
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 Sections 13, 14 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 previously announced that it was re-evaluating its operational strategy and structure. Under its new management team,
however, the Company has elected to remain committed to its branch-based model and its core product of financing primary
transportation to and from work for the subprime borrower. The Company will strategically employ the use of centralized services
departments to supplement the branch operations and improve operational efficiencies, but its focus will be on its core business model
of decentralized operations. The Company’s strategy will also include pricing based on risk (rate, yield, advance, etc.) and a
commitment to the underwriting discipline required for optimal portfolio performance.
The Company’s principal goals are to increase its profitability and its long-term shareholder value through the measured acquisition of
Contracts in existing markets and broadening the geographic area in which its current branches operate. The Company seeks to
strengthen its automobile financing program in the seventeen states — Alabama, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky,
Michigan, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia and Wisconsin — in which it
currently operates by employing its core branch-based business model in each market it services, while supporting its branch network
with targeted centralized servicing departments. 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 branch
offices located in Sarasota, Florida, Toledo, Ohio and Troy, Michigan with other branches in those markets. During fiscal 2018, the
Company consolidated branch offices located in Dayton, Ohio, Doral, Florida and Villa Park, Illinois with other branches in those
markets. The Company also exited the Maryland market by closing its branch office located in Baltimore. The Company will continue
to evaluate any branch locations not meeting its minimum profitability targets and may elect to close additional branches in the future.
The Company also continues to look for expansion opportunities both in states in which it currently operates and in new states.
Although the Company cannot assert how many new markets it will enter (if any) in the foreseeable future, it does remain focused on
growing the branch network where conditions are favorable.
1
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 or lenders in bulk transactions as a means of further
penetrating its existing markets or expanding its presence in targeted geographic locations.
The Company is currently licensed to provide Direct Loans in Florida and North Carolina. The Company is considering the solicitation
of current customers in Florida and North Carolina for the purpose of selling Direct Loans to such customers, and the expansion of its
Direct Loan capabilities to the other states in which it acquires Contracts. Even with this targeted expansion, the Company expects its
total Direct Loans portfolio to remain between 3% and 10% of its total portfolio for the foreseeable future.
The Company cannot provide any assurances that it will be able to expand in either its current markets or any targeted new markets.
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, job instability, the age of the vehicle being financed or some other factor(s). 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 sixteen states
through a total of 60 branch offices, consisting of seventeen in Florida, six in Georgia, five in each of Ohio, Indiana, Kentucky, and
Missouri, two in each of North Carolina, Alabama, South Carolina, Tennessee, Texas, Michigan, and Virginia, and one in each of
Illinois, Kansas, and Pennsylvania. The Company acquires Contracts in Wisconsin using the underwriting staff of the Gurnee, Illinois
branch location. As of March 31, 2018, the Company had non-exclusive agreements with approximately 4,500 dealers, of which
approximately 1,400 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 60 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 and the creditworthiness of the customer. The Company has recommitted to maintaining
pricing discipline and therefore places less emphasis on competition when pricing the discount. 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. 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, 2018, 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 (a) the
Company has a first priority lien on the financed vehicle (or the Company has, in fact, perfected such first priority lien), (b) the
customer has obtained the required collision insurance naming the Company as loss payee with a deductible of not more than $1,000
and (c) 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.
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, 2018 was a 2011 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)
2018
$ 3,108
29,206
11,192
2,667
7,001
1,788
5,558
1,040
4,709
4,663
8,836
14,599
2,200
4,055
3,374
2,835
2,639
105
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
$ 109,575
$ 170,941
$ 187,275
(1) The maximum allowable interest rates are subject to change and vary based on the laws of the individual states.
(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)
2018
$109,575
22.35%
7.41%
54
$ 11,219
9,767
2017
$170,941
22.22%
7.08%
57
$ 11,693
14,619
2016
$187,275
22.66%
7.51%
56
$ 11,348
16,503
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
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 did not pursue a Direct
3
Loan license in any other state during fiscal year ending March 31, 2018 but expects to pursue licenses in one or more states in the
foreseeable future. The size of the loan and maximum interest rate that may be (and is) charged varies 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 2.4% of the Company’s annual consolidated revenues during
the year ended March 31, 2018.
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 62% of
the approximate 2,600 Direct Loan transactions outstanding as of March 31, 2018 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)
2018
$7,642
25.20%
29
$3,754
2,036
2017
$8,676
25.99%
30
$3,626
2,393
2016
$9,578
25.82%
30
$3,589
2,669
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: prior automobile account
repossessions, 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. In most cases, consumers are interviewed via telephone by a Company
application processor (usually the Branch Manager or Assistant Branch Manager). 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 underwriting 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 guidelines 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.
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.
4
The Company utilizes internal audit (the “IA”) to perform 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.
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 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 determination date is included on the delinquency report on the
first day that the Contract is contractually past due. Contracts acquired by the Company 180 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. If an account is 180 days delinquent and the related 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 customer 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.
Marketing and Advertising
The Company’s Contract marketing efforts currently are directed primarily 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 is evaluating and assessing 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.
5
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. Increased competition for the purchase of Contracts enabled automobile
dealers to shop for the best price, resulting in an erosion in the dealer discounts from the initial principal amounts at which the Company
was willing to purchase Contracts and higher advance rates. The Company’s average dealer discount on loans purchased for the fiscal
years ended March 31, 2017 and 2016 was 7.08% and 7.51%, respectively. Further, increased competition resulted in the purchase of
lower credit quality Contracts. However, with the Company’s recent change in management, it has begun to place less emphasis on
competition when pricing the dealer discount. The Company instead focuses on purchasing Contracts that are priced to reflect the
inherent risk level of the contract, and intends to sacrifice loan volume if necessary to maintain that pricing discipline. Primarily as a
result of this shift in focus for the fiscal year ended March 31, 2018, the Company’s average dealer discount on loans purchased
increased to 7.41%. The following table shows number and principal amount of Contracts purchased, average amount financed, average
term, and average APR and discount for the periods presented:
Fiscal Year
/Quarter
Number of
Contracts
purchased
Principal
Amount
purchased
Average
Financed
Average
APR
Average
Discount%
Average
Term
2018
9,767
109,575,099
11,219
22.4%
4
3
2
1
2,814
2,365
2,239
2,349
29,253,725
10,396
23.3%
27,378,449
11,577
21.7%
25,782,056
11,515
22.0%
27,160,869
11,563
22.3%
2017
14,619
170,941,206
11,693
22.2%
4
3
2
1
3,677
3,846
3,592
3,504
42,629,274
11,593
22.3%
45,941,459
11,945
22.0%
41,540,401
11,565
22.3%
40,830,072
11,609
22.4%
7.4%
7.9%
6.9%
7.3%
7.6%
7.1%
7.3%
6.9%
7.0%
7.2%
54
50
54
55
55
57
56
57
57
57
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. Over the course of
fiscal 2016, 2017 and most of fiscal 2018, the Company attempted to expand its product mix to include larger loans with lower APRs
and reduced discounts. With the recent change in management, the Company rededicated itself to its core product of financing primary
transportation to and from work for the subprime borrower and refocused on pricing integrity on those Contracts acquired. The
Company is committed to the branch-based model and believes that model allows it maintain pricing integrity through solid dealer
relationships and a knowledge of the local market.
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 used and new vehicles. No single dealer out of the approximately
6
1,400 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, 2018, 2017 or 2016.
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. If the Company
expands its Direct Loan operations to other states, it expects to become subject to similar on-site audits in such states.
• 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 regard 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.
7
• 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.
•
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 of 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, 2018, the Company employed a total of 299 persons, of which 55 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 have in the past experienced and may in the future experience high delinquency and loss rates in our portfolios. This has
reduced and may continue to 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 consolidated net (loss) income for the fiscal years ended March 31, 2018, 2017, and 2016 was $(1.1) million, $5.4 million and
$12.4 million, respectively. 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 primarily 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 and “Management’s Report on Internal Control over Financial
Reporting” in Item 9A of this Form 10-K, both of which are 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
9
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
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 used and new 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 generally resulted in declining Contract acquisition rates during the 2016, 2017 and 2018 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 on Contracts purchased for the fiscal years ended March 31, 2018, 2017, and 2016 was 7.41%, 7.08%, and 7.51%,
respectively. The Company’s weighted average APR on Contracts purchased for the fiscal years ended March 31, 2018, 2017, and 2016
was 22.35%, 22.22%, and 22.66%, respectively. These competitive factors continue to exist and may impact our ability to secure
quality loans on our preferred terms in significant quantities.
