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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

For the fiscal year ended March 31, 2022

OR

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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 0-26680

 

NICHOLAS FINANCIAL, INC.

(Exact name of Registrant as specified in its Charter)

 

 

British Columbia, Canada

59-2506879

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2454 McMullen Booth Road, Building C

Clearwater, FL

33759

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (727) 726-0763

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common shares, no par value

 

NICK

 

NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No

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

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

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

Indicate by check mark whether the Registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on September 30, 2021, was approximately $93.2 million.

The number of shares of Registrant’s Common Stock outstanding as of March 31, 2022 was approximately 12.7 million shares, no par value (of which approximately 5.1 million shares were held by the Registrant’s principal operating subsidiary and pursuant to applicable law, not entitled to vote and approximately 7.6 million shares were entitled to vote).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement and Information Circular for the 2022 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

 

 

 

 

 

 

Page No.

 

 

 

 

 

 

PART I

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Business

 

1

 

Item 1A.

 

Risk Factors

 

13

 

Item 1B.

 

Unresolved Staff Comments

 

24

 

Item 2.

 

Properties

 

24

 

Item 3.

 

Legal Proceedings

 

24

 

Item 4.

 

Mine Safety Disclosures

 

24

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

25

 

Item 6.

 

[Reserved]

 

26

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

Item 8.

 

Financial Statements and Supplementary Data

 

35

 

Item 9A.

 

Controls and Procedures

 

60

 

Item 9B.

 

Other Information

 

60

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

61

 

Item 11.

 

Executive Compensation

 

61

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

61

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

61

 

Item 14.

 

Principal Accountant Fees and Services

 

62

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

63

 

 


 

Forward-Looking Information

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,” “we,” “us,” or “our”) believes that the expectations reflected or implied in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. As a result, actual results could differ materially from those indicated in these forward-looking statements. Forward-looking statements in this Annual Report may include, without limitation: (1) the projected impact of the novel coronavirus disease (“COVID-19”) outbreak on our customers and our business, (2) projections of revenue, income, and other items relating to our financial position and results of operations, (3) statements of our capital allocation plans, particularly alternatives for future use of excess equity capital, (4) statements of other plans, objectives, strategies, goals and intentions, (5) statements regarding the capabilities, capacities, market position and expected development of our business operations, and (6) statements of expected industry and general economic trends. These statements are subject to certain risks, uncertainties and assumptions that may cause results to differ materially from those expressed or implied in forward-looking statements, including without limitation:

legal and tax complexities surrounding our corporate structure as a British Columbia company with primarily U.S. shareholders and exclusively U.S. operations;
future impacts of the COVID-19 outbreak and measures taken in response thereto, including without limitation the successful delivery of vaccines effective against the different variants of the virus, for which future developments are highly uncertain and difficult to predict;
availability of capital (including the ability to access bank financing);
recently enacted, proposed or future legislation and the manner in which it is implemented, including tax legislation initiatives or challenges to our tax positions and/or interpretations, and state sales tax rules and regulations;
fluctuations in the economy;
the degree and nature of competition and its effects on the Company’s financial results;
fluctuations in interest rates;
effectiveness of our risk management processes and procedures, including the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures;
demand for consumer financing in the markets served by the Company;
our ability to successfully develop and commercialize new or enhanced products and services;
the sufficiency of our allowance for credit losses and the accuracy of the assumptions or estimates used in preparing our financial statements;
increases in the default rates experienced on automobile finance installment contracts (“Contracts”);
higher borrowing costs and adverse financial market conditions impacting our funding and liquidity;
our ability to securitize our loan receivables, occurrence of an early amortization of our securitization facilities, loss of the right to service or subservice our securitized loan receivables, and lower payment rates on our securitized loan receivables;
regulation, supervision, examination and enforcement of our business by governmental authorities, and adverse regulatory changes in the Company’s existing and future markets, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and other legislative and regulatory developments, including regulations relating to privacy, information security and data protection and the impact of the Consumer Financial Protection Bureau's (the “CFPB”) regulation of our business
fraudulent activity;
failure of third parties to provide various services that are important to our operations;

