10-Q 1 nick-20231231.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

 

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

 

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2023

 

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.)

 

26133 US Highway 19 North, STE 300

 

 

Clearwater, Florida

 

33759

(Address of Principal Executive Offices)

 

(Zip Code)

 

(727) 726-0763

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

NICK

 

NASDAQ

 

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

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

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

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

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

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

As of February 13, 2024, approximately 12.7 million common shares, no par value, of the Registrant were outstanding (of which 5.4 million shares were held by the Registrant’s principal operating subsidiary and pursuant to applicable law, not entitled to vote and 7.3 million shares were entitled to vote).

 

 

 


 

 

NICHOLAS FINANCIAL, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

Part I .

 

Financial Information

 

 

Item 1.

 

Financial Statements (Unaudited)

 

1

 

 

Condensed Consolidated Balance Sheets as of December 31, 2023 and March 31, 2023

 

1

 

 

Condensed Consolidated Statements of Income (Loss) for the three and nine months ended December 31, 2023 and 2022

 

2

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended December 31, 2023 and 2022

 

3

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2023 and 2022

 

4

 

 

Notes to the Condensed Consolidated Financial Statements

 

5

Item 2.

 

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

 

20

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

33

Item 4.

 

Controls and Procedures

 

33

 

 

 

 

 

Part II .

 

Other Information

 

 

Item 1.

 

Legal Proceedings

 

34

Item 1A.

 

Risk Factors

 

34

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

Item 3.

 

Defaults Upon Senior Securities

 

35

Item 4.

 

Mine Safety Disclosures

 

35

Item 5.

 

Other Information

 

35

Item 6.

 

Exhibits

 

36

 

 


 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Nicholas Financial, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

December 31, 2023
(Unaudited)

 

 

March 31, 2023

 

Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,817

 

 

$

454

 

Finance receivables held for sale, at a lower of amortized cost or fair value

 

 

50,306

 

 

 

 

Finance receivables, held for investments, net of unearned discounts and fees and accrued interest receivable

 

 

 

 

 

124,315

 

Less: Allowance for credit losses

 

 

 

 

 

(17,396

)

Finance receivables, net

 

 

 

 

 

106,919

 

Repossessed assets held for sale, at a lower of carrying value or fair value less cost to sell

 

 

395

 

 

 

1,491

 

Prepaid expenses and other assets

 

 

390

 

 

 

316

 

Income taxes receivable

 

 

915

 

 

 

946

 

Property and equipment, net

 

 

168

 

 

 

222

 

Total assets

 

$

59,991

 

 

$

110,348

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

Line of credit, net of debt issuance costs

 

$

 

 

$

28,936

 

Accounts payable, accrued expenses, and other liabilities

 

 

938

 

 

 

1,603

 

Total liabilities

 

 

938

 

 

 

30,539

 

Commitments and contingencies (see Note 9)

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

Preferred stock, no par: 5,000 shares authorized; none issued

 

 

 

 

 

 

Common stock, no par: 50,000 shares authorized; 12,658 shares issued,
  
7,289 shares outstanding as of December 31, 2023 and March 31, 2023

 

 

35,267

 

 

 

35,223

 

Treasury stock: 5,368 common shares, at cost

 

 

(76,794

)

 

 

(76,794

)

Retained earnings

 

 

100,580

 

 

 

121,380

 

Total shareholders’ equity

 

 

59,053

 

 

 

79,809

 

Total liabilities and shareholders’ equity

 

$

59,991

 

 

$

110,348

 

 

See Notes to the Condensed Consolidated Financial Statements.