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.
Our business is particularly dependent on our ability to access bank financing at competitive rates. We currently use a $200.0 million
line of credit facility (the “Line of Credit”) with a consortium of lenders to finance a large portion of our Contract purchases and Direct
Loans. This Line of Credit has a maturity date of March 30, 2019. Our average indebtedness under the Line of Credit decreased to
$189.4 million in fiscal 2018 from $211.0 million in fiscal 2017 and $208.2 million in fiscal 2016.
Pledged as collateral for the Line of Credit are substantially all of the assets of the Company. The Line of Credit requires compliance
with certain financial ratios and covenants and satisfaction of specified financial tests, including maintenance of asset quality and
performance tests. In the years ended March 31, 2017 and 2018, the Company faced difficulties in complying with all of these
requirements. Had the Company not entered into amendment 6 and amendment 7 to the credit agreement in effect at such time, the
Company would not have been in compliance with the minimum interest coverage ratio of 1.5:1 as of June 30, 2017, September 30,
2017 and December 31, 2017, respectively. There can be no assurances that the Company will be able to comply with all of the financial
ratios, covenants and financial tests going forward. Failure to meet any financial ratios, covenants or financial tests could result in an
event of default under the Line of Credit. If an event of default occurs, our lenders could increase our borrowing costs, restrict our
ability to obtain additional borrowings under the Line of Credit, accelerate all amounts outstanding under the Line of Credit, or enforce
their interest against collateral pledged under the Line of Credit.
Since the borrowings available under the Line of Credit 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. During the fiscal year ended March
31, 2017 and the first nine months of the fiscal year ended March 31, 2018, the quality of the Company’s loan portfolio generally
deteriorated, which resulted in an increase in non-performing loans, an increase in delinquencies (with a decrease limited to the quarter
ended December 31, 2017) and other factors, which in turn resulted in increased net charge-offs and an increase in the provision for
credit losses. These conditions affected our borrowing capacity under the Line of Credit. In addition, the maximum amount that may be
borrowed under our Line of Credit was recently reduced from $225 million to $200 million as of March 30, 2018.
While management believes that it will be able to obtain renewals or extensions of the Line of Credit beyond its current maturity date,
there are no assurances that the lenders will approve the renewal or extension, or, assuming they will approve it, that the renewal or
10
extension will not be on terms less favorable than the current agreement. The Company may also determine to seek alternative
financing, including but not limited through the issuance of equity or debt. We may not be able to raise additional funds on acceptable
terms, or at all. If we are unable to secure sufficient capital to fund our operating activities, whether through use of the Line of Credit or
through the issuance of equity or debt, we may be required to curtail portions of our strategic plan and, in certain circumstances, we may
be forced to liquidate. Any equity financings may cause substantial dilution to our stockholders and could involve the issuance of
securities with rights senior to the common stock. Any allowed debt financings 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
our business model, and the offering terms, among other things.
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 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, to the extent we otherwise would be in a position to do so. 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. 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 thirty percent (30%) 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 1.00:1 calculated as of the last day of each month for the
three-month 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); or
• Failure to maintain appropriate ratios as it pertains to the Accelerated 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;
11
• ongoing operating expenses;
• planned expansions by opening additional branch offices; and
• any required income tax payments.
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.
If we fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures, we
may not be able to accurately and timely report our financial results, which could lead to a loss of investor confidence in our
financial statements and have an adverse effect on our stock price.
Effective internal control over financial reporting and disclosure controls and procedures are necessary for us to provide reliable and
accurate financial statements, to effectively prevent fraud and to operate successfully as a public company. As further described in Item
9A. Controls and Procedures, our management has concluded that, because of a material weakness, our internal control over financial
reporting and our disclosure controls and procedures were not effective as of March 31, 2018. The Company has and will continue to
enhance its controls and expects to remediate the material weakness. However, we cannot be certain that these measures will be
successful or that we will be able to prevent future significant deficiencies or material weaknesses. Inadequate internal control over
financial reporting or inadequate disclosure controls and procedures could cause investors to lose confidence in our reported financial
information, which could hurt our reputation and have a negative effect on the trading price of our stock and our access to capital.
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
12
financial performance. Also, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations under Title X, the
Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders
available to the CFPB (but not for civil penalties). If the CFPB or one or more state officials believe we have violated the foregoing
laws, they could exercise their enforcement powers in ways that would have a material adverse effect on us. See “Item 1. Business –
Regulation” for additional information.
Pursuant to the authority granted to it under the Dodd-Frank Act, the CFPB adopted rules that subject larger nonbank
automobile finance companies 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 used and new vehicles;
• debt collection practices;
•
proper disclosure to customers regarding financing terms;
• privacy regarding certain customer data;
•
•
•
•
interest rates on loans to customers;
late fees and insufficient fees charged;
telephone solicitation of Direct Loan customers; and
collection of debts from loan customers who have filed bankruptcy.
We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with
all applicable local, state and federal regulations. Our failure, or the failure by dealers who originate the contracts we purchase, to
maintain all requisite licenses and permits, and to comply with other regulatory requirements, could result in consumers having rights of
rescission and other remedies that could have a material adverse effect on our financial condition. Furthermore, any changes in
applicable laws, rules and regulations, such as the passage of the Dodd-Frank Act and the creation of the CFPB, may make our
compliance therewith more difficult or expensive or otherwise materially adversely affect our business and financial condition.
13
We have recently experienced substantial turnover in our senior management. The loss of our key executives could have a
material adverse effect on our business.
Our future growth and development is significantly dependent upon the skills and experience of our senior management team and our
ability to retain that team.
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 had been employed by the Company for 29 years, including 25 years in senior executive
positions. On December 11, 2017, the Company appointed Douglas Marohn as President and CEO. On February 1, 2018, Katie L.
MacGillivary informed us that she would be resigning from her position as CFO and Vice President of Finance. Ms. MacGillivary was
with the Company for 10 years. On February 20, 2018, we announced that Chad Steinorth would rejoin the Company as Vice President
and interim CFO. Mr. Steinorth resigned from the position of interim CFO on June 20, 2018, when Kelly M. Malson assumed her role
as CFO. In March 2018, our Controller position was likewise replaced. On April 27, 2018, the Company notified Kevin D. Bates that it
would not be renewing his employment contract, which therefore expires in July 2018. Mr. Bates has been with the Company for 15
years, including 5 years as a senior executive.
We do not maintain key-man life insurance policies on any of these executives. The loss of services of one or more of the executives
could have a material adverse effect on our business, results of operations and financial condition. In fact, the turnover of our CEO,
CFO and Controller during the year ended March 31, 2018 contributed to a material weakness in our internal control over financial
reporting. See Item 9A. Controls and Procedures in this Annual Report, the text of which is incorporated herein by reference.
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.
With the recent change in senior management, the Company’s business strategy has been redefined. This strategy includes remaining
committed to the branch-based model, focusing on financing primary transportation to and from work for the subprime borrower,
pricing based on risk (rate, yield, advance, etc.) and a commitment to the underwriting discipline required for optimal portfolio
performance.
14
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.
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, has exerted increased pressure on us to reduce our interest rates, fees and dealer
discount rates in order to maintain our market share. Although the Company has recently shifted its focus on not reducing APR and
discounts to secure new loan volume, it can provide no assurances that it will be successful in doing so. Any further reductions in our
interest rates, fees or dealer discount rates could have a material adverse impact on our profitability or financial condition.
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.
Newer, more expensive vehicles securing our larger dollar loans are more susceptible to wholesale pricing fluctuations than are older
vehicles and also experience depreciation at a much greater rate. Until the Company’s portfolio has been successfully converted to
primarily consisting of our target vehicle (primary transportation to and from work for the subprime borrower), the Company expects to
be affected by softer auction activity and reduced vehicle values.
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 Line of Credit. 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.
However, the interest rate swap agreements in effect for most of the past five years matured during the fiscal year ended March 31,
2018, and we have not entered into new arrangements. We will continue to evaluate interest rate swap pricing and we may or may not
enter into interest rate swap agreements in the future.
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.
15
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.
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
16
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.
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,
2018 was approximately 10,000 shares. 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.
Changes in U.S. federal, state and local tax law or interpretations of existing tax law could increase our tax burden or otherwise
adversely affect our financial condition or results of operations.