 


 

alleged infringement of intellectual property rights of others and our ability to protect our intellectual property;
litigation and regulatory actions;
our ability to attract, retain and motivate key officers and employees;
use of third-party vendors and ongoing third-party business relationships;
cyber-attacks or other security breaches;
disruptions in the operations of our computer systems and data centers;
our ability to realize our intentions regarding strategic alternatives;
our ability to expand our business, including our ability to complete acquisitions and integrate the operations of acquired businesses and to expand into new markets; and
the risk factors discussed 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. All forward-looking statements included in this Report are based on information available to the Company as the date of filing of this Annual 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 U.S. Securities and Exchange Commission (“SEC”), including its reports on Forms 10-Q, 8-K and annual reports to shareholders.

 


 

PART I

Item 1. Business

General

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. Additionally, Nicholas Financial 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. In addition, NF Funding I, LLC (“NF Funding I”), is a wholly-owned, special purpose financing subsidiary of Nicholas Financial.

Nicholas Financial-Canada, Nicholas Financial, NDS, and NF Funding I are hereafter collectively referred to as the “Company”.

All financial information herein is designated in United States dollars. References to “fiscal 2022” are to the fiscal year ended March 31, 2022 and references to “fiscal 2021” are to the fiscal year ended March 31, 2021.

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 website 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.

Operating Strategy

The Company remains committed to its branch-based model and its core product of financing primary transportation to and from work for the subprime borrower through the local independent automobile dealership. The Company strategically employs the use of centralized servicing departments to supplement the branch operations and improve operational efficiencies, but its focus is on its core business model of decentralized operations. The Company’s strategy also includes risk-based pricing (rate, yield, advance, term, collateral value) and a commitment to the underwriting discipline required for optimal portfolio performance. The Company’s principal goals are to increase its profitability and its long-term shareholder value. During fiscal 2022, the Company focused on the following items:

maintaining our commitment to the local branch model;
expanding the local branch model into new states;
identifying additional ancillary products to enhance profitability and asset performance;
continuing to focus on strategic acquisitions or bulk portfolio purchases to accelerate total revenue;
ensuring that Direct Loans are available in all our existing branch offices based on the applicable regulatory requirements.
continuing working expansion in two ways, through the Virtual Servicing Center and buying a new market from an existing host branch. We are currently doing this for Augusta GA, Northern Indiana, and Greenville NC. Expansion is a crucial piece to our long-term growth.

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putting a larger focus on technology to help us price our indirect product correctly. This will allow us to be more aggressive and capture the business that has a proven track record of paying. We have several test markets using this pricing and will be gathering more data before we launch companywide.
increasing its direct lending text campaigns from semi-annually to quarterly, expanding live checks to new customers with credit bureau providers beginning in FY 2022, developing sales finance programs to local stores, and investing in new direct loan products with competitive pricing and collateral requirements. All these enhancements will help generate more customers and revenue.

The Company also focused on selecting the right markets to have branch locations. As of March 31, 2022, the Company operated brick and mortar branch locations in 18 states — Alabama, Florida, Georgia, Idaho, Illinois, Indiana, Kentucky, Michigan, Missouri, North Carolina, Nevada, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, and Wisconsin. The Company also originated business in its expansion state of Arizona without a physical branch in such markets.

In fiscal 2022, the Company did not initiate any new restructuring activities.

In fiscal 2022, the Company expanded the branch network with the opening of branches in Boise, Idaho and Houston, Texas. The Company also expanded through the Virtual Servicing Center in Augusta, Georgia, Northern Indiana, and Greenville, North Carolina. 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.

During fiscal 2022, the Company completed bulk portfolio purchases for a total of $3.1 million, with $1.2 million in the first quarter, $0.6 million in the second quarter, $1.1 million in the third quarter, and $0.2 million in the fourth quarter, respectively. The Company plans to consider more bulk portfolio purchases when favorable opportunities present themselves.