1


 

 

Nicholas Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Loss)

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended December 31,

 

 

Nine Months Ended December 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Interest and fee income on finance receivables

 

$

4,954

 

 

$

11,268

 

 

$

18,367

 

 

$

35,580

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Marketing

 

 

22

 

 

 

177

 

 

 

88

 

 

 

1,086

 

Administrative

 

 

3,906

 

 

 

9,398

 

 

 

12,328

 

 

 

25,066

 

Provision for credit losses

 

 

(10,482

)

 

 

10,730

 

 

 

2,570

 

 

 

23,280

 

Fair value and other adjustments, net

 

 

23,110

 

 

 

 

 

 

23,110

 

 

 

 

Depreciation and amortization of intangibles

 

 

22

 

 

 

97

 

 

 

66

 

 

 

339

 

Interest expense

 

 

68

 

 

 

1,239

 

 

 

826

 

 

 

2,782

 

Total expenses

 

 

16,646

 

 

 

21,641

 

 

 

38,988

 

 

 

52,553

 

Income from securities:

 

 

 

 

 

 

 

 

 

 

 

 

Net gain on equity investments

 

 

 

 

 

 

 

 

 

 

 

66

 

Income from cash equivalents

 

 

31

 

 

 

 

 

 

31

 

 

 

 

Total income from securities

 

 

31

 

 

 

 

 

 

31

 

 

 

66

 

Loss before income taxes

 

 

(11,661

)

 

 

(10,373

)

 

 

(20,590

)

 

 

(16,907

)

Income tax expense

 

 

 

 

 

3,000

 

 

 

 

 

 

1,415

 

Net loss

 

$

(11,661

)

 

$

(13,373

)

 

$

(20,590

)

 

$

(18,322

)

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.60

)

 

$

(1.85

)

 

$

(2.83

)

 

$

(2.49

)

Diluted

 

$

(1.60

)

 

$

(1.85

)

 

$

(2.83

)

 

$

(2.49

)

 

See Notes to the Condensed Consolidated Financial Statements.

2


 

 

Nicholas Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

(In thousands)

 

 

 

Three Months Ended December 31, 2023

 

 

 

Common Stock

 

 

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Treasury
Stock

 

 

Retained
Earnings

 

 

Shareholders'
Equity

 

Balance at September 30, 2023

 

 

7,289

 

 

$

35,266

 

 

$

(76,794

)

 

$

112,241

 

 

$

70,713

 

Share-based compensation

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(11,661

)

 

 

(11,661

)

Balance at December 31, 2023

 

 

7,289

 

 

$

35,267

 

 

$

(76,794

)

 

$

100,580

 

 

$

59,053

 

 

 

 

 

 

 

Three Months Ended December 31, 2022

 

 

 

Common Stock

 

 

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Treasury
Stock

 

 

Retained
Earnings

 

 

Shareholders'
Equity

 

Balance at September 30, 2022

 

 

7,309

 

 

$

35,172

 

 

$

(76,684

)

 

$

150,550

 

 

$

109,038

 

Issuance of restricted stock awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Treasury stock

 

 

(19

)

 

 

 

 

 

(110

)

 

 

 

 

 

(110

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(13,373

)

 

 

(13,373

)

Balance at December 31, 2022

 

 

7,290

 

 

$

35,197

 

 

$

(76,794

)

 

$

137,177

 

 

$

95,580

 

 

 

 

 

 

 

 

Nine Months Ended December 31, 2023

 

 

 

Common Stock

 

 

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Treasury
Stock

 

 

Retained
Earnings

 

 

Shareholders'
Equity

 

Balance at March 31, 2023

 

 

7,289

 

 

$

35,223

 

 

$

(76,794

)

 

$

121,380

 

 

$

79,809

 

Cumulative effect of adoption of ASU 2016-13, net of tax

 

 

 

 

 

 

 

 

 

 

 

(210

)

 

 

(210

)

Share-based compensation

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

44

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(20,590

)

 

 

(20,590

)

Balance at December 31, 2023

 

 

7,289

 

 

$

35,267

 

 

$

(76,794

)

 

$

100,580

 

 

$

59,053

 

 

 

 

 

 

 

Nine Months Ended December 31, 2022

 

 

 

Common Stock

 

 

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Treasury
Stock

 

 

Retained
Earnings

 

 

Shareholders'
Equity

 

Balance at March 31, 2022

 

 

7,546

 

 