We are subject to taxation at the federal, state and local levels in the United States. On December 22, 2017, the U.S. government
enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The changes included in the
TCJA are broad and complex. The final transition impacts of the TCJA may differ from the estimates provided elsewhere in this Annual
Report, possibly materially, due to, among other things, changes in interpretations of the TCJA, any legislative action to address
questions that arise because of the TCJA, any changes in accounting standards for income taxes or related interpretations in response to
the TCJA, or any updates or changes to estimates the Company has utilized to calculate the transition impacts, including impacts from
changes to current year earnings estimates. The estimated impact of the new law is based on management’s current knowledge and
assumptions and recognized impacts could be materially different from current estimates.
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 60 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, 2018
and 2017, respectively.
Fiscal year ended March 31, 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal year ended March 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 11.15
$ 9.46
$ 9.44
$ 9.49
High
$ 11.03
$ 10.95
$ 12.50
$ 12.50
Low
$ 7.65
$ 8.25
$ 7.59
$ 8.51
Low
$ 10.03
$ 10.01
$ 8.56
$ 10.01
As of June 22, 2018, there were approximately 134 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 the
shareholder’s 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, 2018, 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, 2013 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.
03/31/2016
$
03/31/2017
81.80 $
157.52
157.56
80.59
191.22
197.75
03/31/2018
$ 68.76
228.47
251.26
Nicholas Financial, Inc.
NASDAQ Composite
Dow Jones US General Financial Index
04/01/2013
$ 100.00
100.00
100.00
03/31/2015
03/31/2014
$ 119.26 $ 106.22
158.52
172.20
135.82
155.73
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, 2018,
2017, 2016, 2015 and 2014. 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, 2015 and 2014 and as of March 31, 2016, 2015 and 2014, 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 (loss)
Earnings (loss) per share – basic:
Fiscal Year ended March 31,
(In thousands, except earnings per share numbers)
2018
2017
2016
2015
2014
$ 83,917
$ 90,466
$ 90,707
$ 86,790
$ 82,629
10,137
37,450
19,868
17
13,282
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
80,754
81,726
70,602
60,694
54,112
3,163
4,261
8,740
3,331
20,105
7,726
26,096
9,240
28,517
11,814
$ (1,098)
$ 5,409
$ 12,379
$ 16,856
$ 16,703
$
(.14)
$
.70
$ 1.60
$ 1.40
$ 1.38
Weighted average shares outstanding
7,719
7,664
7,622
12,013
12,096
Earnings (loss) per share – diluted:
$
(.14)
$
.69
$ 1.59
$ 1.38
$ 1.36
Weighted average shares outstanding
7,719
7,726
7,692
12,192
12,325
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)
2018
2017
2016
2015
2014
$284,162
269,876
165,750
108,437
$333,612
317,205
213,000
108,860
$325,309
311,837
211,000
102,849
(0.36%)
(1.01%)
25.60%
0.98%
10.33%
13.92%
10.65%
1.64%
5.11%
26.04%
2.46%
9.92%
11.81%
9.37%
3.94%
12.85%
27.10%
6.02%
5.50%
9.10%
7.56%
$302,529
288,904
199,000
89,888
5.75%
14.54%
28.00%
8.54%
4.11%
8.13%
7.04%
$283,430
269,344
127,900
141,938
6.10%
12.42%
28.44%
9.65%
4.00%
7.17%
6.22%
$117,217
7.41%
$179,617
7.08%
$196,853
7.51%
$187,893
8.08%
$179,031
8.44%
22.54%
22.40%
22.81%
23.08%
60
65
67
66
23.20%
65
(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. Nicholas Financial is a specialized consumer finance company engaged primarily in acquiring and servicing automobile
finance installment contracts (“Contracts”) for purchases of used and new 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, 2018, 2017 and
2016, a second Florida subsidiary, Nicholas Data Services, Inc. (“NDS”), serves 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 $90.5 million for the fiscal year ended March 31, 2017 to $83.9 million for the
fiscal year ended March 31, 2018. Consolidated revenues for the fiscal year ended March 31, 2016 were $90.7 million. The Company’s
diluted earnings per share decreased from earnings of $0.69 per share for the fiscal year ended March 31, 2017 to a loss of $(0.14) per
share for the fiscal year ended March 31, 2018. Diluted earnings per share for the fiscal year ended March 31, 2016 were $1.59. The
Company’s operating income before taxes for the fiscal year ended March 31, 2018 decreased to $3.2 million from $8.7 million and
$20.1 million for the fiscal years ended March 31, 2017 and 2016, respectively. The decrease from $8.7 million to $3.2 million was a
result of decreased revenues due to a reduction in volume and the gross portfolio yield along with increased interest expense due to cost
of debt and increased provision for credit losses. The Company’s consolidated net (loss) income for the fiscal years ended March 31,
2018, 2017, and 2016 was $(1.1) million, $5.4 million and $12.4 million, respectively.
The Company’s operating results have generally deteriorated as a result of several factors, including, but not limited to, loosened
underwriting guidelines, more aggressive pricing on originations, 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 had previously influenced 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 were competitive with those of other companies. However, it became increasingly difficult for the Company to match or exceed
pricing of its competitors, which resulted in declining Contract acquisition rates during the 2016, 2017 and 2018 fiscal years. The
Company expects this trend of declining acquisition rates to continue in the foreseeable future; however, the driver behind this trend is
now expected to be the Company’s intentional focus on pricing discipline.
22
In addition to affecting the volume of Contracts acquired in recent years, the level of competition exerted pressure on the Company’s
yields associated with Contract acquisitions. While management expects that the Company’s renewed focus on pricing discipline will
continue to put downward pressure on the volume of Contracts purchased to the extent that competitors continue to reduce their contract
acquisition yields as part of their operating strategy, it also expects that the Company’s yields will improve. 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. The weighted average APR of the portfolio for the fiscal years ended March 31, 2018, 2017, and 2016 were 22.35%,
22.44%, and 22.73%, respectively. The average dealer discount as a percent of gross finance receivables associated with new volume
for the fiscal years ended March 31, 2018, 2017, and 2016 were 7.41%, 7.08%, and 7.51%, respectively. The decrease in APR and
discount (and therefore overall yield) on new purchases in fiscal 2018 as compared with fiscal 2017 was primarily driven by purchases
in the first three quarters offset slightly by purchases in the fourth quarter of fiscal 2018.
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
Fiscal Year ended March 31,
(In thousands)
2018
$ 327,832
2017
2016
$ 347,367
$ 334,754
$ 189,375
$ 210,987
$ 208,214
$ 83,917
$ 10,137
$ 73,780
25.60%
$ 90,466
9,222
$
$ 90,707
9,007
$
$ 81,244
$ 81,700
26.04%
27.10%
3.09%
2.65%
2.69%
Provision for credit losses as a percentage of average finance
receivables, net of unearned interest
11.42%
10.70%
7.85%
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)
11.09%
12.69%
16.56%
10.11%
10.23%
10.54%
0.98%
13.92%
10.65%
2.46%
6.02%
11.81%
9.37%
9.10%
7.56%
(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 of Credit.
(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 2018 Compared to Fiscal 2017
Interest and Fee Income on Finance Receivables
Interest income on finance receivables, predominantly finance charge income, decreased to $83.9 million in fiscal 2018 as compared to
$90.5 million in fiscal 2017. The average finance receivables, net of unearned interest, totaled $327.8 million for the fiscal year ended
March 31, 2018, a decrease of 6% from $347.4 million for the fiscal year ended March 31, 2017. Purchasing volume has continued to
slow from fiscal 2017 as a result of a tightening of the Company’s credit underwriting standards and a reduction in auto sales year over
year.
Competition also continued to affect the Company’s ability to acquire Contracts, furthermore, our renewed strategic focus of financing
primary transportation to and from work for the subprime borrower has also impacted our ability to acquire Contracts at desired
yields. As demonstrated in the fourth quarter of fiscal 2018, the yield on new purchases has increased compared to the third quarter of
fiscal 2018 with average APR increasing from 21.7% to 23.3% and average discount increasing from 6.9% to 7.9%. Although the
Company will continue to try and find ways to grow market share, it is focused on yield.