During fiscal 2021, the Company completed bulk portfolio purchases for a total of $1.4 million, with $0.3 million in the first quarter, $0.7 million in the third quarter, and $0.4 million in the fourth quarter, respectively.

The Company is currently licensed to provide Direct Loans in 14 states — Alabama, Florida, Georgia (over $3,000), Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, and Tennessee. The Company solicits current and former customers in these states for the purpose of providing Direct Loans to such customers, and intends to continue the expansion of its Direct Loan capabilities to the other states in which it acquires Contracts. Even with this targeted expansion, the Company expects its total Direct Loans portfolio to remain between 10% and 15% 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 lenders that look primarily to the credit history of the borrower in making lending decisions, typically financing 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, the Company’s automobile finance programs are conducted in 18 states through a total of 47 branch offices located in the states of Alabama, Florida, Georgia, Idaho, Illinois, Indiana, Kentucky, Michigan, Missouri, North Carolina, Nevada, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, and Wisconsin. (Arizona is an expansion state with no local branch office). The Company acquires Contracts in these states through its virtual expansion office operations based in the Charlotte, North Carolina Corporate

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location. As of March 31, 2022, the Company had non-exclusive agreements with approximately 13,000 dealers, of which approximately 9,000 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 contract is complete and executed. 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 and/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 waiver coverage, 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. The Company refers 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, with the typical average discount being between 6.00% and 8.00%. As of March 31, 2022, the Company’s indirect loan portfolio consisted of Contracts purchased from a dealer or acquired through a bulk acquisition. Such Contracts are 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.

 

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Contract Procurement

The Company purchased Contracts in the states listed in the table below during the periods indicated. The Contracts purchased by the Company are predominantly 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, 2022 was a 2012 vehicle. The dollar amounts shown in the table below represent the Company’s finance receivables on Contracts purchased within the respective fiscal year:

 

 

 

Maximum
allowable
interest

 

 

Number of Branches on

 

 

Fiscal year ended March 31, (In thousands)

 

State

 

rate (1)

 

 

March 31, 2022

 

 

2022

 

 

2021

 

Alabama

 

18-36%(2)

 

 

 

2

 

 

$

4,121

 

 

$

2,534

 

Arizona

 

(2)

 

 

 

-

 

 

 

343

 

 

 

-

 

Florida

 

18-30%(3)

 

 

 

11

 

 

 

13,886

 

 

 

16,268

 

Georgia

 

18-30%(3)

 

 

 

5

 

 

 

11,007

 

 

 

11,129

 

Idaho

 

 

(2

)

 

 

1

 

 

 

828

 

 

 

418

 

Illinois

 

 

(2

)

 

 

1

 

 

 

1,632

 

 

 

1,128

 

Indiana

 

 

25

%

 

 

2

 

 

 

4,878

 

 

 

3,259

 

Kansas

 

 

(2

)

 

-

 

 

 

-

 

 

 

14

 

Kentucky

 

18-25%(3)

 

 

 

3

 

 

 

5,458

 

 

 

4,890

 

Michigan

 

 

25

%

 

 

2

 

 

 

2,947

 

 

 

2,508

 

Missouri

 

 

(2

)

 

 

2

 

 

 

5,459

 

 

 

4,759

 

Nevada

 

 

(2

)

 

 

1

 

 

 

2,434

 

 

 

1,567

 

North Carolina

 

18-29%(3)

 

 

 

3

 

 

 

6,997

 

 

 

4,586

 

Ohio

 

 

25

%

 

 

6

 

 

 

12,495

 

 

 

11,636

 

Pennsylvania

 

18-21%(3)

 

 

 

1

 

 

 

2,441

 

 

 

1,359

 

South Carolina

 

 

(2

)

 

 

3

 

 

 

5,432

 

 

 

4,545

 

Tennessee

 

 

(2

)

 

 

1

 

 

 

2,046

 

 

 

2,518

 

Texas

 

18-23%(3)

 

 

 

1

 

 

 

1,762

 

 

 

307

 

Utah

 

 

(2

)

 

 

1

 

 

 

460

 

 

 

243

 

Wisconsin

 

 

(2

)

 

 