$

35,292

 

 

$

(74,405

)

 

$

155,499

 

 

$

116,386

 

Issuance of restricted stock awards

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of restricted stock awards

 

 

(26

)

 

 

(175

)

 

 

 

 

 

 

 

 

(175

)

Share-based compensation

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

80

 

Treasury stock

 

 

(241

)

 

 

 

 

 

(2,389

)

 

 

 

 

 

(2,389

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(18,322

)

 

 

(18,322

)

Balance at December 31, 2022

 

 

7,290

 

 

$

35,197

 

 

$

(76,794

)

 

$

137,177

 

 

$

95,580

 

 

 

 

 

 

See Notes to the Condensed Consolidated Financial Statements.

3


 

 

Nicholas Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended December 31,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

(20,590

)

 

$

(18,322

)

Adjustments to reconcile net income (loss) to net cash provided (used in) by operating activities:

 

 

 

 

 

 

Depreciation and amortization of intangibles

 

 

66

 

 

 

339

 

Amortization of debt issuance costs

 

 

70

 

 

 

124

 

Non-cash lease expense

 

 

36

 

 

 

1,427

 

Net loss on disposal of property and equipment

 

 

10

 

 

 

650

 

Net gain on equity investments

 

 

 

 

 

(66

)

Fair value and other adjustments, net

 

 

23,110

 

 

 

 

Provision for credit losses

 

 

2,570

 

 

 

23,280

 

Amortization of dealer discounts

 

 

(2,660

)

 

 

(4,632

)

Amortization of insurance and fee commissions

 

 

(1,802

)

 

 

(2,395

)

Accretion of purchase price discount

 

 

(54

)

 

 

(119

)

Deferred income taxes

 

 

 

 

 

1,385

 

Cancellations of restricted stock awards

 

 

 

 

 

(175

)

Principal reduction on operating lease liabilities

 

 

(37

)

 

 

 

Share-based compensation

 

 

44

 

 

 

80

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accrued interest receivable

 

 

895

 

 

 

(588

)

Prepaid expenses and other assets

 

 

(27

)

 

 

(100

)

Accounts payable, accrued expenses, and other liabilities

 

 

(627

)

 

 

(2,453

)

Income taxes receivable

 

 

31

 

 

 

44

 

Net cash provided by (used in) operating activities

 

 

1,035

 

 

 

(1,521

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase and origination of finance receivables

 

 

(5,515

)

 

 

(61,769

)

Principal payments received and proceeds from repossessed assets held for sale

 

 

40,955

 

 

 

75,309

 

Purchases of equity investments

 

 

 

 

 

(7,237

)

Proceeds from sale of equity investments

 

 

 

 

 

7,303

 

Payments for property and equipment

 

 

(13

)

 

 

 

Net cash provided by investing activities

 

 

35,427

 

 

 

13,606

 

Cash flows from financing activities:

 

 

 

 

 

 

Repayments on credit facilities

 

 

(29,100

)

 

 

(27,800

)

Proceeds from credit facilities

 

 

 

 

 

17,800

 

Payment of loan originations fees

 

 

 

 

 

(313

)

Repayment of PPP Loan

 

 

 

 

 

(3,244

)

Repurchases of treasury stock

 

 

 

 

 

(2,389

)

Net cash used in financing activities

 

 

(29,100

)

 

 

(15,946

)

Net increase (decrease) in cash and cash equivalents

 

 

7,362

 

 

 

(3,861

)

Cash and cash equivalents, at the beginning of period

 

 

454

 

 

 

4,775

 

Cash and cash equivalents, at the end of period

 

$

7,817

 

 

$

914

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid

 

$

975

 

 

$

2,532

 

Income taxes paid

 

 

 

 

 

24

 

Transfer of finance receivables to repossessed assets

 

 

14,034

 

 

 

6,446

 

 

See Notes to the Condensed Consolidated Financial Statements.