The gross portfolio yield decreased to 25.60% for the fiscal year ended March 31, 2018 as compared to 26.04% for the fiscal year ended
March 31,2017. The gross portfolio yield decreased primarily due to the decrease in the average net receivables. The net portfolio yield
decreased to 11.09% for the fiscal year ended March 31, 2018 from 12.69% for the fiscal year ended March 31,2017. The net portfolio
yield decreased due to a decrease in the gross portfolio yield and an increase in the provision for credit losses as a percentage of finance
receivables, 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 decreased approximately $2.3 million to
$33.2 million for the fiscal year ended March 31, 2018 compared to $35.5 million for the fiscal year ended March 31, 2017. The
decrease was primarily due to the Company having consolidated five branch locations during the fiscal year ended March 31, 2018.
Marketing, salaries and employee benefits, depreciation, and administrative expenses as a percentage of average finance receivables, net
of unearned interest, decreased to 10.11% for the fiscal year ended March 31, 2018 from 10.23% for the fiscal year ended March 31,
2017.
Interest Expense
Interest expense increased to $10.1 million for the fiscal year ended March 31, 2018 as compared to $9.2 million for the fiscal year
ended March 31, 2017. While the average outstanding debt during the year ended March 31, 2018 decreased to $190.0 million from
$211.0 million during the year ended March 31, 2017, this decrease was partially offset by an increase in interest rates under the
Company’s Line of Credit. 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
2018
2017
2.76%
-0.01%
4.35%
7.10%
0.70%
0.09%
3.58%
4.37%
LIBOR rates have increased (1.88% as of March 31, 2018 compared to .98% as of March 31, 2017) which caused a decrease in expense
related to our interest rate swap agreements. 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. On November 8, 2017 the Company executed amendment
7 to this existing Line of Credit which extended the maturity date to March 31, 2018 and increased the pricing of the Line of Credit an
additional 50 basis points to 400. On March 30, 2018 the Company executed amendment 8 to this Line of Credit which extended the
maturity date to March 30, 2019. For further discussions regarding interest rates see “Note 5 – Line of Credit”.
Analysis of Credit Losses
As of March 31, 2018, the Company had approximately 1,375 active static pools. The average pool upon inception consisted of 37
Contracts with aggregate finance receivables, net of unearned interest, of approximately $422,000.
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
2018
$ 16,885
36,890
(36,183)
1,841
$ 19,433
(In thousands)
2017
$ 12,265
36,843
(34,419)
2,196
$ 16,885
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)
2018
$ 773
560
(536)
36
$ 833
2017
$ 748
334
(338)
29
$ 773
25
The provision for credit losses increased to $37.5 million for the fiscal year ended March 31, 2018 from $37.2 million for the fiscal year
ended March 31, 2017 largely due to net charge-offs increasing to 10.65% for the fiscal year ended March 31, 2018 from 9.37% for the
fiscal year ended March 31, 2017.
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 13.92% for the fiscal year ended March 31, 2018 as compared to 11.81% for the fiscal
year ended March 31, 2017. This increase was the result of several factors, including, but not limited to, loosened underwriting
guidelines, insufficient execution of our servicing model, 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 had influenced the Company to purchase lower credit quality Contracts. The Company also
experienced a decrease in auction prices relative to loan balances from fiscal year 2018 to fiscal year 2017. 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, 2018 and 2017, auction proceeds from the sale of repossessed vehicles averaged approximately 35%
and 37%, respectively, of the related principal balance.
Recoveries as a percentage of charge-offs were approximately 5.09% and 6.40% for the fiscal years ended March 31, 2018 and 2017,
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. During fiscal 2017 we were in a
cycle in which credit was more easily available to our typical customer, which led 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, 2018 was 8.07%, a decrease from 10.05% as of March 31, 2017. The delinquency percentage for Direct Loans more than
thirty days past due, excluding Chapter 13 bankruptcy accounts, as of March 31, 2018 was 4.88%, an increase from 3.89% as of
March 31, 2017. The decrease in delinquency percentage for Contracts was driven by the Company’s renewed focus on operations and
servicing.
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 expand its operations.
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, 2018 and March 31, 2017 the Company granted deferrals
to approximately 38.38% and 34.77%, respectively, of total Contracts and Direct Loans. The increase in the number of deferrals for the
fiscal year ended 2018 is a result of portfolio weakness which was exacerbated by the effect of the Company’s unsuccessful attempt at
centralizing collections in the prior year. 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 increased to approximately $4.3 million in fiscal 2018 from approximately $3.3 million in fiscal 2017.
The Company’s effective tax rate increased to 134.71% in fiscal 2018 from 38.11% in fiscal 2017 due to an additional expense taken by
the Company caused by the write-off of certain deferred tax assets. These changes are a result of the U.S. Tax Cuts and Jobs Act (the
"Tax Act"), which") was enacted on December 22, 2017. For further discussion regarding income taxes see “Note 8 – Income Taxes”.
26
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”.
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
(In thousands)
2017
$ 12,265
36,843
(34,419)
2,196
2016
$ 11,325
25,926
(27,963)
2,977
$ 16,885
$ 12,265
27
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
2016
$ 703
$ 748
352
334
(328)
(338)
21
29
$ 773
$ 748
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 had influenced the Company’s prior Management to purchase lower credit quality Contracts. The
Company also experienced a decrease in auction prices from fiscal year 2017 to fiscal year 2016 relative to its loan balances. 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 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.
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.
28
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)
2018
2017
2016
$ 23,681
$ 27,321
$ 22,408
23,297
(47,207)
$ (229)
(28,703)
2,388
$ 1,006
(34,991)
11,044
$ (1,539)
The Company made certain reclassifications to the 2016 statement of cash flows. The amortization of deferred revenues decreased cash
flows from operating activities by $1.7 million for 2016, 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, 2018 was funding the purchase of Contracts, which
are financed substantially through cash from principal and interest payments received, and our line of credit (the “Line of Credit”). On
March 30, 2018, the Company executed amendment 8 to the corresponding credit agreement to extend the maturity date of the Line of
Credit to March 30, 2019. The amendment also reduced the maximum amount available under the Line of Credit from $225.0 million
to $200.0 million and provided for monthly rather than quarterly calculations of the interest coverage ratio. The required minimum
interest coverage ratio of 1.0:1.0 was reduced to 0.7:1.0 for the periods ended April 30, 2018 and May 31, 2018. Borrowings under the
Line of Credit accrue interest at 400 basis points above 30 day LIBOR with a 1% floor on LIBOR. The Line of Credit is secured by all
of the assets of the Company.
Effective November 8, 2017, the Company had executed amendment 7 to the credit agreement which had increased the pricing of the
Line of Credit to 400 basis points above 30 day LIBOR, while maintaining the 1% floor on LIBOR. Such amendment also waived the
minimum interest coverage ratio requirement for the periods ended June 30, 2017 and September 30, 2017 and reduced the minimum
interest coverage ratio requirement to 0.25:1.0 for the period ending December 31, 2017.
On December 30, 2016, the Company had executed an amendment which increased the pricing of the Line of Credit to 350 basis points
above 30 day LIBOR while maintaining the 1% floor on LIBOR. Prior to December 30, 2016, the pricing on the Line of Credit was 300
basis points above 30 day LIBOR with a 1% floor on LIBOR.
The Company will continue to depend on the availability of the Line of Credit, together with cash from operations, to finance future
operations. The availability of funds under the Line of Credit generally depends on availability calculations as defined in the
corresponding credit agreement. In addition, our Line of Credit 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.” Failure to meet any financial ratios, covenants or financial tests could result in
an event of default under our Line of Credit. If an event of default occurs under the Line of Credit, 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 believes that borrowings available under the Line of Credit 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 of Credit 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. During the fiscal year ended March 31, 2017 and the first nine months of the fiscal year
ended March 31, 2018, the quality of the Company’s loan portfolio generally deteriorated, which resulted in an increase in non-
performing loans, an increase in delinquencies (with a decrease limited to the quarter ended December 31, 2017) and other factors,
which in turn resulted in increased net charge-offs and an increase in the provision for credit losses. These conditions negatively
affected our borrowing capacity under the Line of Credit.
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.
29
Contractual Obligations
The following table summarizes the Company’s material obligations as of March 31, 2018.