1

 

 

 

1,178

 

 

 

357

 

Total

 

 

 

 

47

 

 

$

85,804

 

 

$

74,025

 

 

(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 36% 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:

 

 

 

Fiscal year ended March 31,
(Purchases in thousands)

 

Contracts

 

2022

 

 

2021

 

Purchases

 

$

85,804

 

 

$

74,025

 

Average APR

 

 

23.1

%

 

 

23.4

%

Average dealer discount

 

 

6.9

%

 

 

7.5

%

Average term (months)

 

 

47

 

 

 

46

 

Average loan

 

$

11,002

 

 

$

10,135

 

Number of Contracts purchased

 

 

7,793

 

 

 

7,307

 

 

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Direct Loans

The Company currently originates Direct Loans in Alabama, Florida, Georgia (over $3,000), Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, and Tennessee. Direct Loans are loans originated directly between the Company and the consumer. These loans are typically for amounts ranging from $500 to $11,000 and are generally secured by a lien on an automobile, watercraft or other permissible tangible personal property. The average loan made during fiscal 2022 by the Company had an initial principal balance of approximately $4,300. The Company does not expect the average loan size to increase significantly within the foreseeable future. Most of the 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 payment history with the Company, as well as their established relationship with the local branch staff. The Company does not have a Direct Loan license in Idaho, Nevada, Texas, Utah, or Wisconsin, and none is presently required in Georgia provided that the original principal balance of the loan is greater than $3,000. 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 collection experience of the borrower under the Contract is a significant factor in making the underwriting decision. The Company’s Direct Loan program was implemented in April 1995 and accounted for approximately 12% of the Company’s annual consolidated revenues during the year ended March 31, 2022.

In connection with its Direct Loan program, the Company also makes available credit disability insurance, credit life insurance, and involuntary unemployment insurance coverage to customers through unaffiliated third-party insurance carriers. Approximately 69% of the Direct Loans outstanding as of March 31, 2022 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:

 

 

 

Fiscal year ended March 31,
(Originations in thousands)

 

Direct Loans

 

2022

 

 

2021

 

Originations

 

$

28,740

 

 

$

14,148

 

Average APR

 

 

30.5

%

 

 

29.6

%

Average term (months)

 

26

 

 

 

25

 

Average loan

 

$

4,307

 

 

$

4,131

 

Number of contracts originated

 

 

6,770

 

 

 

3,497

 

 

Underwriting Guidelines

The Company’s typical customer has a credit history that fails to meet the lending standards of most banks and credit unions. Some of the credit problems experienced by the Company’s customers that resulted in a poor credit history include but are not limited to: 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.

The Company’s process to approve the purchase of a Contract begins with the Company receiving 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

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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 similar 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 from “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 five-year old, lower mileage used automobile, while a customer in any of the two lowest categories (i.e., “3,” or “4”) usually is purchasing an older, higher mileage automobile from an independent used automobile dealer.

The Company performs audits of its branches’ compliance with Company underwriting guidelines. The Company audits 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. Additionally, field supervisions and audits are conducted by District Managers, Divisional Vice Presidents and Divisional Administrative Assistants to ensure operational and underwriting compliance throughout the branch network.

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 or at the end of the day 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 promise 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 customer 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.

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.

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If an account is 121 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.

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, the terms on which it has purchased Contracts from such dealer, as well as the overall portfolio performance of Contracts purchased from the 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 uses web advertising, social media and print ads in dealer association publications for marketing purposes. The Company is a member and corporate sponsor of the National Independent Auto Dealers Association, which also gives it access to state-level associations. Its representatives attend conferences and events for both state and national associations to market its products directly to dealers in attendance.

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. It also relies on other forms of electronic messaging and in-store advertising.