4


 

 

Notes to the Condensed Consolidated Financial Statements

 

Note 1. Basis of Presentation

Nicholas Financial, Inc. (“Nicholas Financial – Canada”) is a Canadian holding company incorporated under the laws of British Columbia with several wholly-owned United States subsidiaries, including Nicholas Financial, Inc., a Florida corporation (“NFI”). The accompanying condensed consolidated balance sheet as of December 31, 2023, and the accompanying unaudited interim condensed consolidated financial statements of Nicholas Financial – Canada, and its wholly-owned subsidiaries (collectively, the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information, with the instructions to Form 10-Q pursuant to the Securities Exchange Act of 1934, as amended, and with Article 8 of Regulation S-X thereunder. Accordingly, they do not include all of the information and notes to the consolidated financial statements required by U.S. GAAP for complete consolidated financial statements, although the Company believes that the disclosures made are adequate to ensure the information is not misleading. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year ending March 31, 2024. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2023 as filed with the Securities and Exchange Commission on June 27, 2023. The March 31, 2023 consolidated balance sheet included herein has been derived from the March 31, 2023 audited consolidated balance sheet included in the aforementioned Form 10-K.

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

As previously disclosed in the Company’s Registration Statement on Form S-4 filed with the U.S. Securities and Exchange Commission on November 22, 2023, as amended on January 10, 2024 and January 29, 2024, the Company is seeking shareholder approval for the sale of all or substantially all of the Company's undertaking, consisting of automobile finance installment contracts, pursuant to the terms of a Master Asset Purchase Agreement dated as of November 13, 2023 between the Company and Westlake Services, LLC dba Westlake Financial, a California limited liability company (the “Loan Portfolio Sale”). The Company is pursuing the Loan Portfolio Sale for a number of reasons consistent with its previously disclosed evolving restructuring plan. Management believes the Loan Portfolio Sale will free up capital and permit the Company to allocate excess capital and utilize net operating losses to increase shareholder returns, whether by acquiring businesses or by investing outside of the Company's traditional business. Assuming closing of the Loan Portfolio Sale, the Board of Directors intends to explore strategic alternatives for the use of the net proceeds from the sale and seek to maximize the value of deferred tax assets, including net operating losses, available to the Company.

The Company adopted ASU 2016-13 on April 1, 2023 (see Note 2), and consequently utilized the current expected credit losses model through October 31, 2023, by applying a discounted cash flow methodology to its financial assets, measured at amortized cost over the life of the financial assets.

On November 1, 2023, concurrent with the decision to sell the portfolio, the Company reclassified its finance receivables to held for sale, which are carried at the lower of amortized cost or fair value. As a result of this reclassification, the Company eliminated the allowance for credit losses under Accounting Standards Codification (ASC) 326 which resulted in a reversal of previously recorded provisions for credit losses for the three and nine months ended December 31, 2023. The Company compared the fair value and amortized cost of finance receivables held for sale and recorded a held for sale valuation allowance through earnings to reduce the amortized cost basis to fair value as of December 31, 2023.

The Company estimates the fair value of these loans held for sale utilizing a discounted cash flow approach which includes an evaluation of the collateral and underlying loan characteristics, as well as assumptions to determine the discount rate such as credit loss and prepayment forecasts, and servicing costs. In determining the appropriate discount rate, prepayment and credit assumptions, the Company monitors other capital markets activity for similar collateral being traded and/or interest rates currently being offered for similar products. The Company management also reviews the key assumptions used in arriving at the final estimates related to the fair value of these loans held for sale. Significant increases or decreases in any of those assumptions in isolation could result in a significantly lower (higher) fair value measurement.

 

Reclassifications

In certain instances, amounts reported in the prior year financial statements have been reclassified to conform to the current financial statement presentation. Such reclassifications had no effect on previously reported net income (loss)

5


 

 

Note 2. Accounting Standards Recently Adopted or Applied

Cash Equivalents

Short-term highly liquid investments with a maturity date that was 3 months or less at the time of purchase are treated as cash equivalents. Amounts earned from cash equivalents are presented separately in the unaudited Condensed Consolidated Statements of Income (Loss).