Operating leases
Line of credit1
Interest on line of credit1
Total
Payments Due by Period
(In thousands)
Total
$ 3,502
165,750
10,375
Less
than
1 year
$ 1,984
165,750
10,375
1 to 3
years
$1,463
—
—
3 to 5
years
$ 55
—
—
More than
5 years
$ —
—
—
$ 179,627
$178,109
$1,463
$ 55
$ —
The Company’s Line of Credit matures on March 30, 2019. On March 30, 2018, a one-year renewal was executed extending the
maturity date to March 30, 2019 and reducing the Line of Credit from $225 million to $200 million. The pricing of the Line of Credit is
400 basis points above 30 day LIBOR, with a 1% floor on LIBOR. Interest on outstanding borrowings under the Line of Credit as of
March 31, 2018, is based on an effective interest rate of 6.82% 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, 2018, $165.8 million, or 100% of our total debt, was subject to floating interest rates. A hypothetical increase in the
variable interest rates of 1% or 100 basis points (which would result in the variable rates being 2.88% as of March 31, 2018) applicable
to this floating rate debt would result in an annual after-tax increase of interest expense of approximately $1.2 million.
30
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed as part of this Report (see pages 33-52)
Report of Independent Registered Public Accounting Firm
Audited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income (Loss)
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
32
33
34
35
36
37
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Nicholas Financial, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Nicholas Financial, Inc. and Subsidiaries (the “Company”) as of March
31, 2018 and 2017, the related consolidated statements of income (loss), shareholders’ equity, and cash flows for each of the three years
in the period ended March 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2018 and 2017, and the
results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2018, in conformity with
U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting as of March 31,
2018. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Dixon Hughes Goodman LLP
We have served as the Company’s auditor since 2003.
Atlanta, Georgia
June 27, 2018
32
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
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; 12,609 and 12,524 shares issued respectively;
7,895 and 7,810 shares outstanding, respectively
Treasury stock: 4,714 common shares, at cost
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
March 31,
2018
2017
$ 2,626
269,876
2,117
906
1,505
843
—
6,289
$ 2,855
317,205
2,453
674
719
1,184
17
8,505
$ 284,162
$ 333,612
$ 165,750
1,672
5,000
3,303
$ 213,000
1,851
5,932
3,969
175,725
224,752
34,564
(70,459)
144,332
33,889
(70,459)
145,430
108,437
108,860
$ 284,162
$ 333,612
See accompanying notes.
33
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(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 (loss)
Earnings (loss) per share:
Basic
Diluted
Fiscal Year ended March 31,
2018
$ 83,917
2017
$ 90,466
2016
$ 90,707
1,489
19,868
11,324
37,450
469
10,137
17
1,440
21,437
12,180
37,177
492
9,222
(222)
1,497
22,313
11,025
26,278
458
9,007
24
80,754
81,726
70,602
3,163
4,261
8,740
3,331
20,105
7,726
$(1,098)
$ 5,409
$ 12,379
$ (.14)
$ (.14)
$
$
.70
.69
$ 1.60
$ 1.59
See accompanying notes.
34
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(In thousands)
Balance at March 31, 2015 ..........................................................
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 ..........................................................
Additional tender offer cost .........................................................
Common Stock
Shares
7,702
Amount
$ 32,655
Treasury
Stock
$ (70,409)
Retained
Earnings
$127,642
Total
Shareholders’
Equity
$89,888
—
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, net of forfeitures ....................
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
Net Loss.......................................................................................
Issuance of common stock under stock options...........................
Forfeitures of restricted share awards
Share-based compensation ..........................................................
—
91
(6)
—
—
458
—
217
—
—
—
—
$ (1,098)
—
—
—
$(1,098)
458
—
217
Balance at March 31, 2018..........................................................
7,895
$ 34,564
$ (70,459)
$144,332
$108,437
See accompanying notes.
35
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Gain on sale of 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
Decrease (increase) in assets held for resale
Purchase of property and equipment
Proceeds from sale of property and equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net (pay down) 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 (used in) financing activities
Net increase (decrease) in cash
Cash, beginning of year
Cash, end of year
Fiscal Year ended March 31,
2018
2017
2016
$ (1,098)
$ 5,409
$ 12,379
469
(66)
—
37,450
(11,488)
(1,656)
2,216
217
17
4
(932)
(786)
(666)
492
(17)
350
37,177
(13,112)
(1,754)
(1,956)
607
(222)
328
93
(126)
52
458
(24)
—
26,278
(13,811)
(1,662)
(292)
574
24
192
(2,002)
(480)
774
23,681
27,321
22,408
(101,131)
124,154
336
(130)
68
(157,708)
130,029
(305)
(772)
53
(173,027)
139,289
(401)
(913)
61
23,297
(28,703)
(34,991)
(47,250)
(179)
(236)
458
—
—
(47,207)
(229)
2,855
$ 2,626
-
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
$ 2,855
$ 1,849
Supplemental disclosure of noncash investing and financing activities:
Tax deficiency from share awards
$ —
$
(66)
$
(38)
See accompanying notes.
36
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 used and new 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.
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, 2018 and
March 31, 2017 are approximately $164 and $195.5 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.
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.
37
2. Summary of Significant Accounting Policies (continued)
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, 2018.
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 2015. 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, 2018.
The effect on deferred taxes of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
See Note 8 for details regarding the impact of the Tax Cuts and Jobs Act enacted by the U.S. government on December 22, 2017.
38
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, 2018, 2017, and 2016 was 7.41%, 7.08% and 7.51%, 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 (Loss) 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 (loss) income per consolidated statements of income
Less: Allocation of earnings to participating securities
Net (loss) income allocated to common stock
Basic earnings (loss) per share computation:
Net income (loss) 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 (loss) per share
Diluted earnings (loss) per share computation:
Net (loss) income allocated to common stock
Undistributed earnings re-allocated to participating securities
Numerator for diluted earnings (loss) per share
Weighted average common shares outstanding for basic earnings (loss) per share
Incremental shares from stock options
Weighted average shares and dilutive potential common shares
Diluted earnings (loss) per share
39
Fiscal Year ended March 31,
(In thousands, except earnings per
share numbers)
2018
2017
2016
$(1,098)
14
(1,084)
$5,409
(70)
5,339
$12,379
(170)
12,209
$(1,084)
$5,339
$12,209
7,819
(100)
7,719
$(.14)
$(1,084)
—
$(1,084)
7,719
—
7,719
$(.14)
7,766
(102)
7,664
$.70
$5,339
—
$5,339
7,664
62
7,726
$.69
7,727
(105)
7,622
$1.60
$12,209
2
$12,211
7,622
70
7,692
$1.59
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
124,000, 161,000, and 161,000 stock options were not included in the computation of diluted earnings per share for the years ended
March 31, 2018, 2017 and 2016 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.
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, 2018, the Company operated in sixteen states through sixty branch locations. Of the finance receivables total as of
March 31, 2018, Florida represented 28%, Ohio represented 13%, Georgia represented 10% and North Carolina represented 8%. Of the
remaining twelve 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).
40
2. Summary of Significant Accounting Policies (continued)
Statements of Cash Flows
Cash paid for income taxes for the years ended March 31, 2018, 2017 and 2016 was approximately $2.8 million, $5.4 million and
$8.5 million respectively. Cash paid for interest, including debt origination costs for the years ended March 31, 2018, 2017 and 2016
was approximately $10.1 million, $9.1 million and $8.8 million respectively.
Reclassifications
The Company made certain reclassifications to the 2016 statements of cash flows. The amortization of deferred revenues decreased cash
flows from operating activities by $1.7 million and correspondingly increased cash flows from investing activities. Net income and
shareholders’ equity was not changed.
Recent Accounting Pronouncements
In February 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-02, "Income Statement-Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" was issued to address a
narrow-scope financial reporting issue that arose as a consequence of the change in the tax law. On December 22, 2017, the U.S. federal
government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on
the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act of 2017). The ASU No. 2018-02 permits a reclassification from accumulated
other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax
rate. The amount of the reclassification would be the difference between the historical corporate income tax rate of 35 percent and the
newly enacted 21 percent corporate income tax rate. The ASU No. 2018-02 is effective for all entities for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years with early adoption permitted, including adoption in any interim
period, for (i) public business entities for reporting periods for which financial statements have not yet been issued and (ii) all other
entities for reporting periods for which financial statements have not yet been made available for issuance. The adoption of this
guidance will not impact the company’s consolidated financial statements or disclosures.
In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12 Derivatives and Hedging (Topic 815). The
guidance is intended to better align an entity's risk management activities and financial reporting for hedging relationships. This
guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, with early
adoption permitted. The Company is currently evaluating impact of the adoption of this guidance on its Consolidated Financial
Statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718). The guidance provides clarification
on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This guidance
is effective for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years, with early adoption
permitted. The Company will adopt the guidance on April 1, 2018, as required, and it believes the adoption of this guidance will not
have a material impact on its Consolidated Financial Statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805). The guidance clarifies the definition of a
business, which assists entities when evaluating whether transactions should be accounted for as acquisitions of businesses or assets.