Computerized Information System

All Company personnel are provided with real-time access to information. The Company has purchased 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, 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 enables automobile dealers to shop for the best price, which can result in an erosion in the dealer discounts from the initial principal amounts at which the Company is willing to purchase Contracts and higher advance rates. However, the Company instead focuses on purchasing Contracts that are priced to reflect the inherent risk level of the Contract, and sacrifices loan volume, if necessary, to maintain that pricing discipline. For the fiscal year ended March 31, 2022, the Company’s average dealer discount on Contracts purchased decreased to 6.9%, compared to 7.5% for the fiscal year ended March 31, 2021. The table below shows the number

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and principal amount of Contracts purchased, average amount financed, average term, and average APR and discount for the periods presented:

 

Key Performance Indicators on Contracts Purchased

 

(Purchases in thousands)

 

 

 

 

Number of

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

Contracts

 

 

Principal Amount

 

 

Amount

 

 

Average

 

 

 

Average

 

 

 

Average

 

/Quarter

 

 

Purchased

 

 

Purchased#

 

 

Financed*^

 

 

APR*

 

 

 

Discount%*

 

 

 

Term*

 

 

2022

 

 

 

7,793

 

 

$

85,804

 

 

$

11,002

 

 

 

23.1

 

%

 

 

6.9

 

%

 

 

47

 

 

4

 

 

 

2,404

 

 

 

27,139

 

 

 

11,289

 

 

 

22.9

 

%

 

6.9

 

%

 

 

47

 

 

3

 

 

 

1,735

 

 

 

19,480

 

 

 

11,228

 

 

 

23.1

 

%

 

 

6.8

 

%

 

 

47

 

 

2

 

 

 

1,707

 

 

 

18,880

 

 

 

11,061

 

 

 

23.0

 

%

 

 

6.7

 

%

 

 

47

 

 

1

 

 

 

1,947

 

 

 

20,305

 

 

 

10,429

 

 

 

23.2

 

%

 

 

7.0

 

%

 

 

46

 

 

2021

 

 

 

7,307

 

 

$

74,025

 

 

$

10,135

 

 

 

23.4

 

%

 

 

7.5

 

%

 

 

46

 

 

4

 

 

 

2,429

 

 

 

24,637

 

 

 

10,143

 

 

 

23.2

 

%

 

7.5

 

%

 

 

46

 

 

3

 

 

 

1,483

 

 

 

15,285

 

 

 

10,307

 

 

 

23.4

 

%

 

 

7.5

 

%

 

 

46

 

 

2

 

 

 

1,709

 

 

 

17,307

 

 

 

10,127

 

 

 

23.5

 

%

 

 

6.8

 

%

 

 

46

 

 

1

 

 

 

1,686

 

 

 

16,796

 

 

 

9,962

 

 

 

23.5

 

%

 

 

8.0

 

%

 

 

46

 

 

2020

 

 

 

7,647

 

 

$

76,696

 

 

$

10,035

 

 

 

23.4

 

%

 

 

7.9

 

%

 

 

47

 

 

4

 

 

 

1,991

 

 

 

19,658

 

 

 

9,873

 

 

 

23.5

 

%

 

7.9

 

%

 

 

46

 

 

3

 

 

 

1,753

 

 

 

17,880

 

 

 

10,200

 

 

 

23.3

 

%

 

7.6

 

%

 

 

47

 

 

2

 

 

 

2,011

 

 

 

20,104

 

 

 

9,997

 

 

 

23.5

 

%

 

7.9

 

%

 

 

46

 

 

1

 

 

 

1,892

 

 

 

19,054

 

 

 

10,071

 

 

 

23.4

 

%

 

8.3

 

%

 

 

47

 

 

2019

 

 

 

7,684

 

 

$

77,499

 

 

$

10,086

 

 

 

23.5

 

%

 

 

8.2

 

%

 

 

47

 

 

4

 

 

 

2,151

 

 

 

21,233

 

 

 

9,871

 

 

 

23.5

 

%

 

 

8.0

 

%

 

 

46

 

 

3

 

 

 

1,625

 

 

 

16,476

 

 

 

10,139

 

 

 

23.5

 

%

 

 

8.1

 

%

 

 

47

 

 

2

 

 

 

1,761

 

 

 

17,845

 

 

 

10,133

 

 

 

23.5

 

%

 

 

8.4

 

%

 

 

47

 

 