Allowance for Credit Losses (ACL)

In June 2016, the Financial Accounting Standard Board (FASB) issued the Accounting Standards Update (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. The ASU also requires additional disclosures related to estimates and judgments used to measure all expected credit losses.

The Company adopted this standard effective April 1, 2023. The initial impact of adoption was a $0.2 million decrease to retained earnings ($0.2 million increase to the allowance for credit losses (ACL)). As of April 1, 2023, there is a full valuation allowance recorded against the deferred tax assets (DTA). Therefore, a net increase of $0.1 million recorded to the DTA was offset by an increase of the same amount to the valuation allowance. The ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which removes the accounting guidance for troubled debt restructurings and requires entities to evaluate whether a modification provided to a customer results in a new loan or continuation of an existing loan. The amendments enhance existing disclosures and require new disclosures for receivables when there has been a modification in contractual cash flows due to a customer experiencing financial difficulties. Additionally, the amendments require public business entities to disclose gross charge-off information by year of origination in the vintage disclosures. This ASU became effective for us on April 1, 2023. We adopted this guidance in the first quarter of fiscal 2024 using the modified retrospective method. Adoption of this standard did not have a material impact on the Company's unaudited Condensed 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.

 

Finance Receivables Held for Sale

Finance Receivables are reclassified to held for sale at the point the criteria for changing classification is met (when the Company decides to sell finance receivables that were originally classified as held for investment). The previously recorded allowance for credit losses, under Topic 326, associated with the reclassified finance receivables (after applying the write off policy) is released and an offsetting entry recorded to the provision for credit losses. This has had the effect of reversing the pre-transfer held for investment allowance for credit losses through the provision. Finance receivables held for sale are carried at the lower of amortized cost bosis or fair value which generally established a new held for sale valuation allowance through earnings in the same reporting period. Changes in the held for sale valuation allowance are recorded through earnings along with charge offs and recoveries as "Fair value and other adjustments net" in the unaudited Condensed Consolidated Statements of Income (Loss).

6


 

 

Note 3. Earnings Per Share

The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. Earnings per share is calculated using the two-class method, as such awards are more dilutive under this method than the treasury stock method. Basic earnings per share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities. The Company's participating securities are non-vested restricted shares which are not required to share losses, and accordingly, are not allocated losses in periods of net loss. Diluted earnings per share include the dilutive effect of additional potential common shares from stock compensation awards. For the three and nine months ended December 31, 2023, potentially dilutive securities that were not included in the diluted per share calculation because they would be anti-dilutive comprise 10 thousand shares from options to purchase common shares. For the three and nine months ended December 31, 2022, potentially dilutive securities that were not included in the diluted per share calculation because they would be anti-dilutive comprise 10 thousand shares from options to purchase common shares. Earnings per share is computed based on the following weighted average number of common shares outstanding:

 

 

 

Three months ended
December 31,
(In thousands, except
per share amounts)

 

 

Nine months ended
December 31,
(In thousands, except
per share amounts)

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 Net loss per consolidated statements of income

 

$

(11,661

)

 

$

(13,373

)

 

$

(20,590

)

 

$

(18,322

)

 Percentage allocated to shareholders *

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 Numerator for basic and diluted earnings per share

 

$

(11,661

)

 

$

(13,373

)

 

$

(20,590

)

 

$

(18,322

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 Denominator for basic earnings per share - weighted-average shares outstanding

 

 

7,286

 

 

 

7,219

 

 

 

7,285

 

 

 

7,349

 

 Dilutive effect of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 Denominator for diluted earnings per share

 

 

7,286

 

 

 

7,219

 

 

 

7,285

 

 

 

7,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share loss from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.60

)

 

$

(1.85

)

 

$

(2.83

)

 

$

(2.49

)

Diluted

 

 

(1.60

)

 

 

(1.85

)

 

 

(2.83

)

 

 

(2.49

)

 

 

 

 

 

 

 

 

 

 

 

 

 