This guidance is effective on a prospective basis for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. The Company will adopt the guidance on April 1, 2018, as required, and it believes the adoption of this guidance will
not have a material impact on its Consolidated Financial Statements.
In August 2016, the 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
41
2. Summary of Significant Accounting Policies (continued)
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. ASU 2016-09 became effective for the Company for the reporting period beginning April 1,
2017 and did not have a material impact on the consolidated financial statements. At adoption, the Company elected to apply the
amendments related to the presentation of excess tax benefits on the statement of cash flows using the prospective transition method.
The Company also elected to continue to estimate the forfeitures of stock awards as a component of total stock compensation expense
based on the number of awards that are expected to vest.
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.
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. The Company adopted ASU 2016-01 during the year ended March 31, 2018 which did not
have a material effect on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The ASU outlines a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The guidance also requires
disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified
retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application
within the Statement of Consolidated Financial Position. 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 Company currently will adopt the new guidance utilizing the gross down
modified transition method on its effective date of April 1, 2018. Based on its current analysis the Company does not expect the new
guidance to have a material impact on the consolidated financial statements.
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 used and new 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
42
3. Finance Receivables (continued)
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
2018
$ 423,900
(127,994)
295,906
(13,655)
282,251
(19,433)
(In thousands)
2017
$ 502,050
(158,541)
343,509
(17,004)
326,505
(16,885)
2016
$ 487,118
(152,911)
334,207
(18,023)
316,184
(12,265)
$ 262,818
$ 309,620
$ 303,919
The terms of the Contracts range from 12 to 72 months and bear a weighted average contractual interest rate of 22.29% and 22.37% as
of March 31, 2018 and 2017, 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
2018
$ 16,885
36,890
(36,183)
1,841
$ 19,433
(In thousands)
2017
$ 12,265
36,843
(34,419)
2,196
2016
$ 11,325
25,926
(27,963)
2,977
$ 16,885
$ 12,265
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, 2018, the average
model year of vehicles collateralizing the portfolio was a 2010 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
2018
$ 9,964
(2,073)
7,891
(833)
$ 7,058
(In thousands)
2017
$ 10,670
(2,312)
8,358
(773)
$ 7,585
2016
$ 11,012
(2,346)
8,666
(748)
$ 7,918
The terms of the Direct Loans range from 12 to72 months and bear a weighted average contractual interest rate of 25.07% and 25.62%
as of March 31, 2018 and 2017, respectively.
43
3. Finance Receivables (continued)
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
2018
$ 773
560
(536)
36
$ 833
(In thousands)
2017
$ 748
334
(338)
29
$ 773
2016
$ 703
352
(328)
21
$ 748
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, 2018, 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 aligned 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
(In thousands)
2018
2017
Contracts
$ 406,159
13,668
$ 419,827
4,073
Direct
Loans
$ 9,645
263
$ 9,908
56
Contracts
$ 473,446
24,585
$ 498,031
4,019
Direct
Loans
$10,406
222
$ 10,628
42
Finance receivables, gross contract
$ 423,900
$ 9,964
$ 502,050
$ 10,670
44
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, 2018
March 31, 2017
March 31, 2016
Direct Loans
March 31, 2018
March 31, 2017
March 31, 2016
Gross Balance
Outstanding
$
$
1
$
419,827
498,03
482,864
Gross Balance
Outstanding
$
$
$
9,908
10,628
10,978
31 –
60 days
$ 20,203
4.81%
$ 25,450
5.11%
$ 17,466
3.61%
(In thousands)
61 –
90 days
$ 8,339
1.99%
$ 12,388
2.49%
$ 6,069
1.26%
31 –
60 days
$
220
2.22%
191
1.80%
161
1.47%
$
$
61 –
90 days
$
100
1.01%
67
0.63%
41
0.37%
$
$
91-180
days
$ 5,329
1.27%
$ 12,197
2.45%
$ 3,366
0.70%
91-180
days
163
$
1.65%
155
$
1.46%
38
0.35%
$
Total
$33,871
8.07%
$50,035
10.05%
$26,901
5.57%
Total
$ 483
4.88%
$ 413
3.89%
$ 240
2.19%
4. Property and Equipment
Property and equipment as of March 31, 2018 and 2017 is summarized as follows:
2018
Automobiles
Equipment
Furniture and fixtures
Leasehold improvements
2017
Automobiles
Equipment
Furniture and fixtures
Leasehold improvements
Cost
$ 646
1,496
546
1,207
$3,895
$ 712
1,476
546
1,194
$ 3,928
(In thousands)
Accumulated
Depreciation
$ 468
1,071
457
1,056
$ 3,052
$
$
459
851
427
1,007
2,744
Net Book
Value
$ 178
425
89
151
$ 843
$
253
625
119
187
$ 1,184
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 that 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 of 2017, the Company recorded an impairment charge of $350,000 which is classified as administrative expenses in the
consolidated statement of income.
5. Line of Credit.
The Company had a line of credit facility (the “Line of Credit”) up to $225 million during fiscal year 2018. On March 30, 2018, a one-
year renewal was executed extending the maturity date to March 30, 2019 and reducing the line of credit facility to $200 million. The
pricing of the Line of Credit remained at 400 basis points above 30 day LIBOR, with a 1% floor on LIBOR and the beneficial
ownership limit remained at 30%. On November 8, 2017, the Company executed amendment 7 to this existing Line of Credit which
extended the maturity date to March 31, 2018 and increased the pricing of the Line of Credit to 400 basis points above 30 day LIBOR,
45
while maintaining the 1% floor on LIBOR. The amendment also increased the beneficial ownership limit from 20% to 30% and revised
the calculation of availability and the minimum interest coverage ratio. The threshold for the minimum interest coverage ratio was
lowered for the period ending December 31, 2017.
On December 30, 2016, the Company executed an amendment which increased the pricing of the Line of Credit to 350 basis points
above 30 day LIBOR while maintaining the 1% floor on LIBOR. Prior to December 30, 2016, the pricing on the Line of Credit was 300
basis points above 30 day LIBOR with a 1% floor on LIBOR.
Pledged as collateral for this Line of Credit 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, 2018, the Company was in compliance with all debt covenants.
The Company’s operating results over the past two years provide 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 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 previously utilized interest rate swap agreements to manage exposure to variability in expected cash flows attributable to
interest rate risk. The interest rate swap agreements converted a portion of the Company’s floating rate debt to a fixed rate, more closely
matching the interest rate characteristics of the finance receivables. During the twelve months ended March 31, 2018, no new contracts
were initiated and both interest rate swap contracts matured.
The two interest rate swap agreements which expired were as follows: A June 4, 2012 interest rate swap agreement providing for a five-
year term in which the Company paid a fixed rate of 1% and received payments from the counterparty on the 1-month LIBOR rate. This
interest rate swap agreement had an effective date of June 13, 2012 and a notional amount of $25.0 million. A July 30, 2012 agreement
provided for a five-year term in which the Company paid a fixed rate of 0.87% and received payments from the counterparty on the 1-
month LIBOR rate. This interest rate swap agreement had an effective date of August 13, 2012 and a notional amount of $25.0 million
46
6. Interest Rate Swap Agreements (continued)
The locations and amounts of gains 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 recognized in income
(In thousands)
2018
$ 17
$ 18
$ 35
2017
$ 222
(179)
$ 43
Net realized gains 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
for the period ended 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
2018
1.05%
0.91%
2017
0.58%
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, 2018 – asset:
March 31, 2017 – asset:
Fair Value Measurement Using
(In thousands)
Level 1
Level 2
Level 3
$ —
$ —
$ 0
$
17
$ —
$ —
Fair
Value
$ 0
$ 17
Financial Instruments Not Measured at Fair Value
The Company’s financial instruments consist of cash, finance receivables and the Line of Credit. For the cash and the line, the carrying
value approximates fair value.
Finance receivables net approximates fair value based on a calculation using the income approach and an exit price notion. The
Company projected discounted cash flows taking into consideration expected contractual payments, prepayment rate, and expected
credit adjustment. The Company’s approach in the prior year was based on the price paid to acquire Contracts which reflected
competitive market interest rates and purchase discounts for the Company’s chosen credit grade in the economic environment.