1

 

 

 

2,147

 

 

 

21,945

 

 

 

10,221

 

 

 

23.7

 

%

 

 

8.3

 

%

 

 

48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Performance Indicators on Direct Loans Originated

 

 

 

 

 

(Originations in thousands)

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

Contracts

 

 

Principal Amount

 

 

Amount

 

 

Average

 

 

 

Average

 

 

 

 

 

/Quarter

 

 

Originated

 

 

Originated#

 

 

Financed*^

 

 

APR*

 

 

 

Term*

 

 

 

 

 

 

2022

 

 

 

6,770

 

 

$

28,740

 

 

$

4,307

 

 

 

30.5

 

%

 

 

26

 

 

 

 

 

 

4

 

 

 

1,584

 

 

 

7,458

 

 

 

4,708

 

 

 

30.0

 

%

 

 

27

 

 

 

 

 

 

3

 

 

 

2,282

 

 

 

8,505

 

 

 

3,727

 

 

 

31.8

 

%

 

 

24

 

 

 

 

 

 

2

 

 

 

1,588

 

 

 

7,040

 

 

 

4,433

 

 

 

30.0

 

%

 

 

26

 

 

 

 

 

 

1

 

 

 

1,316

 

 

 

5,737

 

 

 

4,359

 

 

30.1

 

%

 

 

25

 

 

 

 

 

 

2021

 

 

 

3,497

 

 

$

14,148

 

 

$

4,131

 

 

 

29.6

 

%

 

 

25

 

 

 

 

 

 

4

 

 

 

753

 

 

 

3,284

 

 

 

4,362

 

 

 

29.6

 

%

 

 

25

 

 

 

 

 

 

3

 

 

 

1,265

 

 

 

4,605

 

 

 

3,641

 

 

 

30.9

 

%

 

 

22

 

 

 

 

 

 

2

 

 

 

924

 

 

 

3,832

 

 

 

4,147

 

 

 

29.2

 

%

 

 

25

 

 

 

 

 

 

1

 

 

 

555

 

 

 

2,427

 

 

 

4,373

 

 

28.7

 

%

 

 

26

 

 

 

 

 

 

2020

 

 

 

3,142

 

 

$

12,638

 

 

$

4,017

 

 

28.2

 

%

 

 

25

 

 

 

 

 

 

4

 

 

 

720

 

 

 

3,104

 

 

 

4,310

 

 

28.6

 

%

 

 

25

 

 

 

 

 

 

3

 

 

 

1,137

 

 

 

4,490

 

 

 

3,949

 

 

28.4

 

%

 

 

24

 

 

 

 

 

 

2

 

 

 

739

 

 

 

2,988

 

 

 

4,043

 

 

27.4

 

%

 

 

25

 

 

 

 

 

 

1

 

 

 

546

 

 

 

2,056

 

 

 

3,765

 

 

28.2

 

%

 

 

24

 

 

 

 

 

 

2019

 

 

 

1,918

 

 

$

7,741

 

 

$

4,036

 

 

26.4

 

%

 

 

25

 

 

 

 

 

 

4

 

 

 

236

 

 

 

1,240

 

 

 

4,654

 

 

27.3

 

%

 

 

24

 

 

 

 

 

 

3

 

 

 

738

 

 

 

2,999

 

 

 

4,063

 

 

25.9

 

%

 

 

25

 

 

 

 

 

 

2

 

 

 

495

 

 

 

1,805

 

 

 

3,646

 

 

26.5

 

%

 

 

25

 

 

 

 

 

 

1

 

 

 

449

 

 

 

1,697

 

 

 

3,779

 

 

25.7

 

%

 

 

28

 

 

 

 

 

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

 

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

 

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

 

 

8


 

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 9,000 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, 2022 or 2021.

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. 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 or off-site examinations can be conducted for any of our locations. Examinations 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.
State licensing requirements. The Company files a notification or obtains a license to acquire Contracts in each state in which it acquires Contracts. 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. For Direct Loan activities, the Company obtains licenses, where required, from each state in which it offers consumer loans.
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