* Basic weighted-average shares outstanding

 

 

7,286

 

 

 

7,219

 

 

 

7,285

 

 

 

7,349

 

   Basic weighted-average shares outstanding and unvested restricted stock units expected to vest

 

 

7,287

 

 

 

7,219

 

 

 

7,285

 

 

 

7,349

 

Percentage allocated to shareholders

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

Note 4. Finance Receivables

Finance receivables held for investment, net consist of Contracts and Direct Loans and are detailed as follows:

 

 

 

(In thousands)

 

 

 

December 31,
2023

 

 

March 31,
2023

 

Finance receivables held for investment

 

$

 

 

$

128,170

 

Accrued interest receivable

 

 

 

 

 

1,932

 

Unearned dealer discounts

 

 

 

 

 

(4,286

)

Unearned insurance commissions and fees

 

 

 

 

 

(1,419

)

Unearned purchase price discount

 

 

 

 

 

(82

)

Finance receivables held for investment, net of unearned discounts and fees and accrued interest receivable

 

 

 

 

 

124,315

 

Allowance for credit losses

 

 

 

 

 

(17,396

)

Finance receivables held for investment, net

 

$

 

 

$

106,919

 

 

7


 

 

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

 

 

 

(In thousands)

 

 

 

December 31,

 

 

March 31,

 

 

 

2023

 

 

2023

 

Finance receivables held for sale at amortized cost

 

$

69,763

 

 

 

-

 

Held for sale allowance

 

 

(19,457

)

 

 

-

 

Finance receivables held for sale at fair value

 

$

50,306

 

 

$

-

 

 

Contracts and Direct Loans each comprise a portfolio segment which consists of groups of loans sharing common risk factors. The following tables present selected information on the entire portfolio of the Company:

 

 

 

As of December 31,

 

 

As of March 31,

 

Contract Portfolio

 

2023

 

 

2023

 

Average APR

 

 

22.7

%

 

 

22.8

%

Average discount

 

 

6.4

%

 

 

6.8

%

Average term (months)

 

 

49

 

 

 

49

 

Number of active contracts

 

 

9,088

 

 

 

14,081

 

 

 

 

As of December 31,

 

 

As of March 31,

 

Direct Loan Portfolio

 

2023

 

 

2023

 

Average APR

 

 

27.3

%

 

 

29.1

%

Average term (months)

 

 

33

 

 

 

28

 

Number of active contracts

 

 

2,485

 

 

 

5,322

 

 

Allowance for Credit Losses (ACL) and Held for Sale Allowance

The Company adopted ASU 2016-13 on April 1, 2023, and consequently utilized the current expected credit losses model through October 31, 2023, by applying a Discounted Cash Flow (DCF) methodology to its financial assets, measured at amortized cost, over the life of those financial assets. Beginning on November 1, 2023, the Company is carrying its loan portfolio at the lower of amortized cost or fair value.

For the period from April 1, 2023 through October 31, 2023, the ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows of finance receivables. Provisions for credit losses were recorded in amounts sufficient to maintain an ACL at an adequate level to provide for estimated losses over the lives of the finance receivables. Portfolio segments are comprised of homogeneous loans sharing common risk factors. Accordingly, loans are not individually evaluated for collectability. Consistent with the application during prior reporting years, the Company continued charging credit losses against the allowance when the account reached 120 days contractually delinquent and any recoveries on finance receivables previously charged to the ACL were credited to the ACL when collected.

The Company used a DCF model to forecast expected credit losses. Historical information about losses generally provided a basis for the estimate of expected credit losses. The Company has utilized its own historical data as well as its peer group companies' data from FFIEC Call Report filings. This data was used to produce regression analyses designed to quantify the impact of reasonable and supportable forecasts in projective models.