47
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 of Credit. Based on these market conditions, the fair value of the Line of Credit as of March 31, 2018 was estimated to be equal to
the book value. The interest rate for the Line of Credit is a variable rate based on LIBOR pricing options.
Description
Cash:
March 31, 2018
March 31, 2017
Finance receivables:
March 31, 2018
March 31, 2017
Line of credit:
March 31, 2018
March 31, 2017
Fair Value Measurement Using
(In thousands)
Level 1
Level 2
Level 3
Fair
Value
Carrying
Value
$2,626
$ 2,855
$ —
$ —
$ —
$ —
$ 2,626
2,855
$
$ 2,626
2,855
$
$ —
$ —
$ —
$ —
$270,404
$ 317,205
$ 270,404
$ 317,205
$ 269,876
$ 317,205
$ —
$ —
$165,750
$ 213,000
$ —
$ —
$ 165,750
$ 213,000
$ 165,750
$ 213,000
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, 2018 and 2017.
8. Income Taxes
The U.S. Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017 and introduces significant changes to U.S. income
tax law. The Tax Act includes a broad range of tax reform including changes to tax rates and deductions that were effective January 1,
2018. The decrease in the enacted corporate tax rate to be applied when our temporary differences are realized or settled ultimately resulted
in a one-time revaluation of our net deferred tax asset of $3.1 million with a corresponding charge to income tax expense. The effects of
the Tax Act increased income tax expense to a level that reduced net income to a net loss for both the three months ending December 31,
2017 and twelve months ending March 31, 2018.
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
2018
(In thousands)
2017
$1,705
340
2,045
1,847
369
2,216
$ 4,261
$4,563
724
5,287
(1,688)
(268)
(1,956)
$3,331
2016
$ 6,964
1,054
8,018
(254)
(38)
(292)
$ 7,726
48
8. Income Taxes (continued)
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)
2018
2017
$5,811
266
—
212
$6,289
$7,742
487
(6 )
282
$8,505
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
Tax Reform – Rate Change
Other
2018
$976
491
3,127
(333)
(In thousands)
2017
$3,059
297
—
(25)
2016
$7,037
660
—
29
Income tax expense
$4,261
$3,331
$7,726
The Company’s effective tax rate increased to 134.71% in fiscal 2018 from 38.11% in fiscal 2017. The effective rate was 38.43% in
fiscal 2016.
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 Company did not grant any options during the years ended March 31, 2018 or 2017.
49
9. Share-Based Payments (continued)
A summary of option activity under the Equity Plans as of March 31, 2018, and changes during the year are presented below.
Options
Outstanding at March 31, 2017
Granted
Exercised
Forfeited
Outstanding at March 31, 2018
Exercisable at March 31, 2018
(Shares and Aggregate Intrinsic Value in thousands)
Weighted
Average
Exercise
Price
$ 10.08
$ —
$ 5.01
$ 13.21
$ 11.25
Shares
333
—
(91)
(91)
151
201
$
7.71
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
4.83
2.02
$
$
107
514
The total intrinsic value of options exercised during the years ended March 31, 2018, 2017 and 2016 was approximately $343,000,
$46,500 and $82,000 respectively.
During the fiscal year ended March 31, 2018, approximately 91,000 options were exercised at exercise prices ranging from $3.50 to
$8.44 per share. During the same period, approximately 91,000 options were forfeited at exercise prices ranging from $8.21 to $14.36
per share.
Cash received from options exercised during the fiscal years ended March 31, 2018, 2017 and 2016 totaled approximately $458,000,
$50,000, and $85,000, respectively. As of March 31, 2018, there was approximately $44,000 of total unrecognized compensation cost
related to options granted. That cost is expected to be recognized over a weighted-average period of approximately 1.6 years.
A summary of the status of the Company’s non-vested restricted shares under the Equity Plan as of March 31, 2018, and changes during
the year then ended is presented below.
Restricted Share Awards
Non-vested at March 31, 2017
Granted
Vested
Forfeited
Non-vested at March 31, 2018
(Shares and Aggregate Intrinsic Value in thousands)
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Weighted
Average
Grant Date
Fair Value
$
11.95
$
8.45
11.71
$
$ 11.01
Shares
90
30
(7)
(36)
77
$
11.25
1.16
$
695
The Company awarded approximately 30,000 restricted shares during the fiscal year ended March 31, 2018. There are no performance
shares included within the 30,000 restricted shares granted that resulted from the Company meeting a performance threshold. During the
same period there were approximately 36,000 restricted shares forfeited. With the adoption of ASU 2016-09 on January 1, 2017, we no
longer reduce stock-based compensation by estimated forfeitures. Instead we account for forfeitures when they occur. For any vesting
tranche of an award, the cumulative amount of compensation cost recognized is at least equal to the portion of the grant-date value of
the award tranche that is actually vested at that date.
As of March 31, 2018, there was approximately $321,000 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 1.56
years.
50
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 2019 later in the year.
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
2019
2020
2021
2022
2023
(In thousands)
1,984
$
1,160
303
44
11
$
3,502
Rent expense for the fiscal years ended March 31, 2018, 2017, and 2016 was approximately $2.3, $2.4, and $2.3 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.
51
12. Quarterly Results of Operations (Unaudited)
Fiscal Year ended March 31, 2018
(In thousands, except earnings per share amounts)
Total revenue
Interest expense
Provision for credit losses
Non-interest expense
Operating income before income taxes
Income tax expense (benefit)
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Total revenue
Interest expense
Provision for credit losses
Non-interest expense (benefit)
Operating income before income taxes
Income tax expense (benefit)
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
First
Quarter
$ 22,198
2,455
9,752
8,679
1,312
500
Second
Quarter
$ 21,338
2,443
10,146
8,185
564
220
344
Third
Quarter
$ 20,526
2,585
8,989
8,138
814
3,712
Fourth
Quarter
$ 19,855
2,654
8,563
8,165
473
(171)
$ (2,898)
$
644
812
$
0.10
0.10
$
$
0.04
0.04
$
$
(0.37)
(0.37)
$
$
0.08
0.08
$
$
$
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)
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 its 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, 2018. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the
Company’s disclosure controls and procedures were not effective as of March 31, 2018. Notwithstanding the material weakness
described in Management’s Report on Internal Control over Financial Reporting below, the Company’s management, including its
Chief Executive Officer and Chief Financial Officer, has concluded that the consolidated financial statements included in this Annual
Report present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and
52
Item 9A. Controls and Procedures (continued)
for the periods presented, in conformity with accounting principles generally accepted in the United States. The Company’s independent
registered public accounting firm has audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements of the Company as of and for the years ended March 31, 2018, and 2017, and its
report herein expressed an unqualified opinion.
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 its Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s internal control over
financial reporting as of March 31, 2018, 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
this evaluation, management has concluded that the Company’s internal control over financial reporting was not effective as of
March 31, 2018 as a result of a material weakness. A material weakness is a deficiency or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of the registrant’s annual or
interim financial statements will not be prevented or detected on a timely basis. Specifically, management identified the following
internal control deficiencies that in combination represent a material weakness:
1) As previously reported, the Company experienced significant management turnover in the year ended March 31, 2018. This
turnover included the Chief Executive Officer and, in the quarter ended March 31, 2018, the Chief Financial Officer and the
Controller. All three of these positions have significant roles in the structure of the Company’s internal control over financial
reporting. Due to this turnover, the Company was unable to maintain consistent internal control processes, testing and
documentation at a level necessary to enable management to assess the effectiveness of internal control over financial reporting
as of March 31, 2018.
2) During the quarter ended March 31, 2018, management identified certain loans classified as non-performing assets that were
beyond 180 days past due and had not been charged off in accordance with policies and procedures for such assets. As a result,
the Company wrote off approximately $800,000 with respect to such loans during the quarter ended March 31, 2018. Had such
loans been charged off on a timely basis, the effect on the Company’s financial position, results of operations and cash flows
would not have been material.
3) During the quarter and fiscal year ending March 31, 2018 close procedures relating to the calculation of the allowance for
credit losses, errors were detected within the calculation model that were discovered by our external auditors. Due to the
complexity of our allowance for credit losses model and the significant turnover within the group responsible for the
calculation and review controls, the error was not detected by our internal control structure.
Notwithstanding the material weakness, the Company’s management, including its Chief Executive Officer and Chief Financial Officer,
has concluded that the consolidated financial statements included in this Annual Report present fairly, in all material respects, our
financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with accounting
principles generally accepted in the United States.