The Company also considered the need to adjust historical information to reflect the extent to which conditions differed from the conditions that existed for the period over which historical information was evaluated. These adjustments to historical loss information may be qualitative or quantitative in nature. The Company considered changes in international, national, regional and local conditions, changes in the volume and severity of past due loans, portfolio bankruptcy trends, maturity terms extensions, changes in the value of underlying collateral for collateral dependent loans, the effect of other external factors, such as competition, legal and regulatory requirements on the level of estimated credit losses, the existence and effect of any concentrations of credit and changes in the levels of such concentrations, changes in the nature and volume of the portfolio and terms of loans, changes in the quality of the loan review system, changes in the experience, depth, and ability of lending management, and reasonable and supportable economic forecasts, which covered the lives of the finance receivables.

The Company discounted expected cash flows at the financial asset’s effective interest rate. The effective interest rate is defined in ASC 326 as the contractual interest rate adjusted for any net deferred fees or costs, premium, or discount existing at the origination or

8


 

 

acquisition of the financial assets. For the Company, this was calculated using adjusted contractual cash flows relative to the amortized cost. The Company also considered prepayment and curtailment effects in calculation of its effective interest rate.

According to ASC 326-20-30-9, estimating expected credit losses is highly judgmental and requires management to produce reasonable and supportable forecasts of expected credit losses. The Company elected to forecast the first four quarters of the credit loss estimate and revert to a long-run average of each considered economic factor as permitted in ASC 326-20-30-9. Based on the final values in the forecast and the uncertainty of a post-pandemic recovery, management elected to revert over four quarters. The Company also used information provided by the Federal Open Market Committee (FOMC) to obtain various forecasts for unemployment rate and gross domestic product, as well as other economic factors that were considered as part of its ACL calculations.

The Company elected not to measure an allowance on accrued interest which is included as a component of amortized cost and limited to performing accounts, defined as an account that is less than 61 days past due. Accrual of interest income on finance receivables is suspended when a loan was contractually delinquent for 61 days or more, or the collateral is repossessed, whichever is earlier. Consistent with the application in the prior reporting periods, the Company continued timely reversing of the accrual of interest income when the loan was contractually delinquent 61 days or more. All of these accounts were accounted for in the calculation for allowance for credit losses.

The Company defines a non-performing asset as one that is 61 or more days past due, a Chapter 7 bankruptcy account, or a Chapter 13 bankruptcy account that has not been confirmed by the courts, for which the accrual of interest income is suspended. Upon confirmation of a Chapter 13 bankruptcy account, the account is immediately charged-off. Upon notification of a Chapter 7 bankruptcy, an account is monitored for collectability. In the event the debtors’ balance is reduced by the bankruptcy court, the Company records a loss equal to the amount of principal balance reduction. The remaining balance is reduced as payments are received. In the event an account is dismissed from bankruptcy, the Company will decide whether to begin repossession proceedings or to allow the customer to make regularly scheduled payments.

Prior to adoption of ASU 2016-13 the Company was periodically evaluating the composition of the portfolio, current economic conditions, the estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts when determining management’s estimate of probable credit losses and the adequacy of the allowance for credit losses. Management utilized significant judgment in determining probable incurred losses and in identifying and evaluating qualitative factors. This approach aligned with the Company’s lending policies and underwriting standards. If the allowance for credit losses is determined to be inadequate, then an additional charge to the provision is recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolio.

The Company used a trailing twelve-month net charge-off as a percentage of average finance receivables, and applied this percentage to ending finance receivables to estimate probable credit losses. This approach reflected the current trends of incurred losses within the portfolio and closely aligns the allowance for credit losses with the portfolio’s performance indicators. Estimating the allowance for credit losses using the trailing twelve-month charge-off analysis reflected portfolio performance adjusted for seasonality. Management evaluated qualitative factors to support its allowance for credit losses. The Company examined the impact of macro-economic factors, such as year-over-year inflation, as well as portfolio performance characteristics, such as changes in the value of underlying collateral, level of nonperforming accounts, delinquency trends, and accounts with extended terms.

As of November 1, 2023, concurrent with the decision to sell the portfolio, the Company reclassified its finance receivables to held for sale, which are carried at the lower of amortized cost or fair value. As a result of this reclassification, the Company eliminated the allowance for credit losses established under ASC 326 which resulted in a reversal of previously recorded provisions for credit losses for the period from April 1, 2023 through October 31, 2023. The Company compared the fair value and amortized cost of finance receivables held for sale and recorded a held for sale valuation allowance of $19.5 million through earnings to reduce the amortized cost basis to fair value as of December 31, 2023.

9


 

 

The following table sets forth a reconciliation of the changes in the allowance for credit losses under ASC 326 on Contracts and Direct Loans for the three and nine months ended December 31, 2023 and 2022 (in thousands):

 

 

 

Three months ended December 31, 2023

 

 

Nine months ended December 31, 2023

 

 

 

 

Contracts

 

 

Direct Loans

 

 

Total

 

 

Contracts

 

 

Direct Loans

 

 

Consolidated

 

 

Balance at beginning of period, prior to adoption of ASU 2016-13

 

$

12,189

 

 

$

1,068

 

 

$

13,257

 

 

$

16,265

 

 

$

1,131

 

 

$

17,396

 

 

Impact of adoption of ASU 2016-13

 

 

 

 

 

 

 

 

 

 

 

(562

)

 

 

772

 

 

 

210

 

 

Provision for credit losses (1)

 

 

1,588

 

 

 

183

 

 

 

1,771

 

 

 

12,713

 

 

 

2,110

 

 

 

14,823

 

 

Charge-offs

 

 

(3,041

)

 

 

(369

)

 

 

(3,410

)

 

 

(21,337

)

 

 

(3,495

)

 

 

(24,832

)

 

Recoveries

 

 

553

 

 

 

82

 

 

 

635

 

 

 

4,210

 

 

 

446

 

 

 

4,656

 

 

Reversal of allowance for credit losses (2)

 

 

(11,289

)

 

 

(964

)

 

 

(12,253

)

 

 

(11,289

)

 

 

(964

)

 

 

(12,253

)

 

Balance at December 31, 2023

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 2022

 

 

Nine months ended December 31, 2022

 

 

 

 

Contracts

 

 

Direct Loans

 

 

Total

 

 

Contracts

 

 

Direct Loans

 

 

Consolidated

 

 

Balance at beginning of period

 

$

5,088

 

 

$

2,003

 

 

$

7,091

 

 

$

1,960

 

 

$

989

 

 

$

2,949

 

 

Provision for credit losses

 

 

9,132

 

 

 

1,598

 

 

 

10,730

 

 

 

19,747

 

 

 

3,533

 

 

 

23,280

 

 

Charge-offs

 

 

(7,077

)

 

 

(1,056

)

 

 

(8,133

)

 

 

(17,266

)

 

 

(2,050

)

 

 

(19,316

)

 

Recoveries

 

 

1,240

 

 

 

24

 

 

 

1,264

 

 

 

3,942

 

 

 

97

 

 

 

4,039

 

 

Balance at December 31, 2022

 

$

8,383

 

 

$

2,569

 

 

$

10,952

 

 

$

8,383

 

 

$

2,569

 

 

$

10,952

 

 

 

(1)
Provision for credit losses and reversal of allowance for credit losses is presented net as "Provision for credit losses" in the Condensed Consolidated Statements of Income (Loss).
(2)
Amounts shown represents charge-off through October 31, 2023. Since November 1, 2023 charge-offs are included in "Fair value and other adjustment, net" in the Condensed Consolidated Statements of Income (Loss).

 

The following table presents gross charge-offs and recoveries by receivable origination year for total portfolio:

 

 

(In thousands)

 

 

Three months ended December 31, 2023

 

 

Gross Charge-offs

 

 

Gross Recoveries

 

 

Net Charge-offs

 

2024

$

88

 

 

$

 

 

$

88

 

2023

 

1,256

 

 

 

138

 

 

 

1,118

 

2022

 

1,294

 

 

 

216

 

 

 

1,078

 

2021

 

363

 

 

 

109

 

 

 

254

 

2020