Remedial Actions
The Company has taken the following remedial actions to address the material weakness:
(cid:6)
The Company hired a permanent Controller at the end of March 2018, and to assist with year-end close and the preparation of
its consolidated financial statements, engaged on a temporary basis an external accounting and financial reporting advisor.
(cid:6) Management has reviewed and strengthened the Company’s operational controls and has assessed the methodology and
calculations of the allowance for credit losses and concluded that its methodology and calculations are sound.
(cid:6)
(cid:6)
The Company has clarified within its special assets group the policies and procedures to be followed regarding items classified
as non-performing assets to ensure the timely recognition of any related losses.
The Company has hired a permanent Chief Financial Officer with experience serving as CFO and director of public companies,
including a company in the consumer credit space, who has assumed her role as of the Company’s CFO effective June 20,
2018.
53
Management’s Report on Internal Control over Financial Reporting (continued)
(cid:6) With the arrival of the permanent Chief Financial Officer, the Company will undergo a review of its internal control policies
and procedures, and make changes if deemed necessary, to ensure items noted above in numbers 1 and 3 of Management’s
Report on Internal Control over Financial Reporting are in place and operating as intended.
Management believes the foregoing efforts will effectively remediate the material weakness. As we continue to evaluate and work to
improve internal control over financial reporting, management may determine to take additional measures to address control
deficiencies or determine to modify or supplement the remediation plan described above. We cannot assure you, however, when we
will remediate such weakness, nor can we be certain of whether additional actions will be required or the costs of any such actions.
Attestation report of the registered public accounting firm
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered
public accounting firm pursuant to the rules of the Securities and Exchange Commission.
Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the Company’s fiscal quarter ended March 31,
2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting,
except as identified in Management’s Report on Internal Control over Financial Reporting above.
54
Item 9B. Other Information
Effective June 20, 2018 (the “Effective Date”), Kelly M. Malson commenced her role as the Company’s Chief Financial Officer in
accordance with the terms of her employment agreement with the Company, dated as of May 29, 2018. Chad Steinorth resigned from
his position as interim Chief Financial Officer as of the Effective Date, and remains employed by the Company in other functions.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The relevant information to be set forth in the definitive Proxy Statement and Information Circular for the 20182017 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 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 relevant information to be set forth 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, 2018, 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)
151 $
11.25
None
Not Applicable
151 $
11.25
670
None
670
The relevant information to be set forth in the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, Director Independence and Board of Directors
The relevant information to be set forth in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The relevant information to be set forth in the Proxy Statement is incorporated herein by reference.
55
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
56
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
10.20
10.21
10.22
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)*
Nicholas Financial, Inc. 2015 Omnibus Incentive Plan (12)*
Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Stock Option Award (13)*
Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Restricted Stock Award (14)*
Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Performance Share Award (15)*
ISDA Master Agreement, dated as of March 30, 1999, between Bank of America, N.A. and Nicholas Financial,
Inc. (16)
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 (17)
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 (18)
Amendment No. 6 to Second Amended and Restated Loan and Security Agreement, dated June 20, 2017, among
Nicholas Financial, Inc., Bank of America, N.A., and each of the Lenders party thereto (19)
Employment Agreement, dated July 26, 2017, between Nicholas Financial, Inc. and Kevin D. Bates (20)*
Employment Agreement, dated July 26, 2017, between Nicholas Financial, Inc. and Katie L. MacGillivary (21)*
Separation and Release of Claims Agreement, dated July 26, 2017, between Nicholas Financial, Inc. and Ralph T.
Finkenbrink (22)*
Waiver and Amendment No. 7 to Second Amended and Restated Loan and Security Agreement, dated November 8,
2017, among Nicholas Financial, Inc., Bank of America, N.A., and the Lenders party thereto (23)
Employment Agreement, dated December 12, 2017, between Nicholas Financial Inc. and Douglas Marohn (24)*
Form of Dealer Agreement and Schedule thereto listing dealers that are parties to such agreements (28)
10.23
Waiver and Amendment No. 8 to Second Amended and Restated Loan and Security Agreement, dated March 30, 2018,
among Nicholas Financial Inc., Bank of America, N.A., and the Lenders thereto (25)
10.24
21
23
24
Employment Agreement, dated May 29, 2018, between Nicholas Financial, Inc. and Kelly M. Malson (26)*
Subsidiaries of Nicholas Financial, Inc. (27)
Consent of Dixon Hughes Goodman LLP
Powers of Attorney (included on signature page hereto)
i
31.1
31.2
32.1
32.2
Certification of President and Chief Executive Officer
Certification of 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)
(15)
(16)
(17)
(18)
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 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.
(19) Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated August 1, 2017, as filed with
the SEC on August 1, 2017.
(20) Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated August 1, 2017, as filed with
the SEC on August 1, 2017.
(21) Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated August 1, 2017, as filed with
the SEC on August 1, 2017.
(22) Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, dated August 1, 2017, as filed with
the SEC on August 1, 2017.
ii
(23) Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2017, as filed with the SEC on November 9, 2017.
(24) Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated December 11, 2017, as filed
with the SEC on December 11, 2017.
(25) Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated April 4, 2018, as filed with the
SEC on April 4, 2018.
(26) Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated May 30, 2018, as filed with the
SEC on May 30, 2018.
(27) Incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended March 31,
(28)
2004, as filed with the SEC on June 29, 2004.
Incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,
2017, as filed with the SEC on June 14, 2017
iii
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 27, 2018
By:
/s/ Douglas Marohn
NICHOLAS FINANCIAL, INC.
Douglas Marohn
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Douglas
Marohn, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his 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 attorney-in-
fact and agent 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 might or could do in person, hereby ratifying and confirming all that said attorney-in-
fact and agent, or his substitute, 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/ Douglas Marohn
Douglas Marohn
/s/ Kelly M. Malson
Kelly M. Malson
/s/ Robin Hastings
Robin Hastings
/s/ Jeffrey C. Royal
Jeffrey C. Royal
/s/ Adam K. Peterson
Adam K. Peterson
/s/ Jeremy Q. Zhu
Jeremy Q. Zhu
President, Chief Executive Officer, and Director
June 27, 2018
Chief Financial Officer (Principal Accounting Officer)
June 27, 2018
Chairman of the Board of Directors
June 27, 2018
Director
Director
Director
June 27, 2018
June 27, 2018
June 27, 2018
S H A R E H O L D E R
I N F O R M A T I O N
Corporate Offices:
Independent Auditors:
Nicholas Financial, Inc.
2454 McMullen Booth Road
Clearwater, Florida 33759
Directors:
Robin Hastings
Chairperson of the Board of Directors
& Nominating/Corporate Governance
Committee Chairperson
Former COO
United Maritime Group
Douglas Marohn
President & CEO
Corporate Secretary
Nicholas Financial, Inc.
Adam Peterson
General Partner
Magnolia Capital Fund, LP
Jeffrey C. Royal
Audit Committee Chairperson
President
Dundee Bank
Jeremy Zhu
Compensation Committee Chairperson
Managing Director
Sepulveda Management, LLC
an affiliate of the TCW Business Unit
Dixon Hughes
Atlanta, Georgia
General Counsel:
Hill Ward Henderson
Tampa Florida
Transfer Agent & Registrar:
Computershare Investor Services
Vancouver, BC, Canada V6C 3B9
Stock Information:
Listed on the NASDAQ National
Market System
Trading Symbol: NICK
Corporate Officers:
Douglas Marohn
President & CEO
Kelly Malson
Chief Financial Officer
Notice To Shareholders:
The Company will supply to any owner
of Common Stock, upon written request
to the Company at the address below
and without charge, a copy of the An-
nual Report and Form 10-K for the year
ended March 31, 2018, which has been
filed with the Securities and Exchange
Commission.
The Annual Report and 10-K are also
available on the Company's internet
website at:
www.nicholasfinancial.com
The Annual Meeting is on August 23, 2018
at 10:00 am, at the Nicholas Finan-
cial, Inc., Corporate Headquarters in
Clearwater, FL:
Nicholas Financial, Inc.
2454 McMullen-Booth Road N.
Building C
Clearwater, FL 33759
(727) 726-0763
Nicholas Financial, Inc.
2454 McMullen-Booth Road
Building C
Clearwater, Florida, 33759 USA
-
(727) 726-0763
Telephone
Fax
(727) 726-2140
-
www.NicholasFinancial.com